DIRECTORS’ DUTIES
When a Company Faces Insolvency
With Smith and Partners, Lawyers
What New Zealand Directors Need to Know
Under the Companies Act 1993, company directors must balance the interests of shareholders and creditors. While this balance is straightforward when a company is solvent, it becomes more complex as financial pressure increases (particularly for parties who are both shareholders and directors as is often the case). Directors who fail to recognise and respond to this shift in circumstances risk personal liability.
When Duties Begin to Shift
When a company can pay its debts as they fall due, directors’ duties are primarily owed to the company itself. However, as insolvency becomes a real possibility, directors must increasingly take creditors’ interests into account. Early warning signs include cashflow pressure, difficulty paying debts on time, or reliance on short-term measures to stay afloat. These issues often arise when customers delay payment, expenses rise unexpectedly, or the business is affected by higher interest rates, litigation costs, or major repairs.
Directors are expected to remain alert to these indicators and to constantly reassess the company’s position as circumstances change.
Heightened Scrutiny and Personal Risk
If a company later enters liquidation, directors’ decisions will be reviewed with hindsight. Liquidators routinely examine whether directors acted prudently, kept themselves properly informed, and avoided overly optimistic assumptions.
Where breaches of duty are identified – particularly reckless trading – directors may face personal liability. The question is not whether the business ultimately failed, but whether directors responded appropriately as financial risk increased.
If you are uncertain about your obligations as a director, or need help understanding the dilemma of balancing your role as director and your rights as a shareholder speak to Tam Irvine – P: 09 837 6837 tam.irvine@smithpartners.co.nz
