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company. Otherwise, it will defeat the main purpose of replacing the old law with
the current reckless trading provision. 40
10.2.5.1 Meaning of Insolvency
Insolvency in the context of New Zealand and Australian statutes refers to the
cash flow test, while in the UK the section specifically mentions the balance
sheet test. 41 Directors in Australia, in particular, have to be vigilant once the
company is unable to pay its creditors when the debts fall due, because under the
test the company is already insolvent. Therefore, any action by directors from
that point of time may expose them to personal liability if the court finds that
there are reasonable grounds to suspect the company was insolvent or would
become so.
In contrast, to ascertain whether directors in the UK have knowledge or ought to
have knowledge that insolvent liquidation will be the consequence of their
actions, the court would have to scrutinise the company‟s financial information. It
is not sufficient for the liquidator to argue that the company had a liquidity
problem, and he or she must prove that the company‟s liabilities exceeded its
assets. The difference in the tests used may affect the question as to when liability
arises, since in theory it is easier to detect or suspect insolvency under the cash
flow test rather than the balance sheet test.
10.2.6 Burden of Proof
The burden of proof in the three jurisdictions is similar, and it lies with the person
who seeks to make the director liable. 42 He or she will have to prove the essential
ingredients stated in the relevant sections, and once that is done, the burden shifts
40 See comments by Justice Sian Elias, „Company Law After Ten Years of Reform‟ in The
Company Law Conference of the New Zealand Law Society (1997) at 9.
41 See Chapter 8 of the thesis.
42 Re Sherborne Associates Ltd [1995] BCC 40; Metropolitan Fire Systems Pty Ltd v Miller
(1997) 23 ACSR 699.
236