New Zealand: Director’s Duties Considered by New Zealand’s Highest Court
On 24 September 2020, the New Zealand Supreme Court released its long-awaited decision in the case of Debut Homes Ltd (In Liquidation) v Cooper  NZSC 100. The main issue was whether a director was in breach of his directors’ duties under the New Zealand Companies Act 1993 (Act) by continuing to trade against the background of an insolvent or nearly insolvent company.
This is the first time that New Zealand’s highest court has considered these issues in detail. Its decision is relevant to all directors of companies in New Zealand and raises the risks for directors of companies in financial distress.
To summarise the facts of the case, Debut Homes Ltd was a residential property developer and Mr Cooper was its sole director and he and his wife owned all the shares in the company. The company had been balance sheet insolvent since March 2009 but had been supported by shareholder advances. By the end of October 2012, the company was in real financial difficulty. In early November 2012, based on projected costings showing a surplus of $170,000, Mr Cooper decided to wind down Debut’s operations by completing and selling existing projects as soon as possible. However, the projected costings did not account for interest costs or goods and services tax payable on the sale of the remaining projects. At the time this decision was made, Mr Cooper knew that the company would have a forecast deficit of over $300,000 once the wind-down was complete. By the end of February 2014, the last remaining project had been completed and sold. In order to complete the projects, new trade debt of approximately $28,000 had been incurred. On 7 March 2014, Debut was placed in liquidation on application by the New Zealand Inland Revenue.
The liquidators brought proceedings against Mr Cooper for (among other things) breach of his duties as director under the Act. The Supreme Court judgment carefully considered the nature and extent of the directors’ duties as set out in the Act, with a focus on the clear wording of the legislation. The key points and guidance provided by the Supreme Court decision for New Zealand directors are as follows:
- If a company reaches the point where continued trading will result in a shortfall to creditors and the company is not salvageable, then continued trading will be a breach of the Act, regardless of whether or not some creditors would be better off than would be the case if the company had been immediately placed into liquidation.
- If directors agree to debts being incurred where they do not believe on reasonable grounds that the company will be able to perform the obligations when they fall due, then there will be a breach of the Act.
- In an insolvency or near-insolvency situation, there will be a breach of the Act if a director fails to consider the interests of all creditors. Such a breach may be exacerbated by a conflict of interest.
- Where there are no prospects of a company returning to solvency, it makes no difference that a director honestly thought some of the creditors would be better off by continuing trading. In those circumstances, there are alternatives to liquidation that are open to directors, including the formal mechanisms under the Act or informal mechanisms.
Ultimately, the Debut Homes case has raised the risk profile for directors who decide to trade the business on in situations of actual or near insolvency in New Zealand. Whether or not to stay the course will be a big decision for directors and increased recourse to formal and informal insolvency mechanisms seems likely.
Search ADVOC News
Thanks to our fantastic clients and team members, CGW has again made the list of finalists in the 2021 Client Choic… https://t.co/GKPSlIDiOH
We are delighted to have received 11 individual rankings across 5 main practice areas that are researched and evalu… https://t.co/PMBNeSrmvd
The Swiss government plans to ease Covid-19 restrictions in Switzerland from March 1 as part of its exit strategy.… https://t.co/nwUZAHqaTe