The Companies Act 1993 (“the Act”) accords extensive, wide-ranging powers upon the director(s) of a company. Section 128(2) gives the board of directors “all the powers necessary for managing, and for directing and supervising the management of the business and affairs of the company”. However, these powers are subject to a number of limitations within and beyond the Act.
This article outlines the main limitations on a director’s powers in relation to their company.
1. Director’s statutory duties
In the course of managing the affairs of the company, the director must always have regard for their statutory duties as set out in sections 131-137 of the Act. These duties are:
- To act in good faith and in the best interests of the company (s 131);
- To exercise powers for a proper purpose (s 133);
- To comply with the Act and the company’s constitution (134);
- To not engage in reckless trading (s 135);
- To avoid incurring obligations unless satisfied that the company will be able to honour them when required to do so (s 136); and
- To exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances (s 137).
Breaching these duties can lead to serious legal consequences, including personal liability of the director.
2. Modifications in the company constitution
If the company has a constitution, section 27 of the Act provides that the constitution may negate or modify the rights, powers, duties, and obligations set out in the Act. The director’s powers to manage the company is subject to the constitution, as specified in section 128(3).
3. Shareholder approval
While directors are entrusted to manage the daily affairs of the company, major decisions affecting the company will require its shareholders to vote on and pass ordinary or special resolutions. The main decisions requiring shareholder approval include:
- Adoption, alteration, or revocation of a constitution (s 32);
- Alteration of shareholder rights (s 117);
- Approval of major transactions (s 129);
- Appointing subsequent directors to the company (s 153);
- Removal of directors (s 156); and
- Approval of amalgamation proposals (s 221).
4. Insolvency
Directors’ powers shift significantly when a company becomes insolvent or is likely to become insolvent. While directors retain their prescribed powers, they must now be exercised differently and with greater caution.
When a company is in a financially precarious state, the directors’ duties shift from shareholders to creditors. Directors will be in breach of their duties if they continue trading if doing so will result in a shortfall to creditors; or agree to debts being incurred without reasonable belief that the company will be able to perform the obligations when they fall due.[1]
Directors also have limited powers to put the company into liquidation. Under section 241(2), a director may put the company into liquidation on the occurrence of an event specified in the constitution, or upon application to the court. Under the same provision, there are a number of other parties entitled to put the company into liquidation – including shareholders or creditors by passing resolutions.
5. Legal proceedings
Generally, a director cannot represent their company in legal proceedings. The High Court in Jaysharee Ltd v Commissioner Inland Revenue dismissed an application for the company director to represent their company, citing what is known as the Mannix rule: A company has no right to be represented in the conduct of a case in court except by a barrister, or by a solicitor in courts or proceedings where solicitors have the right of audience (save for exceptional circumstances).[2] The policy reason behind this rule is that allowing a director or shareholder to represent the company presents “heightened risk” of a lack of objectivity compared to an independent solicitor.[3]
6. Other legal and regulatory limitations
Directors must remain vigilant of any legal and regulatory constraints beyond the Act that could influence their decision-making on a case-by-case basis.
[1] Madsen-Ries v Cooper [2020] NZSC 100 at [174]-[181].
[2] Re G J Mannix [1984] 1 NZLR 309 (CA) at 310–311; as cited in Jaysharee Ltd v Commissioner Inland Revenue [2023] NZHC 2723 at [13].
[3] The Commissioner of Inland Revenue v Chesterfields Preschools Ltd at [2013] NZCA 53 [34].
