The Court of Appeal in Madsen-Ries v Petera [2016] NZCA 103 held that creditors do not need to be considered when deciding whether a director/s’ remuneration was fair, at a time when the company was in financial peril. Section 161 of the Companies Act 1993 (Act) sets out the procedure for the authorisation of directors’ remuneration. Where section 161 of the Act has not been complied with, directors may be personally liable to repay their remuneration or other benefits. However, the courts have held that directors in that situation can avoid liability by demonstrating that their remuneration was ‘fair to the company’.
The liquidators had argued that “fairness” under section 161 of the Act was a reflection of directors’ fiduciary duty under section 131 of the Act, in which context creditors’ interests must be taken into account. The Court of Appeal rejected this approach. There was a difference between transfers by a company to its shareholders, and contexts where the interests of the company and those of its directors and shareholders may not align. In the former scenario, the Act uses the solvency test, and creditors’ interests must be considered. In the latter, the Act uses the concept of fairness to the company, and creditors’ interests need not be considered. The Court of Appeal noted that directors may be subject to other duties when authorising remuneration, which may require them to consider the interests of creditors where the company is in financial difficulty.
In terms of whether the remuneration in question was fair, the Court of Appeal upheld the High Court ruling. The High Court had held that the salaries were fair, because the company got full value from the directors’ work, benefitting from the directors’ administration and gaining profit: Madsen-Ries v Petera [2015] NZHC 538.
The Supreme Court declined leave to appeal the decision: Madsen-Ries v Petera [2016] NZSC 94.