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company to incur debt 246 and when he caused the company to carry on its business in a reckless manner. 247 The court applied the civil standard in cases under section 320. 248 The realisation that company law urgently needed reform was triggered by the share market crash in 1987. 249 The commission suggested that the reckless trading provision in section 320(1)(b) be reformed because the provision hindered the company‟s ability to venture into risky business. 250 Business often involved an element of risk and investing in risky undertakings does not necessarily mean that the director is trading in a reckless manner. A high risk investment normally generates a high return if successful and the company may benefit from this endeavour. The commission acknowledged that companies should be allowed, to a certain extent, to undertake risky investments as long as the company is not exposed to unreasonable risk of insolvency. 251 The Law Commission proposed that section 320 of the Companies Act 1955 be amended to reflect the view that high risk-taking can be reasonable and therefore should be allowed as long as it does not expose the company to the risk of insolvency. 252 The proposal, however, was not taken up by the legislature who 246 Section 320(1) (a) of the New Zealand Companies Act 1955. 247 Section 320(1) (b) of the New Zealand Companies Act 1955. 248 Re Wait Investments Ltd (In Liquidation) [1997] 3 NZLR 96 (HC) at 103; Vinyl Processors (New Zealand) Ltd v Cant [1991] 2 NZLR 416 (HC) at 420; Re Petherick Exclusive Fashion Ltd (In liq) (1986) 3 NZCLC 99,946 (HC); Thompson v Innes (1985) 2 NZCLC 99,463 (HC). 249 NZLC R9 above n49 at [43]. 250 Ibid, at [516]. 251 Ibid. 252 Section 105(1) of the New Zealand Law Commission Draft Companies Act proposed by the commission reads "A director of a company must not agree to the company entering into a contract or arrangement or acting in any other manner unless he or she believes at that time on reasonable grounds that the act concerned does not involve an unreasonable risk of causing the company to fail to satisfy the solvency test"- NZLC R9 above n49 at [516]. 68
instead, enacted section 135 253 in the Companies Act 1993. Section 135 prevents directors from agreeing, causing or allowing a company to carry on business which is likely to create substantial risks of serious loss. The said section applies equally to both solvent and insolvent companies and the effect of such is a high probability that the shareholders or creditors will use the section to restrain the company from engaging in risky investments in the first place. 254 Another provision proposed by the commission was adopted in section 136 of the Companies Act 1993. These two sections have been incorporated into the director‟s duties provision and not into the insolvency provisions as suggested. Fraudulent trading remains in the 1993 Act under the offences and penalties provisions. 255 4.4.3 Directors and Disqualification In addition to imposing personal liability on directors to contribute to compensating the loss incurred by creditors in insolvency, there is also a great concern over the inability of the law to curb directors who have been found responsible for the company‟s insolvency from being directors in another company. 256 The concept of disqualifying directors was first established in the Companies Act 1929 and the disqualification was made on the basis of the director‟s status as a bankrupt. The provision that a bankrupt person is disqualified from becoming a director was 253 Section 135 of the New Zealand Companies Act 1993 provides: " A director of a company must nota) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company‟s creditors: or b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company‟s creditors. 254 See discussion by Justice Sian Elias, „Company Law After Ten Years of Reform‟ in The Company Law Conference of the New Zealand Law Society (1997) at [9-10.1]. 255 Section 380 of the Companies Act 1993. 256 Cork Report n 74 above at[1813]. 69
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http://researchcommons.waikato.ac.n
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ABSTRACT This study examines the le
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TABLE OF CONTENTS ABSTRACT i ACNOWL
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CHAPTER 5 THEORY OF THE CORPORATION
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7.3.3.3 Distribute its Capital to M
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10.2.5.1 Meaning of Insolvency 10.2
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10.6.2.2 Carrying on of any Busines
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CHAPTER 12 CONCLUSION AND RECOMMEND
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CLC Australian Company Law Cases CL
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Stanford LR Stanford Law Review Ste
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Facia Footwear Ltd (in administrati
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Re Avon Chambers Ltd [1978] 2 NZLR
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Re Produce Marketing Consortium Ltd
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Ultraframe (UK) v Fielding & Ors [2
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Mountford v Tasman Pacific Airlines
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Australia 3M Australia Pty Ltd v Ke
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Linton v Telnet Pty Ltd (1999) 30 A
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Malaysia Abdul Aziz bin Atan v Lada
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Perman Sdn Bhd & Ors v European Com
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Other Jurisdictions Singapore Rahj
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Companies Act 2006 Section 60(3)(c)
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Section 993 Section 993(2) Section
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Insolvency Act 1985 37, 70 Insolven
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Section 251 255 Part II Schedule 6
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Section 52(1) Section 52(2) Section
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Section 272(2) Section 272(2)(a) Se
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Section 385(4)(b) Section 385(4)(b)
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AUSTRALIA Absent Debtors Act (NSW)
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Section 206D(1)(b)(b)(ii) 374 secti
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Section 588FE(2)(a) Section 588FE(2
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section 588H (5) 241 Section 588H(6
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Section 598(3)(b) Section 598(3)(c)
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Bankruptcy Act 1967 MALAYSIA Sectio
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Section 130A(6) 391 Section 131 221
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Companies Regulation 1966 Regulatio
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CHAPTER 1 THE STRUCTURE OF THE THES
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A discussion of directors’ duties
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The far-reaching implication of cor
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2.2.1 The United Kingdom The common
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2.2.3 Australia Australia has been
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CHAPTER 3 LITERATURE SURVEY - AN OV
