Director

A director is an individual who has been elected or appointed by the shareholder(s) to arrange company affairs. They can be, but aren’t necessarily, a shareholder of the company. Every company is required to have at least one director.

A director is obliged to act honestly and in the best interests of the company (and its shareholders), with reasonable care at all times. You can find out more about the role and responsibilities here.

The days of having a ‘Sleeping Director’ are long gone. If legal action be taken against a director, they can’t simply shrug their shoulders and say “I wasn’t involved; I relied on others”. A couple of legal cases are further below to show the Court’s position on this defence.

Shareholder

A shareholder is someone who has an investment in a company by owning shares. In small-medium businesses, shareholders often participate in the day-to-day management of a company. The shareholder could be a director, trust, company, or a shareholder-employee. In large companies, a shareholder is unlikely to be a director. Think Microsoft – you may own shares, but you aren’t a director.

Shareholders have a right to the profits of the business. These are paid out through dividends based on the number of shares owned.

Unless a shareholder has personally guaranteed a business liability, there’s no legal obligation for a shareholder to pay any company debt.

Cautionary tales

Mason v Lewis

Mr and Mrs Lewis became minor shareholders and directors of a printing company. The third director was running the business and actively committing fraud by falsifying invoices. After the loss of a key client, the Lewis’ discovered the company owed $163k to Inland Revenue.

When the company went belly-up, the liquidator sued the couple to recoup losses for the creditors. The Courts found that the Lewis’ were negligent in their duties as directors, even though they weren’t involved in the day-to-day operations. They failed to heed the warning signs (including IRD demand letters) and did not take the necessary steps a responsible director should have taken.

The Lewis’ were on the hook for a portion of the company’s losses, reflecting their shareholding and the time they were directors.

FXHT Fund Managers Limited (In Liquidation) v Oberholster

A doctor became a director of a company whose business was the management of private clients’ investments after being introduced to the company by an acquaintance, Mr Hitchinson, who was the only other director. 

The doctor guaranteed the premises and equipment leases, and did not have a day-to-day role in managing the business. He checked in weekly as to the state of affairs, relying on Mr Hitchinson responses. Mr Hitchinson began to take money from some investors to pay other investors’ returns. When the doctor became aware that certain investors’ funds were missing, he made Mr Hitchinson resign as a director.  The company was put into liquidation and Mr Hitchinson was charged with fraud.

The Court looked at how the company was run and found that the doctor had essentially allowed Mr Hitchinson, as an executive director, free rein over the company. While the doctor may have asked the right questions, the Court held that the doctor hadn’t checked Mr Hitchinson’s responses. The doctor had failed to test his assurances, creating the environment that allowed Mr Hitchinson’s dishonesty to thrive.  

The Court ordered the doctor to contribute approximately $310k, which was half of the amount misappropriated by Mr Hutchinson.