Have you recently become, or are you considering becoming a director? A recent Court of Appeal case of Chean v De Alwis illustrates that you may not be protected from personal liability for actions the company has taken before your appointment.
In Chean v De Alwis, the Court
of Appeal found that a director of a company was personally liable
to repay investors money, even though she was not a director at the
time securities were offered to the public without a registered
prospectus, in breach of s 37 of the Securities Act 1993. In this
case, the individuals who were liable to repay investors were those
directors who held the office of director at the time liability
attached to the directors under the Securities Act, not on the date
on which the company made an offer of securities to the public in
breach of the Securities Act. The Court accepted that the director
could have escaped personal liability if she could have proven that
the breach of the Securities Act was not due to any misconduct or
negligence on her part.
What is the lesson to be
learned?
You must do your due diligence on the
company. If the company has raised any capital in the previous
months, check how it was done. If securities were offered to the
public, you should ask to see the legal advice confirming that the
offer complied with the Securities Act. If there is no
documentation, you should get your own advice. This could protect
you against any later personal liability for breaches of the
Securities Act, as you could show that you relied on external legal
advice, and that the breach was otherwise not due to your
misconduct or negligence.
Generally, ask to see the company
records, in particular the Board minutes. You should check what
recent transactions have been made or entered into by the company,
such as dividend payments or major transactions under s 129 of the
Companies Act. You should also check whether any losses have been
suffered by the company and how solvent the company is. These
checks will allow you to assess the financial state of the company,
and the likelihood of a creditor or shareholder claim being made
against the company, and possibly you personally, at a later
date.
And now you are a
director...?
It is not acceptable for directors to sit back and let others
run the show. You must take an active interest in the corporate
governance of the company, act in good faith and comply with your
duties under the Companies Act 1993 and Securities Act. A director
has a duty to be familiar with the ins and outs of the company, and
be aware of the financial situation of the company, including
reviewing monthly and annual financial reports, business plans and
budgets. It is not enough for you to rely on the verbal assurances
of those responsible for the day to day running of the company, you
have a duty to make your own investigations based on the
documentation available, although you can rely on documentation
given to you by an employee of the company who you reasonably
believe to be reliable and competent; or a professional advisor or
expert on matters within their competent.[2]
You need to ensure that every decision and action you take is in
the best interests of the company, and can be supported by
documentation if required. You need to ensure that the company does
not trade recklessly, and can meet all of its obligations.
Finally, seek an indemnity from the company and ensure that the
company effects insurance for you in respect of all liability you
may incur in your capacity as a director and all costs in defending
or settling a claim relating to such liability.
[1] [2010] NZCA 30
[2] Companies Act 1993 s
138.
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