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lenders, employees, suppliers and customers. 5 The theory known as nexus of contract
perceived company as a legal device to facilitate contracting between these groups
though the director‟s duty to shareholders remains. 6 Each group contracts with the
company and is allowed to set terms on which it is prepared to supply the firm‟s
input and it will be remunerated for so doing. 7
Creditors‟ interests in the corporation take the form of repayment on time of a loan
or for goods supplied. As long as the company has sufficient funds to pay, creditors
normally are not concerned with the ways businesses are conducted. The interests of
both shareholders and creditors are said to be in the same direction. However, when
the company is insolvent, the measurement of pain increases because of the
possibility of non-payment of debts.
Shareholders may try to advance their interests to maximise profits and pressurise
the management to pursue risky investments or to withdraw assets from the
company. 8 Creditors, on the other hand, want the management to avoid these types
of investment for which there are no guarantees of success, thus increasing their
chances of not getting paid. 9 In this situation, creditors become the residual claimants
since the shareholders‟ conduct has exposed them to unanticipated risks, i.e. risks not
5 Gavin Kelly and John Parkinson “The Conceptual Foundations of the Company: A Pluralist
Approach” in John Parkinson, Andrew Gamble and Gavin Kelly (Eds) The Political Economy of the
Company (Hart Publishing, Oxford and Portland (Oregon), 2000) 113 at 115-116.
6 Ibid.
7 Ibid.
8 Brian Cheffins Company Law: Theory, Structure and Operation (Clarendon Press, Oxford, 1997) at
78-79.
9 Ibid, at 79.
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