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Directors in Australia can be held accountable if the company incurs debt when it
is insolvent or becomes insolvent as a result of the action. The liability in
Australia does not depend only on actual insolvency; mere suspicion of the
company‟s insolvent status is sufficient. This is indicated in section 588G(1)(c)
which uses the word „suspecting‟ the company is insolvent or would become
insolvent. However, in the UK there must be clear proof of insolvency before
liability is attached. 37
The aim of the section is to prevent directors from dragging the company into
further debts when the company‟s financial situation is doubtful. If the company
has gone into liquidation before liability can be imposed on directors, it may be
too late to prevent losses for creditors. 38 By setting a lower standard for liability,
directors have to act cautiously when making decisions so that the company
would not be exposed to insolvency.
While insolvency is an essential element for directors‟ personal liability in the
UK and Australia, New Zealand does not have such a requirement. The Law
Commission in its initial recommendation suggested that personal liabilities be
imposed on directors when they have „unreasonably risked insolvency‟ 39
although Parliament did not take it up when enacting the legislation in 1993. As a
result, the current reckless trading provision under section 135 of the New
Zealand Companies Act 1993 refers to exposing the company to „substantial
risks‟ before liability can be imposed on directors. Therefore, it is important for
the courts, when construing the meaning of „substantial risks,‟ to strike a balance
between the need to protect creditors and the commercial interests of the
37 Clear proof is required by the court before the company can be subjected to liquidation-see
section 123(1)(e) of the UK Insolvency Act 1986-“if it is proved to the satisfaction of the court
that the company is unable to pay its debts as they fall due”.
38 ALRC R45 Vol 1 1988 above n7 at [280].
39 See Law Commission Company Law Reform and Restatement (NZLC R9,1989) at[516] and
section 105 of the New Zealand Draft Companies Act.
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