Modernising the Companies Act and What It Means for Directors
Modernising the Companies Act and What It Means for Directors
Tuesday 6 May, 2025
The Government intends to introduce a raft of reforms aimed at modernising the Companies Act 1993 (Act) and other related corporate governance legislation. These changes seek to streamline business operations and counter harmful practices such as phoenixing. The previous Minister of Commerce and Consumer Affairs, Andrew Bayly stated, “These reforms bring the law into the 21st century and enable companies to focus on growing their core business, rather than retrofitting their practices to appease out of date legislation.”
The reforms will be introduced in two phases.
Phase One
The first phase will look to modernise the outdated Act, make compliance easier, and prevent bad business practices.
The Act has formed the core of the corporate regulatory system in New Zealand for over three decades. However, as businesses evolve and modernise over time, so too must the laws that govern them. Recent consultations with legal experts and stakeholders have highlighted several areas where the Act is outdated, ambiguous, or overly complex. These issues have prompted the government to propose a package of targeted reforms designed to improve, modernise, and simplify the Act, with the intention of making it more relevant to today’s business environment, reducing compliance costs, and countering poor or illegal business practices.
The key insolvency law reforms in phase one include:
- Extension of claw back periods for transactions with related parties: The voidable transactions regime in the Act allows liquidators to claw back (i.e. recover) funds paid by a company before liquidation in respect of certain transactions undertaken when the company was unable to pay its debts. Currently, for transactions with related parties (including directors and shareholders of the company), the recovery period for these funds applies to transactions undertaken up to two years before liquidation. The proposed reforms extend this recovery period to transactions undertaken up to four years before liquidation.
This extension aims to prevent directors from engaging in transactions that could unfairly disadvantage creditors, promoting fairer outcomes in insolvency situations. However, this change has implications for directors as it increases the period during which transactions with related parties can be scrutinised and potentially reversed by liquidators. Directors will need to exercise greater diligence and caution in their dealings with related parties, to ensure that transactions are in the best interests of the company. - Combating phoenixing: phoenixing is the deliberate act of leaving a failed company with unpaid debts, only for the same owners or directors to start a new company with a similar name to the failed company to continue trading, often with the assets of the failed company transferred to the new company at undervalue. This allows the new company to operate without the liabilities of the old one, leaving creditors with little or no chance of recovering what they are owed.
While there are already provisions in the Act which address these types of activities, phoenixing is still occurring. The proposed reform aims to introduce unique identification numbers for directors, shareholders and general partners of limited partnerships.
The use of unique identification numbers could help prevent the rise of phoenix companies by increasing transparency and enabling authorities and third parties proposing to do business with those entities to track business activities more effectively, making it harder for individuals to hide their involvement in multiple companies and engagement in practices like phoenixing. This reform will also enable directors and shareholders to have the option of removing their residential address details from the public Companies Register (replacing it with an address for service), addressing a long-standing privacy concern.
Phase Two
The second phase – which will be undertaken in parallel – will involve a review by the Law Commission of directors’ duties, liability, sanctions, and enforcement. This is intended to address the issues that arose from the Mainzeal case (Supreme Court findings on the claim against the Mainzeal directors - Tompkins Wake), which involved an assessment of the scope and application of directors’ duties when a company faces financial difficulties and the protection that should be provided to creditors.
Key takeaways
The modernisation of the Act should represent a significant step forward in New Zealand’s corporate governance. By extending the claw back period for transactions with related parties to four years and introducing unique identifiers to help prevent phoenixing, the reforms will create a more equitable framework for creditors while increasing accountability for directors.
Next steps
The Corporate Governance Amendment Bill is expected to be introduced this year. As these changes are implemented, directors and business owners should stay informed on the new requirements to ensure compliance with the Act.
I you need assistance navigating these reforms, get in touch with one of our experts below. We are also available to assist with submissions once the bill progresses through to the select committee stage.
Our thanks to Summer Intern Sarah Smit for her contributions to this article, supported by our Corporate and Commercial team.
