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SOLVENCY, COMPANY DIRECTORS’ DUTIES AND THE PROBLEM OF PROCESS AND ENFORCEMENT- A COMPARATIVE STUDY A Thesis Submitted in Fulfillment of the Requirement for the Degree of Doctor of Philosophy in Law at The University of Waikato By HARIATI MANSOR 2011
ABSTRACT This study examines the legal provisions in relation to creditors’ protection, particularly when the company is insolvent and seeks to compare different statutory approaches with the view of determining the best reforms for Malaysia. Three jurisdictions have been chosen; the United Kingdom, New Zealand and Australia as the basis of comparison due to similar legal history as these countries have often been referred by the Malaysian Courts to assist in the interpretation of the law. To determine the question of creditors’ protection, the thesis will address several main issues. Firstly, the thesis examines the relationship between separate legal entity and limited liability. To do so it questions the circumstances when directors will be personally liable for the debt of the company and the extent to which they are liable. The issue will be explored in the light of the shareholder primacy theory which forms the basis of company law. Directors’ duties therefore are developed with the view of protecting shareholders; and the failure to do so will cause directors to be personally liable. The thesis also considers the arguments for stakeholders’ theory which mandates directors to take account of other stakeholders’ interests in addition to shareholders’ when making decisions. Secondly, it also investigates on how the piercing of the corporate veil and imposing liability on directors will provide protection to creditors especially when the company is insolvent. In order to do so, it scrutinizes the legislative initiatives on the issue as well as the judicial response to the statute. The thesis traces the reforms of the historical doctrine of capital maintenance and the use of solvency test as a replacement to protect creditors. It also provides comprehensive analyses of the law on the issue of remedies in order to ascertain whether the current legal provisions are adequately to protect creditors. (Keyword: separate legal entity, limited liability, shareholders, stakeholders, insolvency, capital maintenance) i
Page 1: http://researchcommons.waikato.ac.n
Page 5 and 6: TABLE OF CONTENTS ABSTRACT i ACNOWL
Page 7 and 8: CHAPTER 5 THEORY OF THE CORPORATION
Page 9 and 10: 7.3.3.3 Distribute its Capital to M
Page 11 and 12: 10.2.5.1 Meaning of Insolvency 10.2
Page 13 and 14: 10.6.2.2 Carrying on of any Busines
Page 15 and 16: CHAPTER 12 CONCLUSION AND RECOMMEND
Page 17 and 18: CLC Australian Company Law Cases CL
Page 19 and 20: Stanford LR Stanford Law Review Ste
Page 21 and 22: Facia Footwear Ltd (in administrati
Page 23 and 24: Re Avon Chambers Ltd [1978] 2 NZLR
Page 25 and 26: Re Produce Marketing Consortium Ltd
Page 27 and 28: Ultraframe (UK) v Fielding & Ors [2
Page 29 and 30: Mountford v Tasman Pacific Airlines
Page 31 and 32: Australia 3M Australia Pty Ltd v Ke
Page 33 and 34: Linton v Telnet Pty Ltd (1999) 30 A
Page 35 and 36: Malaysia Abdul Aziz bin Atan v Lada
Page 37 and 38: Perman Sdn Bhd & Ors v European Com
Page 39 and 40: Other Jurisdictions Singapore Rahj
Page 41 and 42: Companies Act 2006 Section 60(3)(c)
Page 43 and 44: Section 993 Section 993(2) Section
Page 45 and 46: Insolvency Act 1985 37, 70 Insolven
Page 47 and 48: Section 251 255 Part II Schedule 6
Page 49 and 50: Section 52(1) Section 52(2) Section
Page 51 and 52: Section 272(2) Section 272(2)(a) Se
Page 53 and 54:
Section 385(4)(b) Section 385(4)(b)
Page 55 and 56:
AUSTRALIA Absent Debtors Act (NSW)
Page 57 and 58:
