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In the beginning, Australia adopted the UK model of fraudulent trading provisions in its legislation but later departed from this position and now has its own provision to combat the problem. In 1961, the Uniform Companies legislation introduced a new criminal liability in regard to the officer of the company who was “a party to the incurring of a debt by the company without any reasonable expectation that the debt could be paid.” 7 Later, civil liability in relation to the same circumstances was introduced. 8 This liability was later enacted in the Malaysian and New Zealand legislation. While New Zealand has since amended its laws to the existing provisions in its Companies Act 1993, the old law still survives in the Malaysian Companies Act 1965. Australia too has amended its statute and the current position is now in section 588G of the Corporations Act 2001. Like Australia, New Zealand had fraudulent trading provisions which are similar to section 332 of the UK Companies Act 1948. In 1980, two new provisions were inserted under section 320 Companies Act 1955 to make directors personally liable. 9 The first provision, was similar to the Australian section in the Uniform Act 1961, namely “where any person was while an officer of the company knowingly a party to the contracting of a debt by the company and did not, at the time the debt was contracted, honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (including future and contingent debts).” Another provision included was “where any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner.” Due to some deficiencies, the Law Commission in 1989 proposed changes and, as a result, the current reckless trading under section 135 was enacted. 7 Australia Law Reform Commission, General Insolvency Inquiry Report (ALRC R45 Vol 1 1988) at [278] at 25 January 2008. 8 Ibid. 9 John Farrar and Mark Russell Company Law and Securities Regulation in New Zealand (Butterworths, Wellington 1985) at 453-454. 226
Malaysia did not make any changes on this area and still retains the fraudulent trading provision which is a replica of the UK Companies Act 1948. It also maintains the insolvency provision adopted from Australia. The Malaysian Corporate Law Reform Committee (CLRC) had the opportunity to make changes in 2004 but did not propose any amendments to the section. Also, the circumstances as to when directors are held to be personally liable are different in each jurisdiction. It should be noted that the legislation started by imposing criminal liability with the main focus of punishing the person responsible. In the succeeding period, the focus shifted to compensating those who suffered losses, particularly the creditors who are most affected by the directors‟ action. This change indicates the recognition that other parties in the company also require protection from the company. The first section of this chapter will provide comparative analyses of the three systems, particularly of the elements to be proven in proceedings against directors. Issues on remedies and the consequences of breaching the sections will be examined in the next chapter. The section will look at each jurisdiction in detail and see how the courts interpret the sections. The last section will explore the Malaysian law in respect of the duty to prevent insolvent trading, and make suggestions whenever necessary. 10.2 Comparative Aspects Directors can be subjected to personal liability if they fail to prevent the company from engaging in insolvent trading. In the UK, the provision which imposes such an obligation on directors is known as „wrongful‟ trading, 10 „reckless‟ trading 11 (in New Zealand), and „insolvent‟ trading 12 (in Australia). The three provisions generally impose a duty on directors to prevent companies from engaging in business activities when the company is insolvent, although the elements which trigger off such a duty differ from one another. 10 Section 214 of the UK Insolvency Act 1986. 11 Section 135 of the New Zealand Companies Act 1993. 12 Section 588G of the Australian Corporations Act 2001. 227
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http://researchcommons.waikato.ac.n
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ABSTRACT This study examines the le
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TABLE OF CONTENTS ABSTRACT i ACNOWL
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CHAPTER 5 THEORY OF THE CORPORATION
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7.3.3.3 Distribute its Capital to M
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10.2.5.1 Meaning of Insolvency 10.2
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10.6.2.2 Carrying on of any Busines
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CHAPTER 12 CONCLUSION AND RECOMMEND
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CLC Australian Company Law Cases CL
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Stanford LR Stanford Law Review Ste
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Facia Footwear Ltd (in administrati
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Re Avon Chambers Ltd [1978] 2 NZLR
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Re Produce Marketing Consortium Ltd
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Ultraframe (UK) v Fielding & Ors [2
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Mountford v Tasman Pacific Airlines
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Australia 3M Australia Pty Ltd v Ke
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Linton v Telnet Pty Ltd (1999) 30 A
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Malaysia Abdul Aziz bin Atan v Lada
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Perman Sdn Bhd & Ors v European Com
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Other Jurisdictions Singapore Rahj
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Companies Act 2006 Section 60(3)(c)
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Section 993 Section 993(2) Section
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Insolvency Act 1985 37, 70 Insolven
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Section 251 255 Part II Schedule 6
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Section 52(1) Section 52(2) Section
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Section 272(2) Section 272(2)(a) Se
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Section 385(4)(b) Section 385(4)(b)
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AUSTRALIA Absent Debtors Act (NSW)
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Section 206D(1)(b)(b)(ii) 374 secti
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Section 588FE(2)(a) Section 588FE(2
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section 588H (5) 241 Section 588H(6
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Section 598(3)(b) Section 598(3)(c)
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Bankruptcy Act 1967 MALAYSIA Sectio
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Section 130A(6) 391 Section 131 221
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Companies Regulation 1966 Regulatio
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CHAPTER 1 THE STRUCTURE OF THE THES
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A discussion of directors’ duties
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The far-reaching implication of cor
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2.2.1 The United Kingdom The common
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2.2.3 Australia Australia has been
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CHAPTER 3 LITERATURE SURVEY - AN OV
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shareholders, had failed to mitigat
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was mainly responsible for the chal
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3.3 Interests in the Company-Shareh
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contributed by the shareholders and
