Damien Grant: Directors held to account for a reason

Doug Graham. Photo / NZ Herald

Opinion

It is a tragedy to see former Cabinet minister Sir Doug Graham caught up in the quagmire that is Lombard Finance but his fate is an increasingly common one for unwary directors.

Company directors can be held personally liable for the losses of their companies. This is often a surprise to the directors concerned. Limited liability only applies to shareholders, not directors.

Two cases in recent years highlight how creditors can seek to recover funds against directors.

The first involved an unfortunate couple, the Lewises, minority shareholders and directors of a printing company. The other director managed the business and was actively defrauding it.

When the company went into liquidation, the liquidator sued the couple to recover money lost to creditors.

The Lewises took no part in the day-to-day operations of the business yet the courts found they were negligent in their obligations as directors. They did not know about the fraud but as directors they should have. They were required to pay the liquidators more than $500,000.

The second case involves Dr Dirk Oberholster from Whangarei. In December 2005 Oberholster became involved in a foreign exchange business with a Peter Hitchinson. During the following year Hitchinson stole about $400,000 from the business.

In 2006 Oberholster discovered the fraud and the company was placed promptly in liquidation. Again, the liquidators sued Oberholster to recover money lost by the firm's creditors.

Oberholster did nothing illegal or unethical. When he found out about the fraud he acted quickly and appropriately. Although he did not know, he should have. He was insufficiently vigilant in his capacity as a director.

This lack of vigilance allowed the fraud to occur; the court held he was personally liable for half of the money stolen.

Many directors take the view that if the business makes a profit they are entitled to the reward and if the business fails then it is the creditors who must shoulder the burden. This is wrong.

Creditors do not get to share in the profit of a business so they do not deserve to be unduly exposed to its losses.

More often than not, when we investigate a liquidation there is a way to hold a director personally liable. The main reason action is not pursued is the lack of creditor support or the fact that the director has no assets to pursue.

Being a director is like driving a car. You have a responsibility as soon as you get behind the wheel. You may be a good person but if you behave recklessly and cause harm to others you can be held to account.

Many people take director appointments then let someone else run the business. If the business fails these people can be sued and if they have money you can be certain a liquidator will do just that.

damien@waterstone.co.nz