View/Open - Research Commons - The University of Waikato

of law of contract. The court must also focus, when interpreting, on the conduct
and choice of the alleged insolvent company. 235
10.5.2.3 Insolvency
The test of insolvency is provided under section 95A of the Corporations Act
2001 and is defined as the company‟s inability to pay its debt when it becomes
due.
10.5.2.4 Reasonable Grounds to Suspect Insolvency
Before a director can be held personally liable under the Act, it must be shown
that there are reasonable grounds for directors to suspect that the company is
insolvent at the time the debt is incurred or will become so as a result of incurring
such debt. The word reasonable in the section shows that the test is objective and
the director is judged by the standard appropriate to a director or manager of
ordinary competence. 236
It has been suggested that in order to establish what is tantamount to „reasonable
grounds to suspect,‟ the court should look at all the circumstances, and cases have
indicated the court‟s tendency to look at the commercial reality of the company‟s
financial status. 237 The decisions are also consistent with the UK and the New
Zealand approach as discussed above. One important change made to section
588G is the usage of the word „suspect‟ instead of „expect‟ as in the previous
section 556 which indicates a lower standard. 238 In Dunn v Shapowloff, 239 the
court held that „expectation‟ within the meaning of the section goes beyond a
235 See also Hawkins v Bank of China (1992) 7 ACSR 349; Metropolitan Fire Services Pty Ltd v
Miller (1997) 23 ACSR 609 at 704; see also judgement by Kitto J in Queensland Bacon Pty
Ltd v Rees (1965) 115 CLR 266 at 301.
236 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371.
237 Coburn above n229 at 99; 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371; Metropolitan
Fire Services Pty Ltd v Miller (1997) 23 ACSR 609.
238 Coburn above n229 at 100.
239 [1978] 3 ACLR 775 at 789-790. see also 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371
283