Constitution
A company may have a constitution but there is no requirement for the same (The Companies Act, 1993 s.26).
The effect of a company not having a constitution – the directors, members and shareholders have obligations, duties, rights and powers set out in the Act (s. 28).
In the absence of a constitution, a director of a company must not act or allow the company to act in a way that contravenes the Companies Act (s. 134).
Therefore, companies do not require constitutions and in cases of no constitution, the dictates of the Companies Act govern its behavior (Findlaw.com, 2017, “Constitution”, para. 1). In the present scenario, the company has no constitution.
In performing their duties and exercising their powers, directors of a company must act in good faith and in the best interests of the company according to their belief (s.131) (Institute of Directors of New Zealand, 2017) (Parry Field Lawyers, 2017, “Who are duties owed to?”, para. 1).
Jude may have acted in the best interests of the company but not in good faith since his ultimate objective was personal profit.
A director in undertaking their responsibilities under the Act, may rely on information provided by experts, other directors or employees (s.138 (1)).
In relying on the information above, a director must act in good faith (s.138 (2)).
Sections 139 – 149 – Disclosure Requirements and Self-Interest
A director must disclose his interest in a transaction entered into by the company where he is a party or may receive substantial financial benefit from the same (s. 139).
As soon as Jude became aware of the interest he had in the transaction, the law requires him to have entered the same into the Interests Register (s. 189 (1) (c)).
Jude further owes a duty of disclosure to the Board of the nature, extent and value of the interest (s. 140).
Although failure in disclosing has no effect upon the transaction’s validity, Jude is liable to a fine of up to $10,000 (s.140).
Furthermore, the lack of disclosure constitutes a breach of the duty a director owes to shareholders.
Rights and Remedies of Prejudiced Shareholders
The first right that Ellery has against Jude is a personal action claim for breach of the statutory duty owed to him as a shareholder of the company.
Secondly, the Companies Act offers the right to bring a derivative action by a shareholder against a director (s. 165).
Here, Ellery is required by law to sue Jude on behalf of or in the name of the company (Findlaw.com, 2017, “Further Liability”, para. 10).
Ellery has the right of voting against the company when it proposes to enter into a major transaction. However, since the resolution passed, the law requires that the company must purchase at fair value, Ellery’s shares (ss. 106, 129 and 61).
Judicial remedies to prejudiced shareholders (s.174). Among the court orders include the right of compensation.
Offences and Penalties for Non-Compliance with the Act
Section 61 (9) – procedure for making offers to shareholders.
Duty to Act in Good Faith and in the Best Interests of the Company
Section 138A – Offence for when a director seriously breaches the duty to act in good faith and in the best interests of a company.
References
Parry Field Lawyers. (2017). Duties and Liabilities Imposed On A Director of A New Zealand Company. Retrieved March 28, 2017, from https://www.parryfield.com/duties-and-liabilities-imposed-on-a-director-of-a-new-zealand-company/.
Findlaw.com. Practical legal articles from FindLaw New Zealand. (2017). Retrieved March 28, 2017, from https://www.findlaw.com/12international/countries/nz/articles/954.html.
Institute of Directors of New Zealand Code of Practice for Directors. (2017) (pp. 1-3).
Legislation.govt.nz. (2017). Companies Act 1993 No 105 (as at 31 March 2017), Public Act 129 Major transactions – New Zealand Legislation. Retrieved May 9 2017 from https://www.legislation.govt.nz/act/public/1993/0105/latest/DLM320644.html.
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