Business Law

DIRECTORS COLLEGE OF BUSINESS School of Accountancy BACHELOR OF BUSINESS STUDIES BACHELOR OF BUSINESS INFORMATION BACHELOR OF ACCOUNTANCY 155. 203 Law of Business Organisations Semester 2 2008 Wellington Week 7 Lecture 2 21 DIRECTORS (1) 21. 1 Who is a director? Section 126. gives an extended meaning to the term director in order that the persons who actually run the company are liable as such in law. 126 Meaning of “director” (1) In this Act, director, in relation to a company, includes—

A person occupying the position of director of the company by whatever name called; and In the recent case of Clark v. Libra Developments Ltda the Supreme Court held that even where a person who had been declared bankrupt continued to manage the affairs of the company, he was held to be a director although disqualified under s151(2)(b) as a result of the combined effect of s126(1) and s158 which provides:— 158 Validity of director’s acts The acts of a person as a director are valid even though— (a) The person’s appointment was defective; or (b) The person is not qualified for appointment.

In Debt Relief (NZ) Limited (In Liquidation) v. A E Wycherleyb one issue raised in the case was whether the defendant had been a director of DRNZL while he was subject to a banning order under s111 Insolvency Act 1967. The defendant was not registered as a director nor did his name appear as such in the company documentation. He claimed that that he provided consultancy services for the company, payments for which, were subject of the claim by the liquidators. In finding that summary judgment should lie against the defendant on the basis that he had acted as the director of a company in breach of the banning order the court relied on affidavit evidence of an interview with M, the nominal director of the plaintiff company. [2007] 2 NZLR 709 (CA & SC); [2007] NZSC 16 [2008] NZHC 90 c On the basis that they were made under an illegal contract since W was acting as a director in breach of the banning order. Company & Partnership Law © Massey University 19 April 2000 hubbard Page 159 21/08/2008 b DIRECTORS Q. A Q A You are officially the Director of Debt Relief. Yes So what director’s duties did you perform. Strangely enough the owner, Alan Wycherley performed mainly those sort of duties. I felt like notwithstanding that title I was an employee. ….. Q So what other things would Alan do in relation to the Company? A He was the marketing guy, he was the leader of the company, the entrepreneur the salesman, the employer of people, the interviewer of people.

It was his (Alan’s) company as far as we were all concerned Q Despite your name being on it and his not A That’s right. Q In terms of guiding the direction of the Company, who would do that? A Alan’s plan for the future, that’s what he would do. He would often get us together and talk about what he was going to do with New Phone and Debt Relief …”. Although much of this was later contradicted by M, the judge accepted that it probably represented the reality of the situation and that the defendant was in terms of s126(1) a director of the company in breach of the banning order. For the purposes of sections the duties of a director Use of information obtained as, and share dealings by, a director Powers of the liquidator in relation to transactions with or by directors for inadequate consideration Power of the Court to set aside certain securities or charges Power of the Court to order persons to repay money or return property on the application of the liquidator, a creditor or a shareholder. 131 to 141, 145 to 149, 298, 299 301 irector includes: A person in accordance with whose directions or instructions a person who is appointed as, or who occupies the position of a director is required or is accustomed to act; and The extent to which this provision has changed the law in this matter may be judged by looking at a case from before the 1993 Act was passed. Company & Partnership Law © Massey University 19 April 2000 hubbard Page 160 21/08/2008 DIRECTORS Kuwait Asia Bank EC v National Mutual Life Nominees Ltda ACIS, a NZ company acted as money broker.

Since it received deposits from the public it was required under the Securities Act to appoint a trustee for the depositors. NMLNL were appointed as the trustees. ACIS covenanted to supply NMLNL with monthly and quarterly certificates as to its financial position on behalf of the directors in ACIS and signed by two of them. The company failed and NMLNL was obliged to settle with the depositors who had failed to recover their deposits in full.

NMLNL sued the directors of ACIS for breach of duty of care to ensure the accuracy of the certificates issued on their behalf, it was also alleged that the certificates supplied under the covenant were fraudulent. KABE owned 40% of the shares and appointed two of its employees as directors of ACIS. NMLNL failed in its bid to join KABE in the action. The Privy Council held that KABE was not liable for the actions, or inaction of its employees as its agents since their actions as directors were personal action.

