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4.3.3 Development of Insolvency Legislation
Studies have cited mismanagement and incompetence as major causes and fraud only
encompasses small percentage of companies‟ failures. 177 The law must, therefore,
respond to reflect this and duty should not be imposed solely on a director‟s intention
but to cover situations where the director is merely negligent or incompetent. The
Cork Committee had highlighted the same and recommended that the law should be
amended to provide for civil liability for directors who committed wrongful trading,
this was adopted in the Insolvency Act 1986. 178 In addition, the law has to set a
standard of care in which a director has to adhere to in performing his or her duty.
The setting of standard of care is essential in order to ensure the director has the
competency required. 179 The current trend in the law is on rehabilitation of the
company and not merely focusing on punishing directors. However, in imposing
liability on a director, apart from punishing him or her, it is also essential for the law
to provide for compensation for creditors.
The legislative history of companies‟ winding up in the UK began from the passing
of a statute in 1844 named An Act for facilitating the winding up the affairs of Joint
Stock Companies unable to meet their Pecuniary Engagements. 180 The 1844 Act was
supplemented by an Act in 1848 which was later amended in 1849. When the two
Acts were passed, it was the period of great depression and there were many
bankruptcies; hence there were concerns about dissolutions and winding-ups. 181 As
such, the Acts were designed to facilitate companies in their winding up process. The
177 Farrar and Hannigan above n7 at 622-623.
178 Cork Report above n74 at [1776] – [1780].
179 Discussion in the later chapters of the thesis - see Chapter 9 and Chapter 10.
180 The objectives of this Act were stated in its preamble as "to make better provision for discovery of
the abuses that may have attended the formation or management of the affairs of any such
companies or bodies and for ascertaining the causes of their failure." See Formoy above n32 at
73.
181 Cooke above n9 at 152.
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