NZ Companies Act - Director's Duties

Sections 135 and 136 of the Companies Act 1993 (the Act) have been described as being “calculated” to encourage directors “not to exacerbate the indebtedness of a company” if it becomes insolvent, and also to make certain of compensation for any creditors where this occurs.1 To determine the validity of this statement, we first need to establish several things. Firstly, who does this act define as a director and whose actions are liable under ss135 and 136. Secondly, it is important to establish when a company is solvent or insolvent. Section 4 of the Act is the solvency test. Once those two things have been established we can then look at if ss135 and 136 are calculated to discourage directors to partake in reckless trading while insolvent; and if the sections encourage directors to provide compensation for the company’s creditors if insolvency occurs. It is also important to note the obligation of directors to act reasonably during insolvency. The description of ss135 and 136 can only be validated by case law and how the courts interpret ss135 and 136 of the Act. The statute can only be strong if the punishment for reckless trading is severe enough to discourage reckless trading; and if creditors are able to be compensated.

To determine the extent ss135 and 136 of the Act discourage reckless trading while insolvent we first need to establish who these sections apply to. The definition of a director can be found in s126 of the Act.2 A director can be someone who is appointed by the company, but can also be someone who performs directors’ duties and/or a person who has a reasonable amount of control or influence over the running of the company. Directors’ duties can be found in ss131-141 of the Act. Even if a person is not qualified to be a director, yet still acts as a director, they still have to fulfil the obligations of a director. A former director can also be held liable for their actions during their time as a director. The second thing to