Personal Liabilities Of Company Directors

Being a company director in New Zealand is both exciting and daunting. As the ‘mind’ of the company, you shoulder significant responsibility, and it’s crucial to understand precisely what your duties entail as a director.

Many directors express concerns about their potential personal liability for their company’s debts—questioning whether their personal assets, such as their house, could be at risk if the company faces financial difficulties.

However, there are effective strategies to manage these risks from the outset, allowing you to concentrate on the success of your company.

Before we delve into the liabilities of directors, it’s essential to understand the primary duties you owe as a director.

What Duties Do I Owe As A Director?

In New Zealand, under the Companies Act 1993, directors have the following duties:

1. To act in good faith and in the best interests of the company
2. To exercise powers for a proper purpose
3. To exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances
4. To avoid conflicts of interest
5. To not agree to the company incurring obligations that it cannot perform
6. To not engage in reckless trading
7. To not make arrangements that favour one creditor over another when the company is insolvent

These are the core duties, but there are other responsibilities, such as ensuring accurate financial reporting and compliance with tax obligations.

As a director, you must have a thorough understanding of your company’s operations to act in its best interests. If you lack knowledge in a particular area, it’s your duty to seek advice and take appropriate action. We’ve discussed directors’ duties in New Zealand in more detail here.

Being proactive in preventing company issues is crucial, as failure to do so could result in personal liability.

So, what does liability entail?

What Is Limited Liability?

Liability refers to being held accountable for certain actions, often involving consequences such as paying compensation or being barred from serving as a director in the future. Naturally, this is something you’d want to avoid, so it’s important for directors to consider liability from the beginning.

Limited liability means that if the company encounters difficulties and you, as the director, are held liable, they can only claim what you have invested in the company. Why? By establishing a company with limited liability, you’re creating a separate legal entity. The company can incur and repay debts just like an individual, shielding you from personal liability.

Typically, a company director is not personally liable for company debts or losses due to the protection of limited liability. However, there are circumstances where a director can face personal liabilities:

• For unpaid tax obligations
• If personal guarantees have been provided for company loans
• If the company was trading while insolvent
• If fraudulent activities have occurred

Breaching any of the directors’ duties can also lead to personal liability. Given the high standards expected of directors, it’s crucial to exercise caution, even when protected by limited liability. Obligations may persist even after a company has been removed from the New Zealand Companies Register.

Can They Come After My House?

If you’re a company director with limited liability protection in New Zealand, generally, your house cannot be seized to repay company debts under limited liability.

However, directors can still be personally liable for breaching their duties. You may risk losing your house if you:

• Have provided a personal guarantee for a loan
• Have used your house (or other personal assets) as security for a bank loan
• Owe unpaid taxes or employee entitlements
• Have engaged in insolvent trading

The New Zealand Companies Office provides more information about company directors’ liabilities here.

Can I Still Be Liable If I’ve Resigned As A Director?

Even after a company has ceased operations and has been removed from the New Zealand Companies Register, a director’s liabilities may continue. Any breaches that occur after resignation will be scrutinized. Typically, a director remains liable for their actions during their tenure.

Note that fiduciary duties persist beyond resignation, so it’s wise to continue acting in the company’s best interests.

How Can I Reduce These Risks of Liability?

As a new company director, the concept of liability can be overwhelming. However, there are ways to manage these risks effectively.

Insurance

Considering the risks, Directors and Officers (D&O) Insurance is advisable. This insurance shields directors from personal liability or financial losses due to wrongful actions or company troubles. It typically does not cover deliberate illegal conduct.

Deed of Indemnity

Directors can face personal liability in certain situations, which is where a Deed of Indemnity can be beneficial.

This agreement between directors and the company typically outlines:

• The extent of protection
• D&O Insurance provisions
• Access to company documents

A Deed of Indemnity covers costs if a director breaches their duties and protects them from liability. The specifics vary depending on the company and the director’s liabilities.

Managing Your Finances

Directors must be vigilant about their financial responsibilities to avoid insolvent trading. Personal liability can result from breaching this duty, so it’s crucial to be proactive.

While relying on accountants and financial advisors is common, directors are ultimately responsible for the company’s financial health. Active involvement in financial matters is essential, even when the company is performing well.

Effective record-keeping is a director’s responsibility, and it’s recommended to maintain:

• Financial statements (invoices, receipts)
• Legal documents
• Meeting minutes

Next Steps

Stepping into the role of a company director is a significant milestone in the business world, but it comes with substantial legal responsibilities. Fortunately, Sprintlaw has a team of experienced lawyers ready to assist you in managing these risks from the beginning.
You can contact us at [email protected] or call us on 0800 002 184 for a free consultation about your business journey.

---