A matter recently came my way involving a company board comprising more than five
directors that had been operating under a broad delegated-authority model.
This caused me to revisit some fundamental issues relating to company governance
matters, namely:
- Can a company board delegate its powers and responsibilities?
- If so, what is the legal effect?
The answer to the first question is ‘yes’, but subject to significant limitations as I explain
below. These are important issues because ultimately, the directors may be personally liable
for the decisions they make, or delegate, or fail to make.
The starting point is section 128 of the Companies Act 1993 (Act) which states that “the
business and affairs of a company must be managed by, or under the direction or
supervision of, the board of the company….The board of a company has all the powers
necessary for managing, and for directing and supervising the management of, the business
and affairs of the company…. subject to any modifications, exceptions, or limitations
contained in this Act or in the company’s constitution”.
Section 127 defines “the Board” as the “directors of the company who number not less than
the required quorum acting together as a board of directors”. This is intentional to ensure
that, in cases where there are multiple directors of a company, one or a few minority
directors do not seek to usurp the power of the board, and that company decisions are made
openly, fairly, and reasonably.
Section 130 allows a Board of directors to delegate some of its powers by saying “subject to
any restrictions in the constitution of the company, the board of a company may delegate to
a committee of directors, a director or employee of the company, or any other person, any 1
or more of its powers other than its powers under any of the sections of this Act set out in
Schedule 2”. Any restrictions in a shareholders’ agreement (if there is one) would also need
to be considered.
Schedule 2 of the Act sets out a reasonably extensive list of some 22 provisions in relation to which a board of directors is not legally permitted to delegate to anyone. These provisions include the issuing of shares, options, and the related consideration; the payment of dividends and other distributions, and the related issues concerning the application of the solvency test; certain share acquisitions; financial assistance for the acquisition of shares; and share transfers to name a few. The intent is that these issues are deemed to be of high importance such that each director, as part of the board or its quorum at least, must personally ‘turn his or her mind to the issues’ before making a decision on the issue.
The matter that came my way involved circumstances where the directors had allowed
certain executives (non-directors) to use ‘auto signatures’ on a wider range of company
documents, some of which fall within the scope of Schedule 2. This also raises the issue of
whether there was any director consent at all, or worse, whether false statements or records
may have been created, being an offence under sections 377 and 379 of the Act.
The effect of section 374 is that directors may be convicted and fined if they do not comply
with the Act. They may also be liable to creditors, shareholders or other third parties for
breaches of directors’ duties. The current Health and Safety regulatory environment also
places a heavy personal burden on directors, and so prudent directors ought to be watching
the key areas of personal liability very closely.
Added to the above are those provisions of the Act and any constitution or shareholders’
agreement which give the shareholders power to make certain decisions, and which the
directors may be powerless to override.
Under section 18 of the Act, third parties who contract with companies will generally be
entitled to have their contract or arrangement upheld despite any shortcomings in how a
board has operated. The rationale is twofold: first, a company should not ordinarily be
permitted to avoid an obligation to a third party because of its own internal non-compliance;
and second, the third party will generally be unaware of that non-compliance. The effect of
this could be that a poor contract made with insufficient review and oversight by a board is
still likely to bind the Company.
Section 130 states that a board that delegates remains responsible for those matters unless
the board has reasonable grounds to believe it was acting in compliance with the Act, and
monitored the delegated authority by reasonable methods (and the onus will be on the board
to prove those matters).
These issues highlight how important it is for any company board to set up systems and
processes governing how it operates, and to obtain specialist legal advice at the correct
times, to ensure that it is operating correctly within the law. These issues affect not only the
potential personal liability of individual directors but also, ultimately, the value of the
business, which stakeholders will ordinarily wish to protect and enhance.
Sean Lynch
Barrister & Solicitor, Director
Lynch & Co, Corporate & Commercial Law
If you require any commercial legal assistance, please contact Sean Lynch at sean@lynchandco.co.nz, or ph 09 948 8433.
The above article is not intended as legal advice because each set of circumstances will differ. Specific legal advice is required for each particular case.
