If you run a company in New Zealand, you’ll probably hear people talk about a director’s “purpose” sooner or later.
Sometimes it comes up when you’re about to sign a contract, take on debt, bring in investors, or make a tough call like restructuring the business. Other times it comes up after something has already gone wrong, and someone asks: “What was the director trying to achieve here?”
In simple terms, directors’ purpose is a helpful way to describe why a director does what they do - and whether their decisions are made for the right reasons, in the best interests of the company.
It’s worth noting that “directors’ purpose” isn’t a defined legal term in the Companies Act 1993. It’s shorthand for a couple of core legal duties that often turn on a director’s motives and reasoning.
Getting this right matters because being a director isn’t just a title. It’s a legal role with real responsibilities, and directors can sometimes be personally exposed if they step outside those duties.
This article is general information only and not legal advice. If you need advice for your situation, it’s best to get tailored legal guidance.
What Does “Directors’ Purpose” Mean In Practice?
When people talk about directors’ purpose, they’re usually referring to a key idea in New Zealand company law:
- Directors must exercise their powers in good faith and in what they believe to be the best interests of the company.
- Directors must use their powers for a proper purpose (not for an ulterior motive).
These concepts sit at the heart of the Companies Act 1993. They’re not just technical rules - they affect everyday business decisions.
Directors’ purpose becomes important whenever a director is using their position to make decisions like:
- issuing or transferring shares
- approving major transactions
- signing contracts and committing the business to obligations
- taking on finance (or agreeing to guarantees)
- changing the company’s direction, operations, or structure
- entering a conflict-of-interest situation
In other words, if you’re a founder-director, you’re likely dealing with directors’ purpose all the time - you just might not be calling it that.
“Best Interests Of The Company” Isn’t Always The Same As “Best For The Founder”
This is one of the biggest mindset shifts for small business owners who incorporate.
If you’re operating as a sole trader, “the business” is effectively you. But in a company structure, the company is a separate legal entity. As a director, you have to act for the company’s benefit - even if you’re also a shareholder.
That doesn’t mean you can’t make decisions that benefit you. It does mean your decisions need to be justifiable as being for the company’s benefit (and made for a proper purpose), rather than mainly for personal advantage.
What Directors Must Do Under The Companies Act 1993
Company directors in New Zealand have several core duties under the Companies Act 1993. These duties are the legal framework behind what people mean when they talk about directors’ purpose.
Here are some of the key obligations that come up most often for small businesses.
1) Act In Good Faith And In The Best Interests Of The Company
This is the headline duty. Directors must act honestly and with loyalty to the company.
Practically, this means you should be able to explain:
- what decision you made
- why you made it
- how you believed it helped the company (not just you personally)
If you have more than one shareholder (or expect to bring on investors), it’s also smart to have the rules clear from the start in a Shareholders Agreement, so everyone understands how big decisions get made and what happens if interests diverge.
2) Exercise Powers For A Proper Purpose
Even if a director honestly believes they’re helping the company, a decision can still be challenged if they used their powers for an improper purpose.
A classic example is issuing new shares not primarily to raise capital for the company, but to dilute someone else’s shareholding or keep control in a particular person’s hands.
For small businesses, this can creep in when you’re:
- bringing in a new shareholder
- allocating shares between founders
- changing control after a dispute
If you’re planning any of these steps, it’s worth checking whether your Company Constitution or shareholders arrangements set out the process clearly (and whether the process matches what you’re trying to achieve).
3) Comply With The Duty Of Care, Diligence And Skill
Directors must take reasonable care in how they run the company.
You don’t have to be perfect, and you don’t have to be an expert in everything - but you do need to take the role seriously. That often means:
- reading what you sign (and asking questions)
- keeping decent records
- understanding the financial position of the business
- making informed decisions (not just gut-feel decisions)
If you’re making a major commitment (like signing a long-term supply deal, taking on finance, or entering a new market), it’s often worth getting advice on the contract terms so the company isn’t walking into avoidable risk.
