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Director prohibitions

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Registrar’s power of director prohibition

Section 385 of the Companies Act 1993 gives the Registrar of Companies (the Registrar) and the Financial Markets Authority (FMA) the power to prohibit persons who, within the previous five years, have been involved in the management of one or more companies that have failed due to mismanagement. Generally speaking the Registrar will only consider the prohibition of directors and managers of non-financial market participant failed companies, and the FMA will be responsible for consideration of the directors and managers of financial market participants.

Prohibition provides protection for the public from directors and managers of companies who have been unscrupulous, incompetent or irresponsible by ensuring that, for the period of prohibition, such directors are not able to take advantage of the limited liability status of a company, or be involved in the management of a company. The power of prohibition also acts as a deterrent and serves to set appropriate standards of behaviour for directors and persons involved in the management of companies.

Director prohibition is not intended to remedy any wrongs done to shareholders or creditors and it will not result in the recovery of any money that may have been lost as a result of a director’s or manager's actions
 

What is a “failed company”?

For the purposes of section 385, a failed company is one that, within the previous five years:

  • has ceased to carry on business, or been put into liquidation because it could not pay its debts, or in respect of which execution is returned unsatisfied;
  • in relation to which, or to the property of which, a receiver, manager, or statutory manager has been appointed to exercise control of the company pursuant to any enactment; or
  • has entered into a compromise or arrangement with creditors, or is in voluntary administration.

 

When can the Registrar exercise his power of prohibition?

The test for prohibition of a director or manager varies depending on the number of failed companies that a person has been involved with in the previous five years:

Persons who have only been involved with one failed company

The Registrar can prohibit only if satisfied that the manner in which the company was managed was at least partly responsible for its failure.

Persons who have been involved in two or more failed companies

The Registrar may prohibit unless satisfied that:

  • the manner in which the companies, or all but one of the companies, was managed was not responsible for their failure or
  • it would not be just or equitable to prohibit.

 

Process

The process followed by the Registrar includes giving the candidate for prohibition notice of the reasons that prohibition is being considered, and an opportunity to make representations before the Registrar makes any decision whether to exercise his power of prohibition.

 

Term and effect of prohibition

The Registrar’s power of prohibit is for a period not exceeding ten years, and prevents a prohibited person from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of a company.

Notice of a decision to prohibit is given to the person prohibited and published in the New Zealand Gazette. Prohibited persons are also recorded in the Companies Office disqualified directors database.
 

Automatic prohibition on conviction

In addition to the power of prohibition by the Registrar or the FMA under section 385, a person is automatically prohibited from acting as a director or manager if they have been:

  • Convicted of any offence in connection with the promotion, formation or management of a company or
  • Convicted of:
    • An offence under sections 377 to 380 of the Companies Act
    • An offence against section 58 of the Securities Act, or sections 51 or 61 of the Financial Markets Authority Act 2011
    • Any crime involving dishonesty as defined by section 2(1) of the Crimes Act 1961 or
    • The subject of a pecuniary penalty order under the Securities Act 1978.

 

How do you find out who has been prohibited?

You can search for a prohibited person on the Companies Register by carrying out a disqualified director search.

 

Further to this a person who has been adjudicated bankrupt is also prohibited from being a director of a company.  You can search the insolvency register for current bankruptcies on the Insolvency and Trustee Service website.

Visit the Insolvency and Trustee Service website now to search the insolvency register 

 

What are the penalties if a person acts as a director while prohibited?

The Companies Act 1993 makes it an offence for any person to breach a prohibition order, punishable on conviction by imprisonment for a term not exceeding five years or a fine not exceeding NZ$200,000.
 

Who do you contact to make a complaint about a director?

If you are aware of a director, or person who has been involved in the management of a failed company, who may qualify for prohibition then you should lodge your complaint using our online form.

 

When making a complaint it is helpful to set out in as much detail as possible the particular conduct that you consider amounts to mismanagement which caused the failed company or companies. If a complaint does not include sufficient detail of mismanagement, it may not be possible for the Registrar to consider prohibition of the person who is the subject of the complaint.

You should note that any information you provide to the Registrar may be disclosed to the director so that they are in a position to properly respond to the case against them.

After receiving a complaint the Registrar will conduct initial enquiries to gather information about the company and the reasons for failure. This will generally include making enquiries of any insolvency practitioners (liquidators or receivers) that have been appointed to the failed companies, seeking their views on the reasons for failure. 

 

Last updated 2 August 2017

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