If you’re a company director (or you’re about to become one), it’s normal to assume the company structure will protect you personally if something goes wrong.
And in many cases, it does. A company is a separate legal entity, which is the whole point of incorporating in the first place.
But here’s the catch: being a director comes with legal duties, and sometimes you can still be personally liable - even when you’re acting for the company. This 2026-updated guide walks through the most common ways personal director liability arises in New Zealand, and what you can do to reduce your risk from day one.
What Does “Limited Liability” Actually Protect You From?
When you operate through a company, the company generally takes on the business’s obligations. That means, in many scenarios:
- the company signs the contract (not you personally);
- the company owns the assets (not you personally); and
- the company is responsible for debts and claims (not you personally).
This is why people often say companies offer “limited liability”.
However, limited liability isn’t a free pass. It doesn’t automatically protect you from:
- breaches of directors’ duties under the Companies Act 1993;
- personal guarantees you sign to suppliers, landlords, or lenders;
- health and safety obligations (as an “officer” under the Health and Safety at Work Act 2015);
- certain tax obligations and penalties; or
- misleading conduct and other wrongdoing where you were personally involved.
The practical takeaway is simple: the company structure helps, but only if you keep good governance habits and understand where the law “looks through” the company to the people behind it.
Directors’ Duties Under The Companies Act 1993 (And How Liability Happens)
In New Zealand, directors’ duties are mainly set out in the Companies Act 1993. These duties are not just “best practice” - they’re legal obligations.
When a director breaches these duties, they can be exposed to personal consequences such as compensation orders, disqualification, and (in some cases) civil penalties or criminal liability depending on the conduct.
Key Directors’ Duties You Need To Know
Some of the most important duties (in plain English) include:
- Act in good faith and in the best interests of the company (not just your own interests, and not just one shareholder’s interests).
- Use powers for a proper purpose (for example, issuing shares to “dilute” someone for the wrong reasons can create problems).
- Comply with the Act and the company’s constitution (if your company has one).
- Exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances.
If you have a Company Constitution, it’s worth actually reading it. Many directors only discover what the constitution says after a dispute starts - which is usually too late to be helpful.
Conflicts Of Interest: A Common Trap
Another area that often triggers personal risk is conflicts of interest (for example, where you’re also a shareholder, a supplier to the business, or involved in a related entity).
Conflicts aren’t always prohibited - but they usually need to be properly disclosed and managed. If they aren’t, decisions can be challenged and directors can end up personally exposed.
If your company has multiple owners, a Shareholders Agreement is often the document that sets out the “rules of the relationship” (including how major decisions are made and what happens if someone wants out). That kind of clarity can reduce governance issues that lead to liability later.
Insolvency, Reckless Trading, And “Keeping The Lights On” Too Long
One of the highest-risk periods for director liability is when the company is under financial pressure.
Plenty of great businesses hit cashflow issues - especially when costs rise, customers pay late, or economic conditions tighten. The legal risk usually comes from what happens next.
Reckless Trading
Directors can be personally at risk if they allow the company to carry on business in a way that is likely to create a substantial risk of serious loss to creditors.
This is sometimes described in everyday terms as “trading recklessly” - but in practice, it’s about whether the business is being run in a way that exposes creditors to unreasonable risk.
Common warning signs include:
- taking on new customer orders knowing you can’t deliver without going further into debt;
- signing leases or long-term supply deals while insolvent (or close to it);
- paying some creditors but not others with no clear rationale;
- failing to keep proper financial records or ignoring management accounts; and
- continuing to incur tax debts without a plan to catch up.
Separate to reckless trading, directors can face liability if they agree to obligations (like contracts, payment terms, or guarantees) when they don’t believe, on reasonable grounds, that the company can perform them.
In a practical sense: if the company can’t pay, can’t deliver, and you know it (or should know it), signing up anyway can be a personal risk.
What To Do If You’re Worried About Insolvency
If you’re seeing red flags, you don’t need to panic - but you do need to act.
- Get up-to-date financials (not last quarter’s numbers).
- Document board discussions and decisions.
- Stop signing new commitments until you understand the company’s position.
- Get professional advice early (legal and accounting).
Even if you’re a sole director, written records matter. Using a Directors Resolution Template can help show that decisions were considered and properly made (which can be important if your conduct is questioned later).
Personal Guarantees, Security Interests, And “Signing On The Dotted Line”
Even if you do everything right as a director, you can still create personal liability by contract.
This usually happens when:
- a landlord asks you to personally guarantee a commercial lease;
- a lender requests a personal guarantee for finance;
- a supplier requires personal backup for credit terms; or
- a franchisor requires personal promises (often alongside company obligations).
These documents can effectively “override” the protection you expected from incorporating, because you’re agreeing to be responsible if the company can’t pay.
Deeds Of Guarantee And Indemnity
Guarantees are often paired with indemnities, which can be broader and more serious than people realise.
If you’re signing (or being asked to sign) a Deed Of Guarantee And Indemnity, it’s worth getting legal advice first, because the wording can:
- extend liability beyond the original contract;
- continue even after you resign as director; and
- apply even where the creditor hasn’t fully pursued the company first.
Security Interests Over Company Assets
Another common area is when a lender or supplier wants security over company assets. This might include registering security on the PPSR (Personal Property Securities Register).
Depending on the deal, you might see documentation like a General Security Agreement, which can give a creditor broad rights over the company’s present and future assets.