4) Avoid Reckless Trading
One of the biggest areas of director exposure is trading in a way that creates a substantial risk of serious loss to creditors.
Put simply: if the company can’t pay its bills (or is heading that way), directors need to slow down and take a hard look at what’s realistic. Continuing to take on obligations in those circumstances can create personal risk.
This is where directors’ purpose matters a lot. If you keep trading to “buy time” with no real plan, it’s difficult to argue your decisions were properly directed to the company’s best interests.
Also, when a company is insolvent or close to insolvent, directors should be especially careful: creditor interests may become highly relevant to what is in the company’s best interests, and the practical focus often shifts to protecting the company (and its creditors) from further loss.
Directors must not agree to obligations unless they reasonably believe the company will be able to perform them when required.
For example, if you sign a contract committing the company to deliver products or services, but there’s no realistic way to fund or fulfil the contract, that can be a problem.
This is why it’s important to have strong contracting processes in place as you grow - and to make sure your key agreements match what your business can actually deliver.
Common Situations Where Directors’ Purpose Gets Tested
In day-to-day operations, directors’ purpose isn’t usually questioned when everything is going well. It becomes crucial when:
- there’s a dispute between shareholders
- the company becomes financially stressed
- a decision looks “self-interested”
- someone claims they’ve been treated unfairly
- there’s an investigation, complaint, or legal claim
Here are some common examples for small businesses.
Issuing Or Transferring Shares
Share changes are one of the easiest ways for directors’ purpose to be challenged, because the motive can be unclear (or disputed later).
If you’re adjusting ownership, you’ll usually want the steps documented properly, including board decisions and the transaction documents. Depending on what’s happening, that might include Share Transfers and updated company records.
If you’re doing a new issue of shares (rather than a transfer), it’s also worth checking the constitution and shareholder approvals needed - especially if the company has multiple shareholders.
Small businesses often work with family members, friends, or entities the founder controls (like a separate company, or a trust).
That’s not automatically a problem - but it’s a situation where directors should be careful about conflicts of interest, pricing, and documentation.
Ask yourself:
- Would this deal still make sense if it was with an unrelated third party?
- Is the pricing commercially reasonable?
- Is the relationship disclosed and managed properly?
Getting the structure right early can also help avoid confusion about what belongs to the company versus what belongs to you personally.
Hiring, Managing And Letting Staff Go
Employment decisions can raise directors’ purpose issues where the decision is driven by an improper reason (for example, acting out of personal dislike, retaliation, or trying to avoid legal obligations).
For small businesses, the best practical protection is having your employment arrangements properly documented and consistently applied, including a fit-for-purpose Employment Contract.
If you ever need to go down a performance management or termination path, it’s also important to follow a fair process and keep clear records of the business reasons for decisions.
Handling Customer Complaints And Advertising
Directors don’t just manage internal decisions - they also steer how the company behaves in the market.
That matters because the company must comply with laws like the Fair Trading Act 1986 and the Consumer Guarantees Act 1993, which regulate misleading conduct, product/service guarantees, and consumer rights.
From a directors’ purpose perspective, it’s risky to encourage a “sell at all costs” culture that ignores consumer law. Over time, that can create legal liability, reputational damage, and financial exposure that is hard to unwind.
Collecting And Using Customer Data
If your business collects customer details (even basic information like names, phone numbers, or emails), you need to think about how that information is collected, stored, and used under the Privacy Act 2020.
A simple, properly tailored Privacy Policy helps you set expectations with customers and create internal discipline around data handling.
It’s also a practical way to demonstrate that the company is acting responsibly - which supports the broader theme of directors acting with care and in the company’s long-term interests.
Why Directors’ Purpose Matters For Small Businesses (Not Just Big Corporates)
If you’re running a small company, it can be tempting to treat “director duties” as a big-business issue.
