Directors' Duties - How Much Stick is Too Much Stick?

If recent securities law reform proposals are adopted, the new Financial Markets Authority (FMA) will have the power to enforce core directors' duties and to initiate civil actions on behalf of investors.

The current chairperson of the Securities Commission has long argued for such powers, and has chafed against the limitations on the Commission's role, especially in the fall-out from the finance company collapses. The Commission can hold directors to account only in relation to disclosures made in a prospectus or securities advertisement, or for breach of specific obligations in the Securities Act 1978, Securities Markets Act 1988 or related securities legislation.

Until then, enforcement is primarily the responsibility of the company as the core director duties are owed to the company, although following insolvency a receiver or liquidator may pursue breaches and in limited circumstances shareholders may seek leave from the Court to take a derivative action against directors on behalf of their company. As is well known, the core duties, laid out in the Companies Act 1993, include:

to act in good faith and in the company's best interests, and to exercise powers for a proper purpose to comply with the Act and with the company's constitution to exercise due care, diligence and skill to avoid carrying on the business of the company in a manner likely to create a substantial risk of serious loss to the company's creditors, and to avoid incurring obligations unless satisfied that the company will be able to honour them...

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