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CHAPTER 9 THE COMMON LAW DUTIES OF DIRECTORS TOWARD
9.1 Introduction
CREDITORS
As discussed in the previous chapters, the principle of separate legal entity resulted
in the company and shareholders being considered as two distinct personalities. This
means, there is separation of ownership and management where ownership lies with
the shareholders, while the board of directors manages on behalf of the company.
The shareholders were seen as the watchdogs who supervise and control the
directors‟ actions, in addition to the control provided by the market. Later, the
ownership of shares in listed companies began to disperse and the control they
exercised over the board of directors waned. In this respect, market control alone is
not sufficient because the theory that the market will provide adequate control over
directors will only work in an ideal situation. As a result of this, directors have free
rein over the management of the company and there is opportunity for them to shirk
their duty.
This chapter will investigate the legal response to this problem both under the
common law and the statutory provisions. However, the arguments will concentrate
on directors‟ duties in relation to protection of creditors only. The thesis will explore
the extent to which the law on directors‟ duties can be used to protect creditors either
directly or indirectly. Since creditors‟ interests become paramount when the
company is insolvent, attention will be focused on this aspect.
Since this chapter will focus on two main players, the directors and the creditors, the
first section will consider definitions of both directors and creditors. The second
section will examine the legal aspects of directors‟ duties in relation to creditors‟
protection. It will discuss how this duty can be improved so as to provide better
protection to creditors, particularly in an insolvent company.
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