COMPANY DIRECTORS DUTIES & STATUTORY OBLIGATIONS UNDER THE COMPANIES ACT 1993. ALL WRAPPED UP. By Atticus Legal, Extraordinarily Clever Company Lawyers Hamilton & Business Lawyers Hamilton
The Companies Act 1993 (the Act) sets out a number of general duties for company directors as well as important specific statutory obligations. All directors need to know about these. The consequences of breach can be significant. They apply equally to all directors. Even those that consider themselves to be ‘silent partners’ or who otherwise don’t take an active part in the company or its business.
Who are the Directors? That’s an odd question. It’s obvious isn’t it? Or is it?
For the purposes of the Act, a ‘director’ clearly includes someone formally appointed as such. But the term (and the legal obligations attaching) also extends to ‘de facto’ directors, delegates, director alternates and shareholders exercising powers reserved to the directors.
The General Duties of Company Directors
In addition to specific statutory obligations under the Act, all company directors have five general duties:
- To act in good faith and in the best interests of the company.
- To exercise powers for a proper purpose.
- To comply with the Act and the constitution.
- To disclose conflicting interests.
- Not to misuse company information/corporate opportunities.Company directors who breach their duties or obligations can face stiff fines and in some cases can become personally liable to shareholders and creditors.
In certain situations the Act imposes pre-conditions on the use of directors’ powers. Where such a pre-condition exists, directors must sign a certificate recording their opinion that the pre-condition has been met.
The purpose of director certificates is two-fold:
- To force directors to focus on the decision or action in question.
- To provide a ‘paper trail’ for liquidators, creditors and/or shareholders to follow in cases of alleged breaches of directors’ obligations.
The circumstances in which directors must give certificates under the Act include:
- solvency test.
- distributions to shareholders (eg. dividends).
- issuing new shares.
- offers to acquire company’s shares.
- redemption of shares.
- company financial assistance to help others purchase shares.
- approving director remuneration and insurance.
- amalgamations with other companies.
THE SOLVENCY TEST
One of the pre-conditions likely to arise from time to time is the requirement that the company satisfies the solvency test. For example, before the directors can authorise a company ‘distribution’ (eg. a dividend payment) they must certify (based on reasonable evidence) that following the distribution:
- The company will be able to pay its debts as they become due in the normal course of business (‘cashflow solvency’); and
- The value of the company’s assets will be greater than the value of its liabilities including contingent liabilities (‘balance sheet solvency’).
It is important to get the solvency test right. If reasonable grounds are later found not to have existed for the decision that the company would satisfy the solvency test following a distribution, directors who voted in favour of that distribution and/or signed a solvency certificate can become personally liable.
The first part of the solvency test has long been part of company law. The words ‘able to pay its debts as they become due’ mean as the debts become legally due for payment.
The proper approach by the directors has been expressed in this way:
“Regard should be had to [the company’s] trading history, its income, its current assets, its ability to borrow moneys in time to meet its debts and its overall assets/liabilities situation.”
The words ‘in the normal course of business’ contemplate debts which occur during ordinary trading, and which do not constitute abnormal or unusual situations.
Balance Sheet Solvency
The second part of the solvency test requires the directors to have regard to:
- the most recent financial statements of the company which comply with the Financial Reporting Act 1993; and
- all other circumstances which the directors know, or ought to have known, would affect the value of the company’s assets and liabilities (including contingent liabilities).
In considering the balance sheet limb of the solvency test directors can rely upon:
- Valuations of assets and estimates of liabilities which are reasonable in the circumstances. This means up-to-date and meaningful valuations. This also means that directors cannot shelter behind seemingly reasonable valuations or other assessment information gathered if they have reason to believe that there are circumstances which indicate those valuations or assessments are wrong (eg. based on invalid assumptions).
- The advice of employees or outside professionals, if it is reasonable to believe their advice or information is within their areas of competence.
SHARE DEALINGS BY COMPANY DIRECTORS
- Company directors must disclose to the board and enter in the interests register notice of any dealings (that is, buying and selling) involving ‘relevant interests’ in shares of the company.
- Directors must not deal in shares in the company or a related company if they have ‘material’ price-sensitive information, unless those dealings are at fair value.
The penalties for breaching these duties are severe.
- A director who fails to disclose his or her dealings in shares of the company can be fined up to $10,000.00.
- A director dealing in company shares otherwise than for fair value will be personally liable to the other person in the transaction to the extent that the purchase price is less than the fair value or the sale price exceeds the fair value.
RECKLESS TRADING AND DIRECTORS’ DUTIES TO CREDITORS
It may surprise you to know that directors owe duties not only to the company and its shareholders, but also to the creditors of the company. Directors’ obligations to the company’s creditors include:
- Directors must not 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; and
- Directors must not agree to the company incurring an obligation unless they believe on reasonable grounds at the time, that the company will be able to perform the obligation when it is required to do so.
