A large number of New Zealand companies have directors who hold significant personal legal duties and have never held a board meeting. That is not a technicality — the duties apply regardless, and the absence of process is what makes them difficult to discharge.
The duties apply whether you meet or not
Under the Companies Act 1993, directors must act in good faith and in the best interests of the company, exercise powers for a proper purpose, comply with the Act and the constitution, exercise reasonable care diligence and skill, and avoid reckless trading and improper obligations.
Under the Health and Safety at Work Act, officers hold a personal due diligence duty that cannot be delegated or insured against.
Both are assessed against what a reasonable director would have done with the information reasonably available. The only durable evidence of that is a contemporaneous record.
Minimum viable governance
For a small company with two or three directors, this is achievable and unglamorous:
- Meet quarterly, with a short agenda and papers circulated beforehand.
- Minute decisions — what was considered, what was decided, why, and who does what by when.
- Review financial information at each meeting: results against budget, cashflow forecast, debt and covenant position.
- Health and safety as a standing item with substance, including leading indicators and critical risk review.
- Maintain the interests register and disclose transactions in which directors have an interest.
- Keep statutory records current — annual return, registered office, director and shareholder details.
That is perhaps six hours a year of meetings and it substantially changes a director’s position if anything goes wrong.
Interests and conflicts
Directors must disclose interests in transactions and record them in the interests register. This applies to the situations small companies encounter constantly: leasing premises from a director’s family trust, buying services from a company a director 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 a transaction voidable.
Solvency and the reckless trading duties
These are the duties that most often produce personal liability.
A director must not agree to the business being carried on in a manner likely to create a substantial risk of serious loss to creditors, and must not agree to the company incurring an obligation unless there are reasonable grounds to believe it can be performed.
The pattern that produces claims: a company under financial pressure continues taking deposits, ordering stock and accepting work while insolvency is realistically in view.
What protects a director is process — current financial information, a documented realistic assessment, a plan with dates, and evidence that trading stopped when the plan failed. Board minutes are the record of that.
Distributions require the board to be satisfied the company will pass the solvency test, and directors who authorise one without reasonable grounds can be required to repay it personally.
Advisory boards
An advisory board has no legal authority. It provides advice, challenge and accountability while the owner retains all decision rights.
Advantages: lower commitment, no director liability for advisers, easier to establish, and easier to change if it is not working.
It works only where the owner genuinely wants challenge. An advisory board that is ignored achieves nothing and wastes the advisers’ time.
Independent directors
Appointing an independent director brings external perspective and accountability, and it brings that person into the full scope of director duties — which is why competent independents ask questions before accepting.
What they will want: adequate financial information, directors’ and officers’ insurance, a genuine role rather than decoration, and a company that is not already in difficulty. Recruiting an independent director when the business is under stress is difficult for good reason.
Directors’ and officers’ insurance
Covers directors personally for claims arising from their conduct as directors. Relevant to any company with a board, including small ones.
Note that health and safety fines cannot be insured against. Defence costs and reparation orders may be covered depending on the policy.
Shareholder agreements are part of governance
The constitution and the Act deal with running a company. They say almost nothing about what happens when shareholders disagree, want out, or die.
A shareholders’ agreement covering transfer restrictions, valuation, deadlock, working obligations and dividend policy is the document that prevents the disputes governance cannot resolve. It is easiest to negotiate when everyone still gets on.
Where to start
If your company has never held a meeting: hold one, minute it, and set a quarterly rhythm. If you cannot say what your financial position was last month, fix that first, because governance without information is not possible.
The Institute of Directors publishes governance guidance and training, the Companies Office publishes director obligations, and the Companies Act 1993 is free at legislation.govt.nz with no copyright in the official text.
General information only, not legal advice.
