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petition 24 in order to ascertain the first sign of problems, namely the time when the company started suffering losses. In doing so, the court has to refer to the company‟s financial information, including past financial statements. Difficulties arise if the company fails to maintain proper accounts, and directors are deemed to have necessary knowledge which should have been apparent to them if the company had maintained proper accounts. 25 In New Zealand, directors lose their right to rely on the separate legal entity principle if they agree or allow “the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company creditors.” 26 In addition, directors in New Zealand are subjected to the requirement that they must not agree to the company incurring any obligation unless they “believe at that time on reasonable grounds that the company will be able to perform the obligation.” 27 The absence of any time frame in both sections implies that they apply throughout the life of the company, which the Parliament felt would provide better protection to creditors. 28 This is because when the contributions from directors are not limited to insolvent situations only, directors will have to be cautious every time they make decisions and not only when the company is having financial difficulties. 24 In the UK and Malaysia, the filing of the petition is deemed to be the date liquidation commenced; see section 129(2) of the UK Insolvency Act 1986 and section 219(2) of the Malaysian Companies Act 1965. However, in New Zealand, liquidation commences on the date on which and at the time at which the liquidator is appointed; see section 241(5) of the New Zealand Companies Act 1993. The position in Australia is similar to New Zealand, for liquidation is taken to have begun when the order was made or any other situations mentioned in section 513A of the Australian Corporations Act 2001. 25 Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520 at 550. 26 Section 135(a) and (b) of the New Zealand Companies Act 1993. 27 Section 136 of the New Zealand Companies Act 1993. 28 (23 February 1993) NZPD speech by Hamish Hancork (second reading) at 10 October 2010. 232
Hence, action can be brought against directors under the Act if "the way business is carried out is likely to create substantial risk of serious loss." In one decision, the court applied a literal interpretation, and consequently directors are prevented from taking up risks, even when there is a possibility of generating profits. 29 The implication of the decision is that it defeats the aim of the Companies Act 1993 which is evident from its long title; namely the recognition of the company as a vehicle for taking business risks. 30 The decision in the case also illustrated the court‟s failure to recognise the link between risk-taking and profit, and that in deciding whether the risks are substantial, the potential reward should also be taken into consideration. This differs from Australia and the UK, for in both countries, one of the factors taken into consideration when assessing liability is the benefits reaped from taking risks. 31 From the wording of section 214 of the UK wrongful trading provision, it can be presumed that a company is allowed to take risks as long as it does not end up in liquidation. In addition, directors are required to take all steps to minimise losses once it becomes apparent that the company is in distress, which indicates the need for directors to weigh the risks being taken and the benefits which may be generated from them. Nevertheless, in subsequent decisions, a liberal interpretation was used by the New Zealand Court of Appeal and the company was only prohibited from taking illegitimate risks, not all business risks. 32 This appears to be the current state of the law in relation to reckless trading and if the company is run in a way which exposes it to illegitimate risks, then the directors will be liable. 29 Fatupaito v Bates [2001] 3 NZLR 386 at 401; see also South Pacific Shipping Limited (in liq); Traveller v Lower [(2004) NZCLC 263, 570. 30 The Long Title of the Companies Act – “ An Act to reform the law relating to companies, and, in particular,a) to reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for production purposes, the spreading of economic risk, and the taking of business risks; and 31 See Australian case Vriasakis v ASC (1993) 11 ACSR 162 ; for English cases see Re Sherborne Associates Ltd [1995] BCC 40; Rubin v Gunner [2004] 2 BCLC 110. 32 See South Pacific Shipping Limited (in liq); Traveller v Lower (2004) NZCLC 263, 570 and Mason v Lewis [2006] 3 NZLR 225. 233
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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
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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
Page 255 and 256: It is interesting to note in reachi
Page 257 and 258: CHAPTER 9 THE COMMON LAW DUTIES OF
Page 259 and 260: Voluntary creditors can be divided
Page 261 and 262: 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
Page 267 and 268: overriding duty is to the sharehold
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
Page 289 and 290: 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: sum of money that is owed or due.
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
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
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
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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
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
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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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