Navigating Director Duties – what are the obligations and what has changed?
Directors play an important role in the corporate governance and management of companies in New Zealand. There are numerous duties imposed on director’s that apply in the exercise of their powers. These duties are designed to promote accountability, transparency, and ethical behaviour. Understanding and fulfilling these duties is crucial for directors to effectively manage risks and make sound decisions for their company.
The key duties are found in sections 131-137 of the Companies Act 1993, and include the following:
1. Section 131 – Duty to act in good faith and in the best interests of the Company
Directors have a fundamental duty to act in good faith and in a manner the director believes on reasonable grounds to be the best interests of the company.
2. Section 133 – Powers to be exercised for proper purposes
Directors must exercise their power for proper and legitimate purposes. They should not use their company’s position or resources for their personal gain or the benefit of third parties at the company’s expense. The success of the company must be prioritised over directors personal interests or the interests of a third party.
3. Section 134 – Directors to comply with the Act and constitution
Directors must not act, or agree to the company acting, in a manner that contravenes the Companies Act 1993 or the company’s constitution.
4. Section 135 – Reckless trading
Directors must not agree, cause or allow to the business of the company to be carried on in such a manner that would likely create substantial or serious loss to the company’s creditors. This introduces an objective test, focused not on a director’s belief but rather on the manner in which a company’s business is carried on and whether a reasonable prudent director would have carried on business in the same circumstances. Whilst it is recognised that all business is inherently risky, this test considers whether the risk taken by the director was a legitimate business risk.
5. Section 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.
Particularly with respect to finances, it is essential directors monitor the company’s financial position and assess its position of solvency before entering into any obligations.
6. Section 137 – Director’s duty of care
When performing duties or exercising powers, directors must exercise the care, skill and diligence that a reasonable director would exercise in the same circumstances. This is assessed on a test of “reasonableness” and considers the nature of the company, the nature of the director’s decision, the position of the director and the nature of their responsibilities.
Amendments introduced by the Companies (Directors Duties) Amendment Bill
This Bill proposed amendments to section 131 of the Companies Act 1993, pertaining to the duty of directors to act in good faith and in the best interest of the company.
As explored in a previous insight back in 2021, the proposed amendments listed five broader environmental, social and governance factors directors can consider when making decisions in the best interest of their companies, including:
Recognising the principles of Te Tiriti o Waitangi;
Reducing adverse environmental impacts;
Upholding high standards of ethical behaviour;
Following fair and equitable employment practices; and
Recognising the interests of the wider community.
The Bill that received Royal assent in August 2023 removed any reference to the five non-exhaustive factors and instead only records that in considering the best interests of a company, a director may consider matters other than the maximisation of profit (for example environmental, social and governance matters).
Although proposed as a simple addition to assist directors, the impact of the Bill in practice is likely to be minimal. The addition of subsection 131(5) only assists in clarifying that directors may consider a wide number of factors in addition to financial gain when making decisions in the best interest of their companies.
For more information on directors duties, or if you are thinking about becoming a company director and wish to discuss these obligations, please contact us on 03 379 3880.