View/Open - Research Commons - The University of Waikato

even though it was evident from the beginning that the company had little
chances of success. 134
The case of Purpoint Ltd 135 also shows that the court has given the benefit of the
doubt to directors based on their skills to turn around the company to
profitability. In other words, whether or not the company has crossed the fine line
of „no reasonable prospect the company would maintain its solvency‟ would also
depend on the steps taken by the company once the problem had been discovered.
Once directors have taken steps to bring the company to profitability, the
reasonable length of time needed to do so would depend on the circumstances of
each case.
10.3.2.4 Knowledge of Directors/Tests Applicable
Directors are subjected to two tests in ascertaining whether they have the
necessary knowledge that the company has no prospect of avoiding insolvency
liquidation. The tests are described in section 214(4) of the Insolvency Act 1986 -
namely the objective test based on the general knowledge, skill and experience
reasonably expected from a person occupying the same function and position in
the company, 136 and the subjective test depending on the knowledge, skill and
experience the director in question actually has. 137 Directors who are entrusted
with specific functions in the company are also expected to have the knowledge,
skill and experience associated with the position.
134 See Re Purpoint Ltd (1991) BCLC 491 at 498.
135 Ibid.
136 Section 214(4)(a) of the UK Insolvency Act 1986 – “ For the purposes of subsections (2) and
(3), the facts which a director of a company ought to know or ascertain, the conclusions which
he ought to reach and the steps which he ought to take are those which would be known or
ascertained, or reached or taken, by reasonably diligent person having both-
(a) the general knowledge, skill and experience that may be reasonably be expected of a person
carrying out the same functions as are carried out by that director in relation to the
company…”,
137 Section 214(4)(a) of the UK Insolvency Act 1986 – “ For the purposes of subsections (2) and
(3), the facts which a director of a company ought to know or ascertain, the conclusions which
he ought to reach and the steps which he ought to take are those which would be known or
ascertained, or reached or taken, by reasonably diligent person having both-
(b) the general knowledge, skill and experience that that director has.”
259