Section 147 of the Companies Act 1997 settles a question that causes endless argument elsewhere: which directors’ duties can a shareholder enforce personally?
Section 147(1) — the personal action
A shareholder or former shareholder may bring an action against a director for breach of a duty owed to him as a shareholder.
No leave is required, unlike a derivative action under section 143. And under section 141, the term “shareholder” in Part IX includes a personal representative and a person to whom shares have passed by operation of law.
Section 147(3) — the Act says which duties are owed to whom
| Owed to shareholders — personal action available | Owed to the company — derivative action only |
|---|---|
| Section 70 — the duty of each director to take reasonable steps to ensure the share register is properly kept and transfers promptly entered | Section 112 — to act in good faith and in the best interests of the company |
| Section 118 — disclosure of interest in a transaction | Section 115 — care and diligence |
| Section 126 — disclosure of share dealing by directors | Section 123 — use of company information |
The duties owed to shareholders are all information and record duties — keeping the register right, telling shareholders about conflicts, telling them about directors’ dealings in the shares. A failure harms shareholders directly and individually.
The duties owed to the company are the substantive management duties. A breach harms the company, and any harm to shareholders is a consequence of that — which is why it is caught by the reflective loss bar.
The list in subsection (3) is expressed as “without limiting subsection (1)”, so it is illustrative on the shareholder side; but the three duties named as owed to the company are stated definitively.
Section 147(2) — the reflective loss bar
An action may not be brought under subsection (1) to recover any loss in the form of a reduction in the value of shares in the company, or a failure of the shares to increase in value, by reason only of a loss suffered, or a gain forgone, by the company.
If a director causes the company to lose K1 million, the shares fall in value. If shareholders could sue for that fall and the company could sue for the loss, the director would pay twice — and the company’s creditors, who rank ahead of shareholders, would be bypassed.
The bar directs the claim to the right place: the company recovers, through its own action or through a derivative action under section 143. Note that under section 145(d) the Court may nevertheless direct that any amount recovered be paid to former and present shareholders instead of to the company.
The bar is confined to loss suffered “by reason only of” a company loss. A shareholder with a separate and distinct loss — for example, having been induced to sell shares at an undervalue — is not caught, and may also have a claim under section 127(5).
Section 148 — an order requiring a director to act
Notwithstanding section 147, the Court may, on the application of a shareholder, where it is satisfied it is just and equitable to do so, make an order requiring a director to take any action that is required to be taken by the directors under the constitution or this Act — and may grant such other consequential relief as it thinks fit.
Section 148 is not about compensation. It compels performance — calling the annual meeting, signing a certificate the Act requires, filing a notice, registering a transfer, or producing records.
The opening words “notwithstanding section 147” mean the reflective loss bar and the “duty owed to the shareholder” requirement do not apply. Any shareholder may apply in relation to any action the directors are required to take.
Compare section 142(1)(b), which allows a mandatory injunction requiring a person to do what the Act or constitution requires. Section 142 is available to a wider group — including the Registrar and an entitled person — but is barred where the conduct is completed. Section 148 has no such limit, but is confined to shareholders and requires the Court to find it just and equitable.
Choosing the right claim
- Is the loss the company’s? If so, section 147(2) bars a personal claim; seek leave for a derivative action.
- Is it a breach of section 70, 118 or 126? Then a personal action under section 147 lies, without leave.
- Do you need something done rather than paid? Section 148 against a director, section 150 against the company, or a section 142 injunction.
- Is the complaint about unfairness rather than breach? Section 152 reaches conduct that is oppressive, unfairly discriminatory or unfairly prejudicial — and its orders include requiring the company or another person to acquire your shares.
- Do other shareholders share your position? Consider a representative action under section 151.
First, section 154 — a purported exercise by a director of a power vested in the shareholders may be ratified, and is then deemed always to have been proper. But section 154(3) preserves the Court’s powers notwithstanding ratification.
Second, section 140 — a company may indemnify a director only within narrow limits, and never against liability to the company or a breach of section 112. An indemnity outside those limits is void, so a director cannot rely on it.
Sources
- Companies Act 1997 — ss 70, 112, 115, 118, 123, 126, 127, 140–152, 154
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.