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Statutes have attempted to address
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how the matter should be dealt with
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4.2 Development of Corporate and In
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colonies. 14 The emergence of compa
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originally incorporated in order to
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usiness fraud. 42 In 1825, the Bubb
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Companies Act also reveals providin
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Companies Ordinance 1953 of Sabah a
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In 1977, the Cork Committee was app
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the Committee foresaw difficulty du
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operation and termination of a comp
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enforceability of security interest
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procedure, and dispensed with the o
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The creditors‟ protection princip
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shareholders and on personal bankru
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directors as trustees. 162 Members
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4.3.3 Development of Insolvency Leg
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In Australia, the government respon
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appointment of an administrative re
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the current statutes were not effic
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insist on protection to directors i
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and judgment to run the company. 21
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due to the difficulty in obtaining
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The Australian Law Commission in 19
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instead, enacted section 135 253 in
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4.5 Conclusion Malaysia, New Zealan
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CHAPTER 5: THE THEORY OF THE CORPOR
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needs someone to run it on its beha
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The implication of the decision is
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English decisions as guidance and t
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Shareholders who have to incur high
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interests of shareholders by maximi
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situation, directors have a duty to
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concluded purchasing goods from thi
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stipulates directors “may conside
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subsidiary and may continue to pros
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A holding company may use a subsidi
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section 187 of the Australian Corpo
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its holding company), act in a mann
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is just and equitable, to make an o
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Syndicates (NZ) Limited (in liq) 13
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a) Extent to which the Related Comp
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That the management did not differe
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equirement of insolvency and it doe
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The House of Lords in Woolfson v St
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subsidiary. Abdul Malik J held that
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defendant company. During a meeting
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Uniphoenix Corporation Bhd v Raymon
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justice alone is not sufficient; th
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lenders, employees, suppliers and c
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company and as the residual claiman
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The claim that shareholders‟ righ
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particularly lack of effective mana
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management of the companies. Credit
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players‟ interests intertwine wit
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important for directors to build lo
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Despite having included favourable
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at the intersection of a number of
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Directors must weigh any particular
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Directors will also enlist the serv
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Contractarians regard employees in
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terms to their liking, they either
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to boycott the company. 134 The com
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On the other hand, the duty owed to
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and experiences in order to dischar
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CHAPTER 7: A CONCEPTUAL ANALYSIS OF
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Economists divided real capital whi
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the transformation of shares as rea
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the company‟s ability to pay its
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purchase or will not become insolve
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available where special resolution
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The idea that maintaining share cap
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must be satisfied by the company in
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7.4 Conclusion The doctrine of capi
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and once a resolution is passed, to
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The term 'insolvency' has also long
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equivalent to medical negligence ca
Page 245 and 246: meaning of inability to pay debts.
Page 247 and 248: It is important to distinguish as t
Page 249 and 250: long as the accounts give true and
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Page 253 and 254: cases the presumption of insolvency
Page 255 and 256: It is interesting to note in reachi
Page 257 and 258: CHAPTER 9 THE COMMON LAW DUTIES OF
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Page 265 and 266: interests of various parties in the
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Page 269 and 270: to look at the directors‟ purpose
Page 271 and 272: 9.3.3 Duty not to Fetter Discretion
Page 273 and 274: The decisions of the Federal Court
Page 275 and 276: case, directors should disclose the
Page 277 and 278: misconception that the case law and
Page 279 and 280: other reference as to the developme
Page 281 and 282: Australia and Malaysia have express
Page 283 and 284: out “ ...the judgment is in the b
Page 285 and 286: the prospect of success as well as
Page 287 and 288: judge adopted the principle of iden
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Page 295: CHAPTER 10 DIRECTORS’ DUTY TO PRE
Page 299 and 300: interpretation of these provisions.
Page 301 and 302: sum of money that is owed or due.
