Directors' Duties - What Directors Need to Know

Tuesday, July 18, 2017

In New Zealand, there are few prohibitions on who can become a director of a company, and no real qualification requirements.  This means that some people become directors without actually understanding what their role requires.  This can result in a company not being managed and governed as required by the Companies Act 1993 ("Act"), which in turn can lead to a breach of duty, which can have very serious consequences, up to and including personal liability for company debts or even criminal sanctions in the worst of cases.

This brief article simply provides an overview on a director's core duties under the Act.  Over time, we will be adding (as links) more specific articles relating to those duties and how New Zealand Courts have dealt with breach of duty cases before them.

It is very important to be aware that Section 138 of the Act allows a director to rely on professional and expert advice given by certain persons when exercising powers or performing duties as a director – professional or expert advice can assist in avoiding a breach of duty, although only where the director acts in good faith in relying on that advice, makes proper inquiry where the need for enquiry is indicated by the circumstances, and has no knowledge that such reliance is unwarranted.

Article:              Company Law:  The importance of professional advice

Section 131:    Duty of directors to act in good faith and in best interests of the company

Subject to exceptions set out in Section 131, a director of a company, when exercising powers or performing duties, must act in good faith and what the director believes to be in the best interests of the company.

The exceptions relate to allowing directors of subsidiary companies to favour the interests of the parent company (if that is expressly permitted by the constitution of the company) or for joint venture shareholders to act in the best interests of shareholders (if expressly allowed by the constitution of the company).

Section 132 provides that Section 131 does not limit the power of a director to make provision for the benefit of employees of the company in connection with the company ceasing to carry on the whole or part of its business, although the provision made for employees must comply with the Act and be exercised for a proper purpose.

Article:              Section 131:  Acting in good faith and in the best interests of the company

Article:              Mike Pero

Section 133:    A director must exercise a power for a proper purpose

Section 134:    Directors to comply with Act and constitution

A director must not act, or agree to the company acting, in a manner that contravenes the Act or the constitution of the company.

Article:              Mike Pero

135    Reckless Trading

A director of a company must not -

(a)    Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious
        loss to the company's creditors; or

(b)    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.

Article:              Reckless Trading - Case Studies

136   Duty in relation to obligations

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.

137    Director's duty of care

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, -

(a)     The nature of the company; and

(b)     The nature of the decision; and

(c)     The position of the director and the nature of the responsibilities undertaken by him or her.

Criminal Offences:

Section 138A:  Offence for serious breach of director's duty to act in good faith and in best interest of the company

(1)    A director of a company commits an offence if the director exercises powers or performs duties as a director of
        the company -

        (a)    in bad faith towards the company and believing that the conduct is not in the best interests of the
                company; and

        (b)    knowing that the conduct will cause serious loss to the company.

(2)    However, a director does not commit an offence under subsection (1) if the power or duty in question is
        exercised or performed under any of Section 131(2) to (4) or is a power exercised under Section 132.

(3)    A person who commits an offence under this section is liable on conviction to the penalties set out in
        Section 373(4).

This section is a relatively new addition to the Companies Act 1993 – it is uncertain when a director wholly favouring their own interests and causing loss to a company as a result may become criminally liable under this section – however, it is best to always act in accordance with advice and the duties set out previously in this article to avoid a potential prosecution.  The penalty for being found to have committed an offence under this section is a maximum five years in prison or a fine not exceeding $200,000.00.

Section 380:  Carrying on business fraudulently or dishonestly incurring debt

Among other dishonesty offences, Section 380(1) provides:

(1)    Every person who is knowingly a party to a company carrying on business with intent to defraud creditors of the
        company or any other person or for a fraudulent purpose commits an offence and is liable on conviction to the
        penalties set out in Section 373(4) of this Act –
        which provides the same potential penalties as a contravention of Section 138A (mentioned above).

Please kindly direct any enquiries to:

Andrew Knight on (09) 306 6730 ( or

Harry Forsythe on (09) 306 6727 (

© McVeagh Fleming 2017 

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.


Recent Posts


Gifts Financial products Domestic violence Temper Marriage Invalid wills Valid wills Trusts Bill Re Estate of Feron Charity Financial services Asset Protection Constructive trusts Personal Properties and Securities Act 1999 Living standards Violence Consumer credit contracts Residential Skilled migrant points Rest Home Subsidies Changes Employment Undue influence Estate Administration Anti-money laundering (AML) Lease Titles Wills Act 2007 Section 11 Companies Act 1993 Ministry of Social Development Case Study Acknowledgment of Debt Immigration New Zealand Executors duty Section 15A Contract Law Verbal abuse Health and Safety Reform Bill Pattern of offending Mortgage Subsidies Tamarapa v Byerley Interpretation of documents Relationship Property KiwiSaver Protection Order Financial services provider (FSP) Property Re Estate of Campbell Lump sum Recovery of money Grey Power Family Protection Act 1955 Wilson v Donnellan Division of Functions Visa application Credit Contracts and Consumer Finance Act 2003 (CCCFA) Compensation Limitation defence Trust Check Up Body Corporate Administrators duty Amundson v Raos Commercial Law Civil union Hawkes Bay Trustee Company Limited v Judd Personal Landlord Break up Abuse Wills Act 2007 Section 8 Clayton case Protector Interpretation Act 1999 Section 29 Charities Interest Fair share Mortgagee Commercial Zero Hour Contracts Document Disclosure Validity of Wills Tenants Gifting Property (Relationships) Act 1976 Testamentary writing Directors' Duties Section 15 Expression of interest Shareholders' Agreement Immigration Physical abuse Income White v White Litigation Principal Work and Income Twelve years Resident Lease Unfair contract terms Broadbent v Ministry of Social Development Offending Privacy Act 1993 Trusts Contract and Commercial Law Act 2017 Duress Financial Advisers Act 2008 Albany Office ''Best Endeavours'' Trustee Duties Family Trusts Six years Business Blackwell v Hollings Section 182 Family Proceedings Act 1980 Creating Trusts Fair Trading Act 1986 Eviction Will that do Charity begins at home Skilled migrant Economic disadvantage Ilott v Mitson 2017 UKSC 17 De facto Limitation Act 2010 Elder Law Reckless Trading Loss of income Will Mortgagor Limitation Act 1950 Testamentary freedom Intellectual Property Repayment Wills Interpretation Act 1999 Erceg v Erceg WINZ SN v MN [2017] NZCA 289 Psychological abuse Commercial Property Due Diligence Testamentary capacity Murrell v Hamilton Claims against estates Wills Act 2007 Section 14 Trust Confidentiality Legislation update Auckland Office Terms of Trade Testamentary Promises Limitation period Company Law Sale of Goods SMC Wills Act 2007 Beneficiary Rights Lankow v Rose Seperation Tenant Frustration Acknowledgment Part payment Trust busting Ministry Domestic Violence Act 1995 Deceased's wishes Financial Markets Conduct Act 2013 (FMCA)