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shareholders, had failed to mitigat
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was mainly responsible for the chal
Page 87 and 88: 3.3 Interests in the Company-Shareh
Page 89 and 90: contributed by the shareholders and
Page 91 and 92: Statutes have attempted to address
Page 93 and 94: how the matter should be dealt with
Page 95 and 96: 4.2 Development of Corporate and In
Page 97 and 98: colonies. 14 The emergence of compa
Page 99 and 100: originally incorporated in order to
Page 101 and 102: usiness fraud. 42 In 1825, the Bubb
Page 103 and 104: Companies Act also reveals providin
Page 105 and 106: Companies Ordinance 1953 of Sabah a
Page 107 and 108: In 1977, the Cork Committee was app
Page 109 and 110: the Committee foresaw difficulty du
Page 111 and 112: operation and termination of a comp
Page 113 and 114: enforceability of security interest
Page 115 and 116: procedure, and dispensed with the o
Page 117 and 118: The creditors‟ protection princip
Page 119 and 120: shareholders and on personal bankru
Page 121 and 122: directors as trustees. 162 Members
Page 123 and 124: 4.3.3 Development of Insolvency Leg
Page 125 and 126: In Australia, the government respon
Page 127 and 128: appointment of an administrative re
Page 129 and 130: the current statutes were not effic
Page 131 and 132: insist on protection to directors i
Page 133 and 134: and judgment to run the company. 21
Page 135 and 136: due to the difficulty in obtaining
Page 137: The Australian Law Commission in 19
Page 141 and 142: 4.5 Conclusion Malaysia, New Zealan
Page 143 and 144: CHAPTER 5: THE THEORY OF THE CORPOR
Page 145 and 146: needs someone to run it on its beha
Page 147 and 148: The implication of the decision is
Page 149 and 150: English decisions as guidance and t
Page 151 and 152: Shareholders who have to incur high
Page 153 and 154: interests of shareholders by maximi
Page 155 and 156: situation, directors have a duty to
Page 157 and 158: concluded purchasing goods from thi
Page 159 and 160: stipulates directors “may conside
Page 161 and 162: subsidiary and may continue to pros
Page 163 and 164: A holding company may use a subsidi
Page 165 and 166: section 187 of the Australian Corpo
Page 167 and 168: its holding company), act in a mann
Page 169 and 170: is just and equitable, to make an o
Page 171 and 172: Syndicates (NZ) Limited (in liq) 13
Page 173 and 174: a) Extent to which the Related Comp
Page 175 and 176: That the management did not differe
Page 177 and 178: equirement of insolvency and it doe
Page 179 and 180: The House of Lords in Woolfson v St
Page 181 and 182: subsidiary. Abdul Malik J held that
Page 183 and 184: defendant company. During a meeting
Page 185 and 186: Uniphoenix Corporation Bhd v Raymon
Page 187 and 188: justice alone is not sufficient; th
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lenders, employees, suppliers and c
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company and as the residual claiman
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The claim that shareholders‟ righ
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particularly lack of effective mana
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management of the companies. Credit
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players‟ interests intertwine wit
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important for directors to build lo
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Despite having included favourable
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at the intersection of a number of
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Directors must weigh any particular
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Directors will also enlist the serv
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Contractarians regard employees in
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terms to their liking, they either
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to boycott the company. 134 The com
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On the other hand, the duty owed to
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and experiences in order to dischar
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CHAPTER 7: A CONCEPTUAL ANALYSIS OF
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Economists divided real capital whi
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the transformation of shares as rea
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the company‟s ability to pay its
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purchase or will not become insolve
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available where special resolution
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The idea that maintaining share cap
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must be satisfied by the company in
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7.4 Conclusion The doctrine of capi
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and once a resolution is passed, to
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The term 'insolvency' has also long
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equivalent to medical negligence ca
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meaning of inability to pay debts.
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It is important to distinguish as t
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long as the accounts give true and
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current assets must be taken stock
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cases the presumption of insolvency
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It is interesting to note in reachi
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CHAPTER 9 THE COMMON LAW DUTIES OF
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Voluntary creditors can be divided
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are not personally liable for any l
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confidence, a trustee who has been
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interests of various parties in the
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overriding duty is to the sharehold
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to look at the directors‟ purpose
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9.3.3 Duty not to Fetter Discretion
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The decisions of the Federal Court
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case, directors should disclose the
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misconception that the case law and
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other reference as to the developme
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Australia and Malaysia have express
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out “ ...the judgment is in the b
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the prospect of success as well as
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judge adopted the principle of iden
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individual trading through a compan
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liability can be imposed on them wh
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liquidators when it is insolvent. C
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CHAPTER 10 DIRECTORS’ DUTY TO PRE
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Malaysia did not make any changes o
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interpretation of these provisions.
