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The decision was later upheld by the Court of Appeal in Mason v Lewis 185 which
reconfirmed the distinction between legitimate and illegitimate risks, and that
directors will be personally liable only if the risks they take are illegitimate and
substantial. In addition, the Court of Appeal, in construing the meaning of
substantial risks and serious loss, referred with approval to the „sober assessment‟
approach suggested by Mike Ross in his book Corporate Reconstruction:
Strategies for Directors. 186 The sober assessment test requires directors to give a
realistic view on whether the risk-taking is appropriate in the light of the
company‟s capability. 187
The courts applying liberal interpretations in Re South Pacific Shipping Limited
(in liq); Traveller v Lower 188 and Mason v Lewis 189 indicate their recognition that
the company is a vehicle to take business risks as envisaged by the Act. At the
same time, the courts are also aware that there should be a limitation as to the
extent of risks which can be taken. Therefore, it is necessary to set a parameter to
risk-taking and the court should be clear on this issue so that directors will be
able to know when they will be liable.
It is suggested that the protection given to creditors in relation to section 135
should correspond to the risks involved. 190 In other words, creditors who have
assented to the risks taken should not be allowed to rely on the provision in
185 [2006] 3 NZLR 225 at 233.
186 Mike Ross Corporate Reconstructions: Strategies for Directors (CCH, Auckland, 1999);
Mason v Lewis [2006] 3 NZLR 225 at 234.
187 Ross ibid, at 40; the writer suggested “The first phrase „substantial risk‟ requires a sober
assessment by directors as to the company‟s likely future income stream. Given current
economic conditions, are there reasonable assumptions underpinning the director‟s forecast of
future trading revenue? If future liquidity is dependent upon one large construction contract or a
large forward order for the supply of goods and services, how reasonable are the director‟s
assumptions regarding the likelihood of the company winning the contract? Even if the
company wins the contract, how reasonable are the prospects of performing the contract at a
profit?”
188 (2004) 9 NZCLC 263,570.
189 [2006] 3 NZLR 225.
190 See also Brain J D Gould “Directors Personal Liability” (1996) NZLJ 437; the writer
concluded that the law should ask "whether the behaviour of directors is appropriately risky
rather than merely asking whether the behaviour is risky."
271