New Zealand's Companies Act 1993 imposes strict personal duties on every director of a registered company. Understanding these duties is the foundation of good governance — and of understanding why D&O insurance is so important.
The Core Director Duties
Section 131 of the Companies Act requires directors to act in good faith and in the best interests of the company. This is the fundamental fiduciary duty that underpins everything else.
Section 135 prohibits reckless trading — a director must not agree to carry on business in a manner that creates a substantial risk of serious loss to the company's creditors. This is one of the most commonly invoked provisions in NZ insolvency claims.
Section 136 requires directors not to agree to the company incurring obligations if there are reasonable grounds to believe the company cannot meet them.
Personal Liability
The critical point is that these duties are personal. If a director breaches their duties, they can be personally sued — and the company's assets provide no protection. Shareholders, liquidators, and creditors can pursue directors personally.
How D&O Insurance Helps
D&O insurance covers the legal defence costs when a director is personally sued for alleged breaches of their duties. It also covers settlements and judgments. Without D&O insurance, a director facing a significant claim must fund their own defence — which can easily run to hundreds of thousands of dollars even if the claim is ultimately unsuccessful.