Key responsibilities of a NZ company director

A director can also be someone acting in a director’s role, even if they aren’t formally appointed as a director. Someone who directs the company’s business, such as a shareholder who takes a very active role in the business, may be deemed as a director under the law (Companies Act 1993). These people are known as ‘shadow directors’ or ‘deemed directors’ and can still be required to meet the legal obligations and responsibilities of directors, even though they haven’t been officially appointed.

A company must have at least one director. There is no restriction on the total (maximum) number of directors a company may have.

What responsibilities do directors have?

Directors have what is called in law a ‘fiduciary relationship’ with the company. Fiduciary relationships exist where one person places a very high degree of trust and confidence in another person to act on their behalf. This fiduciary relationship means directors must generally act in the best interests of the company (rather than their own interests or the interests of any individual shareholder). The Companies Act 1993 sets out several duties (known as directors’ duties) directors must comply with, including not allowing the company to agree to an obligation unless the director believe the company will be able to perform the obligation; or exercising the degree of care, diligence and skill that a reasonable director would exercise in the same circumstance.

Directors who have resigned remain liable (ie, responsible) for their decisions as a director. Director obligations and responsibilities apply equally to non-executive directors (those who don’t work in the business) and executive directors (those who do work in the business).

What happens if directors don’t comply with their obligations?

Directors who breach their duties can be personally liable for significant civil and criminal penalties under the Companies Act 1993. Generally, directors owe their duties to the company, meaning the company can sue a director for a breach of duty. However, shareholders and creditors (such as the IRD) can take legal action against directors in certain circumstances. So, you shouldn’t assume that because you run a small family business, you are immune from prosecution, there is still a risk of claims from creditors.

Breaches of numerous sections of the Companies Act 1993 can impose personal liability on directors. Penalties can be $5,000-10,000 depending on the offence. For dishonesty type offences, penalties can be up to $200,000 and 5 years imprisonment. Also, under Section 138A of the Act, directors can be criminally liable for serious breaches of the duty to act in good faith. This occurs where a director acts in bad faith, believing the conduct is not in the best interests of the company and knowing the conduct will cause serious loss to the company. Breaches of section 138A can attract the same penalties as a dishonesty offence.

Directors are also exposed to personal liability outside of the Companies Act, such as under the Resource Management Act 1991, Health and Safety at Work Act 2015 (eg, unsafe work environment), Fair Trading Act 1986 (eg, for misleading and deceptive conduct), Commerce Act 1986, Financial Reporting Act 2013, Human Rights Act 1993, Privacy Act 2020 and under tax legislation to ensure tax obligations are complied with.

Directors could face claims from shareholders, creditors, suppliers, employees, regulators, liquidators, competitors, the general public or from the company itself.

How can directors protect themselves?

There are four key mechanisms directors can use to protect themselves from personal liability:

1. Take professional advice: The Companies Act allows directors to rely on reports, statements and financial data, and professional advice given to them by an employee (reasonably believed by the director to be reliable and competent in the matters concerned) or a professional adviser/expert (on matters reasonably believed by the director to be within their expertise), provided the director acts in good faith, makes proper inquiry where the circumstances indicate a need for such inquiry, and have no knowledge that reliance is unwarranted.
2. Indemnification: Require the company to indemnify you to the extent permitted under the Companies Act. An indemnity is essentially a promise to pay liabilities and costs incurred by a director in their role as a director. This must be permitted under the company’s constitution, and there are certain liabilities the company cannot indemnify the director for, such as criminal liability. An indemnity is typically documented in a Deed of Indemnity. See our Director Indemnity Bundle and Constitution for more information.
3. Insurance: Require the company to take out directors’ and officers’ insurance, to the extent permitted under the Companies Act. D&O insurance can provide additional protection in circumstances where the company’s indemnity doesn’t cover the liabilities incurred by the director. D&O insurance is complex, and there is huge variation in the terms and extent of cover amongst D&O insurance policies. It is important that directors understand the nature and extent of the protection provided and all the exclusions. We recommend discussing your needs with an insurance broker.
4. Personal asset structuring: Directors can also undertake personal structuring of their own assets to avoid having any substantial assets in the director’s own name in case they do face legal action .

Key points

There are significant consequences under New Zealand law for directors who do not comply with their legal obligations. If you’re a director of a Kiwi company, or you’re thinking about becoming one, ensure you’re familiar with all your responsibilities and protect yourself from personal liability.