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and does not appear to allow for such risks to be incurred, even in circumstances
where the potential for great rewards exists." O‟Regan J's judgement seemed to
indicate that the company could not trade out of financial difficulty if there were
a risk involved in the act, even when there were potential for success. In doing so,
the court failed to recognise the relationships between business and risk-taking as
well as risks and reward. Consequently, it could stifle directors‟ wide discretion
to make business judgment decisions.
However, William Young J in Re South Pacific Shipping Limited (in liq);
Traveller v Lower, 182 acknowledged that the company has the right to take up
business risks as long as the risk is legitimate. The judge reasoned that
distinctions should be made between illegitimate and legitimate risks in order for
the section to apply in a sensible way. 183 The judge listed some factors for
consideration when determining whether a business risk is legitimate, and they
are 184 :-
a) whether those whose funds are affected fully understood the risk
involved;
b) the obligation directors have to creditors at the time when the
company is insolvent;
c) Whether the court acknowledged that the company should not stop
trading immediately after the company becomes insolvent but
should continue in an attempt to salvage it. In doing so, directors
should consider the appropriate length of time to allow the
company to continue trading; and
d) Whether the conduct of directors in the circumstances was in
accordance with orthodox commercial practice.
182 (2004) 9 NZCLC 263,570 at 263, 590.
183 Ibid, at 263,593
184 Ibid, at 263, 592.
270