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The Court said the following factors were relevant: These factors were considered by the High Court in Cellar House Limited (in Liquidation), Re; Walker v Allen (Nelson CP13-00, 18 March 2004) in finding the director liable for reckless trading (among other breaches of duty) and therefore personally responsible for the debts of the company.
Judgment was entered against the director for ,750,000.
The "legitimacy" test, used to determine director's culpability, was also supported by the High Court in Mountford v Tasman Pacific Airlines of NZ Limited (2005) 9 NZCLC 263,864.
These decisions have no doubt given liquidators and creditors confidence that where directors are reckless the courts will hold them personally liable for the company's debts.
However, the recent cases draw a distinction between legitimate and illegitimate risks in business, and confirm that only the taking of illegitimate business risks warrants a finding of reckless trading.
There are some peripheral points to note: The Court of Appeal case referred to is Lwer v Traveller & Another (2005) 9NZCLC 263,889.
The Court of Appeal has recently upheld a High Court decision which found a director liable for reckless trading and personally responsible for the debts and liabilities of the company to the tune of ,400,000 plus interest from the date of liquidation of the company, not including his liability to related party creditors.
The best guidelines for determining whether or not the actions taken by the director were legitimate or illegitimate business risks were set down by the High Court (in South Pacific Shipping Limited (in Liquidation), Re; Traveller & Anor v Lwer (2004) 9 NZCLC 263,570).
All directors need to be aware of the statutory duty they owe to the company not to trade recklessly and of their potential personal liability for the debts of the company if they do so.
There are now several recent cases where the Courts have taken a hard line against directors.
However, directors can take some comfort in the finding that the taking of legitimate business risks is not reckless. In the two cases decided after South Pacific Shipping and Walker v Allen the Courts have found in favour of the director.
In that case, the Court of Appeal dismissed the director's appeal against the factual finding by the High Court that the director had taken illegitimate business risks in conducting the business of South Pacific Shipping Limited.The Court of Appeal concluded that the company's circumstances, considered objectively, warranted the shutting down of business, and not the taking of further extensive risks.