BIBM622 - Management Non-Compliance – Legal Consequences

Students will be expected to:

Meetings and Procedures

• Describe the different categories, functions, proceedings and requirements for shareholder meetings, including the different categories of shareholder resolution and when these resolutions are
• Explain when the requirements for the holding of a meeting can be satisfied by a resolution in lieu of a
• Outline the circumstances and procedures for the calling of a meeting of partners and discuss the requirements for meetings of trading

Management Non-Compliance

• Analyse the types of liability for non-compliance with statutory requirements – civil and
• Analyse joint and several liability of partners, identify the liability that attaches to directors and shareholders, and
• Identify the liability that attaches to trustees of trading

SHAREHOLDERS’ MEETINGS

Certain powers may be exercised by the shareholders alone. These relate to constitutional matters. Constitutional decisions are usually made through the process of meetings (although it is possible to have a resolution in lieu of meeting) (s. 104(1)). At meetings the shareholders have a chance to vote.

Under the 1955 Act there were few rules and companies were free to adopt what procedures they thought best. The 1993 Act sets out rules in the First Schedule to the Act, although some rules can be modified by the constitution (s. 124). Without a constitution, the First Schedule will govern. Provisions for meetings are also contained in ss. 120-123.

Shareholders have their say subject to the provisions of the constitution and the Act. In order to make valid decisions the meeting must:

• be properly notified, and
• have a quorum present, and
• have no one entitled to attend excluded, and
• follow the company constitution and Act

Section 104(1) requires that powers of the shareholders are exercised only at a properly called meeting, or by a resolution in lieu of a meeting.

Subject to the constitution directors are appointed (s. 153(2)), and removed (s. 156) by ordinary resolution (50%). Notice of the meeting must clearly state that a purpose is to remove a director (s. 156(2)).

There is an opportunity to discuss or comment on management (s. 109(1)). Unless provided for in the constitution a resolution, passed by shareholders relating to the management, is not binding (s. 109(2), (3)). Care must be taken by shareholders, as under s. 126(1) (b), (2) there could be liability as a

Management is entrusted to the Board (s. 128). Shareholders are not permitted to make business decisions, with limited exceptions, however (as stated) they can discuss or comment on management (s. 109) and pass resolutions. Exceptions, where shareholder approval is required, include:

• amalgamations
• major transactions (which shareholders must approve under 129).

Shareholders can approve certain transactions by unanimous assent, provided the solvency test is met (s. 107(1) unless otherwise indicated):

• authorise dividends other than 53
• approve a discount scheme outside of 55
• redeem shares without following 69-72
• give financial assistance other than as provided in 76-80
• authorise director benefits outside of 161
• issue shares without following 42, s. 44, s. 45 (s. 107(2))
• approve transactions in which directors are interested (s. 107(3)).

Assent must be in writing (s. 107(4)).

(i)           Annual Meetings

Shareholder meetings must be held annually (s. 120). The first meeting must be within 18 months of registration (s. 120(2)).

If the company is required to prepare an annual report under s. 208 (s.208(1)), shareholders must receive the annual report, or a notice about how to receive one, or a concise annual report, at least 20 working days before the meeting (s. 209 (1), (3)). The report or concise annual report, must include annual financial statements (s. 211(1)(b),(c), s.209(5)).

Generally, directors have a duty to call the annual meeting (s. 120(1)); they are obliged to hold it on the day called and have no power to postpone it (s.120(4)). There must be not more than 15 months between meetings, and the meeting must be no later than six months after the balance date.

The agenda may include:

• consideration of the financial statements, and auditor’s report
• consideration of the director’s report
• the election of directors
• the appointment of auditors

Section 120(1) and (2) are subject to subsection 5. A meeting does not need to be called or held if there is nothing required to be done at the meeting. The decision must be made in the interests of the company and the constitution must not require the meeting.

(ii)    Special meetings may be called by the Board, an authorised person, or shareholders with at least 5% of the voting rights (s. 121).

The Court can order a meeting on the application of a shareholder, a director or a creditor (s. 123(1), (2)) if it is :

• Impracticable to call/conduct a meeting under the Act or
• In the interests of the company (re The South British Insurance Company Limited

(1980) 1 NZCLC 95 004).

