On your business card, it says you’re the director of your company. But what does that actually mean?
Not all business owners understand that being a director comes with specific duties under the law. It’s important you understand these duties and expectations, because if your company gets into trouble, your personal finances could be put at risk.
In this article we look at the director duties and responsibilities in NZ, and how you might be have some personal liability if your company becomes insolvent.
Directors Responsibilities in NZ
The Companies Act 1993 lays out the responsibilities of directors, which are called “Director’s Duties.” We wrote an extensive article about director’s duties, which you can look to for more information. But the main responsibilities of the director are to:
- - act in a way that doesn’t contravene the Act or the company’s constitution.
- - manage the company in a responsible way, taking all practicable steps to ensure the company remains solvent or isn’t run in a way to risk substantial loss to creditors (called “reckless trading”). Directors owe duties to the company, its shareholders, and other parties who work with the company.
- - file obligations with the Companies Office.
- - ensure accounting records are kept.
- - act honestly, in the best interests of the company.
- - abide by a two-step solvency process at all times (called “The Solvency Test” - learn more about that here).
Risk of personal liability
If your company is declared insolvent or you do not fulfil your duties under the Companies Act 1993, you as the director can be held personally liable under the following circumstances:
- - you fail to complete a solvency certificate when required.
- - you fail to follow the correct procedure for authorising the relevant transaction.
- - at the time the certificate was signed, reasonable grounds for believing that the company would satisfy the solvency test did not exist.
- - between approving the transaction and executing it, the circumstances affecting the company’s ability to meet the solvency test have changed, but the distribution occurs anyway.
If you sign a solvency certificate knowing it is misleading or false, you are committing an offence, and are liable for a fine of up to $20,000, or you could go to prison for up to five years. Likewise, directors who vote for a distribution, but then don’t sign the certificate, are liable on conviction for a $5,000 fine. The directors can also be required to reimburse the company for the distribution paid if the transaction occurs within a specific period preceding liquidation.
The risk of personal liability are too great to take lightly. That’s why it’s important you understand all your duties as a director under the law, and if you’re worried about the solvency process, talk to the professional team at McDonald Vague. We can give you the best plan for managing your company through tough times.