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assessments on directors‟ conduct. 97 Thus it is ill-founded to assume that because of
their legal background judges will make decisions based on their hindsight. 98
The introduction of an additional duty on directors may also encourage them to take
out insurance policies in order to protect themselves against possible liability. 99 The
utilization of insurance could increase moral hazard because payment will now be
made from the insurance funds and not from the directors‟ personal wealth. 100
Therefore, it could undermine the very purpose of the introduction of additional duty
which is to ensure that the directors‟ action would not prejudice the creditors‟
interests. 101 There is also a possibility that directors will enter into highly risky
projects at the expense of both creditors and shareholders since any liability incurred
will be paid by the insurance company. 102
Another aspect which concerned contractarians is the increased monitoring and
agency costs which would result in less efficient allocation of resources. 103 Directors
would engage in extra monitoring of the decisions made in order to minimize the
risks. 104 Directors will take precautions in order to protect themselves by making
investigations in order to determine whether their action will actuate insolvency. 105
97 Keay “Company Directors” above n82 at 314.
98 Ibid.
99 Vanessa Finch “Personal Accountability and Corporate Control: The Role of Directors‟ and
Officers‟ Liability Insurance” (1994) 57 MLR 880 at 887-892; Halpern, Trebilcock and Turnbull
above n54 at 138-145; Keay “Company Directors” above n82 at 327-328.
100 Ibid.
101 Ibid.
102 Ibid.
103 Keay “Company Directors” above n82 at 315.
104 Ibid.
105 Ibid.
138