Entry D4 v1 — Director duties for sole-director companies

What to watch for

Six places the duty applies differently or the sole-director shape changes the exposure — most of which competitor content covering "director duties" doesn't surface because it's written for board-of-directors contexts where the sole-director reality doesn't apply.

1. Good faith and best interests of the company. Not best interests of you. Section 131 requires you to act in good faith and in what you believe to be the best interests of the company.¹ This sounds obvious until you realise the sole-director-and-sole-shareholder is the most common NZ company shape — and the company's interests are not always the same as yours personally. The company is a separate legal entity; its money is not your money, its decisions are not personal decisions, its creditors are not your creditors (until and unless reckless trading or personal guarantees change that). The duty bites hardest when you're tempted to do things that benefit you at the company's expense — taking drawings when the company can't really afford them, paying yourself before paying creditors when cashflow is tight, using company resources for personal purposes without proper accounting. The section 138A offence (added in 2023) means serious breaches of section 131 can be criminal — five years' imprisonment maximum, $200,000 fine maximum. It's rarely invoked but the existence of the offence shifts the legal landscape compared to pre-2023.

2. Reckless trading. The duty that catches sole directors when companies fail. Section 135 prohibits directors from agreeing to, causing, or allowing the business to be carried on in a manner likely to create a substantial risk of serious loss to creditors.² The Supreme Court's decision in Mainzeal Property and Construction Ltd (in liq) v Yan [2023] established that continued trading when the company is insolvent and not salvageable is reckless trading, even where the directors believe continued trading will produce better returns for creditors than immediate liquidation. The duty is forward-looking — you have to assess the risk to creditors, not just hope it works out. For sole directors, this is the duty that most often produces personal liability after a company fails: the liquidator looks back at the trading-while-insolvent period, asks whether continued trading created substantial risk of serious loss, and pursues you personally for the shortfall. There's no "I was the only person making decisions" defence; if anything, being the sole director makes the breach easier to establish because you can't point to a board you were outvoted on.

3. Don't incur obligations the company can't perform. Section 136 is the obligation-side companion to reckless trading. Where section 135 deals with carrying on the business, section 136 deals with specific obligations — you can't agree to the company taking on an obligation unless you believe on reasonable grounds it can perform the obligation when required.³ Signing a supplier contract, accepting a customer order, taking on a lease, agreeing to a payment plan — all of these are obligations. If the company can't realistically meet them when due, you've potentially breached section 136 and you may be personally liable for the loss. For sole-director SMBs, the trap is the "we'll figure it out" decision under pressure — signing a new lease when the existing one is straining cashflow, accepting a large order when the supply chain isn't certain, taking on staff when revenue is precarious. The honest test is whether you have reasonable grounds to believe performance is possible. Hope isn't reasonable grounds.

4. Care and diligence. Proportionate to your circumstances but not negotiable. Section 137 requires you to exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances.⁴ The standard isn't fixed — it takes into account the nature of the company, the position of the director, and what the director knows or ought to know. For a sole director of a small company in a familiar industry, the standard is what a reasonable owner-operator in that industry would do. For a sole director of a company taking on financial complexity beyond your expertise, the standard expects you to seek advice. The implication: you can't avoid liability by saying "I didn't know" if a reasonable director in your position would have known. The countervailing implication: section 138 protects you when you've relied in good faith on advice from professional advisers (accountants, lawyers) who appeared qualified to give it. Get the advice, document it, follow it; that's how the care-and-diligence duty gets met in practice.

5. Conflicts of interest. The interests register matters even when you're the only person involved. Sections 139-149 govern transactions where you have a personal interest separate from your role as director.⁵ The classic example: the company leases premises from a property trust you also control; or the company buys services from another business you own; or you're personally guaranteeing the company's bank loan and the company is making decisions that affect your guarantee. In all these cases you have to disclose the interest in the company's interests register and make sure the transaction is for fair value. The sole-director trap is thinking the register doesn't matter because you're the only one looking at it — it does, because (a) section 140 requires the disclosure regardless of whether anyone reviews it, (b) the register becomes critical evidence if anything is later disputed (by IRD, by a liquidator, by a future shareholder), and (c) failure to maintain the register can itself be a breach. Keep the register; record interested transactions when they happen; document fair-value reasoning. Annual return season is too late.

6. The sole-director-and-sole-shareholder shape doesn't merge the entities. Run them properly separately. This is the most often-missed operational discipline. You're the director (subject to the duties above); you're the shareholder (with rights under the Act and the constitution); the company is a separate legal entity with its own bank account, IRD number, and obligations. The temptation to blur them — drawing money from the company account for personal expenses, using company assets for personal use, treating company decisions as personal decisions — exposes you on multiple fronts. The Inland Revenue side: undocumented drawings can be reclassified as wages (triggering PAYE) or shareholder loans (triggering FBT and interest accruals). The Companies Act side: failure to maintain the separation supports an argument that the company is a sham and the corporate veil should be pierced. The liquidator side: a liquidator looking at company collapse will examine personal drawings, undocumented loans, and asset transfers in the lead-up to insolvency, and can claw them back as voidable transactions under sections 292-297. The discipline is bookkeeping discipline: separate bank account, board minutes (even if you're the only board member — meetings of one are still meetings), shareholder resolutions for major decisions, written records of any drawings or loans between you and the company. The formalities aren't bureaucratic overhead; they're the structural shape that protects you.

A separate point on what duties accomplish in practice. The Companies Act framework was designed for multi-director companies where the duties operate partly as constraints on individual directors and partly as the structural shape of board decision-making. In a sole-director company, the constraint-on-individuals function is absent — you're not voting against yourself — but the structural-shape function is more important, not less. The duties are the discipline that turns owner-operator-decisions into company-decisions. The discipline matters most when the company is under stress: cashflow squeezes, big-decision moments, opportunities that require judgement calls. Sole directors who get into legal trouble after a company fails almost universally got there through the same pattern — they made decisions in the moment that benefited them personally or hoped a problem would resolve itself, didn't document the reasoning, didn't seek advice when they should have, and didn't pause to ask "is this in the company's interests, or mine." The duties aren't there to make life harder; they're there to give you the structural reason to pause at the moments where pausing pays back. Use them.

Where this entry stops

This entry covers the directors' duties under the Companies Act 1993 with specific application to sole-director companies. It doesn't cover:

• The procedural side of closing a company — short-form removal, solvent liquidation, what to do when the company can't pay. See the entry on closing the business properly.
• Annual compliance obligations — annual returns, registered office, share register, accounting records. Separate entry; the duty-of-directors and the procedural compliance side intersect but operate differently.
• Specific scenarios — director loans, related-party transactions, mergers, restructures, capital reductions, dividend declarations. All have their own statutory provisions and case law beyond this entry's scope.
• Multi-director board governance — the dynamics of voting, dissent, abstention, calling meetings, board committees. Different operational picture; this entry is the sole-director version.
• Director liability insurance — D&O insurance is real and worth considering for any company taking on financial risk, but the policy specifics and what's covered/excluded are insurance territory beyond this entry's scope.

For operational depth on specific director-duties scenarios, the Companies Office guidance is the starting point. For specific case-types — particularly trading-while-insolvent decisions, related-party transactions, or significant capital decisions — get a lawyer involved before the decision, not after. The cost of pre-decision advice is dramatically lower than the cost of post-failure litigation.

Last verified 11 May 2026. Full source list: references.