Given the current economic uncertainties, it is timely to consider the duties of company directors. The penalties for breaches can be harsh, and it is important to be aware of your responsibilities to the company, its shareholders, and third parties.
We address some commonly asked questions below.
Am I a director?
A company must have at least one formally appointed director. The Act contains a broad definition of a director, which includes people who are acting in a directors' role, even if not formally appointed.
In the shadows
Director's duties can apply to persons who are not formally appointed as directors. If you direct the company's business, act in the position of director, or if the board is required or accustomed to following your direction you could to be considered a director for the purposes of the Companies Act 1993.
Can I delegate my duties?
Subject to the company's constitution the board may delegate powers under the Companies Act 1993 to a committee of directors, another director or an employee of the company. Schedule 2 to the Companies Act sets out the powers that cannot be delegated.
The board that delegates the power is responsible for the exercise of the power by the delegate. The board will not, however, be responsible where the board believed on reasonable grounds that the delegate would exercise the power in conformity with the duties imposed by the Companies Act and the Company's constitution, and where the board has monitored the delegate's exercises of the power. It is therefore important that, directors monitor delegates continuously.
What are the key duties I need to know?
The Companies Act 1993 sets out the following duties:
- A duty to act in good faith and in the best interests of the company.
- A duty to exercise powers for a proper purpose.
- A duty to comply with legislation and the company's constitutional documents.
- A duty to avoid reckless trading.
- A duty not to agree to obligations that the director does not reasonably believe the company can fulfill.
- A duty to act with the care, diligence, and skill that a reasonable director would exhibit.
- A duty to disclose any conflicts of interest and declare any interest in a proposed transaction.
What degree of care, skill, and diligence must I exercise?
A director must exercise the care, diligence, and skill that a reasonable director would exercise in the circumstances, taking into account:
- The nature of the company.
- The nature of the decision.
- The position of the director and the nature of the responsibilities undertaken by him or her.
The test is objective. However, these are subjective considerations. The position of the director is compared with directors in similar circumstances. The expectations of a director of a small closely held company are likely to differ from those of a director of a large publicly listed company.
It is important to note that you can breach a duty by failing to do something or 'letting' something happen. You must therefore ensure that you have a reasonable knowledge of what is happening within the Company at all times.
What is good faith and in a manner the director believes to be in the best interests of the company?
The test is subjective (what the director honestly believed to be right) however the courts also consider an objective test –that is, how a reasonable director would be expected to act in the circumstances.
Directors must consider the company as a whole – they must not ignore the interests of minority shareholders and must not act in the interests of only one class of shareholder in the company.
Subject to the terms of a company's constitution, a director who is interested in a transaction may vote on a matter relating to that transaction.
Transactions involving self-interest
Under the Companies Act, a director must disclose any interest in a transaction. Section 139 sets out the circumstances in which a director may be interested and includes a transaction where a director is a party to the transaction, or may receive a material financial benefit either personally or via a material financial interest in another party. The transaction may be able to proceed providing the required consents are obtained.
Failure to disclose an interest may lead to a transaction being set aside.
Directors have a duty to prevent a company from trading whilst insolvent. A company is insolvent if it is not able to pay its debts as they become due.
What liabilities do directors face should they fail to comply with their obligations?
Shareholders can bring claims against directors for breaches of duty either themselves, or, where the duty was to the Company, a claim can be brought in the name of the Company via a derivative action. A Court order is needed for a derivative action.
The Court has wide powers to order relief, including ordering the director to repay money with interest and compensation payments.
Under Section 138A of the Companies Act, directors can be criminally liable for serious breaches of the duty to act in good faith where the 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. There are some exceptions to this, however where an offence has been committed, penalties can be fines of up to $200,000.00 and prison terms of up to 5 years.
Do I have a defence?
You may have a defence against a claim for reckless trading if you can show that you have acted reasonably and relied on professional advice.
How can I be protected?
A company may, if permitted by its constitution, indemnify its directors in respect of liability to third parties, but not in respect of criminal liability or breach of the duty to act in good faith.
The Companies Act allows a company to provide insurance for directors in certain situations, as set out in Section 162 of the Companies Act. Again, liability for criminal acts cannot be insured against.
What other procedural matters do I need to understand?
The Companies Registrar maintains the online company records. Annual Returns must be filed every year, and the directors must ensure that the Companies Office records are kept up to date. Changes in directors or changes to a company director's details must by notified to the registrar within 20 working days of the change occurring.
Appointment of Directors
Subject to the constitution of the Company, generally directors are appointed by ordinary resolution of the shareholders. Directors of a company may have the power to appoint alternate directors.
Directors have an obligation to call at least one annual shareholders meeting (subject to the Companies Act and the Company's constitution if there is one). The Companies Act (subject to the Company's constitution) sets out the procedures for calling meetings and the procedures at the meetings.
Are there duties outside of the Companies Act?
The Resource Management Act 1991 governs the protection of the environment in New Zealand. A director of a company may be found guilty of an offence committed by an employee or agent where the act that constituted the offence took place with the authority, permission or consent of the director, and the director knew, or could reasonably be expected to have known that the offence was to be committed and failed to take all reasonable steps to prevent or stop it.
Health and Safety
Under the Health and Safety at Work Act 2015, directors have a duty to exercise due diligence to ensure that the company complies with its health and safety duties and obligations. These duties cannot be delegated. Directors will be personally liable if they breach their due diligence duty and can be penalised with hefty fines and/or prison sentences. Directors, therefore, must maintain sufficient knowledge of Health and Safety matters to ensure that their obligations are met.
Directors have an obligation to ensure that a company meets its tax liabilities. In a liquidation situation where it is established a director has breached a statutory duty, that director may be called upon to return funds to enable the company to meet its tax liabilities.
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.