When can directors be personally liable in New Zealand?
Directors in New Zealand can be personally liable when they breach their legal duties to the company. Personal liability is rare, but it can arise even in early‑stage startups and can result in court orders, compensation claims, disqualification, or (in serious cases) criminal penalties.
Why this matters for startups
Many founders assume that limited liability protects everyone involved in a company. In reality, directors may become personally liable in certain circumstances, such as when they fail to uphold their directors’ duties. For startups making fast, high‑impact decisions with limited resources, understanding when personal liability can arise is important.
What creates personal liability for directors?
Personal liability most commonly arises where a director breaches their statutory duties under the Companies Act 1993. These duties require directors to act in good faith and in the best interests of the company, exercise reasonable care and diligence, and avoid conduct that is reckless or improper. A failure to meet these standards can expose directors to claims made directly against them, rather than the company.
In what situations does liability usually arise?
Liability often only comes into focus after something has gone wrong. Common triggers include company failure, shareholder disputes, or liquidation. At that point, past decisions may be reviewed with the benefit of hindsight. Importantly, decisions made at an early stage can still be scrutinised some years later by shareholders or an independent liquidator.
Who can bring a claim against a director for breach of duty?
A claim for breach of directors’ duties is generally brought on behalf of the company, as those duties are owed to the company itself rather than to individual shareholders or creditors. In practice, this means the board may cause the company to take action, excluding the director concerned. Where the company is unwilling or unable to act, shareholders may bring a derivative claim on the company’s behalf, and if the company enters liquidation, an independent liquidator may pursue claims against directors.
What consequences can directors face?
Where a breach is established, a court can impose penalties personally on a director. These can include:
- Orders requiring the director to compensate the company for losses
- Orders to account for and return any personal profits gained
- Disqualification from acting as a director or being involved in company management
- Criminal penalties in more serious cases
Practical implications for directors
All directors carry the same core duties, regardless of whether they are founders, investors, or specialists brought onto the board. Good governance practices, such as staying informed about the company’s financial position and recording key decisions, help demonstrate that directors have met their obligations. While not every director will be judged in the same way, each remains accountable for their role in board decisions.
There are also practical tools to mitigate risk of personal liability. These include director and officer insurance, and indemnities from the company itself. These tools have their own limitations and costs, so make sure to engage a professional when putting them in place.
FAQs
Are directors personally liable for company debts?
- Not automatically. Personal liability arises from breaches of directors’ duties, rather than from the company’s debts alone.
Is a single poor decision enough to create liability?
- Not necessarily. Liability depends on the circumstances, including what information was available at the time and whether the director acted reasonably. A poor outcome alone does not automatically mean a breach.
Can directors be liable after they resign?
- Liability can arise from decisions made while the person was a director, even if they are no longer a director at the time the claim is made.
Is this relevant for early‑stage startups?
- Early decisions can be reviewed later, particularly if the company enters liquidation.
Need to know more? These may help:
- What are directors’ duties under the Companies Act 1993 in New Zealand?
- What is the difference between a director and a shareholder in New Zealand?
- What does good corporate governance mean for New Zealand companies?
- How often should boards review risk and compliance frameworks?
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Special thanks to Partner Gareth Clendinning and Associate Tom Mohammed for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
