New penalties for directors for failure to file companies' financial statements

New Penalties For Directors For Failure To File Companies Financial Statements

Recent changes to the Companies Act 1993 have extended and enhanced potential penalties for directors who struggle to comply with Companies Act financial reporting requirements. These new requirements took effect on 1 April 2014, but are not limited to accounting periods commencing after that date.

Directors should be aware that in some circumstances companies have obligations to file audited annual financial statements with the Companies Office. Under the Financial Reporting Act 2013, companies are obliged to file audited financial statements if they are defined as “large” under that Act, have 10 or more shareholders, or meet some other criteria, like issuing shares to members of the public. Under the earlier Financial Reporting Act 1993, which still applies to companies with accounting periods commencing before 1 April 2014, any New Zealand company that is a subsidiary of an overseas company also had to file annual financial statements.

Under the new sections in the Companies Act 1993, the Companies Office has the ability to issue directors with an “infringement notice” if they fail to file an annual financial statement within the timeframes specified in the Act. This infringement notice can come with an infringement fee of up to $7,000 for each director. Such an infringement fee operates as a quick fire, easy to issue penalty served not on the company, but on the offending directors personally.

The Companies Office is not limited to issuing the infringement notice, however. Failing to file annual financial statements is an offence under the Companies Act, and the Companies Office may choose to pursue prosecution of the directors. In such a case, the directors will be facing fines of up to $50,000 each for failing to file properly audited annual financial statements in breach of their obligation to do so.

Is this an as-yet-unused tool in the arsenal of the Companies Office? We are aware of circumstances in which these infringement notices have already been issued. The company’s directors were each charged the full infringement fee of $7,000 when filing of financial statements was only 5 weeks late. It appears that the old days of the Companies Office sending you regular reminders about your overdue financial statements may be gone; the Companies Office now seems prepared to use all the new (revenue gathering) tools at its disposal to crack down on such offences.

Please also note that the focus is not necessarily exclusively on directors, as companies are themselves open to a fine of up to $50,000 for committing a financial reporting offence such as failing to file financial statements.

These rules provide strong incentive for otherwise “passive” directors to engage more carefully with their company’s filing obligations under the Companies Act 1993. Directors who are worried they might have outstanding filing obligations should promptly check to ensure their companies are up to date with the company’s obligations.

To discuss the impact of this on your company, or for further advice as to whether your company falls within the requirement to file financial statements, please contact David Selkirk in our Commercial Law team.

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