Solvency (ss135-136)

Question 1

reckless trading section and definition

Answer 1

s135: Directors must not operate the company in a way that gives significant risk/loss to its creditors

Question 2

reckless trading cases

Answer 2

Nippon Express Ltd v Woodward
Faitupaito v Bates

Question 3

duties and relief under s135

Answer 3

owed to the company, creditors can seek relief under s301 for a breach of s135

Question 4

determining legitimacy for reckless trading

Answer 4

Creditor knowledge

Corrective strategies used

Company doesn’t need to cease the moment it becomes insolvent

Whether the conduct of the director was in accordance with orthodox practice

What a reasonable director would’ve done in the relevant circumstances

Question 5

legitimacy case

Answer 5

Mason v Lewis

Question 6

s136 duty

Answer 6

Duties as to incurring of obligations by the company

Question 7

s136 definition and case

Answer 7

director shouldn’t let the company take on obligations unless they reasonably believe the company can meet those obligations when due
(Yan v Mainzeal)

Question 8

s136 2 tests

Answer 8

Subjective element: take into consideration the directors’ beliefs

Objective element: looking at why they believed that, what are the true facts they are being informed by, and who they are being informed by