COMPANY DIRECTORS: ARE YOU TRADING RECKLESSLY?

Company directors: are you trading recklessly? Many business owners choose a company structure because it provides limited liability protection. That creates a valuable separation between the company’s obligations and the personal assets of its shareholders. Many directors misunderstand the limits of that protection, though, and the consequences of getting it wrong can be severe.

30-Second Read

• The Companies Act 1993 prohibits directors from carrying on business in a way likely to create a substantial risk of serious loss to creditors — known as reckless trading (section 135).
• New Zealand’s most significant recent example is Mainzeal, where the Supreme Court held directors personally liable for over $39.8 million plus interest. That followed an eight-year legal battle that concluded in 2022.
• “Sleeping directors” — those who take a passive, uninvolved role — aren’t protected. Courts have held them personally liable too.
• A 2025 High Court decision confirmed that creditors can now pursue directors directly, not only through a liquidator. That’s a real, current shift in who can bring a claim.
• Good governance is the clearest protection against personal liability. That means understanding your company’s financial position, monitoring cash flow, and seeking advice early.

What Is Reckless Trading?

The concept arises under section 135 of the Companies Act 1993(opens in new tab). The legislation prohibits directors from agreeing to, causing, or allowing a company to carry on business in a manner likely to create a substantial risk of serious loss to creditors. Courts focus on protecting creditors, since they often continue supplying goods, services, or finance based on the assumption that directors are managing the company responsibly.

Many directors assume reckless trading only applies once a company becomes insolvent. Courts look beyond insolvency alone, though. They examine how directors managed the company, the risks they accepted, and whether those risks exposed creditors to serious potential loss.

The test is objective. It’s not about whether the business eventually failed — businesses fail every day despite competent leadership. It’s about whether directors allowed it to operate in a way that created an unacceptable risk to creditors.

Two Cases Worth Knowing

Mainzeal is the case every NZ director should know. One of the country’s largest construction companies, Mainzeal went into liquidation in 2013(opens in new tab) owing unsecured creditors around $110 million. After the case worked its way through the High Court, Court of Appeal, and finally the Supreme Court, the directors were held liable for $39.8 million plus interest. That came to more than $50 million in total by the time it concluded in 2022. It’s a clear, modern signal that reckless and insolvent trading claims aren’t confined to small businesses or historical case law. They reach the top of New Zealand’s court system.

Löwer v Traveller (opens in new tab)(Court of Appeal, 2005) remains a significant precedent too. A director was held personally liable for approximately $8.4 million plus interest — one of the largest individual awards of its kind. The court confirmed that even a “sleeping director,” who had largely abdicated involvement to others, could still be held liable.

More recently, a 2025 High Court decision against a director of Civil Underground Limited confirmed something genuinely new. A creditor pursued the director directly, rather than through a liquidator. Previously, this kind of claim was almost always brought by liquidators after a company had already failed. This case signals that creditors — particularly well-resourced or determined ones — may increasingly bring these claims themselves.

The Difference Between Legitimate and Illegitimate Risk

Every successful business involves risk. The law doesn’t punish directors simply because a decision turns out badly. New Zealand courts distinguish between legitimate commercial risk and illegitimate commercial risk, and only the latter generally supports a finding of reckless trading.

Legitimate risk typically involves careful planning, sound financial analysis, and reasonable expectations of success. Proper oversight and genuine consideration of creditor interests matter too.

Illegitimate risk typically involves ignoring obvious warning signs, and continuing to incur debts without realistic repayment prospects. Operating without reliable financial information, and delaying difficult decisions while creditor losses increase, both count too.

Warning Signs Directors Shouldn’t Ignore

Financial distress rarely appears overnight — most businesses show warning signs well before a genuine crisis develops:

• Persistent cash flow pressure. Ongoing difficulty paying suppliers, lenders, Inland Revenue, or employees may indicate deeper issues worth investigating, not just postponing.
• Increasing creditor balances, with no credible repayment plan behind them.
• Reliance on new debt just to service existing debt — a sign of severe financial stress, distinct from ordinary growth borrowing.
• Poor financial reporting. Directors can’t make informed decisions without timely, accurate financial information.
• A significant loss of key customers or contracts, without a reassessment of forecasts and trading plans that follows.

Sleeping Directors Aren’t Protected

Some directors take a passive approach, trusting business partners, family members, or management to handle operations while remaining largely uninvolved. As both Löwer v Traveller and more recent cases confirm, this doesn’t provide protection — New Zealand courts have consistently held “sleeping directors” liable for reckless trading. Accepting a directorship means accepting the legal responsibility to stay sufficiently informed, whether or not you’re involved in day-to-day operations.

What Directors Should Do When Problems Emerge

Financial difficulty doesn’t automatically require liquidation — many businesses successfully restructure or recover from a temporary setback. What matters is acting decisively rather than hoping the problem resolves itself:

• Get accurate, current financial information before making major decisions.
• Prepare cash flow forecasts to understand upcoming obligations and identify potential shortfalls early.
• Speak with professional advisers — accountants, insolvency practitioners, and lawyers can all provide guidance suited to your specific situation.
• Honestly assess business viability, rather than assuming the next contract or upcoming investment will resolve things.
• Communicate early with lenders, suppliers, and key stakeholders. The earlier directors act, the more options generally remain available.

Questions Every Director Should Ask

• Do I understand the company’s financial position right now?
• Can the company meet its obligations as they fall due?
• Do I receive timely financial reports, and do I actually read them?
• Have I reviewed creditor balances recently?
• Are suppliers waiting longer than usual for payment?
• Do current forecasts genuinely support continued trading?
• Have I obtained professional advice where the situation warrants it?
• Would an independent observer consider our recent decisions reasonable?

Summary

Reckless trading is one of the most serious risks facing company directors in New Zealand. Section 135 of the Companies Act 1993 prohibits carrying on business in a way likely to create a substantial risk of serious loss to creditors. The courts have shown real willingness to hold directors personally liable — from Löwer v Traveller’s $8.4 million in 2005, to Mainzeal’s $39.8 million-plus outcome in 2022, to a 2025 case confirming creditors can now pursue directors directly. Sleeping directors aren’t protected, and optimism isn’t a strategy. Monitor your company’s financial position, respond to warning signs early, and get professional advice when circumstances genuinely warrant it.

Talk to EpsomTax.com About Your Compliance Position

If you’re a director with any doubt about your company’s financial position, that doubt is worth resolving properly, not sitting with.

Contact EpsomTax.com for practical advice on your company’s financial reporting and compliance position — and talk to your lawyer directly for advice specific to your legal obligations as a director.