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authors are that the failure of the provision to recognise that business involves
elements of risk taking. The uses of the phrase „likely to create substantial risks
of serious loss‟ in the statute has been interpreted by courts to prevent directors
from taking any form of risks despite their potential to generate profits.
The concern was further emphasised when the High Court in Fatupaito v Bates 164
observed that the wording of section 135 seems to impose a strict duty on
directors to avoid substantial risks of serious loss to creditors, and even in
circumstances where potential for great reward exists, they are not allowed to
take such risks. Nevertheless, the High Court did acknowledge that the degree of
risk-taking corresponds with profits and to disallow any form of risk-taking
would have inhibited the company‟s attempt to turn around its fortunes.
The court‟s strict interpretation, however, has been softened in the decision of Re
South Pacific Shipping Limited (in liq); Traveller v Lower 165 where William
Young J commented (obiter) that for section 135 to be functioning well, there is a
need to make a distinction between legitimate and illegitimate business risks. The
decision was later upheld by the Court of Appeal and confirmed in a later case of
Mason v Lewis. 166 The later interpretation by the court on the section reflects the
aims enunciated in the long title of the Act which acknowledged the company as
means to take business risks and allowing directors wide discretion in matters
relating to business judgment. At the same time, the Act also recognised the
possibility of abuse in those circumstances and the need of the law to protect the
interests of creditors as well as shareholders.
Another criticism levelled against the section is that the wording is ambiguous
and unclear. This defeats one of the main purposes cited by the Law Commission
NZLJ 262 and William Young J in Re South Pacific Shipping Ltd (in liq); Traveller v Lower
(2004) NZCLC 263, 570 at 263,592.
164 [2001] 3 NZLR 386, 401.
165 (2004) NZCLC 263, 570 .
166 [2006] 3 NZLR 225 (Court of Appeal), 233; see also Mountfort v Tasman Pacific Airlines of
NZ Ltd [2006] 1 NZLR 104.
266