NEW ZEALAND Law and Practice Contributed by: Graeme Quigley, Ashton Goatley and Erin Hickey, Webb Henderson
specific matters and its implicit assumption that direc - tors must always consider the maximisation of profit (which is not the case). The current government has announced an intention to repeal it. Section 133 – Proper Purpose Directors must exercise their powers for a proper purpose – that is, when exercising a power conferred upon them, the director must exercise that power in line with the purpose for which it was conferred. This duty is distinct from the duty in respect of best interests, as it is possible to exercise a power for an improper purpose even if the director genuinely believed the course of action was in the best interests of the company. Section 134 – Compliance With Companies Act and Constitution A director may not act, or agree to the company act - ing, in a way that contravenes the Companies Act or the company’s constitution. A contravention of anoth - er statute would not necessarily breach this duty, but may breach Section 131 (with regard to good faith and best interests of the company) and Section 133 (with regard to proper purpose). Section 135 – Reckless Trading A director must not agree to the business of the com - pany being carried on – or cause or allow the busi - ness of the company to be carried on – in a manner likely to create a substantial risk of serious loss to the company’s creditors. Whether or not a director believes the conduct of the business is reasonable is irrelevant – the test is an objective one. Directors are required to make a “sober assessment” of whether their future trading forecasts justify continuing to trade and whether the assumptions that underpin those forecasts are reasonable ( Mason v Lewis (2006) 3 NZLR 225 at [51]); however, the benefit of hindsight should not be applied to directors’ decisions. If there is not a reasonable prospect of the company regain - ing solvency, formal insolvency mechanisms should be invoked (see Debut Homes ) – it is not enough that the director’s decisions would reduce the overall defi - cit. Directors may not continue to trade in a way that favours one class of creditors over another.
In the long-running Mainzeal litigation, the Supreme Court upheld the finding of the Court of Appeal that four former directors of Mainzeal (a construction com - pany) breached Section 135 ( Yan v Mainzeal Property and Construction Limited (in liquidation)) by extracting money from Mainzeal to an overseas parent company through insolvent intermediary companies. A director of both Mainzeal and its parent company made repre - sentations to his fellow directors that the parent com - pany would financially support Mainzeal when it first became insolvent in a balance sheet sense. The repre - sentation was not legally binding, and the parent com - pany did not provide the support when it was needed. The directors were found to have exposed creditors to substantial risk of serious loss by continuing to trade in reliance on the non-binding representations and without a substantial capital injection. However, the court did not award compensation in respect of the breach of Section 135, because the court held that the directors’ conduct during the relevant period did not increase the aggregate loss suffered by Mainzeal’s creditors – known as the “net deterioration” approach. Section 136 – Obligations A director must not agree to the company incurring an obligation unless the director believes at the time, on reasonable grounds, that the company will be able to perform the obligation when it is required to do so. In the Mainzeal case, the Supreme Court found that compensation for breaches of Section 136 should be assessed on a “new debt” basis (ie, the value of obligations incurred without reasonable grounds to believe that the company would be able to perform them when due). Section 137 – Duty of Care A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances – tak - ing into account (without limitation) the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by them. This section does not automatically impose a higher standard of skill on directors who hold professional
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