People often think that a company always means having limited liability when things go wrong.
However, directors can face personal liability when a company fails to meet its obligations, including persons not registered as directors but who exercise control. A director may be responsible for the acts/omissions of other directors.
1. Duty to the Company
In 2023, the Supreme Court in Yan v Mainzeal emphasised that directors must not allow business to be operated where it would create a substantial risk of serious loss. Even if a director has little involvement or knowledge of the company’s daily operations, every director must actively ensure that the company is not trading recklessly (e.g. trading while insolvent/entering into obligations it is not capable of meeting).
In 2024, the High Court in Boaden v Mahoney reiterated that directors must undertake a sober assessment of the company's financial position. Failure to do so can result in personal liability. The focus is not on a director’s belief. It is the manner in which a company’s business is carried on and whether it creates substantial risk of serious loss:
A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform.
2. Duty to Creditors
Directors must not agree to the company incurring financial or contractual obligations it is unable to meet. This cannot be based on a ‘hope’ or merely attempting to improve the company’s financial position. The belief must be based on reasonable grounds and directors are expected to take professional advice if necessary.
Directors may be personally liable for the company’s employment law breaches.
Directors should have an ongoing and monitored risk management plan for continued trading showing a reasonable basis for concluding the company can continue to meet its obligations.
In its 2024 decision of NZ LJ Food Express v Zeng, the High Court found that the director had breached duties by failing to prepare financial statements, improve revenue streams, engage with tax authorities or seek external advice. The director was held liable for $342,632 for reckless trading.
3. De facto Directors
It is not necessary to be named or registered as a ‘director’ in order to have obligations. The meaning of director under the Companies Act includes a person “who controls or who is entitled to control the exercise of powers”.
4. Practical Steps
Regularly review the company's financial position and operations;
Seek professional advice for the company when necessary;
Actively participate in board meetings and ensure that key decisions are documented;
Conduct thorough due diligence before agreeing to any significant transactions or obligations; · Consider personal asset protection and relationship property implications;
Consider insurance cover including Directors and Officers.
Whether as a creditor or as a director, we suggest you obtain timely legal and business advice before agreeing to any significant obligations or signing any documents. (Dave Hoskin) Director, E: david.hoskin@swlegal.co.nz
STEINDLE WILLIAMS LEGAL, Level 2, Suite 2.1, 18 Sale Street, T: 09 361 5563, www.swlegal.co.nz
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