Section 138 of the Companies Act 1993 (the Act) recognises that sometimes directors may not possess expert knowledge and need to rely on professional advice in the course of performing their functions and duties. This section is not a duty, but rather, an affirmative defence to an alleged breach of a director’s core duties under the Act.
However, there are several qualifications to this defence, both in respect of who the director can rely on for advice, and the director’s own conduct upon receiving the advice.
First, a director must believe on reasonable grounds that:
(a) an employee relied on is reliable and competent as to the matter concerned; or
(b) a professional adviser or expert relied on is acting within his or her area of professional or expert competence.
For example, in Goatlands Ltd (in liquidation) v Borrell,[1] the Court noted that the directors could not rely on the advice obtained by a solicitor, as he was not the directors’ usual solicitor, and knew very little about their overall financial position.
In addition, this section will only apply to a director who has acted in good faith, has made proper inquiry where required, and has no knowledge that such reliance is unwarranted.
This means that a director cannot blindly rely on information or advice, and after obtaining advice, must continue to consider and test the information put before them. In Mason v Lewis, it was found that the directors simply relied on the word of their accountant without making proper inquiries of their own, and therefore this section could not provide a defence.[2] The Court commented that directors must “take reasonable steps to put themselves in a position not only to guide but to monitor the management of a company”.[3]
In Debt Homes Limited (in liquidation) v Cooper, it was found that directors were not acting in good faith by relying on “grandiose” and “loose” statements – which are not the type of professional advice contemplated by this section.[4] Similarly, in FXHT Fund Managers Limited (in liq) v Oberholster, reliance on “very informal oral advice” was not a defence.[5]
It is clear that directors should obtain advice in good faith and cannot merely rely on having obtained advice as a shield against performing their duties and managing the company.
[1] Goatlands Ltd (in liquidation) v Borrell (2006) 3 NZCCLR 726.
[2] Mason v Lewis [2006] 3 NZLR 225, 235.
[3] At [83].
[4] Debut Homes Ltd (in liquidation) v Cooper [2020] NZSC 100.
[5] FXHT Fund Managers Limited (in liq) v Oberholster (2009) 10 NZCLC 264, 562 at [104].