Section 206D(1)(b)(b)(ii) 374 secti
Page 59 and 60:
Section 588FE(2)(a) Section 588FE(2
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section 588H (5) 241 Section 588H(6
Page 63 and 64:
Section 598(3)(b) Section 598(3)(c)
Page 65 and 66:
Bankruptcy Act 1967 MALAYSIA Sectio
Page 67 and 68:
Section 130A(6) 391 Section 131 221
Page 69 and 70:
Companies Regulation 1966 Regulatio
Page 71 and 72:
CHAPTER 1 THE STRUCTURE OF THE THES
Page 73 and 74:
A discussion of directors’ duties
Page 75 and 76:
The far-reaching implication of cor
Page 77 and 78:
2.2.1 The United Kingdom The common
Page 79 and 80:
2.2.3 Australia Australia has been
Page 81 and 82:
CHAPTER 3 LITERATURE SURVEY - AN OV
Page 83 and 84:
shareholders, had failed to mitigat
Page 85 and 86:
was mainly responsible for the chal
Page 87 and 88:
3.3 Interests in the Company-Shareh
Page 89 and 90:
contributed by the shareholders and
Page 91 and 92:
Statutes have attempted to address
Page 93 and 94:
how the matter should be dealt with
Page 95 and 96:
4.2 Development of Corporate and In
Page 97 and 98:
colonies. 14 The emergence of compa
Page 99 and 100:
originally incorporated in order to
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usiness fraud. 42 In 1825, the Bubb
Page 103 and 104:
Companies Act also reveals providin
Page 105 and 106:
Companies Ordinance 1953 of Sabah a
Page 107 and 108:
In 1977, the Cork Committee was app
Page 109 and 110:
the Committee foresaw difficulty du
Page 111 and 112:
operation and termination of a comp
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enforceability of security interest
Page 115 and 116:
procedure, and dispensed with the o
Page 117 and 118:
The creditors‟ protection princip
Page 119 and 120:
shareholders and on personal bankru
Page 121 and 122:
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
Page 157 and 158:
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
Page 165 and 166:
section 187 of the Australian Corpo
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its holding company), act in a mann
Page 169 and 170:
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
Page 177 and 178:
equirement of insolvency and it doe
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The House of Lords in Woolfson v St
Page 181 and 182:
subsidiary. Abdul Malik J held that
Page 183 and 184:
defendant company. During a meeting
Page 185 and 186:
Uniphoenix Corporation Bhd v Raymon
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justice alone is not sufficient; th
Page 189 and 190:
lenders, employees, suppliers and c
Page 191 and 192:
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
Page 203 and 204:
Despite having included favourable
Page 205 and 206:
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
Page 213 and 214:
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
Page 219 and 220:
and experiences in order to dischar
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CHAPTER 7: A CONCEPTUAL ANALYSIS OF
Page 223 and 224:
Economists divided real capital whi
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the transformation of shares as rea
Page 227 and 228:
the company‟s ability to pay its
Page 229 and 230:
purchase or will not become insolve
Page 231 and 232:
available where special resolution
Page 233 and 234:
The idea that maintaining share cap
Page 235 and 236:
must be satisfied by the company in
Page 237 and 238:
7.4 Conclusion The doctrine of capi
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and once a resolution is passed, to
Page 241 and 242:
The term 'insolvency' has also long
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equivalent to medical negligence ca
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meaning of inability to pay debts.