Page 303 and 304: Hence, action can be brought agains
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Page 307 and 308: to the director to prove that he or
Page 309 and 310: expect that the company was solvent
Page 311 and 312: In the case of Secretary of State f
Page 313 and 314: trading at a deficit. 64 In other w
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Page 317 and 318: not „a party‟ if he knew that m
Page 319 and 320: econcile the two judgments with one
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Page 323 and 324: 10.3.1.3 For any other Fraudulent P
Page 325 and 326: company. In this aspect, section 21
Page 327 and 328: to Australia and New Zealand which
Page 329 and 330: even though it was evident from the
Page 331 and 332: the steps taken were with the aim o
Page 333 and 334: decisions. 150 Therefore, directors
Page 335 and 336: The Law Commission proposed that th
Page 337 and 338: to reform the law, namely to reduce
Page 339 and 340: A similar issue was raised in the E
Page 341 and 342: The decision was later upheld by th
Page 343 and 344: 10.4.3 Duty in relation Obligation
Page 345 and 346: fraudulent purpose.” 201 Although
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from the carrying on of the busines
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The first civil version of the inso
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amounts. 223 In Hussein v Good, 224
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of law of contract. The court must
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defendant. 244 Therefore, a directo
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additional capital, as well as a re
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trading without any other action ta
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Another defect of the section is in
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argue that there are reasonable gro
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10.6.2 Responsibility for Fraudulen
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Siow Yoon Keong v H Rosen Engineeri
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The courts have acknowledged that t
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The defendant in the case relying o
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To date, there have been few cases
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ability of the company to pay off i
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can be disqualified from taking par
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power to do so is an archaic equita
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is for a short period of time. This
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ights against the company are froze
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involves a situation where the comp
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11.2.3 Winding-up Liquidation is a
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11.2.3.1 Effects of Successful Avoi
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transactions, 59 the provisions cle
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11.2.3.1.2 Recovery from Third Part
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ecover the proceeds of sale or to p
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order. 83 If the value of the asset
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Without this class action, the unse
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the power to apply for a compensati
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defraud, which implies their culpab
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also be enforced by the company. 11
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The court has the power if it think
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contravention or pecuniary penalty
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discretion to order the director‘
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Marketing Consortium (No 2) 147 cle
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discovered that the director had en
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compensatory. 163 Damages are asses
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of causation similar to torts in as
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ecause the court considered that it
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It should be noted that Re Cyona Di
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11.3.7.2.3 Duration The court also
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contribution order is made to the
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This is similar to the case of frau
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company is using funds belonging to
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Since section 304(1) originates fro
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11.3.8.2 Problems of Enforcement/Pr
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However, extracting promise of inde
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In relation to an action against a
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Investments Commission is entitled
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The position in Australia has clear
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Disqualification on the grounds of
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As a result of the recommendations
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exercised by the Registrar or the O
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actions which are committed with a
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The court has to deduce evidence of
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11.4.2.1 Standard of Proof Disquali
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11.4.2.2 Court’s Order Section 6
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of disqualification. 322 However, t
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mitigating factors considered by th
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11.5 Other Remedies 11.5.1 Mareva I
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for under the Act. 348 The action p
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of trust or breach of duty in relat
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CHAPTER 12 CONCLUSION AND RECOMMEND
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The separate legal personality conc
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deemed to be an alien concept to Br
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positive action to minimize losses
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insolvent. In Malaysia, there is no
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BIBLIOGRAPHY BOOKS and ARTICLES AHM
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BENNETT, Howard, 'Late Floating Cha
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COBURN, Niall F, 'Insolvent Trading
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http://ssrn.com/abstract=988944 at
Page 487 and 488:
FISHER, Gregory, LEE , Janet and JO
Page 489 and 490:
GUNASEKARA, Gehan and TOY, Alan, 'L
Page 491 and 492:
HOPT, Klaus J., 'Comparative Compan
Page 493 and 494:
KEAY, Andrew and Murray, Michael, '
Page 495 and 496:
McCHESNEY, Fred S., 'Economics, Law
Page 497 and 498:
OTTOLENGHI, S, 'From Peeping Behind
Page 499 and 500:
ROSS, Mike, Corporate Reconstructio
Page 501 and 502:
SCHWARTZ, Alan, ‗A Normative Theo
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WALTERS, Adrian, 'Void Dispositions
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WORTHINGTON, Sarah, 'Subrogation Cl
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REPLIES TO EXAMINERS APPENDIX 1 Pag
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Page 220-it is asserted that direct
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What are the criteria for determini
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addition it provides incentive for
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See also Secretary of State for Tra
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Most jurisdictions in Australia hav
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