NEW ZEALAND Law and Practice Contributed by: Graeme Quigley, Ashton Goatley and Erin Hickey, Webb Henderson
qualifications in a particular area. The position may, however, be different if a director is brought onto the board to add a particular skill set. Section 138 – Use of Information and Advice The Companies Act expressly permits directors, when exercising powers or performing duties, to rely on reports, statements, financial data, professional and expert advice, and other information provided by: • those (including employees, professional advis - ers and experts) whom the director reasonably believes to be competent in the relevant area; and • fellow directors (or directors’ committees on which the director did not serve) in relation to matters within those directors’ or committees’ designated authority. In each case, the director must act in good faith, have no knowledge that such reliance is unwarranted, and make proper inquiry where the need for inquiry is indi - cated by the circumstances. Mainzeal Implications The Supreme Court also noted the following implica - tions arising out of the Mainzeal case: • directors have a continuing obligation to monitor the performance and prospects of the company; • where monitoring reveals the potential for substan - tial risk of serious loss to creditors or doubt as to whether there exists a continuing reasonable basis for the belief that obligations incurred will be able to be honoured, directors should squarely address the future of the company; • directors may need to obtain independent expert advice and the courts will allow a reasonable time for directors to “take stock” and decide on a course of action; • directors must deal directly with the issues giving rise to the concern, recognising that a long-term strategy of trading while balance sheet insolvent is generally not acceptable; and • courts will apply a standard of reasonableness when assessing directors’ decisions, noting that: (a) these decisions are likely to involve the exer - cise of business judgement; and
(b) directors are often required to make com - plex decisions under the pressure of time with incomplete knowledge despite their best efforts, and the courts will avoid “hindsight bias” (ie, will recognise that reasonable deci - sions may nonetheless turn out badly and there may be more than one reasonable course of action). 3.7 Responsibility/Accountability of Directors All the directors’ duties described in 3.6 Legal Duties of Directors/Officers are owed to the company, rather than to shareholders. A limited set of duties is owed directly to the shareholders, including the duty to supervise the share register and the duty of directors to disclose their interests and dealings in the com - pany’s shares. Although directors owe none of these duties directly to creditors, Section 135 and Section 136 respectively require directors to consider whether the company’s business is being carried out in a way that is likely to create a substantial risk of serious loss to creditors and whether the company will be able to perform the obligations that it proposes to incur. If the company became insolvent and was placed into liquidation, the liquidator could then bring an action (on behalf of the company) against a director that had breached their duties to the company. Amounts received from directors as a result would be applied for the benefit of the company’s creditors in the liq - uidation. 3.8 Breach of Directors’ Duties Shareholder Enforcement A present or former shareholder may bring an action against a director for a breach of duty owed to them as a shareholder (Section 169), but not for breaches of duties owed to the company itself. However, Section 165 allows a shareholder (or a director) to apply to the court for leave to bring proceedings in the name and on behalf of the company for breach of such a duty, or to intervene in existing proceedings to which the company is a party. In deciding whether to grant leave, the court must consider the prospects of success, cost, likely relief,
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