Hmmm, it's a worry! Please read this excellent article from Fortune Manning Lawyers:
All directors need to be aware of the statutory duty they owe to the company not to trade recklessly and of their potential personal liability for the debts of the company if they do so. There are now several recent cases where the Courts have taken a hard line against directors. The Court of Appeal has recently upheld a High Court decision which found a director liable for reckless trading and personally responsible for the debts and liabilities of the company to the tune of $8,400,000 plus interest from the date of liquidation of the company, not including his liability to related party creditors.
The relevant provision is section 135 of the Companies Act 1993:
A director of a company must not -
There are some peripheral points to note:
The best guidelines for determining whether or not the actions taken by the director were legitimate or illegitimate business risks were set down by the High Court (in South Pacific Shipping Limited (in Liquidation), Re; Traveller & Anor v Löwer (2004) 9 NZCLC 263,570).
The Court said the following factors were relevant:
The "legitimacy" test, used to determine director's culpability, was also supported by the High Court in Mountford v Tasman Pacific Airlines of NZ Limited (2005) 9 NZCLC 263,864.
These decisions have no doubt given liquidators and creditors confidence that where directors are reckless the courts will hold them personally liable for the company's debts.
However, directors can take some comfort in the finding that the taking of legitimate business risks is not reckless. Although, it is a fine distinction. In the two cases decided after South Pacific Shipping and Walker v Allen the Courts have found in favour of the director.
In Global Print Strategies (in Liquidation); Re Mason & Anor v Lewis & Anor (High Court Auckland) the Court found that recklessness requires more than mere negligence. The director must make a conscious decision to allow the business to be conducted in such a way as to pose a substantial risk of serious loss to the company's creditors, or must be wilfully or grossly negligent in turning a blind eye. This introduces a degree of subjectivity to the otherwise objective test of whether a director's conduct was reckless.
In Petros Developments Limited (in Liquidation); Re Advanced Plastics Limited v Harnett & Anor (High Court Auckland) the Court found that the director's conduct was not reckless as the director had the full support of the creditors and the creditors were fully aware of the risks which incidentally were substantial. There was a common strategy between the director and the creditors. The Court made the observation that all business is inherently risky.
The question will always be whether the director's conduct can fairly be regarded as reckless but it is important for directors to bear in mind the principles or guidelines in the South Pacific Shipping case. It is still open for directors to authorise their companies to take risks in business (this is often necessary to promote the company's best interests) but all care should be given to those decisions to ensure the risk taking is legitimate.
Read the full article here here. Note that this article is under review due to some recent courtroom developments. We'll update it as more information comes to hand.
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