Directors do not need to consider creditors'
interests when determining the fairness of their own remuneration,
even after the company has become insolvent, the Court of Appeal
The Companies Act 1993 requires that directors who vote to
authorise director remuneration must sign a certificate stating
that, in their opinion, the payment is fair to the company and
setting out the grounds for that opinion.
Liquidators of Petranz Limited, and the company itself, sued the
company's directors for authorising remuneration which they
alleged was unfair to the company.
The company became insolvent but continued trading. During this
period the directors continued receiving salaries. Upon
liquidation, the company's largest debt was owed to Inland
The High Court found the directors breached their duties
(including by reckless trading), failed to keep proper accounting
records, and failed to follow the correct procedures when
authorising directors' remuneration.
When directors fail to follow those procedures, they can be
required to repay to the company any remuneration which they cannot
establish was fair to the company, as in the
But that issue did not arise in this case as the High Court
found that the remuneration was fair because the company continued
to derive value from the directors' work after it had become
any remuneration paid to directors when a company is insolvent
is unfair to the creditors, unless it is for work done to stop the
company trading and to preserve the position of the creditors,
the duty to certify fairness of payments to directors is a
reflection of a director's fiduciary duties – which, when
the company is insolvent, require the interests of the
company's creditors to be considered.
Instead the Court found that, under the Companies Act, the
creditors are protected against the risk of improper distribution
of company assets to shareholders (for example, by the payment of
dividends) by the solvency test and by directors' duties not to
In contrast, the concept of "fairness" in the
Companies Act calls for a consideration of the potentially
competing interests of:
the company and its directors
the company and its shareholders, or
the shareholders themselves
but not the interests of creditors.
Interestingly, the Court of Appeal accepted that director
could have been (though was not) approved by shareholders via
the "unanimous entitled person consent" provisions of the
Companies Act; in which case
the directors would have been required to certify that the
company will satisfy the solvency test after the payment - and
would have been liable to repay that remuneration if the company
did not do so.
The Court of Appeal did not consider that this outcome was
inconsistent with its conclusions on the different roles which the
solvency test and considerations of "fairness" play in
the scheme of the Companies Act.
This conclusion is not completely convincing: it remains an odd
outcome that the test for the legitimacy of director remuneration
fairness (to the company, not creditors) where the remuneration
is approved by directors, but
solvency (which protects creditors) where the remuneration is
approved by shareholders.
But that outcome is not of the Court of Appeal's making, and
we agree that it was right not to let that one oddity distract it
from its overall analysis.
When certifying that director remuneration is fair to the
company, directors need not consider creditor interests, even if
the company's solvency is in question.
the decision to "purchase" director services is no
different to any other trading decision directors make - so they
should not take it if it would breach their duty not to trade
creditor interests will still be relevant to assessments of
personal liability for breaches of directors' duties, and
to minimise the prospect of future claims, directors should
ensure they follow correct processes to authorise director payments
and to certify solvency and/or fairness to the company.
1Madsen-Ries v Petera  NZCA
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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