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isks of serious loss to creditors. A director in New Zealand also has a duty under
section 136 not to allow or cause the company to enter into obligations if there
are no reasonable grounds to believe that the company will be able to meet those
obligations. In Australia, a director has a duty to prevent a company from
incurring debts if the company is insolvent at the time or becomes insolvent as a
result of incurring the debt. In the UK, the wrongful trading provision does not
require the wrongful conduct to be proven, instead the director‟s knowledge, or
deemed knowledge, needs to be established. Under wrongful trading, once a
director knows or ought to have known that insolvent liquidation is unavoidable,
he or she has to take every step to minimise potential losses to creditors.
The three provisions share similar aims, namely to protect creditors when the
company is in financial difficulties, by preventing directors from continuing with
business as usual. In addition, the implication of breaching the sections is the
same; directors can no longer rely on the principle of separate legal entity and
would be personally liable. However, there are differences in regard to when
directors cross the threshold to become personally liable.
In New Zealand, what needs to be proven is that the way the company operates
its business is likely to create substantial risks. In doing so, the focus would be on
a series of circumstances, not on any specific event or time. Hence, the court will
examine whether the director‟s conduct of the business creates substantial risks of
serious loss to creditors. The provision also differs from section 136, for in this, it
has to be proven at the time the obligation is incurred that the directors have
reasonable grounds to believe it can be met by the company.
In Australia, a director is liable when the company „incurs debts‟, which is akin
to the requirement of „incurring obligations‟ in the New Zealand section 136.
Obligation can be referred to as „an act or course of action to which a person is
morally or legally bound; a duty or commitment‟ 20 while „debts‟ is defined as „a
20 (From The Oxford Dictionary of English (2nd edition revised) in English Dictionaries &
Thesauruses. at 22 October 2009.
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