A director is not absolutely liable for all losses
suffered by a company on his or her watch.
So the Court of Appeal has ruled in a recent liquidation
Rowan Johnston, a former investor and director in NZNet, pumped
funds into the company when it ran into difficulties, but found
that NZNet's managing director Stephen Andrews had misled him
about the company's financial position.
On 15 September 2011, he resigned his directorship and a couple
of months later, NZNet went into liquidation.
The liquidators sued the former directors for breach of duty in
the High Court, which found Mr Johnston had acted recklessly, but
did not order him to contribute to NZNet's assets.1
The liquidators appealed.
The Court of Appeal
As with the High Court, the Court of Appeal
accepted that Mr Johnston had failed to exercise reasonable
skill and care as a director, but declined to order that he pay
the liquidators had failed to establish the extent of the
deterioration of NZNet's finances between January and September
2011. In any event, Mr Johnston would have been entitled to an
allowance for the substantial advances he made to the company over
Mr Andrews as managing director was primarily liable for
NZNet's losses. Mr Johnston was not an executive director. He
did not run the company
Mr Andrews actively misled Mr Johnston over a sustained period
of time, and
the duration of Mr Johnston's breach was relatively short
– a matter of nine months.
Interestingly, one of the factors that influenced the
Court's decision was the position of the IRD, which stood to
gain the most from any compensation order. However, as the Court
pointed out, it allowed NZNet's tax debt to escalate without
taking any recovery steps. This led the Court to observe
There is an irony in the
liquidators' complaint that Mr Johnston should have moved
earlier when the company's second largest creditor was guilty
of the same inaction. The IRD's failure to act is unexplained
and inexplicable; if it had acted much earlier its claimed loss
would have been reduced accordingly. The IRD contributed
significantly to its own losses.
The Court of Appeal also questioned the economic benefits of the
liquidators bringing the claim when Mr Johnston's potential
liability was "very modest
The performance of a director will be measured by reference to
the particular responsibilities of that person within the
particular company structure.4 Even if a director is
found to have breached his or her duties, the Courts will still
address factors of causation, culpability and fairness when
deciding whether to order compensation.
For liquidators, the case highlights what most practitioners
know already: that claims against directors must be realistic,
well-prepared and supported by an adequate evidential foundation.
Not all claims against directors will be worth pursuing and not all
breaches cause loss resulting in damages.
1Grant & Khov v Johnston 
2Grant & Khov v Johnston 
NZCA 157 at 
3Grant & Khov v Johnston 
NZCA 157 at 
4Grant & Khov v Johnston 
NZCA 157 at 
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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