The Law Commission is set to embark on a significant review of directors’ duties and liabilities. Initiated at the request of the Minister of Justice, Hon. Paul Goldsmith, this review is poised to address longstanding concerns within the corporate sector about the clarity and effectiveness of the current legal framework, particularly regarding directors’ duties in relation to reckless trading and incurring obligations.

Key areas of focus

Duties under the Companies Act 1993

The Companies Act 1993, which has been the cornerstone of corporate governance for over three decades, will be scrutinised to ensure its provisions remain relevant and practical. As noted above, particular attention will be given to duties related to reckless trading and the incurrence of obligations (under sections 135 and 136 of the Act, respectively), areas that have been flagged for their ambiguity and potential to dissuade directors from engaging in legitimate business risks, particularly in light of the Supreme Court’s decision in Mainzeal.

Burden of liability

The review will also examine the overall burden of liability imposed on directors. There is a growing concern that the current legal environment may be overly punitive, thereby impacting directors’ willingness to take calculated business risks. This aspect of the review aims to strike a balance between accountability and fostering a risk-taking entrepreneurial spirit.

Enforcement mechanisms

The effectiveness of current enforcement mechanisms will be another critical focus. The Commission will explore whether existing modes of enforcement are adequate and who should be responsible for enforcement. This includes considering whether there needs to be a more coherent and practically workable system for holding directors accountable. Care will need to be taken not to make it too easy for shareholders to enforce directors’ duties, which could lead to excessive litigation and hinder effective decision-making, as well as acting as a deterrent to prospective directors accepting appointments.

Leadership and timeline

The review will be led by Commissioner Geof Shirtcliffe, who brings extensive experience in corporate law. The project is slated to commence in the first half of 2025, with preparatory work already underway.

Implications and expectations

This review comes at a crucial time, with various stakeholders, including the Institute of Directors and both the Court of Appeal and Supreme Court, advocating for reforms to ensure that directors’ duties are both coherent and practically applicable. The Supreme Court’s decision in the Mainzeal case has underscored the need for such a review, highlighting inconsistencies and the need for clarity in the current legal framework.

Conclusion

The Law Commission’s review is expected to bring much-needed clarity and modernity to the legal duties of directors in New Zealand. By addressing the ambiguities and enforcement challenges within the current framework, the review aims to foster a more conducive environment for corporate governance that balances accountability with the encouragement of legitimate business ventures.

While this doesn’t mean anything for directors just yet, stay tuned for further updates as this review progresses. In the meantime, If you require advice or assistance with corporate governance matters, please do not hesitate to contact us.

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