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Duties of a Company Director

The New Zealand Companies Act 1993 defines three duties which the Director of a New Zealand Company must fulfill when acting on behalf of the Company: the Duty of Good Faith, the Duty to Act for Proper Purpose, and the Duty of Care.

Duty to Act for a Proper Purpose

The director of a New Zealand Company can only exercise their powers only for their intended purpose.

Before a director chooses to use their powers they should determine the reason for which the power were originally granted to them. The director should then seek to ascertain the limit within which the conferred powers were intended to be used. They must then identify and recognize their own reasons for using their powers at that time.

If the Director’s actions are questioned, a subjective test will be applied to see if they fulfilled the Duty to Act for a Proper Purpose.

Examples that constitute an improper use of power could include the establishment of unreasonably generous “golden parachutes” for company executives, and employee share purchase schemes intended for price maintenance rather than employee enrichment.

Duty of Care

The Companies Act 1993 imposes a general duty of care on all directors, based on the underlying concept of director diligence. Any person serving as the Director of a New Zealand company is obligated to devote adequate attention, observance and activity to the care of the company.

To judge whether the Director appropriately applied a Duty of Care to the company, a court will carry out an objective test, whereby it will be determined how much attention was required from the director and whether the level was fulfilled.

Duty of Good Faith

When the director of a New Zealand company exercises his powers or makes judgments on behalf of the organization, the decisions must be in the best interest of the entity, and not to serve their own preferences or those of a particular group of shareholders.

Good Faith is treated as a subjective test when questioned or if legal action is pursued. The court examining the complaint will judge whether the Director had reasonable grounds to believe that his actions were in the best interest of the company. If it is found that the director’s belief was without grounds or that it was based on patently unreasonable assumptions, the court might find that the actions were not in good faith.

Penalties

If it is ever found that the Duties were breached, the director can be found personally liable for the losses incurred by the New Zealand company. In some limited circumstances even the shareholders of the company will be able to bring legal action against the offending director.