One. That’s the number of directors banned from running a company last year by the Registrar of Companies.

Under the Companies Act, the registrar can choose to ban directors when companies fail as a result, even partly, of mismanagement, but insolvency practitioners question whether the system is working.

In the last 9 years, the registrar has banned 185 directors from overseeing firms, running at an average of 20 a year, but in 2011 the wheels fell off when Bridgecorp chairman Bruce Davidson appealed to the High Court against a ban the registrar was planning to impose.

The High Court upheld the ban, and banning orders have started to flow out of the registrar’s office again, but liquidators believe the system lets too many directors preside over multiple company failures. They say the system is ad hoc because of a lack of funding and “bureaucratic failure”.

They claim the Companies Office is under-resourced, as is the Official Assignee, which handles many liquidations. Further, creditors don’t seek bans often enough or fund liquidators to investigate company mismanagement.

Even the Inland Revenue Department, which was the petitioning creditor in 4713 liquidations in 2008, 2009, and 2010 of firms owing $816 million in tax, says it does not have a system to seek banning orders in cases of mismanagement.

Liquidator Robert Walker says liquidators are supposed to report to the registrar breaches of director duties, but few do so.

“There’s no point in reporting to a black hole. It just gets sucked in and disappears,” he says.

If they do report and the registrar tries to act, he says, it will simply produce a massive pushback by directors, who have a right to fight the bans.

“All directors would be writing in saying ‘No, no, no’.” It would be a deluge of calls for reviews. [the Companies Office] would be absolutely swamped.”

His solution is to charge more for company registrations to help pay for liquidators to seek bans through the courts.

Staples Rodway’s Gareth Hoole blames funding for the low numbers of bans. “Where it falls down is that the National Enforcement Unit just doesn’t have the funding.”

The Davidson appeal looks likely to exacerbate that. As a result of that decision, the Business, Innovation and Employment Ministry, which operates the Companies Office, says the registrar reviewed all director-prohibition cases to ensure they were compliant with the court process. In a significant proportion of cases, it was

necessary to gather further information about the failed firms and give the director the chance “to review and respond to this information before the registrar could proceed”.

While the Companies Act places the onus on directors of failed companies to satisfy the registrar that they should not be banned, the ministry says case law requires the registrar to undertake some investigation, such as identifying company mismanagement or director misconduct.

A director has no requirement to notify the registrar of previous failed companies when registering as a director of a newly incorporated company.

Bans of up to five years by the registrar, which were brought in after the 1987 sharemarket crash, are not meant to be punitive, but to protect our system of commerce and creditors from people unfit to carry out the role. The ministry stresses it does not seek to stifle innovation by banning entrepreneurs whose companies fail in the ordinary course of trading.

Ralph Chivers, chief executive of the Institute of Directors, says: “The vast majority of directors in New Zealand take their roles very seriously, are appropriately skilled and do a good job. Like any other profession that involves a position of trust and authority, it is important to have a robust system through which directors can be sanctioned. This is not only important to ensure those who have behaved criminally or negligently are sanctioned but it is also important for public confidence and the reputation of the profession.”

He says the system works “but there is room for improvement”. The various organisations that are part of the system need to be resourced appropriately and have good communication “to ensure the right information gets to the right places”. The institute, he adds, is pleased with some of the new sanctions brought in, including the ability to impose lifetime bans.

“There have been a number of recent improvements in the process for sanctioning directors who have been negligent or deliberately misled investors. The introduction of the FMA in May 2011 has led to a greater focus on compliance and ensuring the most serious offenders are prosecuted – something we think they have been doing very well.”

Chapman Tripp’s Ross Pennington says the country needs to focus more on growth than on negative perceptions that there were gaps in the law.

He points out the current system of penalties is working, resulting in jail sentences for wrongdoers. “For every dollop of retribution, let’s have a dollop of go-forward as well,” he says.

Source: Story by Rob Stock

Fairfax NZ News. Published 09/09/12

http://www.stuff.co.nz/business/7639682/Why-directors-of-failed-firms-can-dodge-bans