Some business owners run the risk of jeopardising their family assets and finances because they do not understand their legal obligations as a company director fully.
The benefits of trading through a limited liability company are well documented and we would seldom advise trading under any other structure but just because you have a limited liability company it does not mean that you are invincible.
Limited liability does not mean no liability.
Directors are charged with the stewardship of a company and their actions (or lack thereof) can lead to them being held personally liable for certain debts and losses of the company on the basis of a breach of their stewardship duties.
One of the landmark New Zealand precedents is found in the case of Mason & Anor as liquidators of Global Print Strategies Ltd (in liq) v Lewis & Ors. In that case Mr and Mrs Lewis were minority shareholders and directors in a company that was run by a third party who was not actually a director. When the business failed and liquidators were appointed, it was discovered that Mr and Mrs Lewis had not been as diligent in their stewardship duties as the Court believed they should have been, tending instead to accept explanations from their business manager rather than questioning and drilling down into the information.
They protested to the Court that they were minority shareholders and therefore “sleeping directors” but sadly for them no such concept exists.
A director who allows a company under their stewardship to be run in such a manner as to create or increase the risk of significant loss to its creditors could well be guilty of reckless trading and as such could be held personally liable for the losses suffered as a result of that trading.
We have, over the years, seen people taking on the role of a director to help a family member or because they thought it was the right thing to do at the time, without understanding the onuses upon them. Some common mistakes directors of small and medium sized enterprises make are:
- Not acting in the company’s best interests
- Conducting business in a reckless manner, frequently not even knowing that they are doing so
- Not keeping proper books of account (if you do not measure it, you cannot manage it)
- Not managing conflicts of interest
- Not being aware of the extent of their personal liability
- Failing to adhere to all compliance requirements
The onus of ensuring that directors’ duties are met falls squarely onto the shoulders of the directors themselves. Good corporate governance is essential, no matter how small the business is. Frequently in the case of small companies the directors allow their roles as directors to become blurred with their operation role as an employee and they should guard against that.
Every director would be well served having a sign on their desk that reads “the buck stops here” and the responsibility for keeping the company on the right track, thereby reducing the risk of loss to the various stakeholders, is that of the directors.
If you have any concerns about your role as a director in your own company or in respect of any other boards on which you serve, we strongly recommend that you have a chat to us about your duties and how you can improve your governance practices.