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It is important to distinguish as t
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long as the accounts give true and
Page 251 and 252:
current assets must be taken stock
Page 253 and 254:
cases the presumption of insolvency
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It is interesting to note in reachi
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CHAPTER 9 THE COMMON LAW DUTIES OF
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Voluntary creditors can be divided
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are not personally liable for any l
Page 263 and 264:
confidence, a trustee who has been
Page 265 and 266:
interests of various parties in the
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overriding duty is to the sharehold
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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
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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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individual trading through a compan
Page 291 and 292:
liability can be imposed on them wh
Page 293 and 294:
liquidators when it is insolvent. C
Page 295 and 296:
CHAPTER 10 DIRECTORS’ DUTY TO PRE
Page 297 and 298:
Malaysia did not make any changes o
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
Page 305 and 306:
Directors in Australia can be held
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
Page 315 and 316:
maintained in section 213 of the In
Page 317 and 318:
not „a party‟ if he knew that m
Page 319 and 320:
econcile the two judgments with one
Page 321 and 322:
carrying it on (whether because of
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
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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
Page 347 and 348:
from the carrying on of the busines
Page 349 and 350:
The first civil version of the inso
Page 351 and 352:
amounts. 223 In Hussein v Good, 224
Page 353 and 354:
of law of contract. The court must
Page 355 and 356:
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
Page 361 and 362:
Another defect of the section is in
Page 363 and 364:
argue that there are reasonable gro
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10.6.2 Responsibility for Fraudulen
Page 367 and 368:
Siow Yoon Keong v H Rosen Engineeri
Page 369 and 370:
The courts have acknowledged that t
Page 371 and 372:
The defendant in the case relying o
Page 373 and 374:
To date, there have been few cases
Page 375 and 376:
ability of the company to pay off i
Page 377 and 378:
can be disqualified from taking par
Page 379 and 380:
power to do so is an archaic equita
Page 381 and 382:
is for a short period of time. This
Page 383 and 384:
ights against the company are froze
Page 385 and 386:
involves a situation where the comp
Page 387 and 388:
11.2.3 Winding-up Liquidation is a
Page 389 and 390:
11.2.3.1 Effects of Successful Avoi
Page 391 and 392:
transactions, 59 the provisions cle
Page 393 and 394:
11.2.3.1.2 Recovery from Third Part
Page 395 and 396:
ecover the proceeds of sale or to p
Page 397 and 398:
order. 83 If the value of the asset
Page 399 and 400:
Without this class action, the unse
Page 401 and 402:
the power to apply for a compensati
Page 403 and 404:
defraud, which implies their culpab
Page 405 and 406:
also be enforced by the company. 11
Page 407 and 408:
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
Page 421 and 422:
ecause the court considered that it
Page 423 and 424:
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
Page 429 and 430:
This is similar to the case of frau
Page 431 and 432:
company is using funds belonging to
Page 433 and 434:
Since section 304(1) originates fro
Page 435 and 436:
11.3.8.2 Problems of Enforcement/Pr
Page 437 and 438:
However, extracting promise of inde
Page 439 and 440:
In relation to an action against a
Page 441 and 442:
Investments Commission is entitled
Page 443 and 444:
The position in Australia has clear
Page 445 and 446:
Disqualification on the grounds of
Page 447 and 448:
As a result of the recommendations
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exercised by the Registrar or the O
Page 451 and 452:
actions which are committed with a
Page 453 and 454:
The court has to deduce evidence of
Page 455 and 456:
11.4.2.1 Standard of Proof Disquali
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11.4.2.2 Court’s Order Section 6
Page 459 and 460:
of disqualification. 322 However, t
Page 461 and 462:
mitigating factors considered by th
Page 463 and 464:
11.5 Other Remedies 11.5.1 Mareva I
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for under the Act. 348 The action p
Page 467 and 468:
of trust or breach of duty in relat
Page 469 and 470:
CHAPTER 12 CONCLUSION AND RECOMMEND
Page 471 and 472:
The separate legal personality conc
Page 473 and 474:
deemed to be an alien concept to Br
Page 475 and 476:
positive action to minimize losses
Page 477 and 478:
insolvent. In Malaysia, there is no
Page 479 and 480:
BIBLIOGRAPHY BOOKS and ARTICLES AHM
Page 481 and 482:
BENNETT, Howard, 'Late Floating Cha
Page 483 and 484:
COBURN, Niall F, 'Insolvent Trading
Page 485 and 486:
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
Page 503 and 504:
WALTERS, Adrian, 'Void Dispositions
Page 505 and 506:
WORTHINGTON, Sarah, 'Subrogation Cl
Page 507 and 508:
REPLIES TO EXAMINERS APPENDIX 1 Pag
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Page 220-it is asserted that direct
Page 511 and 512:
What are the criteria for determini
Page 513 and 514:
addition it provides incentive for
Page 515 and 516:
See also Secretary of State for Tra
Page 517 and 518:
Most jurisdictions in Australia hav
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