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4.4 Development of Directors’ Duties in an Insolvency Situation
4.4.1 Introduction
The doctrine of limited liability allows the shareholders to limit their liability to the
amount of unpaid shares. This doctrine was introduced by the Limited Liability Act
1855, and at the time, opinion was divided as to the expediency of allowing this
privilege to companies. One of the implications of limited liability is that
shareholders are no longer subjected to situations where creditors could claim their
personal wealth to satisfy the company‟s debts. They are also in the position to know
the extent of their liability and this will encourage members of the public to invest in
the company.
Nevertheless, limited liability also provides opportunity to unscrupulous directors to
take advantage of the situation by exposing the company to risks of failure because
they will not be personally liable for such failure. A company‟s failure may have
adverse effects on many parties such as the company, shareholders, creditors,
employees and members of the public. The law has always been sympathetic and
lenient towards directors by imposing a low standard of prudence, care and skills. 217
Various Law Commissions Reports concluded that the inadequacy of the law on
directors‟ liability in incurring debts of the company was either because no specific
section was available or if there was, it was difficult to enforce. 218 Hence,
recommendations were made to introduce new direct provisions or to amend the law
in order to improve any existing shortcomings. In doing so, care must be taken to
ensure the law must not impose too many restrictions on directors to use their skills
217 Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. Per Romer J at 428 “A director need not
exhibit in the performance of his duties a greater degree of skill than may reasonably expected
from a person of his knowledge and experience.”
218 Cork Report n 74 above at[1776]; ALRC R45 above n95 at [278-279].
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