Director Liability & Piercing The Corporate Veil In New Zealand

One of the biggest reasons small business owners choose to operate through a company is simple: limited liability. In plain English, it usually means the company is responsible for its debts and obligations - not you personally.

But if you’ve ever heard someone say “we’ll just sue the director” or “the courts can pierce the corporate veil”, you’ll know that limited liability isn’t always the end of the story.

In this guide, we’ll break down what piercing the corporate veil means in New Zealand, when directors can actually be personally liable, and what practical steps you can take to protect your business (and yourself) from day one.

What Does “Piercing The Corporate Veil” Mean In New Zealand?

A New Zealand company is a separate legal person under the Companies Act 1993. That means it can:

• enter contracts in its own name
• own assets
• borrow money
• sue and be sued

This “separate legal personality” is what people often call the corporate veil. It’s the legal separation between:

• the company, and
• the humans behind it (shareholders and directors)

“Piercing the corporate veil” is a phrase used to describe rare situations where the courts (or legislation) effectively look past the company and hold individuals behind it responsible.

It’s important to know that in New Zealand, this isn’t a casual, everyday remedy. Courts generally respect the company structure. In practice, personal liability usually arises because:

• a statute (like the Companies Act) imposes personal duties on directors (and a breach can lead to personal orders), or
• the director personally committed a wrong (like misleading conduct), or
• the director gave a personal guarantee

So while “piercing the corporate veil” is a popular way to describe director exposure, the real question for business owners is:

What are the actual legal pathways for suing a director personally in New Zealand?

When Can Directors Be Personally Liable (Even If There’s A Company)?

Director liability often surprises people because it doesn’t always require “fraud” or something dramatic. Sometimes it’s about how the business was run, especially when money gets tight.

Below are some of the most common situations where personal liability may arise.

1) Breach Of Directors’ Duties Under The Companies Act 1993

Directors in New Zealand owe duties to the company (and in some cases, their actions can expose them to claims). Key duties include:

• acting in good faith and in the best interests of the company
• exercising powers for a proper purpose
• not trading recklessly
• not incurring obligations the company can’t perform
• exercising the care, diligence and skill of a reasonable director

Two provisions small business directors hear about a lot are:

• Reckless trading (s 135): agreeing to, causing, or allowing the business to be carried on in a way likely to create a substantial risk of serious loss to creditors.
• Incurring obligations (s 136): agreeing to the company incurring an obligation unless you reasonably believe the company can perform it when required.

These issues tend to arise during insolvency - for example, when a liquidator investigates what happened and whether creditor losses could have been reduced.

If you want a deeper explainer on how this risk comes up for founders, personal liability can attach in more ways than many directors expect.

2) Misleading Or Deceptive Conduct (Personal Involvement)

Even if your company is the party entering a deal, a director can sometimes be personally liable if they personally engaged in misleading conduct - especially where someone relied on what the director said.

This can come up in situations like:

• pitching to investors
• selling a business or business assets
• inducing a supplier to provide credit
• making “it’s definitely happening” promises to a customer when it’s not

Depending on the facts, these disputes might overlap with contract law, the Fair Trading Act 1986, and general misrepresentation principles (which can sometimes lead to personal exposure if the director is directly involved).

The big takeaway: don’t assume “I said it as director” automatically protects you. The company structure helps - but it doesn’t give a free pass to mislead people.

3) Personal Guarantees (The Veil Doesn’t Help Here)

In many small businesses, banks, landlords, and key suppliers will ask directors to sign personal guarantees.

If you’ve signed one, there is no need to argue about veil-piercing - because you’ve voluntarily agreed to personal liability if the company doesn’t pay.

This is extremely common in:

• commercial leases
• equipment finance
• trade credit accounts
• business loans and overdrafts

Before signing, it’s worth getting advice on what you’re actually agreeing to (including whether the guarantee is unlimited, whether it continues after you resign, and whether it covers interest and enforcement costs).

4) Unpaid Tax And Employee-Related Liabilities (Often Indirect, But Still Serious)

In New Zealand, the company is typically the taxpayer and the employer. That usually means tax debts and employee entitlements are owed by the company, not the director personally. However, directors can still face serious consequences if they’ve allowed non-compliance to build up - for example through enforcement action, penalties, or (in some cases) claims or orders tied to how the company was managed.