(iii)        Resolution in lieu of meeting

Annual and special meetings need not be held if a written resolution on the issue(s) to be considered is passed by shareholders entitled to vote who represent at least 75% of the NUMBER OF SHAREHOLDERS and 75% of VOTES – s. 122. No prior notice need be given (s. 122(6)). Resolutions may be signed by people overseas or out of town/city, through a fax, email etc. (s. 122(3A)). A copy of the resolution is sent to every shareholder who did not sign, within five working days of the resolution passing (s. 122(5)). They are also to be given a statement of rights under s. 110, if a special resolution under s. 106(1)(a) or (b) was passed.

Some issues require unanimous consent of all shareholders (s. 107), and a resolution under

1. 207I and J requires support by not less than 95% of shareholder votes entitled to vote.

If the issue affects the rights of an interest group there is a need for a 75% vote of that interest group (s. 117(1)).

• Conduct at Meetings is regulated by the First Schedule to the Act.

Schedule 1, clause 2 prescribes the notice requirements – at least 10 working days with sufficient particularity as to the meeting – agenda, etc. (cl. 2(1), (2)). Irregularities in the notice can be waived by unanimous action of shareholders (cl. 2(3)). At common law failure to give notice invalidated all proceedings. However, s. 213 provides that validity is not affected where the failure is accidental (see also cl. 2(3A)). Shareholders entitled to receive notice are shareholders whose names are in the register at the time specified in s. 125(3).

Notice may be given by delivery, post or fax (s. 391), or by electronic means (s. 391(3A) – (3C)). The notice states the time and place of the meeting (cl. 2(1)), the nature of business (cl. 2(2)(a)), the text of any special resolution(s) or resolution for the purposes of s. 207I or J (cl. 2(2)(b)(ba)) and the rights of a shareholder under s. 110, if a special resolution is required by s. 106(1)(a) or (b) (cl. 2(2)(c)). There are additional notice requirements if a director is to be removed (s. 156(2)), or an auditor is not to be reappointed (s. 207V).

Shareholders are able to have matters raised at the meeting but must give written notice to the board before the meeting (cl. 9(1)).

Directors should clearly state any interests they may have in any matter, even if it is disclosed in the company’s interests register. Failure could result in an action under s.174.

Those entitled to attend are shareholders, the auditor, and directors. No one may be excluded (except for misconduct). Meetings can give permission for other persons to attend. Meetings are private but the press usually attend large company meetings by convention, but this permission can be withdrawn – Police v Rennie [1989] DCR 337.

The quorum is a majority of voting strength – those present, represented by a proxy or who have made a postal vote (cl. 4(2)). Note that this rule can be substituted by the constitution. No business can be conducted without a quorum (cl. 4(3)). If there is no quorum (within 30 minutes after the starting time) the meeting is rescheduled, for one week later (cl.4(3)(b)).

Shareholders may appoint a proxy (i.e. a person is appointed to attend, vote and speak for the shareholder – cl. 4(2)). Any shareholder may appoint one (cl. 6(1)). The appointment must be in writing, including electronically (cl. 6(3)). A proxy need not be a shareholder and it could be for a specific meeting or a specified period. Notice must be received by the company within a certain time before a meeting (usually 48 hours) (cl. 6(5)). However, cl. 6(5A)) stipulates that if the notice of meeting requires the proxy to be produced later than the time specified in the constitution the proxy may be produced by that later time. The constitution cannot remove the right to appoint a proxy. See cl. 5A.

Unless excluded by the constitution, postal voting is permitted (cl. 7(1)). This can include ‘electronic means’ (cl. 7(1A)).

The chairperson of the Board of Directors chairs meetings, unless the constitution provides otherwise (cl. 1(3), 1(1)). If s/he is not present 15 minutes before the meeting is to start, shareholders may appoint another person. If the chairperson does not act in accordance with the “rules of natural justice” it is possible to bring an application for judicial review of any decision. The chairperson of the meeting has no casting vote, unless allowed by the constitution (cl. 5(7)).

The conduct of the meeting is decided by the meeting (cl. 13)

Meetings involve a gathering of shareholders (cl. 3(a)), audio / audio-visual / electronic communication (cl. 3(b)) or a combination of these methods (cl. 3(c)). Electronic means can be used if the board approves of it (cl. 14(1)).

At conventional meetings, voting may be by voice or show of hands, with each shareholder having one vote (cl. 5(1)). A poll may be called for (the number of votes each shareholder has is counted) (cl. 5(4)). Voting is usually by voice in cases of audio / audio-visual link.

