Becoming a company director in New Zealand takes about ten minutes and a Companies Office filing. Understanding what you have signed up for takes rather longer. The Companies Act 1993 imposes a set of personal duties on directors that do not disappear because a company is small, because you are the only shareholder, or because someone else runs the day-to-day operation.
This is an explanation of those duties, not legal advice. If your company is under financial pressure, take advice early rather than reading and hoping.
Who counts as a director
The obvious answer is anyone appointed and recorded on the register. The Act reaches further than that. A person who is not formally appointed but who gives instructions the board is accustomed to following can be treated as a director, and carry the same duties. This catches the family member who really makes the decisions, the investor who directs strategy from outside the boardroom, and the former director who never quite stepped back.
The practical point: you cannot avoid the duties by staying off the register while continuing to run the company.
The core duties
Five obligations do most of the work in practice.
- Act in good faith and in the best interests of the company. The company is the beneficiary, not you personally and not the shareholder who appointed you. Where those interests diverge, the company wins.
- Exercise powers for a proper purpose. Powers granted for one reason cannot be used for another — issuing shares to dilute a troublesome shareholder is the classic example.
- Comply with the Act and the constitution. Ignorance of your own company’s constitution is not a defence.
- Exercise reasonable care, diligence and skill. Measured against what a reasonable director would do in the same circumstances, taking account of the nature of the company and your particular role and expertise. A director with accounting qualifications is held to a higher standard on financial matters than one without.
- Avoid reckless trading and improper obligations. Two separate duties, and the ones that most often bite.
Reckless trading is where directors get caught
A director must not agree to the business being carried on in a way likely to create a substantial risk of serious loss to creditors. Separately, a director must not agree to the company incurring an obligation unless they reasonably believe it can be performed.
These two duties matter most when a company is struggling. The temptation is to keep trading, take another order, and hope that the pipeline turns things around. Where directors keep taking deposits or ordering stock while insolvency is realistically in view, personal liability becomes a genuine possibility, and liquidators do pursue it.
What protects a director here is not optimism but process: current financial information, a documented and realistic assessment, a plan with dates attached, and evidence that you stopped when the plan failed rather than when the money ran out.
Conflicts and disclosure
Directors must disclose interests in transactions to the board and record them in the interests register. This applies to the ordinary situations that small companies run into constantly — leasing premises from a director’s family trust, buying services from a company a director also owns, guaranteeing related-party debt.
Disclosure is not an admission that something is wrong. Failure to disclose is what creates the problem, because it can make the transaction voidable and it undermines your position if the arrangement is later challenged.
Solvency, distributions and the paperwork that proves it
Dividends and share buybacks require the board to be satisfied the company will pass the solvency test — able to pay debts as they fall due, with assets exceeding liabilities. Directors who authorise a distribution without reasonable grounds can be required to repay it personally.
The recurring theme across every one of these duties is the same. The duties are judged on what a reasonable director would have done with the information reasonably available, and the only durable evidence of that is a contemporaneous record. Board minutes that record what was considered, what was decided and why are unglamorous, and they are the single most useful thing a small-company board can do to protect itself.
What this means in practice
For most small New Zealand companies, meeting these duties comes down to a short list of habits: read the financial statements rather than filing them, hold and minute real board meetings even if the board is two people, keep the interests register current, and treat any period of financial stress as the moment to get advice rather than the moment to press on.
None of that is expensive. Reconstructing it after a liquidator asks is.
