In recent months, a series of judgments in New Zealand and abroad have enabled plaintiffs to pierce that corporate veil and directors have found themselves exposed to both civil and criminal liability as a result.

The Companies Act 1993 sets out the duties that are owed by a director to a company and, if a director falls foul of those duties, the company can look to that director for recompense. It is important to note however that the Companies Act does not seek to codify the law and the courts are free to find directors liable for, among other things, aiding and abetting breaches of the Fair Trading Act, dishonestly assisting breaches of fiduciary duty and in negligence.

Recent cases coming out of the courts are telling us that the judiciary now has little tolerance for directors who try to argue that they unquestioningly relied on the advice of others when making a decision or that they were ‘backseat drivers’ in decisions made by a Board which was led by other directors with strong personalities. The courts now expect every director on the Board to question, to understand and to be actively involved with the company’s governance.

Be that as it may, the law in this area is far from settled. While in some cases the courts are steadfastly refusing to strike out causes of action against directors because of the developing nature of law in this area, others courts are summarily dismissing cases issued against directors, refusing to accept that directors duties are any wider now than they were before the likes of the Feltex Decision, R v Moses, and ASIC v Healey.

The writer’s own view is that the law in this area is in a state of flux and will continue to evolve until settled by a firm decision in a superior court.
In the meantime, it is wise to remember that the decisions emanating from the courts are fact specifc and to protect yourself from any attempt to pierce the corporate veil you must:

• Act honestly and make decisions with a clear conscience.

• Be financially literate to ensure you are able to understand the documents that come before you.

• Properly govern the company by asking questions of fellow directors or members of your management team if you have cause for concern.

• Understand the business of the company and properly monitor those to whom you delegate tasks.

It is also wise to protect yourself with a policy of insurance but please beware of the fine print! Policies of insurance often contain exclusion clauses which may preclude coverage in certain situations. Be sure you know your policy of insurance well before you commit to it and clarify ambiguous clauses before you fork out for expensive insurance premiums for what may become a worthless piece of paper.

Written by Karen Towt www.denniskinglaw.com

Disclaimer: This newsletter discusses its topic in general terms and should not be relied upon as legal advice.