Resolutions are passed to make decisions. Except where required by the Act or the constitution, ordinary resolutions are sufficient (cl. 5(3)). Some matters require a special resolution. Minutes of the meeting must be prepared (cl. 8(1)), and must be kept at the registered company office for 7 years (s. 189(1)(b)); generally signed as correct by chairperson (cl. 8(2)).

PARTNERS’ MEETINGS

As we have seen, the management structure of partnerships can be very flexible. The Partnership Law Act 2019 sets out certain basic rules; however, these can always be negated or modified by agreement of the partners.

The procedure for partners’ meetings, and the reasons for which they are held, are similarly very flexible. It is up to the partners to decide when, where, how and for what reasons they will hold partners’ meetings.

The only statutory rule in this regard is found in s. 48, which states that every partner may take part in the management of the partnership business. Ordinarily, management decisions in respect of the partnership would take place at partners’ meetings. Section 48 therefore implies that, at the very least, where there is no prior agreement all partners must be entitled to attend, and contribute to, partners’ meetings throughout the year.

TRUSTEE MEETINGS

A.        Why hold Trustee Meetings?

It is vitally important that trustees hold meetings, and formally record their decisions. This is because trustees are accountable to the settlor, and to the beneficiaries, for their actions and they must be able to show that they have acted properly (s. 27 of the Trusts Act 2019), in accordance with the Trust Deed (s. 24 of the Trusts Act 2019) and the law.

Trustee meetings (or alternatively signed trustee resolutions in lieu of a meeting) are the mechanism through which trustees formally make and record their decisions in respect of the trust property.

In other words: without trustee meetings (or resolutions), nothing happens.

Likely items on the agenda for trustee meetings would include: business management review, business planning, reviewing investments and investment strategy (in accordance with s.30 of the Trusts Act 2019), approving financial statements for the trust, considering beneficiaries and authorising distributions.

B.        Requirements for Trustee Meetings

The Trust Deed may impose rules regulating how and when trustee meetings must be held. Otherwise, trustees are free to hold meetings as they see fit and regulate their procedure.

All trustees must consent to a proposed course of action before it can be pursued (i.e., unanimous trustee decision-making is a requirement of trading trusts unless the Trust Deed provides otherwise – s. 38 of the Trusts Act 2019).

In addition, trustees need to ensure that they consider the interests of all the beneficiaries (s. 26(a) of the Trusts Act 2019), and the wishes of the settlor, in their decision-making process. In fact, it is a good idea to formally record in the trustee resolution that this has occurred.

MANAGEMENT NON-COMPLIANCE – LEGAL CONSEQUENCES

A.        Introduction – Civil vs Criminal Liability

Liability for non-compliance with statutory requirements falls into two categories: civil liability to others and criminal liability to the state.

Civil liability attaches where a statutory requirement (e.g., companies: major transactions must be approved by 75% majority of shareholders first) has not been fulfilled and the Act in question (e.g., Companies Act 1993) imposes personal liability on the parties responsible (e.g. directors) to ‘make good’ the loss.

Criminal liability attaches where the Act in question (e.g., Companies Act 1993) imposes a fine or term of imprisonment for non-compliance with a statutory requirement.

B.        Companies – Director & Shareholder Liability

The general rule is that shareholders and directors of a company are not liable for the company’s obligations and liabilities. However, there are exceptions to this, discussed below.

i)          Directors – Penalties & Personal Liability

Directors face potential liability under the Companies Act 1993 regime. They are liable for penalties in the form of fines (ranging from $5,000 to $200,000), or imprisonment (up to 5 years) if they fail to comply with the provisions of the Companies Act, listed in Section 373 and 374.

In addition, directors can be personally liable for company debts in certain circumstances, e.g. s. 300(1)

Major areas of potential personal liability for directors include:

• Where procedures for distribution (or share redemption) are not followed, the director may be liable to the company for any amount of the distribution which cannot be recovered from shareholders: 56(2).
• The director may be personally liable if the company did not satisfy the solvency test immediately after making a distribution: 56(2)(b).
• The director may be personally liable if s/he no longer believed on reasonable grounds that the company would satisfy the solvency test immediately after the distribution is made: 56(3).
• Where the company is liquidated and unable to pay its debts, the director may be personally liable if the company did not keep proper accounting records or failed to prepare financial statements: 300.
• Where the delegate has misused a director power, and the board has failed to monitor by “reasonable methods properly used” the exercise of the power (s.130(2)), the directors may be liable.
• A director may also be liable for:
  • knowingly making false statements in a document required by the Act (s.377)
  • fraudulently using or destroying property of the company (s.378)
  • falsifying records with intent to defraud or deceive (s.379). Other directors can be responsible for failing to take adequate measures to prevent or detect falsification (s.190(2)).

