IT is a defence to an insolvent trading claim that "on the basis of illness or some other good reason", the particular director did not take part in the management of the company at the time of insolvent trading.
The recent case of Deputy Commissioner of Taxation v Clark considered an appeal against a decision in which the court had allowed the ‘some other good reason’ defence where a wife had been told by her husband that her appointment was a mere formality to make up the number of required directors.
The judge, at first instance, relied upon the reasoning from the guarantee cases that (in the right circumstances) a bank’s enforcement of a personal guarantee provided by a wife for her husband’s business would be unconscionable because of the relationship of ‘trust and confidence’ between the spouses.
The appeal court overturned the trial judge’s ruling and found that:
p The words ‘good reason’ were not to include reasons that caused a director never to participate in management of the company such as complete reliance by a wife on her husband; and
p The total abdication of the duties of a director in reliance on the conduct of a spouse was inconsistent with the duties imposed upon directors by statute and case law.
It is clear from this case that only episodes of non-involvement in the management of the company by a director, rather than a complete non-involvement, may be used in such defences.
Alison Robertson, partner
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