Alarm Bells

Alarm Bells are Ringing for Sleeping Directors

It has long been commonplace in New Zealand for owners of small businesses to have their husbands, wives or de facto partners registered as directors. Often this appointment is a mere gesture, with the spouse/partner director having little to no involvement in the business. However, these so-called “sleeping directors” can be at risk if the company encounters financial difficulties.

Am I a “sleeping director”?

The primary duties of a director are to (a) know what is happening with the company; and (b) to act in its best interests. This degree of knowledge required depends on the company and how it operates, but ultimately it is the director’s duty to satisfy themselves that the business is trading well. Even directors who are actively involved in one part of the business may not know the overall financial situation and can face the same risks as “sleeping directors” when the company later turns out to be doing less well than they believed.

Why should I be concerned (for myself or for my spouse/partner)?

Directors have a responsibility to the company (and to its shareholders and creditors) to ensure that the company remains solvent. If they trade recklessly or let the company take on obligations that it cannot pay, they can be personally liable. In the case of a liquidation, any money which has been paid to the directors may also need to be repaid.

This can even happen when one of the directors is deliberately concealing information from the other directors. For example, in the FXHT Fund Managers Ltd liquidation, a sleeping director whose only real role in the business was that of an investor was held liable for money that his business partner had fraudulently taken from the Company.

It is no excuse for a director to say that they relied on their other director(s) or that they did not play an active role in the business. If a person accepts appointment as a director then they need to keep an active eye on the business. At a minimum this means being familiar with the company’s accounts, its overall financial situation, and any obvious risks facing the business for the next financial year. This a major risk for those who are merely directors because the company is a “family” business and have no real day-to-day involvement.

Health and Safety obligations

Directors also have duties under the Health and Safety Act 2015. They are obliged to know what health and safety risks are involved with their business and what steps are taken to prevent those risks from causing harm. A sleeping director may be subject to conviction and penalties if they fail to ensure the health and safety of all those involved with their company.

Conclusion

The above is just a brief summary of some of the risks that sleeping directors, but if it applies to your company, then you should ensure that all directors are actively involved or consider reassessing who is a director in order to avoid a sleeping director nightmare.

This article was written by Blair Shepherd for Rotorua Now Magazine

Blair is a Solicitor in Holland Beckett Law’s litigation team.