NZ’s Companies Act is finally being reformed – but will the changes go far enough?

Reforms to the Companies Act are meant to make Aotearoa New Zealand an easier and safer place to do business. But key gaps in the reforms mean they could fall short of achieving these goals.

Last year, the government announced a package of reforms to update the Companies Act and related corporate governance legislation.

The reforms include modernising and simplifying the rules. For example, company directors will be given a unique identifier to combat phoenixing – the practice of directors closing failing companies only to relaunch under a slightly different name.

But the new rules would remove the recently introduced amendment clarifying that directors may consider environmental, social and governance (ESG) factors. And the reforms also fail to address more fundamental questions: what role does a corporation perform in society and what role should it perform?

Overdue improvements

The government’s changes, to be implemented in two phases, are focused on deterrence of poor business practices while reducing the burden of compliance for businesses.

Phase one focuses on four areas of change: modernise, simplify and digitise the Companies Act; introduce a unique identifier for company directors; improve outcomes for creditors when companies become insolvent; and promote uptake of the New Zealand Business Number (NZBN).

Among these proposals are some positive steps. For example, enabling companies to make use of modern digital technology to provide information to shareholders and creditors via webpage rather than having to send this information to each individual.

In addition to introducing unique identifiers for company directors to prevent poor and illegal business practices, the reforms will address safety concerns by letting company directors replace their residential addresses on the Companies Register with a business-related address.

The reforms also seek to make it easier for businesses to connect and transact with each other and the government using the NZBN. The NZBN system can make business transactions faster by verifying a company’s identity and supporting electronic invoicing.

In fact, the New Zealand Institute of Economic Research estimates NZ$550 million per year in productivity gains may be realised with full NZBN adoption.

Phase two of company law reform will be a review by the Law Commission of directors’ duties and related issues of director liability, sanctions and more effective enforcement.

This work is set to begin this year. It will address, in particular, the increasingly unclear and complex rules around insolvent trading and directors’ duties.

This issue was highlighted by the collapse of Mainzeal, one of the country’s largest commercial construction companies. In 2023, the Supreme Court upheld an earlier decision that found the company’s directors continued to run the business, despite it being insolvent.

Some refining needed

The reform package, however, also contains some proposals that would benefit from further refinement and input.

This includes the plan to repeal the ESG amendment. The 2023 amendment explicitly allowed directors to consider environmental, social and governance factors when acting in the best interests of the company – not just the maximisation of profit.

Despite being controversial, removing the amendment could make things worse. Before the amendment came into force last year, directors were already able to consider ESG factors, even if it wasn’t outlined in the law. But repealing the amendment now might signal that ESG should not be considered at all.

The reforms also don’t include the creation of a beneficial ownership register. Beneficial ownership refers to the individuals who ultimately own or control a company, even if their names do not appear on official documents.

This information would help fight financial crime, such as money laundering. It would also help us meet our international obligations under the Financial Action Task Force.

If the goal of this reform package is a step towards modernity and transparency, the proposed repeal of the ESG amendment and omission of a beneficial ownership register undermines this.

Thought may also be given to Aotearoa New Zealand’s current one-size-fits-all model. Companies here are predominantly small to medium enterprises, with more than 95% having 20 employees or less. Yet, our Companies Act does not distinguish by company size and perhaps it is time to consider doing so.

Considering the role of corporations in society

Beyond modernising and simplifying existing rules, the reforms should consider the essential role and purpose of corporations in society.

These questions matter as company law shapes how businesses operate, influencing our daily lives – whether we are consumers, employees, investors or members of communities impacted by their activities.

The changes currently proposed demonstrate a political appetite for change. Yet it is important that any change breaks the cycle of the political pendulum swinging, to establish a stable foundation of company law that transcends the shifting priorities of successive governments.

Changes to corporate law must benefit Aotearoa New Zealand as a whole and not narrowly focus on the prevailing governmental agenda.