Can a Company Director Take Legal Action Against Another Director?

Running a company is no small feat. While serving as a company director is rewarding, it is not always smooth sailing. Sometimes, you and your co-directors may have disagreements over company management or misconduct. In such situations, you may wonder if legal action against your fellow director is an option. This article will provide an overview of when you, as a company director, can take legal action against another director.

Directors Duties

In New Zealand, company directors must uphold the overarching duties imposed by the Companies Act 1993. As a director, your duties include:

• acting in good faith and in the best interest of the company;
• exercising due care, diligence and skill that a reasonable director would exercise;
• exercising your power for a proper purpose;
• complying with the Companies Act and the company's constitution;
• not engaging in reckless trading; and
• avoiding incurring obligations unless the company will honour them.

Breaching your director's duties is a civil offence that brings significant penalties and may trigger legal proceedings.

Internal Resolution and Board Consultation

Prior to taking legal action against another director, you should first attempt to resolve your issues internally. Internal resolution may involve raising your concerns at a board meeting or opting to negotiate or mediate with your fellow director. This method is a beneficial first step as it aids in preserving your relationship with other directors and can help maintain the company's reputation. Internal resolution allows the company to continue operating smoothly while managing your dispute.

You may also want to send a legal letter requesting your fellow director to cease their actions. Your letter should include:

• the director's conduct;
• the impact of their breach; and
• a request for any relevant information or documents; and
• any undertakings necessary to stop further breaches.

If you wish to send a letter, you should engage a lawyer to help you clearly set out your legal rights and obligations.

Legal Action

As a director, you may take action against another director if they have breached their duties to the company. You have two key legal remedies available under the Companies Act:

• an injunction; or
• derivative action.

Injunctive Relief

An injunction is a court order that can restrain a company director who proposes to act in a manner that would breach their duties or the company's constitution. If you discover another director's intentions to breach their duties, you may apply to the court to prohibit them from doing so. However, remember that you cannot apply for an injunction for a past or completed breach.

The court will consider your application and decide whether to impose an injunction on the breaching director. It may also grant consequential relief or make an interim order if necessary.

NZ Directors Duties

Understand your role as a director and how to meet your legal obligations. Download our free guide today.

Download Now

Derivative Actions

A derivative action enables you, as a director, to bring legal proceedings against other directors who have breached their duties on behalf of the company. Essentially, a derivative action allows you to step into the shoes of your company to pursue legal action against your fellow director.

You may want to consider seeking leave for a derivative action where:

• a fellow director has breached their duties and brought financial loss or damage;
• your company has failed to or does not intend to bring proceedings, which often occurs when other directors are unwilling to bring action;
• you want to protect your company's interest against breaching directors whose actions may be detrimental.

While seeking leave to bring a proceeding against another director, you must notify your company of the intention to bring proceedings.

When determining whether to grant you leave, the court will consider:

• the likelihood of the proceeding succeeding;
• the cost of the proceedings in relation to the relief likely to be obtained;
• any action already taken by the company or related company to obtain relief; or
• the interest in the company in the proceedings commenced, continued, defended or discontinued.

When Will the Court Grant Leave?

The court may grant leave to bring a derivative action if satisfied that either:

1. the company does not intend to bring, continue, defend, or discontinue the proceedings; or
2. it is in the interests of the company that the conduct of the proceedings should not be left to the directors or the determination of shareholders.

Additionally, two more conditions must be satisfied:

3. the applicant must be acting in good faith; and
4. it must appear to be in the interests of the company that the proceedings be brought, continued, defended, or discontinued.

Key Takeaways

A company director may take legal action against another director where the director is in breach of their director's duties. The first step is commencing internal resolution or alternative dispute methods. Otherwise, there are two key legal pathways you can consider:

• an application for injunctive relief to stop a director intending to breach their duties; or
• if the director has already breached their duties, bringing a derivative action on behalf of the company.

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.