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Director Duties: Know your risks.
Being a director brings legal duties. These aren't optional, and ignorance isn't a defence. When companies fail, directors can face personal liability.
The Companies Act 1993 sets out specific duties for directors. Courts take these seriously. Understanding what's expected helps you act properly and protects you if something goes wrong.
These duties are not optional. They apply to all directors, whether appointed, deemed, or shadow directors. The standard is objective - your personal capabilities don't lower the bar.
Your core duties as a director
These statutory duties form the foundation of director responsibility in New Zealand.
Act in good faith and in the best interests of the company
Your loyalty is to the company, not to shareholders, employees, or yourself. This can create tension when shareholder interests conflict, but the company comes first. You must act honestly and with proper motives.
- - Company interests, not personal
- - Honest and proper motives
- - Manage conflicts carefully
Exercise powers for proper purposes
Don't use your position for purposes beyond what the role is meant to achieve. Issuing shares to block a takeover, for example, may breach this duty even if you believe it's in the company's interests.
- - Powers exist for specific purposes
- - Can't use for collateral benefits
- - Consider primary motivation
Not act in a way that's reckless or creates substantial risk
You must not act in a manner that a reasonable director would consider reckless. This includes trading while insolvent or taking unreasonable risks with the company's assets. This is the most common path to personal liability.
- ! Company can't pay debts
- ! Continuing to trade when insolvent
- ! Unreasonable business risks
Not agree to obligations the company cannot perform
Don't commit the company to things it can't deliver. If you know or should know the company can't meet an obligation, you may be personally liable to creditors who suffer loss.
- - Know company's financial position
- - Don't overcommit resources
- - Personal liability risk
Exercise care, diligence, and skill
Act with the care, diligence, and skill a reasonable director would exercise in the same circumstances. This is an objective standard - your actual skill level doesn't lower the bar. You are expected to acquire knowledge and skill to properly discharge your duties.
- - Objective reasonable person standard
- - Must acquire necessary skills
- - Can't hide behind inexperience
When directors face personal liability
Insolvent Trading
The most common path to personal liability. If you allow the company to trade while insolvent, or when insolvency is likely, and this causes loss to creditors, you can be personally liable for those debts.
Warning: Creditors can pursue directors directly when a company fails with unpaid debts and evidence of insolvent trading.
Breach of Director Duties
Breach of director duties can result in personal liability to the company. If your breach causes the company loss, you may need to compensate it.
Liquidators often pursue directors for losses caused by breaches discovered during wind-up.
Tax Obligations
Directors can be personally liable for unpaid PAYE and GST in certain circumstances. The IRD pursues these claims regularly.
PAYE obligations can attach personally when directors allow company funds to be used for other purposes.
Health and Safety
Under the Health and Safety at Work Act 2015, directors must exercise due diligence to ensure the company meets its health and safety obligations.
Personal duties that cannot be delegated. Due diligence requires active engagement, not passive oversight.
Protecting yourself as a director
While director duties carry real risks, proper conduct and documentation can protect you if your actions are ever questioned.
Documentation Matters
If your conduct is ever questioned, you'll need to show you acted reasonably. Board minutes recording your questions, concerns, and the reasoning behind decisions provide evidence of proper process.
What to record
- - Key decisions and the reasoning
- - Professional advice received
- - Questions raised and answers given
- - Dissenting views expressed
Relying on others
You can rely on employees and advisors, but this reliance must be reasonable. If something doesn't seem right, ask questions. "I was just following advice" won't protect you if a reasonable director would have questioned it.
When to seek advice
- - Financial difficulty or potential insolvency
- - Conflicts of interest situations
- - Major transactions or restructuring
- - Shareholder disputes
Key Takeaways
Directors owe specific statutory duties under the Companies Act
Personal liability can arise from insolvent trading, tax obligations, and H&S
Stay informed about the company's financial position
Document your decision-making process
Seek advice before acting in complex situations
D&O insurance provides a layer of protection
Related Guide
Understand your duties and responsibilities as a director.
Read the Director Responsibilities GuideRelated Reading
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