Common pressure points include:

• PAYE / GST arrears
• holiday pay and wage disputes
• record-keeping failures

Employment disputes are also a good reminder that your business should have solid documentation in place early, including a fit-for-purpose Employment Contract and compliant policies. It won’t eliminate all risk, but it can make problems far easier to manage.

Note: this section is general information only and isn’t tax advice. Director exposure for tax issues depends heavily on the facts and the relevant Inland Revenue powers at the time.

5) Veil-Piercing Arguments For Fraud, Sham Companies, Or Phoenixing

This is the scenario most people imagine when they talk about piercing the corporate veil. It usually involves allegations like:

• the company is being used as a sham or façade to avoid existing legal obligations
• assets have been stripped out to defeat creditors
• the director used the company to commit fraud
• “phoenix” activity (closing one company and continuing the same business through another, leaving debts behind)

Courts can be willing to look past the company structure in extreme cases - but it’s fact-specific, and generally not something you can rely on as a creditor unless you have strong evidence.

Who Can Sue A Director Personally (And What Does That Look Like)?

It depends on what legal pathway applies.

In many director-duty scenarios, claims are brought by:

• the company (for example, via new management), or
• a liquidator (after insolvency), or
• shareholders (in limited circumstances, such as derivative actions or unfair prejudice-type disputes)

In other cases (like misleading conduct or personal guarantees), claims can be brought by:

• customers
• suppliers
• landlords
• lenders
• business purchasers

If you’re in a multi-founder business, director liability issues often overlap with governance and internal decision-making. That’s one reason many startups put a Company Constitution and Shareholders Agreement in place early - so expectations, voting rights, and decision-making are clear before things get stressful.

Common Small Business Scenarios Where The Veil Gets Tested

Here are a few real-world examples (in plain language) where people start asking about piercing the corporate veil and suing directors personally.

Scenario 1: The Business Takes Deposits, Then Can’t Deliver

Imagine you run a service business (or an online store) and take deposits for work or stock. Cashflow gets tight, and you keep accepting new deposits to cover old bills.

If the company collapses, customers might allege misleading conduct or that the director knew (or should’ve known) the business couldn’t deliver.

Whether a director is personally liable depends on what was said, what you knew at the time, and how the money was handled - but this is a common fact pattern where the “company shield” feels very thin.

Scenario 2: The Company Keeps Ordering On Credit While Insolvent

Many small businesses rely on supplier credit. A director might keep ordering stock, thinking “we’ll turn the corner next month”.

If there wasn’t a reasonable basis to believe the company could pay when payment fell due, that can raise director duty issues (and, after insolvency, liquidator scrutiny).

Scenario 3: A Founder Leaves, And The Remaining Director Runs The Business “Their Way”

This can turn into allegations about misuse of company funds, conflicts of interest, or decisions not made in the company’s best interests.

Disputes like this often escalate quickly because they’re not only legal - they’re personal. Getting the governance right early (and documenting decisions properly) can make a huge difference if the relationship breaks down.

If you’re dealing with serious governance concerns, it can also be relevant to understand directors’ duties and how claims are usually framed.

Scenario 4: A Director Signs Contracts Without Being Clear It’s The Company

Sometimes directors accidentally expose themselves by signing in a way that makes it unclear whether the contracting party is the company or the individual.

This often happens with:

• short-form quotes and invoices
• handshake deals later “confirmed” over email
• contracts where the company name isn’t correctly stated

It’s a small admin detail that can create big legal headaches later.

How Do You Reduce The Risk Of Personal Director Liability?

You can’t eliminate risk entirely (that’s business), but you can reduce the likelihood of a director-liability crisis - and you can put yourself in a far better position if one arises.

1) Treat Limited Liability As A Starting Point, Not A Strategy

Limited liability is not a plan for dealing with debt. If the business model only works when creditors carry the risk, you’re going to be under pressure fast - and that’s where directors make rushed decisions that create personal exposure.

