Directors’ duties in New Zealand are not theoretical concepts. They are legal obligations that apply every day a company is operating. Whether you are a formal director, a de-facto director, or a person who is effectively calling the shots, the Companies Act 1993 makes it clear that you must act in a way that protects the company and its creditors.
Many business owners take on the title of director without fully understanding what the law requires. Others treat the company as an extension of themselves. The reality is that directors’ duties are serious. Breaches can lead to personal liability, disqualification, and in some cases prosecution. The purpose of this article is to give New Zealand business owners a clear understanding of what those duties are and how to meet them in practice.
The duty to act in good faith and in the best interests of the company
Section 131 of the Companies Act 1993 requires directors to act in good faith and in what they believe to be the best interests of the company. This means decisions must be made for the benefit of the company as a whole, not for a particular shareholder, not for a related business and not for personal benefit. When a director faces a conflict of interest, they must disclose it and ensure their decision making remains focused on the company’s interests.
The duty to act with care, diligence and skill
Section 137 sets the standard for how directors must carry out their role. Directors must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. This does not mean perfection. It means being informed, seeking advice when needed, understanding the company’s financial position and ensuring decisions are grounded in logic rather than assumption. A director who does not understand the business or its financial risks is not meeting this duty.
The duty to avoid reckless trading
Section 135 prohibits directors from allowing the business to be carried on in a manner likely to create a substantial risk of serious loss to creditors. This is often misunderstood. It does not require certainty of loss. It requires directors to assess whether the level of risk they are taking is acceptable. If the company is trading while unable to pay its debts, or taking on obligations it cannot realistically meet, a director may be personally liable.
The duty not to incur obligations the company cannot perform
Under section 136, a director must not agree to the company taking on obligations unless they believe on reasonable grounds that the company will be able to meet them. This is a forward looking duty. Directors must consider forecasted cash flow, ability to deliver services, and the realistic financial capacity of the business.
The duty to comply with the Act and the company constitution
Directors must ensure the company complies with the Companies Act 1993 and any obligations set out in the company’s constitution. This includes proper record keeping, preparing financial statements, maintaining accurate share registers and ensuring shareholder actions follow legal procedure.
The duty to keep proper records and stay financially informed
New Zealand case law makes it clear that a director cannot hide behind ignorance. A director must remain informed about the company’s financial position. This includes reviewing financial statements, understanding cash flow, monitoring liabilities and knowing when the company is approaching insolvency. Failing to stay informed is itself a breach of duty.
The personal liability risk
Many business owners assume the company structure will protect them from personal exposure. This is only true when directors meet their duties. If a director breaches their duties and the company suffers loss, the director can be held personally liable under section 301 of the Act. The court can order repayment, contribution to debts, or compensation.
Practical steps for directors
The solution is not fear. It is structure and awareness. Directors should regularly review financial reports, document decision making, seek professional advice early, disclose conflicts of interest, and ensure agreements and obligations are achievable. Good governance is not bureaucracy. It is protection.
The bottom line
Directorship in New Zealand is a position of trust. The law expects directors to be careful, informed and loyal to the interests of the company. When directors understand their obligations and operate with discipline, they protect themselves, their business and the people who rely on them.
