This section explains the key features of companies and why a community group might want to adopt this particular legal form.
Key features of companies
Companies Act 1993, ss 10, 15, 97
- Minimum requirements – A company must have a name, one or more shares, one or more shareholders, and one or more directors.
- Separate legal identity – By registering and incorporating under the Companies Act 1993, a company becomes a body corporate under the name of the company, and therefore it has a separate legal identity distinct from its shareholders and directors. Until it’s liquidated, the company has a continuing existence even if the shareholders or directors change.
- Limited liability – Unless its constitution states otherwise, a company is a “limited liability” entity. This means a shareholder isn’t personally liable, beyond the value of their shareholding, for any of the company’s contracts, debts or other obligations, unless the shareholder has given a personal guarantee.
Why choose to become a company?
Although most community groups don’t choose the company form, it may be appropriate if you want:
- to keep control and decision-making in the hands of just a few people
- to provide those people with limited liability
- to make it easy to transfer ownership of some or all of the group’s property.
Registering and incorporating as a company
Companies Act 1993, ss 10, 12
To register and incorporate as a company you’ll need to apply to the Registrar of Companies at the Companies Office. Your company will need to have:
- a name
- one or more shares
- one or more shareholders
- one or more directors.
(For information about how to apply, visit the Companies Office website at: www.business.govt.nz/companies/learn-about/starting-a-company)
Companies Act 1993, ss 26-34
Although it’s not a requirement, it’s always a good idea for a company to have a specially drafted constitution that meets the company’s particular needs.
In general a company’s constitution can’t contradict the rules contained in the Companies Act 1993 and a provision in a constitution that tries to do this will be legally invalid. Some provisions in the Companies Act, however, state explicitly that they can be varied by the constitution.
A company can adopt a new constitution, or change or revoke its current one, only by a special resolution passed by 75 percent of the shareholders.
Companies Act 1993, ss 120, 121
A company must hold an annual meeting of shareholders within 18 months after it’s incorporated. Annual meetings must be held within six months after the company’s balance date and within 15 months after the last annual meeting.
A special meeting of shareholders can be called at any time by the board of directors or by someone authorised by the constitution.
Directors: Their role, powers and duties
Companies Act 1993, ss 128-138, 161
The board of directors is responsible for the day-to-day management of the company. The directors must comply with the Companies Act and the company’s constitution.
Directors can delegate their powers to individuals or committees, but they continue to be responsible for their duties and must make sure there’s a monitoring system for those delegated duties.
- act in good faith and in the company’s best interests at all times
- exercise their powers for a proper purpose
- exercise the care, diligence and skill that a reasonable director would exercise in the circumstances
- keep records of the basis on which important decisions are made – this will help establish that their decisions were reasonable if this is questioned later.
Directors must not:
- act, or agree to the company acting, in a way that contravenes the Companies Act or the company’s constitution
- agree to the company taking on obligations that the company can’t meet or that would create serious loss to the company’s creditors
- cause or allow the company’s business to be carried out in a way that’s likely to create a substantial risk of serious loss to the company’s creditors
- release or make use of any confidential information about the company.
Directors can be paid a fair amount for their role.
Companies Act 1993, ss 138A, 156, 164
Directors who breach their statutory duties can be removed from office by the company’s shareholders. The company, or any other director or shareholder, can also apply to the courts for an injunction to stop a director breaching his or her duties. There are also heavy criminal penalties if a director acts in bad faith, knowing that their conduct isn’t in the company’s best interests and that it will cause the company serious loss. In those cases the director can be jailed for up to five years or fined up to $200,000.
Records, reports and financial accounts
Companies Act 1993, ss 189, 194, 195, 208-214A; Financial Reporting Act 1993
- Records and registers – A company is generally required to keep a number of records at its registered office, including its constitution and minutes of all meetings and resolutions of shareholders and directors over the past seven years.
- Annual reports and returns – A company must prepare an annual report each year within five months of its balance date; this must be sent to all shareholders before the AGM. A company must also file an annual return with the Registrar of Companies every year, except for the calendar year in which it’s registered. Companies that register as charities also have some specific reporting requirements (see “Charities and charitable status / Administrative responsibilities of registered charities” in this chapter).
- Accounts – Some companies may be required to prepare annual financial statements and, in some cases, to file those statements with the Companies Office (for information, visit: www.business.govt.nz/companies/learn-about/updating-company-details/financial-reporting).
Dividends: Payments to shareholders
Companies Act 1993, ss 52, 53
A dividend is a payment made by the company to a shareholder in proportion to his or her particular shareholding. The board of directors can authorise the payment of dividends only once the company has satisfied the “solvency test” set out in the Companies Act. Alternatively, the shareholders can unanimously authorise a dividend.
Contracts and transactions with other people and organisations
Companies Act 1993, s 129
A company can enter into a contract with another person or entity. The appropriate way of doing this will depend on the particular kind of contract (see “Laws you may need to know about / Contracts” in this chapter).
A special shareholders’ resolution is required before a company can enter into a “major transaction”, which is where the value of the assets or obligations involved is more than half of the value of the company’s assets.
Liquidation and receivership
Companies Act 1993, Part 16; Receiverships Act 1993
“Liquidation” (or “winding up”) of a company is when it stops trading or becomes “insolvent” (this means when it’s unable to pay its debts or when it doesn’t have enough assets to meet its liabilities). The company’s assets are sold and the proceeds are paid to the company’s creditors according to what the company owes them and the priorities between those creditors themselves. Any surplus money will be distributed proportionately among the shareholders.
A company can be put into liquidation voluntarily or by the courts. Liquidation begins when a liquidator is appointed.
“Receivership” is when a creditor of the company or the courts appoint a “receiver” to take control of and manage the assets of a company that’s in financial difficulty. A receiver can be appointed by or on behalf of a secured creditor to protect and take control of the assets over which the security has been granted. Debentures creating a security over the company’s property often give the debenture holder the right to appoint a receiver.