News and Events

The Days Of Sleeping Directors Are Over

The decision of Mason v Lewis (High Court, Auckland CIV2003-404-0936) is a timely reminder that Company Directors must take proper steps to place themselves in a position to guide and monitor the management of the Company to which they are appointed.  Directors must actively govern, monitor and assess the Company's financial performance as well as develop and implement viable rescue plans if a Company gets into financial strife.

The facts of Mason v Lewis were that Mr and Mrs Lewis were Directors of a Company that's financial position went from bad to worse.  It traded on, however running up debts which it was unable to pay.

The eventual collapse of the Company was bought about by the discovery that the Chief Executive of the Company (and not a Director) had been providing fraudulent invoices to a Creditor.  The Creditor had then made payment to the Company based on those invoices.  The Creditor subsequently attempted to recover its money and the fraud was discovered.

The Lewises' were not participants in the fraudulent scheme and were ignorant rather than dishonest.

The High Court observed that the Lewises' had formed a majority on the board over a substantial period of the Company's loss making life.  They had relied upon others to fulfil their duties. 

It was found that the Lewises' failed to take proper steps in respect of the worsening financial situation of the Company and failed to monitor and to ask the right questions or implement a prudent course of action to rectify the Company's worsening financial situation.  Although they weren't dishonest, this did not absolve the Lewises' from liability and breach of their duties to guide and monitor the management of the Company.

Pursuant to Sections 300 and 301 of the Companies Act 1993, the High Court assessed that the Lewises' culpability was 60% of the Company's total indebtedness which resulted in a maximum award of $1,260,000.00 to the Creditor.  It was the Lewises' underlying failure to that the Company was properly set up with adequate and ongoing books of account and monitoring permitted the dishonesty to occur. 

In summary, Directors who fail to meet the duties imposed by the Companies Act 1993 may well expose themselves up to a claim for compensation from Creditors for losses caused by their failure to manage.  Directors must proactively be involved in the operation of the Company's of which they are associated with and must assess from time to time whether or not they are fulfilling those duties.

Please remember, this information is designed as a guide only and shouldn't replace the advice of you legal professional.  We welcome your comments: chris.peddie@awslegal.com