That’s not automatically “bad” - it’s just something you should understand properly before committing, because it affects:
- your ability to refinance later;
- what happens if the company defaults; and
- your negotiating position with other creditors.
Other Laws That Can Create Personal Director Liability (Beyond Company Law)
When people think about director liability, they often focus only on the Companies Act. But in real life, liability risk also comes from other areas of law that apply to how the business operates day to day.
Health And Safety (HSWA 2015) Officer Duties
Under the Health and Safety at Work Act 2015, directors are usually considered “officers” of the business.
That means you have a duty to exercise due diligence to ensure the company complies with health and safety obligations.
In practical terms, “due diligence” tends to mean you should be able to show you’ve taken reasonable steps to:
- understand the business’s key health and safety risks;
- ensure resources and processes exist to manage those risks;
- verify that the business is actually following those processes (not just saying it does); and
- respond appropriately when incidents, near misses, or hazards arise.
You don’t have to personally do every safety task - but you do need governance-level oversight.
Tax Obligations (GST, PAYE, And Record-Keeping)
Tax is another area where directors can get into trouble, especially where:
- PAYE is deducted from wages but not paid to IRD;
- GST is collected but used for other expenses; or
- records are incomplete, inaccurate, or not maintained properly.
While company tax debts are generally the company’s responsibility, directors can still face serious consequences if there’s dishonest conduct, repeated non-compliance, or other circumstances that trigger personal exposure.
Misleading Statements And Consumer Law Risks
If you’re involved in marketing, sales, pricing, or customer communications, you need to keep an eye on the Fair Trading Act 1986 (misleading and deceptive conduct) and the Consumer Guarantees Act 1993 (consumer rights in many retail-style transactions).
Director liability issues can arise where a director personally:
- authorises misleading advertising;
- makes false claims to customers or investors; or
- is involved in conduct that breaches consumer law.
This is especially relevant for online businesses where ads, influencers, landing pages, and “limited time” offers can move quickly - and mistakes scale fast.
Privacy And Data Handling
If your company collects personal information (customers, employees, mailing lists, CCTV footage, online accounts), you need to comply with the Privacy Act 2020.
Privacy issues can quickly turn into director-level problems if governance is weak - for example, if there’s a serious data breach and the business has no systems, no training, and no response plan.
Having a fit-for-purpose Privacy Policy is a good start, but it’s not the whole solution. You also want internal processes that match what you say you do.
How To Reduce Your Risk As A Director (Practical Steps That Actually Help)
Legal risk can feel abstract until something goes wrong. The good news is that many director liability issues are preventable with solid governance habits and the right documents in place.
1) Keep Proper Records (And Don’t Rely On Memory)
If a decision is important, record it. This includes:
- major contracts and why you entered them;
- fundraising decisions and shareholder approvals;
- financial decisions during cashflow stress; and
- conflict disclosures and management.
In disputes, the paper trail often matters as much as the underlying decision.
2) Make Sure Your Company Structure And Ownership Rules Are Clear
A lot of director problems are really “relationship problems” between founders or shareholders that spill into governance issues.
Two documents often do a lot of heavy lifting here:
If you’re running a company with others, getting these right early can save you serious stress later - especially if the business grows, raises funds, or someone wants to leave.
3) Treat Insolvency Risk Like A Governance Issue (Not Just An Accounting Issue)
Cashflow issues aren’t automatically a “director liability” problem. They become a director liability problem when governance falls behind reality.
Things that help:
- regular financial reporting you actually read;
- clear delegations (who is responsible for what);
- pausing big decisions until you’ve got accurate numbers; and
- getting advice early, before options narrow.
4) Be Cautious With Personal Guarantees
Before you sign, ask:
- Is this a company obligation, a personal obligation, or both?
- Can the guarantee be limited (amount, time period, or specific obligations only)?
- Does it continue if I resign as director?
- Is there an indemnity tucked inside that expands my exposure?
It’s much easier to negotiate before signing than after the business is under pressure.
5) Put The Right Employment And Contractor Arrangements In Place
Employment mistakes can become expensive quickly - and while the company is usually the party on the hook, directors can still end up dealing with the fallout if processes are poor.
If you’re hiring staff, having a clear Employment Contract and consistent policies can reduce misunderstandings and disputes.
If you engage contractors, make sure the relationship is documented properly and reflects reality (misclassification can create legal and tax risks).
6) Get Legal Help Early For High-Stakes Decisions
There are moments where “winging it” is a bad idea, like:
- raising capital or issuing shares;
- signing a long-term lease;
- giving personal guarantees;
- restructuring ownership; or
- navigating redundancy or performance management.
The cost of advice is usually far lower than the cost of trying to fix a problem after it’s already escalated.
Key Takeaways
- Operating through a company generally provides limited liability, but directors can still face personal exposure in specific situations.
- Directors’ duties under the Companies Act 1993 can create personal liability if you don’t act in good faith, use powers properly, and exercise reasonable care and diligence.
- Financial distress is a common trigger point - reckless trading and taking on obligations the company can’t meet can expose directors personally.
- Personal guarantees, indemnities, and secured lending documents can contractually create personal liability even if the company is the main contracting party.
- Director liability risk can also arise under other laws, including health and safety obligations (HSWA 2015), tax compliance, consumer law, and privacy requirements.
- You can reduce risk with good governance habits: clear ownership rules, written resolutions, accurate financial reporting, careful contract signing, and tailored legal advice when it matters.
If you’d like help setting up strong director protections, reviewing a guarantee, or getting your governance documents sorted, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
