NEW ZEALAND Law and Practice Contributed by: Graeme Quigley, Ashton Goatley and Erin Hickey, Webb Henderson
although “directors will probably have a hard task persuading the court that they honestly believed that an act or omission that resulted in substan- tial and foreseeable detriment to the company was in the company’s best interests” (at [109]). Under a subjective test, however, “the fact that an allegedly unreasonable belief was held may... provide evidence that the belief was not hon- estly held” (at [109]). Case law and commentary has also identified exceptions to the subjective nature of the test where there is no evidence of actual consideration of the best interests of the company, where there is a failure to consider the interests of creditors in an insolvency or near- insolvency situation, where there is a conflict of interest, or where a director’s decisions are irra - tional (at [113]). If provided for in the company’s constitution and (in some cases) agreed to by the other share - holders, a director may act in the best interests of a parent company or – in the case of a joint venture – their appointing shareholder, even though such actions may not be in the best interests of the company. In the absence of such a provision in its constitution, the interests of a company must be considered separately from the interests of a group of related companies (Kumar v Smartpay Ltd [2023] NZCA 410). Section 131 was amended in 2024 to express - ly state that as part of directors’ duty to act in good faith and in what they believe to be the best interests of the company, directors may consider matters other than the maximisation of profit, and gives as examples “environmental, social, and governance matters” . As part of the reforms to New Zealand company law discussed at 2.1 Hot Topics in Corporate Governance , it is proposed that this amendment be reversed, on the basis that it was already clear that direc - tors are free to consider matters other than the
maximisation of profit, and that referring to spe - cific matters in the Companies Act may raise questions about the weight that may be given to other matters. The earlier amendment had also attracted criticism noting that (as an unin - tended consequence) it appeared to presuppose that directors must consider the maximisation of profit, whether or not they also consider the other matters referred to. Section 133 – Proper Purpose Directors must exercise their powers for a proper purpose – that is, when exercising a power con - ferred 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 exer - cise 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 acting, in a way that contravenes the Companies Act or the company’s constitution. A contraven - tion of another 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 company being carried on – or cause or allow the business 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. Direc - tors are required to make “sober assessment” of whether their future trading forecasts justify
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