Companies are one of the most common business structures in New Zealand. Credit teams come across them on a daily basis and it’s important that they understand the key elements of a company and how to contract with them.

In this article, we explain what companies are, how to enter into contracts with them and things to watch out for.

What is a company?

A company is a separate legal entity, distinct from its directors and shareholders. This means that:

• Companies can enter contracts in their own names;
• Companies can sue and be sued;
• Companies can own, buy and sell property, grant security and borrow money;
• Shareholders do not own company assets. Instead, they own a share in the company itself;
• Shareholders are not liable for company losses. This is the principle of limited liability; and
• Directors can be personally liable in some circumstances, if they have breached their duties under the Companies Act 1993 (such as reckless trading or negligence).

In New Zealand, companies can be either:

• incorporated in New Zealand – this means the company was created in New Zealand under the Companies Act 1993; or
• registered in New Zealand – this means the company was created overseas and obtained registration in New Zealand (which any overseas company must do within 10 working days of commencing business in New Zealand).

What is the Companies Office and why would I use it?

The Companies Office is responsible for the incorporation and registration of companies in New Zealand. It maintains the Companies Office Register, which is a publicly searchable register of all companies incorporated or registered here.

The Companies Office Register is a really useful tool and should be your starting point for investigating a company. Things you can find on it include:

• the names and details of all current and former directors of a company;
• the names and details of shareholders (but for companies with extensive shareholder numbers this is not as straightforward);
• the company’s registered office address and address for service – useful if you need to serve a statutory demand!
• the Constitution of the company – which is the set of internal rules the company must follow;
• identifying whether the company is part of a group of companies;
• whether the company is in receivership, in liquidation, voluntary administration or statutory management (i.e. insolvency in some form); and
• keeping updated on insolvency progress, by reviewing the periodic reports that liquidators are required to publish on the Companies Office Register.

The Companies Office Register is also a good way to conduct basic credit checks for the directors and shareholders. By searching the names of directors and/or shareholders, you can find out what other companies they are/have been directors or shareholders of, which is a good way to find out if they have a history of involvement in companies with insolvencies.

How does a company enter a contract?

In general, companies can enter into a contract if they are signed by:

• a director; or
• any person who holds themselves out as having authority to sign on the company’s behalf. Most common signatories are senior managers, such as the CEO. Obviously, some care needs to be taken here – if in doubt, ask for evidence of delegated authority.

However, there are special rules for Deeds. Unlike an ordinary agreement or contract, for a company to validly sign a Deed it needs to be signed as follows:

• if there is only 1 director, by that director whose signature must be witnessed (and the directors cannot witness each other signing);
• if there are at least 2 directors, any 2 directors can sign and their signatures do not need to be witnessed;
• any other way that the company’s constitution allows. This means that sometimes, a company with more than 1 director can still sign by a single director signing if their signature is witnessed.

So, what is a Deed?

A deed is a legal document that contains a binding promise or commitment. Unlike an agreement, they:

• must be in writing, signed and witnessed; and
• they do not require consideration or payment from one party to another to be legally binding.

The most common uses for Deeds in New Zealand are:

• creating and amending trusts (such as a Trust Deed, Deed of Appointment and Removal of Trustee and Deed of Variation of Trust) – all must be done by Deed;
• acknowledging or forgiving debt – many loans are structured in this way;
• guarantees – where one party promises to take on the responsibilities of another (such as pay a loan the other party has borrowed);
• indemnities – where one party promises to make good any loss suffered by the other party if certain events occur (such as a breach of contract which forces the other party to seek legal action, in which case the breach and all legal costs may be payable by the party in breach);
• to protect confidential information (such as in a Non-Disclosure Deed or Confidentiality Deed); and
• gifting assets.

What are some red flags when working with companies?

There are several things to watch out for when dealing with companies. These include:

• Directors or shareholders that have been involved with other companies that have been placed into receivership, liquidation or been struck off of the Companies Office Register. This raises questions about credit risk and solvency;
• Changes in control – if you’ve entered into a contract with a company, presumably you have satisfied yourself about the creditworthiness of the business and its directors/shareholders. But what happens if the directors or shareholders change to people who you know nothing about, or that you wouldn’t have agreed to enter into a contract with? That is where change of control comes in – you should ensure your contract prevents a company from having a change in control without your prior written consent. Often, the threshold to trigger consent would be a change in 50% or more of the company’s shareholders, or a change in composition of the Board or power to appoint directors;
• Applications to put a company into liquidation – all applications to put a company into liquidation by a creditor must be publicly notified in the New Zealand Gazette and the main local newspaper where the company’s registered office is located. So read the Gazette and the public notices section of the newspaper to check if any of your customers are named;
• Signing – check that documents have been signed correctly as above. Pay particularly close attention to guarantees and debts. Have they been signed and witnessed as set out above?
• Is the company name correct on legal documents? Check the Companies Office Register to make sure it is the right legal name and where possible, include reference to the Company Number or NZBN in your terms of trade/credit contracts to avoid potential confusion if name changes occur;
• PPSR searches – make sure you take care when searching the PPSR for companies. Best practice is to search 3 ways – the full company name, a part name search and using the company number or NZBN. This reduces the risk that you miss financing statements registered by other secured creditors who have misspelled the name or used the wrong company number; and
• Struck off companies – sometimes a company may be struck off the Companies Office Register when you have a contract in place, or are owed debt. When a company is struck off, it means that it no longer exists. If this occurs, you can apply to the Companies Office Registrar to have the company reinstated – brought back to life.

Are there any useful debt recovery tools for dealing with companies?

Yes – the most useful debt recovery tool when dealing with companies is a statutory demand. This is a demand issued under the Companies Act 1993 and requires a company to either:

• pay the amount set out in the statutory demand, or enter into a compromise or give security to the creditor within 15 working days of service; or
• make an application to the High Court to set aside the statutory demand within 10 working days of service.

The timeframes for complying with or applying to set aside a statutory demand are strict and if they are not met, the company on which the statutory demand has been served is presumed by law to be insolvent. The creditor will then be able to file an application in the High Court to put the company into liquidation.

A crucial element for statutory demands is that they cannot be used for disputed debts, because of their serious consequences. So be sure that there is no genuine dispute about the debt before resorting to service of a statutory demand.