The following is a summary of the duties and obligations of Directors under the Companies Act 1993.

1. Management

The Board of Directors has primary responsibility for the financial performance and statutory compliance of the company. Where Directors have a role in the management of a company, the scope of their role should be explicit. The meaning of the term “Director” for the purposes of this statutory provision is very wide, including any person acting as a director or who is able to instruct a director.

2. Major Transactions

These should not be entered into without a special resolution or be conditional upon such a resolution.  A “major transaction” is one involving the purchase or disposition (or giving rights over) assets which are more than half the value of the company’s assets.  If the company undertakes such a transaction in breach it cannot rely on this fact to avoid its commitment to others.

3. Good Faith/Best Interests

A Director when exercising powers or performing duties on behalf of a company, must act in good faith and in what they believe is the best interests of the company. The duty preserves the right of the Directors to make a business judgment. What is in the best interests of the company will often, but not necessarily, be what is in the best interests of the existing shareholders. In the event of insolvency the company’s interests may be aligned with the creditor’s interests. The Courts will not generally “second guess” a Director’s actions or decisions provided they are supportable. There will be limits as to the degree to which Directors can rely on advice from others without making their own inquiries.

4. Proper Purpose

A Director must exercise a power for a proper purpose. The meaning of this statutory provision remains untested. It may be relevant where the Board is locked in a struggle with shareholders or endeavouring to forestall a take over. Where a Board engineers a share issue to produce more sympathetic shareholder support this may be a situation where Directors motives are questioned.

5. Compliance with the Companies Act and Constitution

A Director must not act or agree to the company acting in a manner that contravenes this Act or the company’s constitution. This provision does not create a separate offence but may be useful to shareholders obtaining relief against the Directors proposing to undertake (or refrain) from certain action.

6. Reckless and Insolvent Trading

A Director must not agree to the business being carried on in a way likely to cause substantial risk of serious loss to creditors or to cause or allow the business to be carried on in a way likely to create substantial risk of serious loss to company’s creditors. The Director must not agree to the company incurring an obligation unless he or she believes, on reasonable grounds, the company can meet that obligation when required. Directors should ensure that up to date financial records are kept and that they read and understand those records and reports. Although a business must be allowed to take risks and the fact of temporary insolvency may occur, what is significant is the decisions made, the action taken (or the inactivity of the directors) in light of that information.

7. The Duty of Care, Diligence and Skill

A Director when exercising powers and performing duties must exercise care, diligence and skill that a reasonable director will exercise. This is not a single standard but is based on the circumstances including the nature of the company, the nature of the decision and the Director’s position and responsibilities. This is an objective test, by which the Director’s actions will be measured. There is a limit to which a Director can avoid such a duty in the event of delegation and/or in the event of reliance on reports and financial statements and advice.

“……more is required of Directors than supine indifference the legislature requires diligence and action”

“……Directors should bring an informed and independent judgment to bear on the various matters that come to the Board for decision.”

A Director should understand the business, understand the financial statements and exercise informed independent judgment in every case.

8. Directors Interested in Transactions

A Director will be “interested” if in any company transaction:

• He or she is a party or
• Will or may derive material financial benefit
• Has a financial interest in a party to the transaction
• Is a Director/Trustee of another party that will obtain a material benefit (exceptions are made for wholly owned subsidiary and/or holding company)
• Has a close relative who will/may get a material benefit
• Is otherwise directly interested

In such a case the Director should declare his or her interest and record it in a register. If the transaction is not recorded in the register the company may have the option of avoiding the transaction if it did not obtain fair value at the time. The company can not use this provision to avoid a transfer to a genuine third party. A Director can still vote on the transaction and participate once their interest is noted. The boundaries as to what will be considered material are not precise and a prudent Director will generally disclose all transactions even where the interest is tenuous and the amount minor.

If you are a Director or are contemplating an offer of a directorship you should be familiar with the statutory and common law obligations that go along with being a Director in a New Zealand company.

If you have any questions relating to the duties that might be imposed in a specific situation you should obtain legal advice.