Corporations and Business Associations Law

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Corporations and Business Associations Law
When companies are suffering from failed business and insolvency, the banks as the financiers for them and other creditors may try to get involved into the management and operations of the business in the way of giving advice and providing assistance to the directors of those distressed companies so as to protect their interests as much as possible. But as a result, the banks and creditors might be at a risky situation where they could be liable as shadow directors which could be captured by the sections in Companies Act 1993. This essay will talk about the risks for banks and creditors deemed as shadow directors and the rationale of the approach Act captures them. Further, some problems and uncertainties with New Zealand current law will be addressed and also the factors the Court considers to decide whether a particular banks or creditor is a shadow director or not. As it is shown in s 126 of Companies Act 1993, the definition of director is: In this Act, director, in relation to a company, includes-

(a) a person occupying the position of director of the company by whatever name called; and (b) for the purposes of sections 131 to 141, 145 to 149, 298, 299, 301, 383, 385, 386A to 386F, and clause 3(4)(b) of Schedule 7, - (i) a person in accordance with whose directions or instructions a person referred to in paragraph (a) may be required or is accustomed to act; and (ii) a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and (iii) a person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; … (Krtolica v Westpac Banking Corporation [2008] NZCCLR 24 (HC) at [181]) Referring to the definition of director in the Companies Act 1993, when the banks or creditors provide advice or assistance to a board of a company is in the situation of being deemed as shadow directors to the company, they would face potential risks for the reason that ‘in New Zealand, the list of provisions in the Act specified as being applicable to shadow directors includes the general statutory duties imposed on all directors, the general misfeasance provision, the avoidance provisions applicable to directors , and the director disqualification provisions’. (Taylor, 2010) In the first place, banks or creditors should comply with the general duties which directors should do. For example, they must act in good faith and in the best interests of the company (Companies Act 1993, s131); their powers should be exercised for proper purpose (Companies Act 1993, s133); they must comply with Act and constitution (Companies Act 1993, s134); they must not agree, cause or allow the reckless trading which is likely to create a substantial risk of serious loss to the company’s creditors (Companies Act 1993, s135); they must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so (Companies Act 1993, s136); they must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances (Companies Act 1993, s137). In the second place, banks or creditors who have been deemed as shadow directors may rely on reports, statements, and financial data and other information given by employees of the company or other directors (Companies Act 1993, s138), but after that, they must not disclose that information to any person. (Companies Act 1993, s145) Meanwhile, when they have interests or relevant interests to the company, they must register and disclose the relevant information of the interests. In the last place, banks or creditors should also carry on other specific duties including accounting records and preparing...
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