Directors’ Duty of Care in New Zealand

A company director is responsible for managing your company’s business and affairs. If you are a company director in New Zealand, you must comply with your legal duties. This article explains some of your duties as a company director, specifically your duty of care.

What Is a Director’s Duty of Care?

A director of a company is legally required, in the performance of their work as a director, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. In evaluating what degree of care is required, a director must take into account:

• the nature of their company;
• the nature of the decision in question; 
• their position as the director of the company;
• the nature of the responsibilities they have undertaken as director; and
• any other matters that appear relevant. 

Additionally, to exercise the diligence of a reasonable director, it is necessary for you to:

• remain informed regarding the dealings of your company;
• undertake inquiries where necessary into dealings or issues in the company; and
• seek competent advice from experts where it is appropriate, or prudent, to do so. 

What Happens if a Director Breaches This Duty of Care?

As a director, if you fail to uphold this duty of care, you may be subject to a civil liability claim. However, you cannot be criminally liable for breaching your duty of care. 

You should note that you owe a duty of care to your company, not to the shareholders. Therefore, the shareholders could not bring a claim against you. Instead, shareholders would need to bring a claim in the name of your company. 

What Is a Reasonable Director?

There is no uniform standard for a reasonable director. As a company director, you likely receive little to no training for your role. Likewise, there is no universal guidebook on being a reasonable director. 

Instead, when evaluating whether you upheld your duty of care to the standard that a reasonable director would have, a court will deploy a partially objective, partially subjective test. This test considers what an ordinary person with an ordinary degree of prudence, might be expected to do in those circumstances. Further, a court assesses your actions against that of a reasonable director. A court will only compare a director’s conduct with another if the two were in identical circumstances.

Other Directors’ Duties

As a company director, you are also subject to other duties, alongside this duty of care. Some of these further duties are set out below.

Act in Good Faith

You must act in good faith in what you believe to be your company’s best interests. 

You can be criminally liable if you, in the performance of their duties and powers:

• act in bad faith towards the company; 
• believe that the conduct is not in the best interests of the company; and
• know that the conduct will result in serious loss to the company. 

Proper Purpose

A company director must exercise their powers for a proper purpose. 

Regardless of whether you believe that you are acting in the company’s best interests, you must not exercise your powers for a purpose other than that for which the power was conferred for.

Comply With Legislation and Company Documents

As a director, you must comply with the Companies Act 1993 and the company’s constitution in the performance of their duties. 

You owe this duty to both the company and the shareholders.

Not Engage in Reckless Trading

You must not consent to the company’s business being carried out in a manner that would likely create a substantial risk of serious loss to your company’s creditors. This duty extends to not “causing or allowing” the business to be carried on in this manner. Such actions would include:

• trading whilst the company is insolvent; or
• trading whilst the company is close to insolvency. 

Similarly, a director must not agree to the company taking on new obligations unless they reasonably believe that the company can carry out these obligations when it is required to do so.

Key Takeaways

As a company director, you play an integral role in ensuring that your company operates effectively and efficiently. Likewise, there are certain duties which you must follow. These duties are to:

• exercise the care, skill and diligence that a reasonable director would exercise in the same circumstances;
• act in good faith and in the best interests of the company;
• exercise their powers for a proper purpose; 
• comply with company law and your company’s constitution; and
• not engage in reckless trading.

If you need advice about your directors’ duties, contact LegalVision’s New Zealand corporate lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions