View/Open - Research Commons - The University of Waikato

The Law Commission proposed that the old section be abolished and a new
section be introduced which imposed liability on a director if he or she acted at a
time when there were reasonable grounds to believe that the act concerned
involved an „unreasonable risk of causing the company to fail to satisfy the
solvency test.‟ 160 The Commission also recommended imposing a duty on the
director not to cause the company to incur an obligation unless he or she believed
at that time, on reasonable grounds, that the company would be able to perform
the obligation when required to do so. 161 This suggestion was later incorporated
in section 136 of the Companies Act 1993.
When the Act was finally enacted in 1993, the fraudulent element in section 320
of the Companies Act 1955 was abolished as suggested. However, some changes
were made in respect of the other two provisions. The Justice Department
substituted the Commission‟s „unreasonable risk of causing the company to fail
to satisfy the solvency test‟ with a „reckless‟ test. The reckless test was later
modified to the current form by the Justice and Law Reform Select Committee.
One of the reasons for changing it to the present form can be glimpsed from the
parliamentary debate which stated that the liability would apply throughout the
life of the company and not only in liquidation. 162
Since section 135 was introduced in the Companies Act 1993, it has been
subjected to many comments. 163 Among the main criticisms put forward by these
160 See the New Zealand Law Commission Draft Companies Act – section 105 (1) –"A director of
a company must not agree to the company entering into a contract or arrangement or acting in
any other manner unless he or she believes at that time on reasonable grounds that the act
concerned does not involve an unreasonable risk of causing the company to fail to satisfy the
solvency test."
161 Section 105(2) of the New Zealand Law Commission Draft Companies Act.
162 (23 February 1993) NZPD speech by Hamish Hancork (second
reading) at
10 October 2010.
163 See comments made by David Goddard “Directors‟ Liability for Trading While Insolvent: A
Critical Review of the New Zealand Regime” in Ian Ramsay (Ed.) Company Directors’
Liability for Insolvent Trading (CCH Australia, Centre for Corporate and Securities Regulation,
University of Melbourne, 2000) 169; Justice Sian Elias above n40; Justice Tompkins
“Directing the Directors: The Duties of Directors Under the Companies Act 1993” (1994) 2
Waikato LR 13; Michael Bos and Martin Wiseman “Directors‟ Liabilities to Creditors (2003)
265