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Hence, action can be brought against directors under the Act if "the way business
is carried out is likely to create substantial risk of serious loss." In one decision,
the court applied a literal interpretation, and consequently directors are prevented
from taking up risks, even when there is a possibility of generating profits. 29 The
implication of the decision is that it defeats the aim of the Companies Act 1993
which is evident from its long title; namely the recognition of the company as a
vehicle for taking business risks. 30
The decision in the case also illustrated the court‟s failure to recognise the link
between risk-taking and profit, and that in deciding whether the risks are
substantial, the potential reward should also be taken into consideration. This
differs from Australia and the UK, for in both countries, one of the factors taken
into consideration when assessing liability is the benefits reaped from taking
risks. 31 From the wording of section 214 of the UK wrongful trading provision, it
can be presumed that a company is allowed to take risks as long as it does not end
up in liquidation. In addition, directors are required to take all steps to minimise
losses once it becomes apparent that the company is in distress, which indicates
the need for directors to weigh the risks being taken and the benefits which may
be generated from them.
Nevertheless, in subsequent decisions, a liberal interpretation was used by the
New Zealand Court of Appeal and the company was only prohibited from taking
illegitimate risks, not all business risks. 32 This appears to be the current state of
the law in relation to reckless trading and if the company is run in a way which
exposes it to illegitimate risks, then the directors will be liable.
29 Fatupaito v Bates [2001] 3 NZLR 386 at 401; see also South Pacific Shipping Limited (in liq);
Traveller v Lower [(2004) NZCLC 263, 570.
30
The Long Title of the Companies Act – “ An Act to reform the law relating to companies, and,
in particular,a)
to reaffirm the value of the company as a means of achieving economic and social
benefits through the aggregation of capital for production purposes, the spreading of
economic risk, and the taking of business risks; and
31 See Australian case Vriasakis v ASC (1993) 11 ACSR 162 ; for English cases see Re Sherborne
Associates Ltd [1995] BCC 40; Rubin v Gunner [2004] 2 BCLC 110.
32
See South Pacific Shipping Limited (in liq); Traveller v Lower (2004) NZCLC 263, 570 and
Mason v Lewis [2006] 3 NZLR 225.
233