Of course, directors are also liable if they breach their duties (civil liability) e.g., s.135 (reckless trading).

Note that the director has defences for offences in s.376. The board or director would need to show that they took all reasonable and proper steps to ensure compliance with the Act.

ii)        Shareholders – Lifting the Corporate Veil

We have already seen that shareholders may be liable in terms of s.97(2) and s.97(3), e.g., for amounts unpaid on their shares and for calls properly made by the board.

Note that the original shareholder remains liable for amounts that are unpaid on shares (s.100(2)).

The law regards shareholders as SEPARATE from the company itself: s.15 of the Companies Act 1993 – “a company is a legal entity separate from its shareholders”.

• The case law supports this principle, especially: Saloman v Saloman & Co Ltd [1897] AC 22 (House of Lords, England) and Lee v Lee’s Air Farming Ltd [1961] NZLR 325 (Privy Council).

However, in certain circumstances the Court will ‘lift the corporate veil’ and hold shareholders accountable (i.e., liable) for the company’s debts where the company is set up as a ‘fraud’ or ‘sham’ for the shareholders to hide behind.

Examples of lifting the corporate veil:

• Where shareholders are not following the formalities of operating a company (i.e. irregular meetings, incomplete documentation and resolutions).
• Where the corporate veil was used to unfairly circumvent a restraint of trade clause in an employment contract: Gilford Motor Co Ltd v Horne [1933] Ch 935 – an employee left Gilford Motor Co Ltd, set up his own company and competed with his former employer (through a company structure) in breach of the restraint of trade clause in his employment contract.

The risk of having the corporate veil lifted is why it is vitally important that companies hold properly called and documented annual and special meetings in shareholders and directors, and that the annual reports are sent out to shareholders in time.

C.        Partnerships: Joint & Several Liability

Every partner is liable jointly for all debts and obligations of the firm (each partner is an agent of all other partners in the partnership: s.18) (s.22 of the Partnership Law Act 2019). This means third parties may sue the partners together (‘joint liability’). The liability of partners to third parties will be discussed in more depth in Week 10.

D.        Trading Trusts: Trustee Liability

• Trustees are personally liable for all trust debts and obligations (s. 81(1) of the Trusts Act 2019). The liability is joint.

By s. 81(2) of the Trusts Act 2019 a trustee who incurs an expense or a liability when acting reasonably on behalf of the trust may obtain reimbursement or pay from trust property.

A trustee’s liability can be limited or indemnified by a ‘trustee limitation of liability clause’ in a contract. Alternatively, a corporate trustee could be used.

• i) A trustee commits a breach of trust when he or she does not act in accordance with the Trust Deed or the law (e.g., borrowing money from a bank over and above what the Trust Deed specifically allows). The legal consequences that flow from a breach of trust are:
  • Trustee is personally liable to compensate the beneficiaries for any loss to the Trust (caused by the breach of trust);
  • Trustee is personally liable to account for any profit made through using the trust property in breach of trust; and
  • Trustee will lose his/her right of indemnity against the trust assets if sued by a third party (i.e., will have unlimited personal liability to the trust creditors in respect of the breach of trust that cannot be recouped out of the trust assets).

1. ii) Relief for Breach of Trust

If the trustee has committed a breach of trust s/he may be indemnified from trust property if all the beneficiaries agree (s.82(1) of the Trusts Act 2019). There are conditions for this to happen, found in ss. (2). There can be no indemnification if the breach of trust arises from the trustee’s dishonesty or wilful misconduct (s. 82(3)).

Trust deeds must not limit or exclude a trustee’s liability for a breach of trust, or provide an indemnity against the trust property for liability for dishonesty, wilful misconduct or gross negligence (ss. 40 and 41).

Any trust deed that purports limit the liability of the trustee or to indemnify them in breach of these provisions is invalid (s. 42).