Fast forward one year: The cash flow is tight, your employee has suffered a serious injury, you haven’t slept properly in weeks and now you’re being told you’ve miscalculated annual leave entitlements. 

It’s easy fall into compliance traps such as this when you’re setting out in business, so let’s make sure you get it right from the start.

Compliance checklist for New Zealand directors

Small business is the backbone of New Zealand’s economy and many of these entities use corporate structures due to the owner’s liability for business costs generally being limited to the capital they contribute. 

However, unlike larger businesses, there is no board of directors providing a helicopter view of the company and it can be difficult for sole directors to separate themselves from the various roles they play: Director, shareholder and employee. 

Being a director of a New Zealand company, especially a small business, comes with legal responsibilities that go far beyond day-to-day operations. It’s not just about making sales or managing staff, it’s about governance, compliance and risk management. Getting it wrong could have serious implications, so here are some steps you can take to ensure that you are compliant and not putting yourself at risk. 

Legal and governance requirements for company directors 

•  Understand and comply with your duties under the Companies Act 1993
•  Ensure that your company meets the solvency test before incurring debt or making distributions
•  Avoid reckless trading or incurring obligations that your company cannot meet
•  Keep accurate board minutes and resolutions 

What are the duties under the Companies Act 1993 and what do they mean? 

• To act in good faith and in the best interests of the company. This means that you must avoid any actions that could advance your own interests at the company's expense.
• To exercise powers for a proper purpose. As a director, you should not use the company’s position or resources for your personal gain or the benefit of third parties at the company’s expense.
• To comply with the Act and the company constitution. It is important that as a director you understand the requirements of the Companies Act and understand your constitution.
• To disclose conflicting interests. This is a common concern in a smaller business as the director is often the shareholder so will benefit personally from decisions made. 

Company solvency test 

Before making distributions or incurring major debts, directors must ensure the company passes the solvency test, which has two parts: 

• Liquidity test: Can the company pay its debts as they fall due?
• Balance sheet test: Are assets greater than liabilities? 

Failing this test can lead to personal liability for a director, especially if the company is placed into liquidation. 

Solvency is often an issue for small businesses and it is important to work with your local accountant when facing solvency issues. 

Reckless trading

As a director of a New Zealand company, you must act with the care, diligence and skill that a reasonable director would in similar circumstances. This is an objective standard, meaning your actions are judged against what others in your position would reasonably do. Most reckless trading cases are due to businesses continuing to trade when facing insolvency. As a director is it imperative that you understand the financial position of the company. 

Company directors who breach their duties or obligations can face stiff fines and, in some cases, become personally liable to shareholders and creditors.

Health & Safety  

Every New Zealand company has to comply with the relevant health and safety requirements, and directors have a key role in ensuring that the company: 

• Stays informed about workplace risks
• Has a health and safety policy  
• Ensures health and safety policies are in place and followed
• Provides training and resources for staff safety
• Monitors incidents and takes corrective action
• Complies with the Health and Safety at Work Act 2015

Under the Health and Safety at Work Act 2015, directors are considered “officers” and must exercise due diligence to ensure that their business meets its health and safety duties. It is also a responsibility that you cannot cover by insurance. As a director it is important that you are aware of the risks to employees and you have taken steps to mitigate those risks. This is a continual improvement process that requires close attention.

Financial oversight

As director of a company, it is important that you understand its financial position. As small businesses  generally only have one or two directors, a quarterly meeting with your local accountant provides the opportunity to work on your business, improving systems and highlighting issues before they become serious. Directors should ensure the following: 

•  Meet regularly with your accountant or financial advisor
•  Review cash flow, budgets and forecasts
•  File tax returns and GST on time
•  Maintain accurate financial records

Cybersecurity and privacy 

• Implement basic cybersecurity measures (e.g., firewalls, antivirus, backups)
• Conduct a cyber risk assessment  
• Train staff on phishing and data protection
• Comply with the Privacy Act 2020
• Have a data breach response plan

Cybersecurity is a serious issue for directors and while it is not a specific requirement of the Companies Act 1993; it is important to be aware of the issues surrounding cybersecurity and minimise risks. Our IT Services team can provide assistance if needed.

Employment & HR

•  Use written employment agreements for all staff
•  Ensure compliance with minimum wage, leave entitlements and holidays
•  Maintain a safe and inclusive workplace
•  Keep up with changes in employment law

It is illegal to employ someone and not provide an employment contract. Directors need to ensure that the company is paying employees in compliance with New Zealand employment legislation and understand employment legislation requirements. Due to the complexities of our holidays act legislation, always use a reputable payroll software or a payroll provider that understands the specifics of your business. Our HR and payroll teams offer a range of services, should you need their help.  

Insurance and risk management 

•  Hold Directors & Officers (D&O) insurance
•  Review business insurance policies annually
•  Use indemnity clauses in your company constitution (if applicable)

Insurance provides protection when things go wrong, and directors need to be aware of what insurance is in place and if further insurance is required. Insurance should be reviewed at least annually to ensure correct coverage is in place.

Policies and procedures

•  Develop and review internal policies (e.g., leave, conduct, safety)
•  Ensure staff understand and follow these policies
•  Document procedures for key business functions

Policies and documentation provide a level of protection for the directors. If there are employees, it is important that employees understand the importance of following policies and procedures. Again, our HR teams are here to help if needed.

Training & Development

•  Attend governance or compliance workshops
•  Stay updated on legal changes affecting directors
•  Subscribe to industry newsletters or legal updates

Being a director is a continual learning process and staying updated ensures that directors are aware of the responsibilities of the position. Of note, our offices hold a range of events and most cover topics that are relevant to directors.  

Final thoughts

Being a director in New Zealand comes with significant responsibilities, but also the opportunity to lead your business with integrity and foresight. By understanding your duties, taking proactive steps and seeking help where needed, you can protect both your company and yourself, and achieve the objectives that you had when you went into business.