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there is no guarantee that the company will be able to generate adequate profits and
continue as going concern, hence the risks lie with creditors who may not get paid.
The principle of separate legal entity enshrined in New Zealand in section 15 of the
Companies Act 1993 shields directors from personal liability. The privilege,
however, is revoked when the company trades whilst insolvent and directors can be
held personally liable for any loss incurred by creditors. The underlying principle for
such liability is when the company is insolvent the company is technically exposing
assets and capital belonging to creditors at risk.
In the context of maintaining solvency, the duty is not a perfect duty because failure
to do so does not attract liability unless the company trades while insolvent and
exposes creditors to risks. 7 Up until that point, the company may lawfully expose its
capital and assets to the risks of trade. In addition, directors could not be held liable
for any loss resulting from trading loss which is an integral part of business
activities. 8
Thus, there should be a distinction between loss due to trading and loss due to
director‟s misconduct. 9 The law has imposed liability on directors who have exposed
companies to illegitimate risks. 10 In attempting to define what is illegitimate risk, the
law must recognise that assessment of the company‟s ability to survive is a matter of
judgment and a substantial margin of tolerance must be allowed to directors to
perform their function of taking legitimate risks. 11 The courts have applied a standard
7 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113-114.
8 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113-114.
9 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113-114.
10 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113-114.
11 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113-114.
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