The Supreme Court has clarified the basis for assessing losses suffered by creditors when directors are found to have allowed a company to trade when insolvent.

The measurement of damages differs depending on which duty the directors breached.

Breaches of s135 of the Companies Act (carrying on the business in a manner likely to create a substantial risk of serious loss to creditors) are assessed as the difference between the company’s position when it became insolvent and its position at liquidation.  The Court held that there was no proved difference in the position and the losses were therefore nil.

Breaches of s136 (allowing the company to incur obligations to creditors when the directors did not believe on reasonable grounds that the company could meet those obligations) are assessed based on new debt incurred following being insolvent.  The Court assessed the liability for new debt at $39.8 million.  The Court assessed one director liable for the full amount and the other directors individually liable for $6.6 million each.

The Court held that the directors could not reasonably rely on promises of support from other companies that were not legally binding and/or those companies were not in a position to honour.  This meant the directors could not believe the company could honour its new obligation as they fell due.

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