Analysis of of section 135 of the New Zealand Companies Act 1993
The requirements of section 135 of the Companies Act 1993 that a company should not be carried in such a way as to create substantial risks of serious loss to a company’s creditors has been criticized as virtually imposing a warranty of solvency. Additionally, the taking of substantial business risks is a necessary part of business and there will be many circumstances in which directors who take such risks are not fairly open to criticism if the risks later crystallise1. A literal approach on the plain words of s 135 therefore would, on their face, potentially cover conduct which might fall short of recklessness. Nevertheless, in interpreting this section, the Courts have made it clear that a breach of s 135 requires an element of illegitimate risk taking. This has been discussed comprehensively in the case of Jordan and Vance v O’Sullivan and Ors,2 where Clifford J added his support to William Young J’s approach in applying s 135 so as to create distinction between legitimate and illegitimate risk taking activity and not following the alternative view of those who felt compelled to construe s 135 in a literal manner.3
In this case, the plaintiffs were liquidators of Condrens Parking Limited (CPL), which was a company engaged in the supply of parking services in Wellington and Auckland. Four of the defendants were at various times the directors of CPL. The fifth defendant was a company (Parking New Zealand Limited) of which Mr O'Sullivan (one of the directors) was at all material times the sole director and shareholder. CPL went into receivership and subsequent liquidation at the request of its largest creditor and CPL’s liquidators claimed that the directors have breached their duties on the basic legal proposition that where a company is, or is near to being, insolvent, the duties that the directors owe to that company require them to consider the interests of the company’s creditors. Two aspects of the case have been brought to the Court by the plaintiffs.
In this case, the plaintiffs were liquidators of Condrens Parking Limited (CPL), which was a company engaged in the supply of parking services in Wellington and Auckland. Four of the defendants were at various times the directors of CPL. The fifth defendant was a company (Parking New Zealand Limited) of which Mr O'Sullivan (one of the directors) was at all material times the sole director and shareholder. CPL went into receivership and subsequent liquidation at the request of its largest creditor and CPL’s liquidators claimed that the directors have breached their duties on the basic legal proposition that where a company is, or is near to being, insolvent, the duties that the directors owe to that company require them to consider the interests of the company’s creditors. Two aspects of the case have been brought to the Court by the plaintiffs.