View/Open - Research Commons - The University of Waikato

to the director to prove that he or she has a defence or defences to exonerate them
from liability. The standard of proof is a civil standard balance of probability.
10.2.7 Standard of Liability
The standard of liability applicable in reckless trading is an objective test;
focusing on the manner in which the business is carried on and whether it would
create a substantial risk of serious loss. 43 Unlike the UK and Australian
legislation, there is no element of subjectivity mentioned in section 135 of the
New Zealand Companies Act 1993. Section 136 of the New Zealand Companies
Act 1993, on the other hand, uses both the subjective and objective elements.
There is a possibility that reliance solely on an objective element would result in
the court substituting its own perspective or hindsight on the matter. 44 In most
cases, the courts have relied on the evidence given by professional practitioners
in a reconstruction of the company‟s financial position, and what he or she would
have done in those circumstances. 45 The approach of the courts in New Zealand
differs from that of the UK, for in the UK the courts have been cautioned not to
use hindsight in making decisions, but instead to base their decision on the
evidence available to directors at the time. 46
However, by setting an objective standard on liability, directors are compelled to
equip themselves with a minimum standard. It imposes a duty on directors to
guide and monitor the company since the company‟s financial position is central
to liability under the section. Directors therefore cannot leave the management of
the company to a third party because it is important that they form their own
opinion as to the company‟s position. Directors are compelled to be vigilant in
exercising their duty and this could benefit the company as a whole.
43 Mason v Lewis [2006] 3 NZLR 225 at 234; see also Fatupaito v Bates [2001] 3 NZLR 386.
44 Keay above n2 at 114.
45 Ibid.
46 See Re Sherborne Associates Ltd [1995] BCC 40.
237