The starting point for fashioning a replacement for ss 135, 136 and 300 must be the limited policy rationale for any provision imposing liability on directors who trade while insolvent. Directors should be liable if:
• they have misled a creditor as to the risk involved in dealing with the company, either expressly or by failing to disclose circumstances so far out of the ordinary that they call for remark; and
• their action meets the culpability threshold (dishonesty, negligence etc.) appropriate in the circumstances.
I begin by considering express statements as to the company’s financial position made by a director or other agent. If such a statement is false, the maker will be liable:
• at common law, if it is made fraudulently or negligently. Negligence could be established by absence of reasonable grounds for the statements, including (probably) failure to
30. Hon Justice Tompkins, “Directing the Directors: The Duties of Directors Under the Companies Act 1993” (1994) 2 Waikato Law Review 13.
31. Section 9, which is based on s 52 of the Australian Trade Practices Act 1974 (Cth), provides that “No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.” Section 43 of the Fair Trading Act 1986 confers on the court the power to grant a wide range of relief where a breach of s 9 results in loss or damage, including an award of compensation for that loss or damage.
32. See, for example, Dell v Beasley [1959] NZLR 89 at 95 (common law); Mills v United Building Society [1988] 2 NZLR 392 at 406 (HC), upheld on appeal at 411–13 (Fair Trading Act). The need for actual knowledge under the Fair Trading Act or the statutory misrepresentation regime in the Contractual Remedies Act 1979 is queried by some commentators such as Burrows, Finn and Todd, The Law of Contract in New Zealand (1997) at 313, 329. But in circumstances where there has been no misleading half-truth or prior representation, it seems to me that the most that the other party can reasonably infer from silence is that there is nothing exceptional known to the speaker which makes the transaction almost inevitably doomed.
prepare and take into account the accounting records and financial statements required for every company;
• under s 9 of the Fair Trading Act 1986, without proof of fault of any kind.31
The existence of these comprehensive grounds of liability for express statements means that there is no need to include further liability provisions in the Companies Act. (An argument can be made for limiting liability in negligence, and under the Fair Trading Act. And the inability to contract out of liability under that Act is anomalous, at least so far as commercial transactions are concerned, given the law’s acceptance that liability for negligent misstatement can be excluded by contract. But these are wider issues that require separate consideration.)
What, then, should the position be in relation to non-disclosure? Both at common law and under the Fair Trading Act, the better view is that in the absence of any mislead- ing half-truth or prior representation, liability for failure to warn of adverse factors in connection with a transaction can arise only where there is a duty to speak — and the law imposes such a duty only where:
• the circumstances are so unusual that they call for remark; and
• these matters are actually known to the person who fails to disclose them.32
Moreover, the person who deals with the company must in fact be misled, and must act to his or her detriment as a result.
It is difficult to see any reason for liability for deception in relation to a company’s solvency being stricter, or more extensive, than liability for other forms of deception under the general law. Rather than leaving it to the courts to develop the law in this area, it may well be desirable to set out in the Companies Act the precise scope of this head of liability. But it should be carefully conditioned on the factors described above. The duty would be owed to the person who is misled, not to the company. The measure of loss would be the amount lost by that creditor as a result of the dealing that would not have occurred but for the misrepresentation.
That leaves only the alternative policy argument identified above — that it is more efficient for the default rule to be that directors are liable for excessive risks taken while insolvent or near-insolvent, as the costs of such a rule to the company in terms of higher directors’ fees and more risk-averse directors are less than the additional cost of credit incurred in the absence of such rules. The trigger for liability could be trading on past a
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Directors’ Liability for Trading While Insolvent: A Critical Review of the New Zealand Regime
certain point, or taking “excessive risks”, or some combination of the two. The desirability of such a rule is not self-evident: it is an empirical issue that cannot be answered in the abstract, and which requires more careful scrutiny than legislators in New Zealand have accorded it. Framing such a rule in a way that deters undesirable conduct, but does not deter socially desirable risk-taking or give rise to considerable uncertainty and cost, would be far from simple. If such a rule is adopted, the measure of liability to the company (not to creditors) should be the net losses suffered as a result of trading on, or as a result of taking the proscribed “excessive” risks, rather than the face value of particular debts incurred.
In summary, the existing ss 135, 136 and 300 are as misguided as they are novel. They should be repealed. They should probably be replaced with a provision imposing liability to creditors for culpable non-disclosure, and possibly (depending on further analysis) with an additional provision imposing liability to the company for net losses incurred as a result of trading on after the directors knew (or should have known) that the company was insol- vent, or as a result of taking certain excessive risks in specified financial circumstances. It is not easy to identify a principled basis for any more extensive imposition of liability in this area.
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