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The Australian Law Commission in 1988 also felt reforms in the area were necessary
because before then directors did not owe any direct duty to the company. 241 Prior to
1988, the law did not impose any duty on directors not to incur further liability when
the company was insolvent. Instead, any directors‟ liabilities were based on the
notion of joint responsibility on the part of the directors when a particular debt was
incurred. 242
The Commission proposed that a new provision be included in the legislation to
make directors directly liable to the company if they failed to prevent the company
from engaging in insolvent trading. 243 The commission specifically rejected
attaching a criminal liability to insolvent trading provisions. The commission
stressed that the purpose of insolvent trading provisions is for creditors to recover
their money and not to punish the directors. 244 Recommendations on insolvent
trading were incorporated in the Corporate Law Reform Act 1992 and, to date, the
provision remains in sections 588G of the Corporations Act 2001. Nevertheless, the
criminal liability is now provided for in section 588G(3) of the Act and it requires an
element of dishonesty to be proven.
The New Zealand Companies Act 1955 had specific sections on directors‟
responsibility for debt and the condition of previous conviction was conspicuously
absent from the Act. The Companies (Amendment) Act 1980 introduced two new
provisions relating to directors‟ liability for incurring debt into the Companies Act
1955. In addition to the existing fraudulent trading 245 provision, the amendment
provided that the director would be responsible if he unreasonably caused the
241 ALRC R45 above n95 at [280].
242 Ibid.
243 ALRC R45 above n95 at [285].
244 Ibid, at [323].
245 Section 320(1) (c ) of the New Zealand Companies Act 1955.
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