How to - the powers and duties of NZ company directors

How do I find out what my powers and duties as a director are?

The specific powers, rights, duties and obligations of New Zealand company directors are determined by the company's constitution, if there is one, and by the COMPANIES ACT 1993. If there is no constitution then these matters are determined by the Act.

Directors' duties

The law has developed a set of rules, known as "directors duties", that limit the ways in which directors can exercise their rights and powers by outlining the minimum standard of behaviour that is expected of them. These are contained in the COMPANIES ACT 1993 and in decisions of the courts, and they are outlined below.

These rules strike a balance between, on the one hand, not hindering directors in the performance of their roles by placing too much control on them, and on the other, not allowing directors to have uncontrolled discretion.

A director's "fiduciary" obligation as agent for the company

Directors act as agents for the company and therefore all their actions should be taken with the company in mind. Because of this agency relationship, directors have a "fiduciary" obligation to both the company and the shareholders, which means that a director is in a special position of trust.

Duty to act in good faith and in the company's best interests, and related duties

One of the most important duties of company directors is to act in good faith and in the interests of the company. There are a number of specific obligations that are related to this:

• to exercise their powers for proper purposes only
• not to use company funds other than as authorised
• to act honestly ("bona fide") at all times
• to comply with the COMPANIES ACT 1993 and the company's constitution, if there is one
• to not trade recklessly – that is, to not carry on the company's business in a manner likely to create a substantial risk of serious loss to the company's creditors

Duty to the company's employees

As employer for the company, a director must have regard to and take into account the interests of the company's employees.

Duty of care and skill

Whenever you exercise a power or perform a duty as a company director, you are under a duty of care and skill. This means that you must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances, taking into account, among other things, the nature of the company and the particular decision.

This is a high standard, and the courts will not find it to be breached merely because of an error in judgement. In performing their duties, a director is not required to exhibit a greater degree of skill than may be reasonably expected of a person with his or her knowledge and experience.

Shareholders may sue directors if they breach their duties

The shareholders of a company have a collective right to bring an action in the courts against a company director if they have legitimate reasons for doing so, which would include a breach of any of the duties outlined above.

Cautionary notes

• Should any question as to the powers, rights, obligations or liabilities of a company's director arise, the first step is to examine either the constitution or the personal employment contract if one exists.
• There are a wide range of possible conflicts that may arise between a company and any one of its directors. This is an area where there will often be personal friendships and large amounts of money involved. Further, it is not at all uncommon for the survival of a company to depend on the performance of the company's director. It is therefore important that either the company constitution (if there is one) or the director's personal employment contract, or both, states what the directors' duties are, what the procedures are for dealing with any issues that may arise, and what action will be taken for certain behaviour or conduct. This will provide certainty should any conflict arise. It is vital that the constitution and the contract are compatible to avoid any unclarity about what the provisions are.
• To ensure that proper provision has been made in these documents for potential conflicts and that the company and the director are protected, it is highly advisable that you enlist the services of a lawyer who is experienced in company law.