Commercial and Corporation Law: Director's Duties and Liabilities

This report provides an analysis of director's duties and liabilities under the New Zealand's Company Act 1993. The report emphasizes the importance of directors exercising due care and diligence, particularly concerning solvency tests for decisions like dividend distributions and share buybacks. It highlights that failure to perform these duties can lead to personal liability for directors, as outlined in sections 56(3), 135, and 136 of the Act. Furthermore, the report clarifies that shareholders in limited liability companies generally have liability limited to their unpaid share amounts, while unlimited liability applies if stated in the company's constitution. The conclusion reinforces that directors can be held personally liable for company debts if they fail to meet their legal obligations, while shareholders are generally protected from such liabilities. The report references relevant sections of the Companies Act 1993 and supporting legal publications.

Commercial and corporation law

The Company Act 1993 governed the laws and the regulation with respect to the company,
shareholders and directors. The company is controlled and managed by the directors who are
selected by the shareholders of the company. In the cited Act, there are several duties of the
directors is defined which is mandatory to be complied by all the directors (Fleming, 2017).
This Act requires the application of reasonable care while making decision. For example
solvency test is applied for making decision such as distribution of the dividend, buyback of the
shares and so on. It is the duty of the director to perform the solvency test. The main objective of
the solvency test is to determine whether the company is able to meet its liability as and when the
liability arises. If the director did not perform the activity by due care and diligence, then it leads
to the personal liability on the director. The liability depends on the participation in the decision
by the director.
According to section 138 of the Company Act 1993, the director can consider the advice of the
expert and the professional only if they perform in good trust.
According to section 56(3) of the Company Act 1993, which is related with recovery of
distribution stated that if the failure to take the satisfying action to prevent the distribution and if
the director terminated after distribution, but before the distribution held the position as a
director and satisfied that the after the distribution the company will be solvent, then the director
will be personally liable for the debt to the company. The amount of the liability of the director is
up to the amount which was not recovered from the shareholders. Therefore it is the duty of the
director to perform the solvency test to eliminate the personal risk.

According to section 135 of the Act, a director should not take participation and allowed others
in activities of the company which leads to the substantial risk related to the loss of the creditor
of the company (Hannigan, 2018).
Further section 136 of the Company Act 1993, stated that the director should agree with the
obligation incurred by the company only if there are certain chances that the company can meet
its obligation (Loveland, 2018).
Further, the liability of the shareholders in case of the limited liability company is only up to the
remaining amount which is not paid by them. According to the section 97(1), if the constitution
of the company stated that the liability of the shareholder of the company is unlimited, then, in
this case, the liability of the shareholder in unlimited (Companies Act 1993 Liquidation
Regulations 1994, 2018).
On the basis of the above analysis, it has been concluded that the directors are personally liable
for the debt incurred by the company if they do not exercise due care and diligence. Therefore
the liquidator of the company can claim from the director for the debt incurred by the company.
However, shareholders of the company are not liable for the debt incurred by the company.

REFERENCES
Companies Act 1993 Liquidation Regulations 1994, (2018). Retreived from
<http://www.legislation.govt.nz/regulation/public/1994/0130/10.0/DLM191648.html>
Fleming, M. (2017). Directors' Duties - What Directors Need to Know. Retreived from
<https://www.mcveaghfleming.co.nz/articles/directors-duties-what-directors-need-to-know>
Hannigan, B. (2018). Company law. Oxford University Press, USA.
Loveland, I. D. (2018). Constitutional Law. Routledge.