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sum of money that is owed or due.
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Hence, action can be brought agains
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Directors in Australia can be held
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to the director to prove that he or
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expect that the company was solvent
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In the case of Secretary of State f
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trading at a deficit. 64 In other w
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maintained in section 213 of the In
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not „a party‟ if he knew that m
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econcile the two judgments with one
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carrying it on (whether because of
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10.3.1.3 For any other Fraudulent P
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company. In this aspect, section 21
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to Australia and New Zealand which
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even though it was evident from the
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the steps taken were with the aim o
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decisions. 150 Therefore, directors
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The Law Commission proposed that th
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to reform the law, namely to reduce
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A similar issue was raised in the E
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The decision was later upheld by th
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10.4.3 Duty in relation Obligation
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fraudulent purpose.” 201 Although
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from the carrying on of the busines
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The first civil version of the inso
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amounts. 223 In Hussein v Good, 224
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of law of contract. The court must
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defendant. 244 Therefore, a directo
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additional capital, as well as a re
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trading without any other action ta
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Another defect of the section is in
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argue that there are reasonable gro
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10.6.2 Responsibility for Fraudulen
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Siow Yoon Keong v H Rosen Engineeri
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The courts have acknowledged that t
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The defendant in the case relying o
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To date, there have been few cases
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ability of the company to pay off i
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can be disqualified from taking par
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power to do so is an archaic equita
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is for a short period of time. This
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ights against the company are froze
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involves a situation where the comp
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11.2.3 Winding-up Liquidation is a
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11.2.3.1 Effects of Successful Avoi
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transactions, 59 the provisions cle
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11.2.3.1.2 Recovery from Third Part
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ecover the proceeds of sale or to p
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order. 83 If the value of the asset
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Without this class action, the unse
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the power to apply for a compensati
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defraud, which implies their culpab
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also be enforced by the company. 11
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The court has the power if it think
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contravention or pecuniary penalty
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discretion to order the director‘
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Marketing Consortium (No 2) 147 cle
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discovered that the director had en
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compensatory. 163 Damages are asses
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of causation similar to torts in as
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ecause the court considered that it
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It should be noted that Re Cyona Di
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11.3.7.2.3 Duration The court also
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contribution order is made to the
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This is similar to the case of frau
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company is using funds belonging to
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Since section 304(1) originates fro
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11.3.8.2 Problems of Enforcement/Pr
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However, extracting promise of inde
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In relation to an action against a
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Investments Commission is entitled
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The position in Australia has clear
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Disqualification on the grounds of
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As a result of the recommendations
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exercised by the Registrar or the O
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actions which are committed with a
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The court has to deduce evidence of
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11.4.2.1 Standard of Proof Disquali
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11.4.2.2 Court’s Order Section 6
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of disqualification. 322 However, t
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mitigating factors considered by th
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11.5 Other Remedies 11.5.1 Mareva I
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for under the Act. 348 The action p
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of trust or breach of duty in relat
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CHAPTER 12 CONCLUSION AND RECOMMEND
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The separate legal personality conc
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deemed to be an alien concept to Br
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positive action to minimize losses
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insolvent. In Malaysia, there is no
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BIBLIOGRAPHY BOOKS and ARTICLES AHM
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BENNETT, Howard, 'Late Floating Cha
Page 483 and 484:
COBURN, Niall F, 'Insolvent Trading
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http://ssrn.com/abstract=988944 at
Page 487 and 488:
FISHER, Gregory, LEE , Janet and JO
Page 489 and 490:
GUNASEKARA, Gehan and TOY, Alan, 'L
Page 491 and 492:
HOPT, Klaus J., 'Comparative Compan
Page 493 and 494:
KEAY, Andrew and Murray, Michael, '
Page 495 and 496:
McCHESNEY, Fred S., 'Economics, Law
Page 497 and 498:
OTTOLENGHI, S, 'From Peeping Behind
Page 499 and 500:
ROSS, Mike, Corporate Reconstructio
Page 501 and 502:
SCHWARTZ, Alan, ‗A Normative Theo
Page 503 and 504:
WALTERS, Adrian, 'Void Dispositions
Page 505 and 506:
WORTHINGTON, Sarah, 'Subrogation Cl
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REPLIES TO EXAMINERS APPENDIX 1 Pag
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Page 220-it is asserted that direct
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What are the criteria for determini
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addition it provides incentive for
Page 515 and 516:
See also Secretary of State for Tra
Page 517 and 518:
Most jurisdictions in Australia hav
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