Banned directors

In addition to investigation and prosecution of offenders under various legislation, the National Enforcement Unit also assesses and determines whether candidates should be prohibited from being directors of a company under section 385 of the Companies Act 1993.

Among the reforms introduced by the 1993 Companies Act legislation was a significant amendment to the power of the Registrar of Companies to prohibit directors or managers of failed companies from future directorships or management positions.  The prohibition power is designed to protect the public from directors or managers who have a track record of commercial failure.  It affirms the accountability of directors and managers to creditors and shareholders as demanded by the Companies Act 1993.

Section 385 of the Companies Act 1993 gives the Registrar of Companies the power to prohibit a 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 for a period not exceeding five years.

If a person is convicted of breaching the prohibition order, they are liable to imprisonment for a term not exceeding five years or to a fine not exceeding NZ$200,000.

This website holds a database of prohibited persons including those prohibited under section 385.

This database contains details of directors that have been banned (prohibited) from managing companies under either the Insolvency Act 1967 or Companies Act 1993.  A search will confirm whether or not an individual has been banned, details of the Act under which the director was banned, the duration of the prohibition and lists the companies they were associated with.  Searches of this database are FREE.

The banning of a person from being a company director or from managing a company can be initiated in a number of ways, including:

• By the Registrar of Companies.

• By the Court following an application by the Official Assignee.

• Automatically, if a person becomes bankrupt.

• Automatically, if a person is convicted of certain offences.

The length of time a person is banned varies, depending on the way in which the prohibition occurred.

Prohibition pursuant to Section 385 of the Companies Act 1993 

Section 385 of the Companies Act 1993 sets out the framework for the prohibition process:

1. The person must have been a director of, or concerned in, or a person who took part in, the management of one or more companies.
2. One or more of these companies must have “failed” within the previous five years. “Failed” companies include those which have been liquidated, placed into receivership or have ceased trading because they were unable to pay their debts as and when they fell due.
3. If the person has been a director or manager of two or more failed companies, that person must satisfy the Registrar that either mismanagement was not even a partial cause of the failures; or that it would not be “just or equitable” to exercise the power.
4. If there has been only one failure, the onus of proving mismanagement rests with the Registrar.
5. The Registrar must then notify the person of his intention to consider exercising the power, and consider any submissions that person wishes to make to the Registrar.
6. If prohibition is warranted, a prohibition period is then set, and the person is formally notified of this fact.

The criteria, relevant to taking prohibition action includes:

• the number of failed companies
• the degree and incidences of mismanagement
• the existence or absence of any external factors
• the degree of managerial control exercised by the person concerned
• the amount of the deficiency to creditors
• the number of creditors and
• the strength of evidence for prohibition.

There is an avenue for lodging complaints about corporate delinquency.

The disqualification process is complaint driven, although reports in the public domain may also give rise to an investigation.

Prohibition action usually stems from information supplied by the liquidator of a company.  Referrals may, however, be forwarded to the Registrar from any source.  Documents relating to the company in question or formal reports on the role played by persons in the management of such companies may also be submitted.

Action by the Registrar under section 385 is discretionary, and the Registrar will consider whether there is a possible risk to the public in allowing the person to act as a director, manager or promoter of a company.  Before any action is taken, a referral must be accompanied by some evidence which:

• identifies that the person was involved as a director of or manager of one or more companies that have failed within the last five years, and
• establishes some grounds for the belief that mismanagement was at least partly responsible for the failure of one or more of those companies.

The object is not, however, to use it against merely unsuccessful entrepreneurs so as to stifle all enterprise.  It is not so much a penalty for past misconduct but a method of protecting the public from future misconduct.