Company Law — Lecture 13

1. Company Law — Lecture 13 • Duty to avoid reckless trading

2. Duty to avoid reckless trading • Overview • Objective of the duty • Who owes the duty? • Elements of the duty • Consequences of breach

3. Duty to avoid reckless trading (cont) • Overview — s 135, Companies Act 1993 • directors have a duty to avoid reckless trading which may result in substantial or serious loss to the company’s creditors • Objective of the duty • protection of creditors • the duty is owed to the company, not to creditors directly • Who owes the duty? • directors (includes de facto and shadow directors)

4. Duty to avoid reckless trading (cont) • Section 135, Companies Act 1993 • Elements • duty is imposed on directors • “director” is defined in s 126 (see Lecture 11) • directors must not • agree to the business of the company being carried out in a manner likely to create a “substantial” risk or “serious” loss to the creditors or • cause or allowthe business to be carried on in a manner likely to create a “substantial” risk or “serious” loss to the creditors

5. Duty to avoid reckless trading (cont) • Section 136 — a complementary section • a director must not agree to the company incurring an obligation unless the director believes at the time that the company will be able to perform the obligation when it is required to do so • the belief must be based on reasonable grounds • The reckless trading test • objective • Nippon Express (NZ) Ltd v Woodward • Fatupaito v Bates • Re Wait Investments Ltd (in liq); McCallum v Webster • Re South Pacific Shipping Ltd (in liq); Traveller v Löwer

6. Case Law • Montfort v Tasman Pacific Airlines of NZ Ltd (2005) • Mason and Melzer as Liquidators of Global Print Strategies Ltd (in liq) v Lewis (2006). Court of Appeal identifies “essential pillars” of section 135 as four fold

7. Duty to avoid reckless trading (cont) • Consequences and remedies for breach of duty • s 169, Companies Act 1993 • see Lecture 16