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of creditors, and both arguments are based on the economic analysis of efficiency
and fairness. 66 Those supporting the duty argued that creditors are vulnerable, like
shareholders, and require protection from the law. On the other hand, those who are
against the imposition of this duty insisted that such duty is redundant since creditors
can rely on the market and are well able to negotiate favourable terms with the
company. 67
Among the mechanisms available for creditors to safeguard their interests are a)
negotiating favourable terms in the contracts; b) insisting on guarantee or security,
and c) other self help mechanisms.
a) negotiating favourable terms in the contracts
Creditors can protect themselves by negotiating with the company and because they
have better access to information, they will be able to gauge the risks entailed. Hence
they can adjust the interest rate so that lending is proportionate to risks incurred. Any
changes in the company will be of importance to creditors and they can include in
the contacts restrictions on the company‟s activities to ensure the availability of the
assets in the event of winding up. 68 Creditors can also include in the contracts a
requirement for the company to furnish them with frequent financial information. 69
Creditors are also aware of the possibility of directors increasing the level of
riskiness after the contract has been made and will prepare against such occurrence
by adjusting the interest rate. 70
66 See; Vanessa Finch “The Measures of Insolvency law” (1997) 17 OJLS 227 [“Measures”]; Roy
Goode “Is the Law too Favourable to Secured Creditors? (1983-1984) Can. Bus LJ 53; Rizwaan
Mokal “On Fairness and Efficiency” (2003) 66 MLR.
67 See David Wishart “Models and Theories of Directors‟ Duties to Creditors” (1999) 14 NZULR 323.
68 Halpern, Trebilcock and Turnbull above n54 at135.
69 Ibid.
70 Ibid.
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