This is an updated article of April 2022.
If you are a director of a company in New Zealand, you must comply with certain specific legal duties. You must comply with these duties regardless of whether you are:
- formally appointed as a director; or
- otherwise direct the company's business or act in the position of a director.
This article explains some of your duties as a director of a company in New Zealand.
Directors' Duties
The Companies Act 1993 (Companies Act) sets out the director's duties that apply. As a director of a company in New Zealand, you must as a minimum:
- act in good faith and in the best interests of the company;
- exercise due care, diligence, and skill that a reasonable director would exercise in the same circumstances;
- exercise powers for a proper purpose;
- comply with the Companies Act and the company's constitution;
- not engage in reckless trading; and
- avoid incurring obligations unless satisfied that the company will be able to honour them when required to do so.
Acting in Good Faith
When you exercise your powers or perform your duties as a director of a company in New Zealand, you must ensure that you act in:
- good faith; and
- in what you believe is the best interests of the company.
This means that, for example, you must avoid acts that promote your own interests at the expense of the company.
Acting in the best interests of the company is a subjective test and enables you to exercise discretion to use your business judgment (rather than consider what an ordinary or reasonable person might do in a similar situation).
This duty has certain limited exceptions. For example:
- directors of wholly-owned subsidiaries may, if expressly permitted under the constitution, act in a way that they believe is in the best interests of the holding company, even if that is not in the best interests of the subsidiary; and
- directors of a company that is carrying out a joint venture between the shareholders, may, if expressly permitted under the constitution, act in a manner that they believe is in the best interests of a shareholder (or shareholders), even if that is not in the best interests of the company.
Due Care, Diligence, and Skill
When exercising your powers or performing your duties as a director of a New Zealand company, you must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances. In doing so, you must take into account the:
- nature of the company;
- nature of the decision;
- position of the director; and
- nature of the responsibilities that the director undertakes.
This is an objective test of how a reasonable director in the same circumstances would act. You should make sure that you understand the business and the financial statements, and always exercise informed independent judgment. You should not rely on the other company directors to inform you.
Reckless Trading
You must not engage in reckless trading in relation to the company. In other words, you must not allow or cause the company to carry out its business in a manner that is likely to create a substantial risk of serious loss to the company's creditors.
This is an objective test. It is also possible to breach this duty even if you allow reckless trading to occur through no positive action, or rely on the guidance of more active or dominant members of the board. Accordingly, it is important that:
- you actively take part in the company's business and understand its financial position; and
- you do not agree to the company incurring an obligation unless you believe, on reasonable grounds, that the company can meet that obligation.
What Happens if I Breach My Duties?
If you breach your duties as a director, you may have to pay a penalty.
You could also be held personally liable to repay or restore funds if the company goes into liquidation and you are found to be in breach of one of your duties as a director of that company.
In addition, for serious breaches of director duties you may be convicted of a criminal offence and liable to up to five years imprisonment or a fine of up to $200,000, if you:
- act in bad faith towards the company;
- believe that your actions are not in the best interests of the company; and
- know that your conduct will cause serious loss to the company.
If you are considering directorship of a company in New Zealand, you should undertake due diligence to understand the business and how the board operates. Ensure that the company will indemnify you and has in place sufficient director and officer insurance that you can access.
Key Takeaways
If you are considering directorship of a company in New Zealand, ensure that you understand what your duties as a director are. You should do your research so that you understand the company's business and you should also seek independent expert and professional advice to make sure you are protected from any personal risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.