View/Open - Research Commons - The University of Waikato

could be reconciled on the basis that the former was dealing with the proposition
of evidence, while the latter with substantive law. 104
Having determined that dishonesty is an important element to establish fraudulent
trading, the next question is how it should be proven. In other words, should
dishonesty be judged based on the director‟s state of mind (subjective test) or on
what a reasonable man would perceive to be dishonest (objective test). Initially,
the test adopted by the court was subjective; whether the director knew at the
time of carrying on business that there was no reasonable prospect of creditors
ever being paid. 105 However, the judge also stated in his judgment that an
inference can be made that the company is carrying on business with intent to
defraud, which can indicate the presence of an objective element in the test. 106
The court in Aktieselskabet Dansk Skibsfinansiering v Brothers 107 decided that
whether there was dishonesty must depend on the assessment of all the existing
facts. On the issue of the standard to be applied to determine dishonesty, the
judge adopted the test in Hardie v Hanson 108 i.e. whether the director is
personally dishonest. The court also stated that for an inference of fraud to be
made, there must be an additional element such as misrepresentation, deception
or some personal advantage on the part of the directors.
The presumption that the court can deduce intent to defraud, which represents the
objective test, was also apparent in the case of Re Gerald Cooper Chemicals Ltd
(in liquidation). 109 In that case, Lord Templeman stated that the word „intent‟ in
the section "must be taken to intend the natural or foreseen consequences of his
act. Intent of a person carrying on the business is that the consequences of
104 See Farrar “Fraudulent Trading” above n78; Farrar “Corporate Insolvency” above n97 at 224.
105 Re William C. Leith Brothers Ltd (1932) 2 Ch 71 at 77.
106 Keay above n2 at 54.
107 [2001] 2 BCLC 324.
108 (1960) 105 CLR 451.
109 [1978] Ch 262.
250