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and judgment to run the company. 219 It is essential that the law recognise the running
of businesses involves risks and allows directors freedom to decide as they deem
fit. 220 Therefore, the law should only intervene in circumstances where directors‟
decisions entail immense risks and result in companies‟ failures. 221
4.4.2 Directors’ Duties and Insolvent Companies
Since the introduction of the first insolvency legislation, there were concerns over
abuses or fraud administered to the company and whether one of the causes of the
company‟s failure could be traced to it. Hence, the early legislation was designed not
only to provide for winding up of the insolvent companies but also to address the
issue of fraud. This has since been repealed and amended by inserting new
provisions relating to fraud as and when new frauds emerged which injured the
company, shareholders and members of the public. 222 Frauds against the company
were often committed by those who were involved in the management of the
company such as directors, thus it is important for the law to be able to address this
situation.
In imposing duties on directors, there must be a balance between the rights of the
directors to manage the company and the rights of other parties involved in the
company such as the shareholders, creditors and members of the public. The
common law, therefore, imposes fiduciary duties on directors to act bona fide in the
interest of the company. This is to ensure that directors adhere to the minimum
standard of behaviour, failure to do so will subject them to penalties. The test used
by the court to measure whether the director has adhered to the minimum standard is
a subjective test, in which case the director generally will be able to get away as long
219 Cork Report n 74 above at [1805].
220 NZLC R9 above n49 at [516].
221 Ibid.
222 Holdsworth A History above n147 at 60.
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