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section 138. In Mason v Lewis, 53 the Court of Appeal implied that section 138, which provides a defence to a director who reasonably relies on the advice of a third party when discharging his or her duty, could be used for reckless trading. In this case, the court concluded that the directors could not depend on the section because there were clear indications at the time that the company was insolvent and any reasonable director would not have agreed for the company to continue to trade. It is important for directors who wish to rely on section 138 to make sure that the advice given by the third party will not cause substantial risks of serious loss to creditors. The decision in the case can also be presumed to be equally relevant in regard to a directors‟ duty under section 136. 54 Moreover, section 138 appears under the general heading of director‟s duties, which also includes both sections 135 and 136. 55 In the UK, in order to escape liability, directors must take positive actions to minimise creditors‟ losses. However, the section is silent on the position of directors who are not able to take any action due to illness or any other reasons which prevent them from taking part in the management of the company. This differs from Australia which has a specific defence for directors who are absent due to illness or for any other good reason. 56 It is submitted that in the light of the wording of the section which requires „steps‟ to be taken to minimise losses, it is probable that directors who fail to take any affirmative action may be held liable by the court regardless of the reasons for failing to do so. 57 53 [2006] 3 NZLR 225 at 237. 54 Neil Campbell and David Cooper Company Law Update (New Zealand Law Society Seminar, 2008) at 45 55 Ibid. 56 See section 588H (4) of the Australian Corporations Act 2001. Section 588H(4) of the Corporations Act 2001-„ If a person was a director of the company at the time when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company.‟ 57 See Re Brian D Pierson [2002] BCLC 275. 240
In the case of Secretary of State for Trade and Industry v Taylor, 58 a case under the Company Disqualification of Directors Act 1986, a director who knew of the company‟s impending liquidation but could not influence its board to take up his suggestion was held not to be unfit for the purpose of disqualification. The court went on to state that the fact the director failed to resign after protesting against further trading could not lead to the finding of unfitness. 59 In New Zealand, the court‟s decision in Mason v Lewis 60 seems to incline towards directors having a duty to monitor the company despite engaging a third party to run it. Directors have to take reasonable steps to ensure that they are well aware of what is happening in the management of the company, as well as supervising its management. It is also a defence in Australia for a director to prove that he or she has taken all reasonable steps to prevent the company from incurring debts. 61 The section imposes a heavy burden on directors to take all reasonable steps, which means he or she will not be able to rely on the defence if the court is of the opinion that there are still measures which the director failed to implement. In the UK, once the court has identified the first sign of stress in the company, the next step is to examine the directors‟ conduct; a director can avoid liability if the court is satisfied that he or she had taken every step that ought to have been taken in order to minimise the potential loss to creditors. The existence of the phrase „ought to have taken‟ implies that what is required from directors is to take reasonable steps. In doing so, the court will consider the general knowledge, skill and experience of a reasonable director, as well as that of the particular director. 62 58 [1997] 1 WLR 407. 59 [1997] 1 WLR 407 at 414. 60 [2006] 3 NZLR 225. 61 Section 588H(4) of the Corporations Act 2001-„ It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt.‟ 62 See section 214(4) (a) and (b) of the Insolvency Act 1986. 241
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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
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current assets must be taken stock
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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
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 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: expect that the company was solvent
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
Page 353 and 354: of law of contract. The court must
Page 355 and 356: defendant. 244 Therefore, a directo
Page 357 and 358: additional capital, as well as a re
Page 359 and 360: 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
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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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