NEW ZEALAND Law and Practice Contributed by: Graeme Quigley, Ashton Goatley and Erin Hickey, Webb Henderson
set of duties is owed directly to the sharehold - ers, including the duty to supervise the share register and the duty of directors to disclose their interests and dealings in the company’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 liquidation. 4.8 Consequences and Enforcement of 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 may not directly bring an action against a director for breaches of duties owed to the com - pany. However, Section 165 allows a shareholder or director to apply to the court for leave to bring proceedings in the name and on behalf of the company. This creates an avenue for sharehold - ers to hold directors to account for breaches of their duties to the company (and may also be used for bringing proceedings against third par - ties). The Section may also be used to intervene in existing proceedings for the purpose of con -
tinuing, defending or discontinuing proceedings to which the company is a party. When determining whether to grant leave to the shareholder (or director), the court must have regard to: • the likelihood of success; • cost; • anticipated level of relief; • any action already taken to obtain relief; and • the interests of the company in the proposed proceedings. The court should also consider whether the applicant seeking leave may have ulterior motives other than the best interests of the com - pany (Johnson v Johnson [2020] NZHC 1563). In Vijayakumar v Vasanthan [2021] NZHC 1827, the court noted that it was helpful in this respect to consider whether an experienced liquidator would bring the claim, given that they regularly decide whether to issue proceedings against directors. Additionally, the court may decline an applica - tion under Section 165 if a more effective alter - native remedy exists under Section 174. Leave will only be granted if the court is satisfied that: • the company does not intend to bring, dili - gently continue or defend, or discontinue the proceedings itself; or • it is in the interests of the company that the proceedings should not be left to the direc - tors or to the determination of the sharehold- ers as a whole. Sections 170 and 172 allow a shareholder to bring an action requiring a director or the com - pany to take any action required to be taken by the directors or the company (respectively)
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