Most of us go into business because we want to make a decent living doing something we enjoy. We want to be able to provide for our families and enjoy the fruits from our efforts. One of the biggest mistakes business owners – particularly new business owners – make is confusing profit with revenue. Don’t assume just because the money is in your bank account, it’s available for you to use. As a business, you need to put your liabilities – debts, paying suppliers, payroll, tax obligations, etc – first. Remember that the money you take out of the business can’t be used for growth, and growing the business is what will allow you to continue to increase your personal…

On 24 September 2020, the Supreme Court delivered its judgment on a case taken by the liquidators of Debut Homes Limited (In Liquidation) (Debut) against its director, Leonard Wayne Cooper. In this case, the liquidators alleged that the director had been in breach of duties as director under the Companies Act 1993 (the Act) and were seeking orders against the director. The liquidators were successful in the High Court, but that decision was overturned by the Court of Appeal. The liquidators were then granted leave to appeal to the Supreme Court, where they were successful, and the orders made in the High Court were restored. The background to the case was that Debut was a property developer and Mr Cooper…

All companies must keep company records, minutes, resolutions and a share register. This article discusses what is required and what can happen when there is a failure to maintain company, statutory and financial records. Failure to keep accounting records and to comply with Section 194 Companies Act 1993 can render director(s) liable to conviction for an offence. Failing to maintain books and records may cause a presumption of insolvency and directors could be held personally liable. Companies have an obligation to keep company records under S189 of the Companies Act 1993. Minutes, resolutions and financial statements must be maintained for the last 7 years. S190 of the Act requires that the records must be kept in a written form or…

The Tax Working Group at recommendation 61 have said for closely held companies, that IRD should be granted the ability to require shareholders to provide security to IRD if debt is owed by the shareholders to the company and the company owes debt to IRD. This enhances the position of IRD in insolvency and essentially breaks the corporate veil. Accountants need to monitor the current account positions of their clients and ensure that dividends and salaries are being declared to ensure current accounts are not overdrawn. Recommendation 61 provides:61. that, for closely held companies, Inland Revenue have the ability to require a shareholder to provide security to Inland Revenue if:(a) the company owes a debt to Inland Revenue.(b) the company…

We have recently been involved in a liquidation where we considered the directors breaches of duties and ultimate loss to creditors so extreme as to be worthy of taking an action in the High Court. The action was funded by the largest creditor. We alleged the directors (a former banned director, an undischarged bankrupt based in Hong Kong, and a lawyer) traded recklessly (s135), incurred obligations without reasonable belief they would be able to perform the obligations (s136) and failed to exercise care, diligence and skill that reasonable director would have exercised in the same circumstances (s137). We sought recovery from the directors. The case involved customer losses from the companies first order, when the customer had paid a large…

It is common in New Zealand for the directors and shareholders of small companies to be the same people and many are also employees of the company – executive directors.  Whether this is in the form of a family owned business or a just a small to medium sized enterprise made up of unrelated individuals this involvement on all levels can create difficulties. The advantage of such a set up is that the individuals are motivated to make the business work and be profitable. The downside is that the closed nature of the board can leave gaps in the knowledge and experience held by the directors and their closeness to the business can lead to subjective decision making. Depending on…

With financial year end, one of the considerations fresh in the minds of business owners and their advisors is the decision regarding appropriate directors’ remuneration. In a previous article we reviewed the case of Madsen-Ries and Vance v Petera [2015] NZHC 538. In this article, we consider an issue on appeal by the liquidators of Petranz Limited (“the company”) as to whether salaries paid by the company to the directors were fair to the company when they were paid (Madsen-Ries v Petera [2016] NZCA 103). This article will also cover where creditor considerations fit in with such decision making, and the appropriate remedies for creditors if things go wrong. Background Mr and Mrs Petera were the sole directors and shareholders…

There is risk and responsibility that comes with being a director. Sections 131 to 145 of the Companies Act 1993 (the Act) set out directors’ responsibilities and duties owed to both the company and third parties. In the event of business failure by liquidation or other means, if any action is taken for breach of these sections of the Act, it generally falls to insolvency practitioners to act. Whether the insolvency practitioner decides to take any action for breach of directors’ duties is commonly assessed on a case-by-case basis, taking into consideration the likely recovery weighed against the cost of the action and the evidence available to support the action. The ability to pursue a director, however, is not limited…

There is a lot of confusion amongst business owners on the best sale option – assets or shares. Getting it wrong can incur unexpected liabilities and loss. There are two types of business sales: An asset sale (plant, property, machinery, equipment, goodwill, etc) A share sale (being shares, either all or part). However, understanding the risks and benefits will help business owners make an informed decision.  The sale/purchase decision should consider debt structures, securities held and required, the level of transparency sought, risk profile of the parties, the tax impacts, how the business operates, who is required, and whether the business will attract investors. It also depends on consents being achieved, transferability or gaining of regulatory licenses, warranties, contingent liabilities,…

Amongst the director duties imposed by the Companies Act 1993 ("the Act") directors must keep proper accounting records (section 194), and their remuneration must be properly authorised by the board and recorded in the company's interests register (section 161). Without proper accounting records directors' ability to perform their other duties can also be affected. If directors fail to perform their duties they may face fines, personal liability for company debts, or orders to compensate the companies concerned for losses caused. The case of Madsen-Ries and Vance v Petera [2015] NZHC 538 dealt with various breaches and remedies in respect of directors' duties, and the judgment is well worth further study for both directors and insolvency professionals. Madsen-Ries and Vance v…

With power comes responsibility, and the duties imposed on company directors are extensive and onerous. Whilst business is brisk and revenues swell, breaches of directors’ duties often go unnoticed and without serious repercussions. When fortunes change, a director’s conduct, even years before, can come under close scrutiny from various quarters. As matters go from bad to worse, these parties include shareholders, creditors, receivers, liquidators and regulatory enforcement. Section 126 of the Companies Act 1993 (“the Act”) widely defines directors; effectively including shadow and silent directors, as well as those who although not duly appointed, exercise certain powers of a director. Calling to account Under the Act, liquidators have extensive powers to investigate the affairs of failed companies and the conduct…

With the recent activity in high profile prosecutions of company directors by the Serious Fraud Office ("SFO"), we thought it opportune to revisit a case in which our firm was involved highlighting the point that it is not only the high profile directors that pay a heavy penalty when events do not go according to plan. We pinpoint some useful tips for your clients who may be considering taking on a governance role in a company for which they do not necessarily have all of the prerequisite skills or experience. The judgment for FXHT was released on 9 April 2009. This case concerns a foreign exchange investment broker. The elements of the case involved fraud, breaches of directors' duties and…