View/Open - Research Commons - The University of Waikato

situation, directors have a duty to ensure that the property of the company is
sufficient to meet its obligation to the creditors. The rationale for imposing a duty to
the company and to creditors is to ensure that the affairs of the company are properly
administered and that its property is not dissipated or exploited for the benefit of the
directors themselves to the prejudice of the creditors.
From the speech of Lord Templeman in the case, it seems that a director has a duty
to ensure the company must ensure at all time that it has enough assets to pay
creditors. This duty has been suggested to be either merely reiterating the capital
maintenance principle enunciated in Re Exchange Banking Company 62 (Flitcroft’s
case), or extending the said principle to a duty to guarantee the solvency of a
company. 63
Likewise, Street J in Kinsela v Russell Kinsela Pty Ltd 64 recognised creditors‟
interests when the company is insolvent and that any breach by directors in such
circumstances could not be ratified by shareholders. 65 Nevertheless, the judge did not
devise any test to determine the extent of the degree of financial instability which
would trigger the duty. This question was answered and deliberated further in
Nicholson v Permakraft (N.Z.) Ltd. 66 Cooke J in his judgment 67 held that directors
owed a duty to the company, but if the company is insolvent, near insolvent or of
62 (1882) 21 Ch D 519.
63 See comments made by Professor Farrar in John Farrar “The Responsibility of Directors and
Shareholders for a Company‟s Debts” (1989) 4 Cant. LR 12 at 14; and also Irene Trethowan in
“Directors‟ Personal Liability to Creditors for a Company Debts” (1992) 20 ABLR 41 at 46.
64 (1986) 10 ACLR 395; (1986) 4 ACLC 215 at 223.
65 See also Re Horsley & Weight Ltd [1982] 1 Ch 442; Re DKG Contractors Ltd [1990] BCC 903;
where the court held that shareholders could not ratify the breach in cases where the company is
insolvent and they would clearly benefit at the expense of creditors.
66 [1985] 1 NZLR 243.
67 [1985] 1 NZLR 243 at 249-250.
85