2) Keep Excellent Financial Visibility (Especially In Tough Months)

Director liability often turns on what you knew (or should have known) at the time you agreed to keep trading or take on new obligations.

Practical habits that help:

• up-to-date management accounts
• realistic cashflow forecasting
• knowing what debts are due and when
• documenting key decisions (especially if you decide to keep trading)

If things start sliding, getting advice early can be the difference between “we managed it” and “we’re in liquidator territory”.

3) Be Careful With Statements To Customers, Suppliers, And Investors

If you’re negotiating while under pressure, it’s easy to over-promise. But personal liability can arise when a director’s direct statements cross the line into misleading conduct.

Focus on:

• making accurate, supportable claims
• avoiding “guarantees” unless you mean them
• putting key representations in writing carefully

4) Use The Right Legal Documents (So Responsibility Is Clear)

Good documentation won’t fix a failing business - but it can stop a manageable problem turning into a dispute about who said what and who is responsible.

Depending on your setup, that might include:

• a Company Constitution (to set governance rules, director/shareholder powers, and decision processes)
• a Shareholders Agreement (to deal with exits, decision-making, deadlocks, funding, and dispute pathways)
• proper customer contracts and terms (so the company - not you personally - is clearly the contracting party)
• well-documented approvals for major decisions

And if you’re a director, it’s also common to have a Deed Of Access And Indemnity in place - which can help give directors clearer rights to access company information and may include indemnities (where legally permitted) and insurance arrangements.

5) If You’re Buying Or Selling A Business, Do Proper Due Diligence

When a deal goes wrong, buyers often look for someone to blame - and veil-piercing language becomes part of the conversation very quickly.

Solid due diligence can help you identify red flags early (like hidden liabilities, customer disputes, or unclear ownership of key assets) and make sure the deal terms actually protect you. Depending on the transaction, that might include a Legal Due Diligence process before you sign.

What Should You Do If You Need To Sue A Director (Or You’ve Been Threatened)?

If you’re on either side of a director liability dispute, the first step is usually to slow things down and get clarity. These matters can escalate quickly, and rushed emails often become evidence later.

If You’re Trying To Sue A Director Personally

Ask yourself (or your lawyer) early:

• Is there a personal guarantee?
• Do we have evidence of direct misleading statements by the director?
• Is this really a claim against the company (contract debt), rather than the director personally?
• Is the company insolvent (meaning a liquidator may end up controlling the claim landscape)?
• Is there evidence suggesting a sham structure, asset stripping, or phoenix behaviour?

In many cases, the strongest claims aren’t “piercing the corporate veil” in the dramatic sense - they’re more straightforward causes of action like guarantees, misrepresentation, or statutory duties.

If You’re A Director Being Threatened With Personal Liability

Don’t ignore it and hope it goes away. Practical steps include:

• Preserve documents (contracts, emails, board notes, financials) - deleting things can create bigger problems.
• Stop and assess solvency if the claim relates to debts or obligations.
• Avoid informal admissions in writing while you’re still figuring out the legal position.
• Get advice early before the dispute hardens into litigation.

Often, the best “director liability defence” is showing you acted reasonably, monitored the business properly, and made decisions with a genuine basis - not perfect decisions, but defensible ones.

Key Takeaways

• “Piercing the corporate veil” is real, but it’s not the usual way director liability happens in New Zealand - courts generally respect the separate legal personality of a company.
• Directors can still face personal exposure through Companies Act duties (especially reckless trading and incurring obligations without a reasonable basis).
• Personal liability can also arise where a director is directly involved in misleading or deceptive conduct, or where they’ve signed a personal guarantee.
• Small business risk spikes when cashflow is tight - so financial visibility and careful decision-making are essential for directors.
• Strong governance documents (like a Company Constitution and Shareholders Agreement) help prevent internal disputes and clarify decision-making before things get messy.
• If you’re facing (or considering) a director liability claim, getting early legal advice can help you choose the right pathway and avoid expensive mistakes.

If you’d like help with company structures, directors’ duties, or a dispute involving arguments about piercing the corporate veil, you can get in touch with Sprintlaw for a free, no-obligations chat.