Being a company director in New Zealand can be exciting - you’re helping steer the business, make big calls, and (hopefully) grow something valuable.
But there’s a serious legal side to it too. Directors have duties under the Companies Act 1993, and if those duties are breached, the consequences can be personal, expensive, and disruptive to the business.
This 2026 update reflects the current compliance expectations around governance, record-keeping, solvency, and accountability - especially as more businesses raise capital, scale fast, and operate digitally.
Let’s break down what “breach of director’s duties” actually means, what can happen if it occurs, and the practical steps you can take to reduce risk from day one.
What Are A Director’s Duties In New Zealand (And Why Do They Matter)?
In New Zealand, directors’ duties are primarily set out in the Companies Act 1993. These duties exist to make sure directors act responsibly, and to protect the company, shareholders, and (in some cases) creditors.
Even if you’re running a small company with a handful of shareholders (or you’re the only shareholder), these duties still apply. It’s also important to remember that you can’t “contract out” of most director duties - meaning a private deal or internal understanding won’t override the law.
Key Director Duties Under The Companies Act 1993
While the details depend on your company and what’s happening in practice, the most commonly relied-on duties include:
- Acting in good faith and in the best interests of the company (not your personal interests).
- Acting for a proper purpose (for example, issuing shares for genuine fundraising rather than to dilute another shareholder).
- Complying with the Act and the company constitution (where the company has one).
- Using the care, diligence, and skill that a reasonable director would use in the same circumstances.
- Not trading recklessly (essentially, not running the business in a way that creates a serious risk of loss to creditors).
- Not incurring obligations the company can’t perform (for example, signing contracts when you know the company can’t pay).
A well-drafted Company Constitution can also affect what “proper process” looks like inside your company - especially around decision-making, director powers, and shareholder approvals.
Why Director Duties Feel “Personal”
One of the biggest surprises for first-time directors is that a breach can create personal liability. Even though the company is a separate legal entity, the law can require directors to personally compensate the company (or, in some circumstances, creditors) for the harm caused.
That’s why governance isn’t just paperwork - it’s a key part of being legally protected as you grow.
What Counts As A Breach Of A Director’s Duty?
A breach happens when a director fails to meet their legal obligations. Sometimes it’s deliberate misconduct (like misuse of company funds), but more often it’s a poor decision made under pressure, without proper information, or without understanding the legal risk.
Common breach scenarios usually fall into a few buckets: conflicts, solvency problems, and process failures.
Common Examples Of Director Duty Breaches
- Conflicts of interest: you make a decision that benefits you (or someone close to you) at the expense of the company, without proper disclosure and process.
- Reckless trading: the company keeps trading when it’s not realistically able to pay its debts as they fall due.
- Signing contracts the company can’t perform: taking on obligations you know the business can’t meet (like agreeing to a large supply contract without funding).
- Improper use of information: using company information for personal gain.
- Improper share issues: issuing shares without following the correct approvals or for an improper purpose.
- Failing to keep good records: decisions aren’t documented, key approvals aren’t recorded, and no one can later show the basis for the director’s decision.
A Quick Reality Check: “But I’m Just A Small Business Director”
It’s easy to assume director duties mainly apply to big corporates. In reality, many director duty claims arise in SMEs - because decisions are fast, roles overlap, and the line between “business money” and “personal money” can get blurry.
If you’ve brought on co-founders or investors, having a clear Shareholders Agreement can also reduce the risk of governance disputes escalating into allegations of a breach.
What Happens If A Director Breaches Their Duties?
If there’s a breach, the consequences depend on the duty breached, how serious it is, and who has suffered loss (the company, shareholders, creditors, or others).
In practice, the outcome usually sits somewhere on a spectrum - from internal disputes and removal, through to court action and personal liability.
1. The Director Can Be Removed Or Restricted
A breach can lead to governance consequences such as:
- removal of the director under the company’s constitution or shareholder resolutions
- loss of trust and breakdown of working relationships
- restrictions on authority (for example, needing approval before spending above a threshold)
Even if a dispute doesn’t go to court, the commercial impact can be huge - especially if the company is fundraising, negotiating with banks, or trying to sell.
2. The Company (Or Shareholders) Can Bring A Claim
In many cases, the company can take action against the director to recover losses. Depending on the facts, shareholders may also have pathways to seek remedies.
Remedies can include:
- compensation (paying money back to the company)
- accounting for profits (handing over profits made through wrongdoing)
- injunctions (court orders stopping certain actions)
These disputes often arise after a relationship breakdown between founders or investors - which is why it’s worth setting expectations early, documenting decisions, and keeping conflicts managed properly.
3. Personal Liability Can Follow (Even With A Limited Liability Company)
Directors often assume that because the company is “limited liability”, they’re protected. Limited liability helps, but it’s not absolute.
If duties are breached - especially around solvency (like reckless trading) - a director may be ordered to personally contribute to losses.
Where directors have also signed personal guarantees, the financial exposure can stack up quickly. This is also why directors should be careful about any Deed of Guarantee and Indemnity documents and understand what they’re taking on before signing.
4. There Can Be Serious Consequences In Insolvency
When a company becomes insolvent, decisions made in the period leading up to insolvency get scrutinised closely.
If you’re a director and your company is in financial distress, your actions (or inaction) can be reviewed by:
- liquidators
- creditors
- courts
At that point, record-keeping becomes crucial. If there’s no paper trail showing you acted prudently, took advice, and made reasonable decisions, it becomes much harder to defend your position.
5. Regulatory And Reputation Impact
Even where the outcome is “just” a civil claim, allegations of a director duty breach can affect:
- your ability to raise capital or obtain lending
- commercial deals (partners may walk away due to perceived governance risk)
- your personal reputation in the market
And for many directors, that reputational cost is just as significant as any legal cost.