ADVICE FROM PROFESSIONALS & DELEGATION
When exercising their rights and powers, directors are entitled to rely on reports, statements, advice and information supplied by professionals, experts and employees who the directors have reasonable grounds to believe to be reliable and competent. However, if the directors have reason to doubt the competency of those advisers then the directors should make further inquiry as warranted.
The board of directors may also (subject to any restrictions in the constitution of the company) delegate to a committee of directors, a particular director, an employee or any other person some of the board’s powers (other than those listed in the Second Schedule to the Act). However, where delegation occurs the board must continue to monitor the exercise by the delegate of the power, and must continue to believe on reasonable grounds that the delegate will exercise the power in accordance with the constitution and the Act.
OTHER MAJOR FEATURES OF THE ACT
(i) The Act is permissive in nature, but the benefit of many of the important flexible reforms that it offers (e.g., the power for the company to repurchase its own shares) can only be gained if there is an express empowering provision in the constitution.
(ii) In addition to the power to repurchase its own shares (if allowed by the constitution), a company can also provide financial assistance for the purchase of its own shares. These powers can be very useful where an existing shareholder wishes to sell his or her shares or where the shareholders wish to reduce the company’s capital.
(iii) Some other important features of the Act that company directors need to be conscious of:
- Directors have administrative requirements to fulfil under the Act to provide a ‘paper trail’ of responsibility (especially in the form of directors certificates, where required).
- The rules relating to ‘major transactions’ and when they apply (see below). Minority shareholders who disagree over a major transaction can demand their shares be purchased by the company.
- In the case of closely-held companies, some of the requirements of the Act can be waived where there is a signed ‘unanimous agreement of entitled persons’ (see below).
Companies are subject to a ‘major transaction’ rule which means they must not (without specific approval by special resolution of shareholders) acquire or dispose of, or agree to acquire or dispose of, assets worth more than half the company’s total assets before the transaction. Nor can a company (without approval by special resolution of shareholders) acquire or incur rights, obligations or liabilities which are worth more than half the value of the company’s total assets before the transaction.
Even if a major transaction is approved by special resolution, a minority shareholder who voted against it can require the company to purchase his or her shares. This could be financially damaging to the company if a number of shareholders demand buy-back of their shares.
Directors’ Certificates and Directors’ Interests
As noted above, the Act imposes specific administrative responsibilities on directors, particularly in relation to certification and self-interest transactions.
The directors are required to keep and make available to shareholders a record of ‘certifications’ whereby the directors certify that the requirements of the Act and the constitution have been complied with in various circumstances. Dissenting directors will need to record their dissent in directors’ minutes.
Directors’ certificates are required to record that certain procedures/criteria have been satisfied – for example, certifying:
- that consideration payable for the issue of new shares is fair and reasonable;
- that the solvency test will be satisfied after a distribution; and
- that financial assistance proposed to be given for the purchase of the company’s shares is fair and reasonable to the company and in the best interests of the company.
The Act also requires disclosure by directors in an ‘interests register’ in respect of self-interest transactions as well as requirements relating to share dealings by directors (see above).
UNANIMOUS APPROVAL EXEMPTION
Although some of these administrative responsibilities under the Act may appear a little daunting, there is an important exemption available to companies which are able to obtain the unanimous approval of shareholders (and other ‘entitled persons’, if any). This will be particularly useful for closely-held companies.
This exemption, where available, limits the restrictions and administrative requirements of the Act in respect of transactions in which a director is interested, authorisation of dividends, repurchase by the company of its own shares and certain other circumstances. In each case however, the board of directors must be satisfied on reasonable grounds that the company will satisfy the solvency test following exercise of the power.
FURTHER INFORMATION FOR COMPANY DIRECTORS
For further information see also our Atticus Legal information sheets on the following:
- For company records & registers the directors must keep at https://atticuslegal.co.nz/company-records-and-registers-directors-obligations-by-atticus-legal-company-business-lawyers-hamilton/
- For a bit more on the general directors duties and what they mean at https://atticuslegal.co.nz/directors-duties-basic-principles/
- For general principles applying to companies and ‘limited liability’ at https://atticuslegal.co.nz/company-law-101-what-directors-and-shareholders-need-to-know/
WANT TO KNOW MORE? Just ask Atticus Legal, Wizard-like Company Lawyers Hamilton & Business Lawyers Hamilton
CALL ANDREW SMITH, the owner of Atticus Legal, for expert professional advice on any of the matters referred to in this information sheet.
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Disclaimer: The information contained in this information sheet is, of necessity, of a general nature only. It should not be relied upon without appropriate legal advice specific to your particular circumstances.
This information sheet is copyright ©Atticus Legal, March 2016