Directors’ Duties

Published in Business Law, Tim Brown

Many small business owners/operators are directors of companies, but not many are aware of their responsibilities, obligations and duties as directors. Below we summarise some of the important directors’ duties which are set out in the Companies Act 1993 (“Act”). The duties apply to all directors, regardless of the size or type of the company in which they are involved.

Duty of Directors to act in good faith and in best interests of company

Section 131 of the Act provides that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be in the best interests of the company.

In 2014 this duty was enhanced by the addition of section 138A of the Act, which targets deliberate and serious breaches of this duty. Parliament made it an offence where a director exercises powers or performs duties as a director of a company in bad faith towards the company and believing that the conduct is not in the best interests of the company and knowing that the conduct will cause serious loss to the company. Where a director commits an offence under section 138A of the Act, he or she will be liable upon conviction to up to five years’ imprisonment or a fine of up to $200,000.

Reckless Trading

Section 135 of the Act requires that a director of a company must not agree to, or cause or allow, the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Directors to comply with Act and Constitution

Section 134 provides that a director of a company must not act, or agree to the company acting, in a manner that contravenes the Act or the constitution of the company. This duty obviously requires that directors are aware of their obligations under the Act and the company’s constitution (if it has one).

Director’s duty of care

Under section 137 of the Act, a director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation, the nature of the company; the nature of the decision and the position of the director; and the nature of the responsibilities undertaken by him or her.

Duty in relation to obligations

Section 136 of the Act states that a director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

Powers to be exercised for proper purpose

Finally, section 133 of the Act provides that a director must exercise a power for a proper purpose.

If you are a director of a company, take note of the statutory duties described above and be mindful of them whenever exercising powers or performing duties as a director of a company, especially in respect of any related-party transactions where there may be a conflict of interest. As always, if in doubt, give us a call. A five minute phone call could save you plenty!

DISCLAIMER: The content of this document is general in nature and is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

Tim Brown has specialised in business/commercial law for over 13 years. Tim is an expert in all business law matters, including establishing new businesses, buying and selling existing businesses, restructuring and succession planning, commercial contracts, capital and debt funding, corporate governance and compliance.

For further information about directors' duties, please contact Tim.



Tim Brown (LLB, BCom)
Director / Solicitor

First Floor Conway Building
188 High Street
PO Box 576
Rangiora 7400

tim@conwaylaw.co.nz
www.conwaylaw.co.nz