What Happens If There Is A Breach Of A Director’s Duty?

It’s no secret that directors hold a position of power over a company’s operations. Because of this, they are subject to certain duties and obligations that help to promote good governance and ensure they act in the company’s best interests. 

If you are a director of a company, or thinking about becoming one, you’ll need to know and understand what these duties are so you can make sure you act in accordance with them. Breaching your duties as a director can have some very serious consequences for you in both your professional and personal capacity.

Who Is A Director?

Working out if you are a director is based on the definition found in the Companies Act 1993. This includes directors, de facto directors and shadow directors.

• Director: Someone who has been validly appointed as a director or an alternate director
  
• De facto director: Someone who carries out the same roles that a director would, even though they have not been validly appointed as one
  
• Shadow director: Someone whose instructions and / or wishes are followed by validly appointed directors of the company, even though they themselves have not been validly appointed as one

It’s important to note you don’t need to be validly appointed as a director to be bound by the director’s duties.

At the end of the day, if you are exercising the same powers and discharging the same functions that a director would, you will need to accept the responsibilities and obligations that come with being a director. 

What Are The Director’s Duties?

In New Zealand, company directors have the following legal duties:

• To act in good faith
• To fulfil their duty of care
• To use their powers for a good purpose
• To follow the Companies Act and their Company Constitution
• To meet their commitments
• To trade in a way that protects the company’s creditors
• To use company information appropriately

Additionally, there are a few other general duties you will need to be aware of as a director. These include:

• Submitting financial documents and statements to the Companies Office
• Maintaining accurate financial records
• Staying up to date with the company’s decision making
• Upholding tax obligations

Dive deeper into the nitty gritty of director’s duties here.

Has There Been A Breach Of A Director’s Duty?

Working out if there has been a breach of a director’s duty depends on the specific situation and should be considered on a case-by-case basis.

Ask yourself whether the actions you or another company director have taken are authorised by:

• the company constitution
• the company’s members in a general meeting
• the company’s board of directors

If proper authorisation has been given, it will be unlikely that a breach of a director’s duty has taken place. 

Example The members of Company XYZ passed a resolution allowing Tom, a director of Company XYZ to take out a loan on behalf of the company. If Tom takes out a loan in accordance with the resolution, it is unlikely that he will have breached his director’s duties.

What Happens If There Has Been A Breach Of A Director’s Duties?

Breaching your director’s duties can have very serious consequences and often varies according to what duty has been breached and what has subsequently happened because of the breach. 

These can include:

• Personal liability (being held personally liable for civil penalties, compensation, debts and financial losses, and tax obligations)
• Criminal conviction
• Disqualification as a director
• Commercial repercussions

Generally, though, a breach of these duties can result in imprisonment for up to 5 years or a fine of up to NZ$200,000.

Company Debts And Financial Losses

In most cases, a company will be responsible for its own debts. However, there are some situations in which you can be held personally liable for repaying the company’s debts. These include:

• If you have breached a director’s duty and, as a result of the breach, the company has suffered a loss
• If the company becomes insolvent
• If you act as a guarantor for the company
• Illegal phoenix activity (that is, if you register a new company to take over a business that had previously become insolvent)

Tax Obligations

As a director of a company, you also bear the responsibility for ensuring the company meets its tax obligations in relation to:

• Company tax: you will need to pay 28% tax on your company’s profits.
• GST payments: GST refers to Goods and Services Tax, and is a 15% tax that is paid for most goods and services.
• PAYE (Pay As You Earn): you will need to withhold a certain amount of your employees’ salaries, which you pay to Inland Revenue (IRD) for them.
• ESCT (Employee Superannuation Contribution Tax): you will need to pay a minimum of 10.5% of an employee’s ordinary time earnings toward their super.

If your company fails to comply with its tax obligations and doesn’t remit the requisite tax amounts to IRD, they can issue a penalty notice. This can lead to a prison sentence in serious cases.

Criminal Conviction

In extreme cases, if you have seriously breached your duty to act in good faith or the duties not to improperly use information or the position of director, you could face criminal charges and even imprisonment.

Breaches resulting in criminal conviction often involve an element of dishonesty or recklessness, including a director making false or misleading disclosures or engaging in dishonest conduct. 

Disqualification

Both the courts and the Companies Office have the power to disqualify you from managing companies for long periods of time if you have breached your directors duties.

A Disqualified Director Check will usually show whether someone has been banned from being a director. This can be done under either the:

• Insolvency Act 1967
• Companies Act 1993

Commercial Ramifications

Though not a legal consequence, it’s also important to be aware of the implications breaching a director’s duty has for the company itself. 

As you know, a company’s reputation is often one of its most valuable assets. If a company director breaches their duty, it will likely tarnish that reputation and the company will often be subjected to much greater scrutiny from the public – meaning actual and potential investors and regulators alike.

I Think There Has Been A Breach. What Should I Do?

One of the best things to do if you think there has been a breach of a director’s duty is to obtain independent financial and legal advice as soon as you become aware of it. It is essential to do this as soon as possible so you can minimise the consequences of the breach efficiently, as well as mitigate your own personal liability.

Moving forward, it will be important that you implement strong policies and processes to ensure compliance with the law, the company constitution, and other operational shareholder agreements.

Speak With A Lawyer

Understanding your responsibilities and obligations as a director of a company can be overwhelming, as there are many areas of the company you will need to be across.

If you would like more information or help with getting on top of your legal obligations as a director, get in touch! We have a team of friendly expert lawyers who are ready to help.

If you would like a consultation on your options moving forward, you can reach us at 0800 002 184 or [email protected] for a free, no-obligations chat.

---