Who Can Take Action If There’s A Breach?
This is one of the most common questions we get: who actually has the right to do something about it?
It depends on what happened and who has suffered the loss, but typically action can be taken by the following parties.
The Company Itself
The company is often the “right” party to bring a claim, because directors owe many duties to the company (not directly to individual shareholders).
In reality, this can get complicated if:
- the director being accused controls the company
- there’s a deadlock between founders
- there are multiple shareholders with different priorities
Shareholders
Shareholders may be able to take action in certain circumstances, including where the company won’t act, or where shareholder rights have been harmed.
This is also where clear governance documents can help reduce disputes before they escalate. If you’re changing ownership or control, getting the paperwork right (including the changing company ownership process) can help prevent future arguments about whether a director had authority to do what they did.
Liquidators (If The Company Is In Liquidation)
Once a company is in liquidation, a liquidator may investigate director conduct and bring claims to recover assets or compensation for creditors.
This is why the “solvency mindset” is so important for directors: you need to be able to show you were acting responsibly as the company’s financial position changed.
Creditors (In Some Situations)
While director duties are usually owed to the company, creditors can be impacted heavily by reckless trading or incurring obligations without reasonable belief the company can perform them.
If you’re worried the business may not be able to pay its debts, it’s worth getting advice early - waiting until after the fact is when directors often get caught out.
How Do Courts Decide Whether A Director Has Breached Their Duties?
Director duty claims aren’t only about whether the business failed. Businesses fail for all sorts of reasons - market changes, cashflow issues, product misfit - and failure alone doesn’t automatically mean a director breached their duties.
Courts will usually focus on process and reasonableness, including what a reasonable director would have done in the same situation.
Key Factors That Often Matter
- What information did you have at the time? (Not with hindsight.)
- Did you ask questions and challenge assumptions?
- Did you obtain advice when needed? (For example, legal or accounting advice.)
- Did you properly manage conflicts?
- Did you document decisions? (Board minutes, resolutions, written records.)
Good Process Is A Director’s Best Defence
Think of it this way: when things go wrong, the question becomes “can you show you acted responsibly at the time?”
That’s why it’s worth putting in place:
- clear approval thresholds (who can sign what)
- regular financial reporting to directors
- proper board meeting notes or written resolutions
- conflict registers and disclosure processes
If you’re running a fast-moving business (especially with remote teams or multiple stakeholders), having clear internal documentation can make the difference between a manageable dispute and a serious legal claim.
How Can You Reduce The Risk Of A Director Duty Breach?
The best time to manage director duty risk is before there’s pressure - before cashflow tightens, before relationships deteriorate, and before major deals are signed.
Here are practical steps you can take to protect yourself and the business from day one.
1. Get Your Governance Documents Right Early
If your company has more than one shareholder (or will in future), it’s worth setting the rules of the road early.
This doesn’t remove director duties, but it reduces the risk that governance becomes messy - which is often where breaches are alleged.
2. Treat Conflicts Of Interest As A Normal Part Of Business (And Manage Them)
Conflicts come up all the time, especially in SMEs:
- you’re also a supplier to the company
- your family member is hired or contracted
- you’re involved in another business that overlaps
A conflict isn’t automatically “wrong” - the issue is failing to disclose it or letting it drive decision-making without proper safeguards.
A simple written conflict process can stop issues from escalating later.
3. Be Careful When The Company Is Under Financial Stress
This is where directors face the biggest risk. If the company is struggling, it’s crucial to:
- keep up-to-date accounts and cashflow forecasting
- hold regular director meetings (even if informal) and record decisions
- avoid taking on new obligations without a realistic plan to perform them
- get professional advice early (legal and accounting)
If you’re negotiating funding or trying to sell the business, it’s also worth ensuring key commercial documents are accurate and signed properly - even details like how you sign and witness documents can matter in a dispute. If it comes up, who can witness a signature is something many directors only look up when it’s already urgent.
4. Put Strong Contracts In Place (So You’re Not Forced Into Bad Decisions)
Many director “breach” situations start with commercial uncertainty - unclear payment terms, messy supplier arrangements, or customers disputing obligations. When your agreements are vague, directors can get pushed into reactive decisions that increase risk.
Depending on what your company does, it may be worth having properly drafted agreements such as:
- service agreements (so clients know exactly what you’re delivering and when)
- terms and conditions for online or recurring services
- supply or distribution agreements
For example, a tailored Service Agreement can help prevent disputes that snowball into governance and cashflow crises.
5. Keep Board Decisions Documented (Even If You’re A Small Team)
You don’t need a corporate-style boardroom to act like a responsible director.
Simple steps help a lot:
- write down major decisions (why you made them and what you relied on)
- store key contracts and approvals in one place
- make sure delegations (who can sign what) are clear
If the company later needs to show it acted properly, those records become your safety net.
Key Takeaways
- Directors in New Zealand have legal duties under the Companies Act 1993, including acting in the company’s best interests, using reasonable care, and avoiding reckless trading.
- A breach of a director’s duty can lead to removal, civil claims, and in some situations personal liability - particularly where solvency issues are involved.
- Common breaches often involve conflicts of interest, poor record-keeping, incurring obligations the company can’t perform, or continuing to trade under serious financial risk.
- Who can take action depends on the circumstances, but it may include the company, shareholders, and liquidators (especially in insolvency scenarios).
- Courts often focus on whether the director’s decision-making process was reasonable at the time - good documentation and sensible governance practices can be a key defence.
- Having the right legal foundations in place early (like a Company Constitution and Shareholders Agreement) can significantly reduce governance disputes and director risk.
If you’d like help setting up strong governance documents, reviewing director obligations, or managing a dispute involving director duties, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