It is clear that under s126 the bank would be liable as “the person accordance with whose directions or instructions a person who is appointed as, or who occupies the position of a director is required or is accustomed to act”. A person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and A person who exercises or who is entitled to exercise or who controls or who is entitled to control he exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and For the purposes of sections 131 to 149, the duties of a director, use of information obtained as, and share dealings by, a director 298, Powers of the liquidator in relation to transactions with or by directors for inadequate consideration Power of the Court to set aside certain securities or charges Power of the Court to order persons to repay money or return property on the application of the liquidator, a creditor or a shareholder. person to whom a power or duty of the board has been directly delegated by the board with that person’s consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board; and For the purposes of sections 145 to 149 of this Act, 299, 301 [1990] 3 NZLR 513, [1990] 3 All ER 404 Company & Partnership Law © Massey University 19 April 2000 hubbard Page 161 21/08/2008 a DIRECTORS a person in accordance with whose directions or instructions a person referred to in paragraphs (a) to (c) of this subsection may be required or is accustomed to act in respect of his or her duties and powers as a director. director”, in relation to a company, does not include a receiver. However where the role of a receiver is misunderstood by the parties difficulties may arise. Fatupaito v Bates. a M was the sole director and shareholder of MS Ltd. O was employed in the manufacturing process. B offered his services to the company as an accountant. This offer was accepted. B took responsibility for ensuring compliance with legislation including income tax and gst.

The company did not prosper and after a serious disagreement between M and O stemming from the financial plight of the company B suggested that M appoint B as the “receiver” to try resolve the situation. Clearly neither M not B understood the nature of receivership and in court they accepted that B never was the lawful receiver of the company. As part of the arrangement B became the sole signatory to MS Ltd’s bank account. Although the company was insolvent on the balance sheet test, B decided that the best course would be to continue trading in order to complete work on hand and so be entitled to payment under the contracts concerned.

This proved to an error as the contracts had very small margins and in the event the decision to continue trading increased the overall deficit by some $59,517. 59c. The issues were (1) Was B a director of company? and (2) If so, had B breached ss135 (carrying on the business of the company so as to cause a substantial risk of serious loss to the company and/or its creditors) or 136 (agreeing to the company incurring obligations it could not perform. Held: as to (1) B was deemed to be a director under s126(1)(b)(iii) and (c).

Considerable significance was attached to the fact that he had sole charge of the company’s bank account although O continued to manage the operations of the company. However the key point was that B and M thought that B was the receiver and therefor had the powers of a receiver. Since he was not, in law, a receiver, these powers were those of a director and such he was therefore deemed to be. (2) In deciding to continue trading meant that B was in breach of s135 – reckless trading, B was also in breach of s136 in that he incurred liabilities which he had no real belief that the company would be able to meet.

His liability under s301 was assessed at $30,000. 00. The shareholder(s) who take(s) acts by virtue of the constitution, as a director by making decisions that are properly the function of a director will incur liability as a director. If the constitution of a company confers a power on shareholders which would otherwise fall to be exercised by the board, any shareholder who exercises that power or who takes part in deciding whether to exercise that power is deemed, in relation to the exercise of the power or any consideration concerning its exercise, to be a director for the purposes of the duties of a director.

E. g. the duty to act in good faith, powers to be exercised for a proper purpose, compliance with the Act and the constitution, not to trade recklessly, not to cause the company to incur liabilities for the company which the company cannot fulfil, duty of care, diligence and skill, not to make personal use of information or advice acquired as a director. 2001] 3 NZLR 386 ; (2001) 9 NZCLC 262,583 (HC… Company & Partnership Law © Massey University 19 April 2000 hubbard Page 162 21/08/2008 a DIRECTORS Similarly if the directors can only exercise their powers as directors with the consent of, or under the direction of the shareholders then the shareholders who give such consent or direction will be liable as directors.

If the constitution of a company requires a director or the board to exercise or refrain from exercising a power in accordance with a decision or direction of shareholders, any shareholder who takes part in — The making of any decision that the power should or should not be exercised; or The making of any decision whether to give a direction, — as the case may be, is deemed, in relation to making any such decision, to be a director for the purposes of sections 131 to 138 of this Act. The extended definition of director in this section does not include a person to the extent that the person acts only in a professional capacity.

Durham Developments Ltd v Hempseeda a manager was held to be an “officer’ of the company for the purposes of swearing an affidavit in relation to summary judgement proceedings on behalf of the company. In Kwon v Kimb by allowing a person to run the company and to behave like a director the parties were held to be estopped from denying his authority. They had received payments from him as a director and they could not now ignore the circumstances under which those payments had been made. (1997) 11 PRNZ 378 Noted: 23 TCL 39/7 Company & Partnership Law © Massey University 19 April 2000 hubbard Page 163 21/08/2008 b a