• Every director of a New Zealand company owes statutory duties under the Companies Act 1993, including acting in good faith and in the best interests of the company, and exercising powers only for a proper purpose.
• Directors must not agree to, cause, or allow the business to be carried on in a manner likely to create a substantial risk of serious loss to creditors — commonly referred to as the duty against reckless trading.
• A director with a financial or other interest in a matter relating to the company must disclose that interest and have it recorded in the company’s interests register.
• Breaching director duties can expose a director to personal liability, including being required to compensate the company or its creditors, and in serious cases can lead to disqualification from acting as a director.

Scope & Objective

This guide is a companion to our general New Zealand Company Registration and Companies Office Compliance guide, and focuses specifically on the statutory duties every director takes on personally once appointed. These duties exist independently of what’s written in a shareholders’ agreement or constitution — they are imposed directly by the Companies Act 1993, and a director cannot contract out of them.

The Core Duties: Good Faith and Proper Purpose

The foundational duties require a director to act in good faith and in what the director believes to be the best interests of the company, and to exercise powers for a proper purpose. These are subjective in part — the law generally looks at what the director honestly believed — but that protection only holds up if the director can show they turned their mind to the company’s interests, rather than simply rubber-stamping a decision that benefited themselves or another party.

Related duties require a director not to act, and not to agree to the company acting, in a manner contrary to the company’s constitution, and not to exercise powers for an improper purpose — such as issuing shares primarily to entrench control rather than to raise genuine capital. These duties apply to every director equally, regardless of whether they are also a shareholder or the company’s sole owner-operator.

Avoiding Reckless Trading and Insolvent Trading

Section 135 of the Companies Act prohibits a director from agreeing to, causing, or allowing the business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors — this is the reckless trading duty, and it is assessed against what the director knew or ought reasonably to have known about the company’s financial position at the time.

A closely related duty under section 136 prohibits a director from agreeing to the company incurring an obligation unless the director believes, on reasonable grounds, that the company will be able to perform that obligation when required. Continuing to take on new debt, new leases, or new supplier commitments after a director knows (or should know) the company cannot realistically meet them is where reckless and insolvent trading claims most often arise — and directors can be held personally liable to compensate creditors for losses that result.

Disclosing Conflicts of Interest

Directors must also disclose any interest they have in a matter relating to the company — for example, being a party to a contract the company is entering into, or holding a significant interest in another company the business deals with. Once disclosed, that interest must be entered in the company’s interests register, which every company is required to maintain. Disclosure does not automatically prevent the director from participating in the decision, but failing to disclose an interest at all removes that protection entirely and exposes the transaction (and the director) to challenge.

In practice, the interests register is one of the most commonly neglected statutory documents — many small companies simply don’t maintain one, or let it fall out of date as new contracts and relationships develop, which becomes a real problem the moment a related-party transaction is scrutinized by a liquidator, the IRD, or another shareholder.

Common Director Duty Mistakes

• Assuming that being a minority or non-executive director reduces exposure to the reckless trading duty — the duty applies to every director, regardless of shareholding or involvement in day-to-day management.
• Continuing to take on new debts, leases, or supplier commitments after cash flow problems become apparent, rather than treating early warning signs as a trigger for professional advice.
• Not maintaining an interests register at all, or letting it fall out of date as new contracts and related-party relationships develop.
• Believing that disclosing a conflict of interest automatically clears a director to vote on or benefit from the related transaction, without checking the specific disclosure and voting rules that apply.
• Treating director duties as something the company’s lawyer or accountant is responsible for, rather than a personal statutory obligation each director carries individually.

Making Sure Your Directors Are Meeting Their Statutory Duties?

Whether you need help setting up or updating an interests register, reviewing a decision for reckless trading risk, or understanding what a director’s duties actually require in practice, our team can help.

Get in touch to get started today.