But in reality, small businesses can be more exposed because:
- directors are often also the main decision-maker (so there’s no buffer)
- there may be fewer internal checks and balances
- record-keeping can be informal (which makes it harder to prove decision-making was proper)
- cash flow swings can be sharper, raising creditor-risk issues
Getting directors’ purpose right isn’t just about avoiding claims. It’s about building a company that’s investable, scalable, and resilient.
It Supports Better Decision-Making When Things Get Hard
Imagine this: the company is under pressure, revenue is down, and you’re deciding whether to take on another big contract and “push through”.
If your decision-making is grounded in:
- up-to-date financial information
- documented reasoning
- a realistic plan to meet obligations
you’re far more likely to land on a decision that’s commercially sound and aligned with your director duties.
It Protects Relationships Between Co-Founders And Shareholders
Many director disputes are really “relationship disputes” underneath - but they still get argued using legal duties.
When directors can show decisions were made for proper company reasons (and processes were followed), it’s easier to keep things professional and avoid conflicts turning into costly deadlocks.
It Helps You Avoid Personal Exposure
We can’t pretend director duties are just box-ticking. In some circumstances, directors can face personal consequences if duties are breached.
The best approach is proactive: build governance habits early, even if you’re a small team. That includes having the right legal documents, keeping clean records, and getting advice before major decisions.
How To Make Sure Your Decisions Align With Directors’ Purpose
The goal isn’t to make your business bureaucratic. It’s to create a simple “decision discipline” that protects you and the company as it grows.
1) Be Clear On Who The Decision Is For
Before you act, ask: Is this in the best interests of the company?
If the decision benefits you personally (which is common in small businesses), ask a second question: Is the company still benefiting in a genuine, defensible way?
2) Document Major Decisions
When decisions are questioned later, the issue is often that there’s no paper trail.
You don’t necessarily need formal board minutes for every small decision, but for major decisions, basic documentation helps, such as:
- what options you considered
- any advice you relied on (accounting, legal, financial)
- the reasons for your final decision
This is especially important when decisions affect ownership, debt, or long-term obligations.
3) Manage Conflicts Early (Don’t Ignore Them)
Conflicts of interest are common in founder-run companies. They aren’t automatically a breach - but they do need to be handled properly.
Practical ways to manage conflicts include:
- disclosing the conflict to the company
- having the non-conflicted director(s) decide (where relevant)
- recording the decision and why it’s still in the company’s interests
If you’re unsure whether a situation is a conflict, it’s worth getting legal advice early - it’s much easier to manage properly upfront than to fix later.
4) Keep Your Company’s “Rules” Up To Date
A lot of directors’ purpose issues arise because the company’s governance documents are outdated or never properly set up.
Depending on your structure and goals, that can include:
- a constitution that matches how you actually run the company
- a shareholders agreement that sets clear rules for exits, control, and funding
- proper share issuance/transfer documentation
As your business evolves (new shareholders, new funding, expansion), your documents should evolve too.
Key Takeaways
- Directors’ purpose is a practical way of describing why a director makes decisions, and whether those decisions are made in good faith, for a proper purpose, and in the best interests of the company.
- Under the Companies Act 1993, directors must act in the company’s best interests, exercise care and diligence, avoid reckless trading, and not take on obligations the company can’t meet.
- Small businesses are not “too small” for director duties - founder-directors face these obligations every day, especially when signing contracts, raising capital, or managing cash flow pressure.
- Directors’ purpose is often tested in real-world scenarios like share issues, related-party deals, shareholder disputes, and financially stressed trading.
- Simple habits like documenting major decisions, managing conflicts early, and keeping governance documents current can significantly reduce legal risk and support business growth.
- Having the right legal foundations in place (like a Shareholders Agreement, Company Constitution, Employment Contract, and Privacy Policy where relevant) helps show your decisions are structured and defensible.
If you’d like help setting up (or reviewing) your company’s governance documents, or you’re making a major decision and want to check it aligns with director duties, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
