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espect of risks foreseeable by them. Creditors who have, for example, extended
credit to the company after knowing its precarious financial position should not
be allowed to rely on the reckless trading because they, themselves, have
consented to the risk-taking. In such a situation, creditors should protect
themselves against such risk by arranging for security.
The standard to determine whether section 135 has been breached is objective. 191
The Court of Appeal in Mason v Lewis 192 confirms the approach taken in the
earlier case which stated that it was not the Parliament‟s intention to inject an
element of subjectivity in the section or else it could have used, for instance,
words such as „knowingly cause or allow…‟ 193
10.4.2.2 Defences
Section 135 and section 136 do not have specific defences which a director can
rely on to exonerate himself or herself from liability. However, in respect of
section 135, it is a defence for a director if he can prove to the satisfaction of the
court that the risks he has taken are legitimate and not substantial. 194
A director can also argue in his defence that the creditors knew of the risk he or
she was about to take and consented to it. 195 For example, creditors who have
extended credit to the company after knowing of its deteriorating state should not
be allowed to use section 135 to their advantage if the venture fails to bring the
company out of its current situation.
191 Fatupaito v Bates [2001] 3 NZLR 386.
192 [2006] 3 NZLR 225.
193 [2006] 3 NZLR 225 at 234.
194 Re South Pacific Shipping Ltd (in liq); Traveller v Lower (2004) 9 NZCLC 263,570.
195 Ibid.
272