A review of directors’ duties and liabilities will hopefully lead to clearer roles for directors of New Zealand companies.
The New Zealand Law Commission has been tasked with carrying out the review under the Companies Act 1993 – expected to begin in mid-2025. While it will take time to be completed and implemented, better clarity around the legal roles, obligations and liabilities of company directors can only be a good thing.
In the meantime, our Corporate Law team is happy to provide guidance to directors and business owners on their legal obligations. To discuss this further, please reach out to a member of our friendly team.
The review
In June 2024, the Minister of Justice Paul Goldsmith asked the Law Commission to review the legal duties of company directors under the Companies Act 1993 (Act), together with the associated liabilities which directors can be faced with.
Read the Law Commission’s announcement here.
For some time now, directors have come up against a good deal of uncertainty in how the Act expects them to operate. For example, the tension between the need to protect company creditors while simultaneously enabling directors to exercise their reasoned commercial judgement has left a grey area in the law – one examined by the Court of Appeal and the Supreme Court in the landmark case Yan v Mainzeal[1].
In that case, both the Court of Appeal and the Supreme Court supported an overall legislative review of the Act to help address a “general incoherence” in how the statutory directors’ duties are applied in practice. With the Law Commission’s recent announcement, it appears that the Courts will be granted their wish.
The review will be led by Commissioner Geof Shirtcliffe, who has commented that “The law relating to directors’ duties and liabilities has been causing concern for some time and a review is timely. Duties in the Companies Act relating to reckless trading and incurring obligations are particularly unclear and difficult to apply as they are currently framed and may discourage directors from taking legitimate business risks.”
It is likely the review will focus on the duties relating to reckless trading, the competing interests between a business and its creditors, and whether other currently prescribed directors’ duties and enforcement methods are fit for purpose.
Directors’ duties at law
As a quick recap, the Act currently requires directors to comply with key duties (and can impose penalties if directors fail to do so). These duties include:
- acting in good faith and in the best interests of the company
- exercising all powers of directorship for a proper purpose
- avoiding the company acting in a manner contrary to the Act or its constitution
- avoiding reckless trading (being the creation of a substantial risk of serious loss to the company’s creditors)
- avoiding the company incurring obligations which the company will be unable to fulfil
- exercising the care, diligence and skill of a reasonable director.
What does this mean for company directors?
Perhaps nothing just yet – it may be several years before New Zealand businesses can expect to see any practical changes to the legislation.
However, in the longer term, we are hopeful that the direction taken by the Government will lead to greater certainty regarding the responsibilities of a director of a New Zealand company.
[1] Yan v Mainzeal Property and Construction (in Liq) [2021] NZCA 99 / [2023] NZSC 113.
