If you are a director of a company in New Zealand, you must comply with your legal duties. You will be required to comply with the directors' 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.
- 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 Law and with the company's constitutions;
- 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 you should avoid acts that promote your own interests at the expense of the company.
There are certain limited exceptions to this duty. For example:
- directors of wholly-owned subsidiaries may act in a way that they believe is in the best interests of the holding company, even if that is not the case; and
- directors of a company that is carrying out a joint venture between the shareholders, may act in a manner that they believe is in the best interests of a shareholder (or shareholders), even if that is not the case.
However, these exceptions will only apply if they are expressly permitted by the company's constitution.
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 you undertake.
This is an objective test of how the reasonable director in the same circumstances would act. You should make sure that you understand the business and the financial statements and you should always exercise informed independent judgment. You should not rely on the other company directors to inform you.
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.
You will be in breach of this duty even if you allow reckless trading to occur through no positive action. Accordingly, it is important that:
- you are actively engaged in the company's business; 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, you may be convicted of an 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, talk to the board and make sure that the company will indemnify you or effect insurance for you during your directorship
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.