Do your small business clients understand director responsibilities?

Inez de Lambert

The article is relevant to members in New Zealand and was current at the time of publication.

Directors of small businesses in New Zealand carry legal responsibilities that go beyond day-to-day operations, including governance, compliance and risk management. 

Getting things wrong can be serious. Company directors who breach their duties or obligations can face stiff fines and even become personally liable to shareholders and creditors.

Here are 12 tips that will help clients who are considering becoming directors. 

1. Understand and comply with duties under the Companies Act 1993 (the ACT)

A director’s main duties under the Act are:

• Act in good faith and in the best interests of the company. Avoid anything that could advance their own interests at the company’s expense.
• Understand and comply with the Act and the company’s constitution.  
• Disclose conflicting interests. 
• Do not agree to the company incurring obligations unless the company can perform them.

2. Ensure the company meets the solvency test 

Before making distributions or incurring major debts, directors must ensure the company passes the two-part solvency test.

• Liquidity: Can the company pay its debts as they fall due?
• Balance sheet: Are assets greater than liabilities?

Failing this test can lead to a director being personally liable, especially if the company goes into liquidation. 

3. Avoid reckless trading 

Running the company in a way that risks serious loss to creditors — essentially, taking excessive risks with someone else’s money is reckless. Most reckless trading cases involve continuing to trade when facing insolvency, instead of liquidating before things get worse. 

4. Act competently

Directors must act with “the care, diligence and skill that a reasonable director would” in similar circumstances. 

This is an objective standard — their actions are judged against what others in their position would reasonably do. 

5. Keep clear records of meetings

Directors should keep accurate board minutes and resolutions. It must be clear who did or decided what. Minutes can be used as legal evidence.

6. Take health and safety seriously

Directors must not underestimate the importance of health and safety. Every New Zealand company must comply with relevant health and safety requirements. Directors must ensure the company:

• complies with the Health and Safety at Work Act 2015
• stays informed about workplace risks and mitigates them
• has a health and safety policy that staff follow
• provides training and resources for staff safety
• monitors incidents and takes corrective action.

7. Maintain financial oversight

Any company director must understand the financial position of the company. 

• Meet regularly — quarterly works well — with the accountant or financial advisor.
• Work with them on the business, improving systems and highlighting issues before they become serious.
• Use these sessions to review cash flow, budgets and forecasts.

8. Understand the laws that govern the industry

A director needs to learn the basics of the laws and regulations that apply to their company’s industry. 

Understand the company’s main legal risks and whether management has good processes to protect against them.

9. Follow due process for employment and human resources

Directors need to understand employment legislation and ensure employees are paid in compliance with New Zealand employment law. Ensure the company: 

• uses written employment agreements for staff
• uses a payroll provider that understands the specifics of their business
• complies with minimum wage, leave entitlements and holidays
• maintains a safe and inclusive workplace.

10. Take care of insurance and risk management

Directors need to know what insurance is in place and whether it is adequate. Directors should:

• hold director’s and officer’s insurance for their own exposure, plus an indemnity from the company
• review the company’s business insurance policies annually.

11. Set policies and procedures

Policies and documentation provide some protection for the director, so:

• develop and review internal policies for leave, conduct, safety etc
• document procedures for key business functions 
• make sure employees follow policies and procedures.

12. Train and stay in shape 

Being a director is a continual learning process — they should stay updated on their responsibilities. 

• Refer to business.govt.nz, the government’s online small business resource, which also carries governance information from IoD.  
• Follow legal changes affecting directors.
• Subscribe to industry newsletters and legal updates.

Tips were compiled with the help of Guy Beatson, General Manager of the Governance Leadership Centre at the Institute of Directors; Catherine Matson, Associate Director, Business Advisory Services, Baker Tilly Staples Rodway; and Rupert Rouch, Corporate and Commercial Partner, Buddle Findlay.