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Bisson J, when addressing the appropriate test under section 320(1)(b) which
dealt with directors‟ liability for carrying the business of the company in a
reckless manner 172 states
Was there something in the financial position of the company which
would have drawn to the attention of an ordinary prudent director to the
real possibility not so slight as to be a negligible risk, that his continuing
to carry on the business of the company would cause the kind of serious
loss to creditors of the company which section 320(1)(b) was intended to
prevent? 173
Section 135 imposes a duty on directors not to trade in manner which would
expose the company‟s business to substantial risks of serious loss. Therefore, the
courts will look at the way directors operate the business in order to decide
whether liability ensues under the section.
In the case of Re Group Hub Ltd (in liq); The PC Company Ltd v Sanderson, 174
the court looked at the modus operandi of the company and found that the
company never had substantial reserves, any profits made were modest, and it
incurred periodic losses. The court hence decided that a company with such
structure can only avoid liability under section 135 if it is able to trade profitably
from the beginning. 175 Concern has been raised whether this is the right approach,
given the fact that the majority of businesses started up in New Zealand are not
able to trade profitably from their inception, thus exposing their directors to
personal liability. 176
172 Section 320(1)(b) of the New Zealand Companies Act 1955, a predecessor to section 135 of
New Zealand Companies Act 1993.
173 Thompson v Innes (1985) 2 NZCLC 99463 at 99472.
174 Unreported case HC Hamilton, CP 18-00, 1 November 2001; Priestley J; see also Re Gellert
Developments Ltd (2002) 9 NZCLC 262, 942.
175 Bos and Wiseman above n163 at 266.
176 Ibid.
268