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the steps taken were with the aim of minimising loss to creditors. 143 In other
words, the section imposes a duty on the part of directors to minimise losses to
creditors once liquidation is inevitable and if he or she succeeds he or she will be
able to avoid liability under the section. Directors could only rely on the defence
in section 214(3) of the Insolvency Act 1986 and could not depend on the general
defences in section 1157 of the Companies Act 2006. 144
It is, therefore, important to see how the courts construe the meaning of „every
step that director ought to have taken.‟ The usage of the words „ought to have
taken‟ gives the connotation of an objective element to the section, and therefore
in determining whether a director has taken every step, the courts are referring to
every reasonable step taken. 145 The objective element is further emphasised in
section 214(4) in which courts are to have regard to the general knowledge, skill
and experience of a reasonable person as well as those of the individual director.
Like the standard applicable in determining whether directors have knowledge or
ought to have knowledge that there are no reasonable prospects to avoid insolvent
liquidation, directors will be subjected to the higher of the two standards. As
such, directors cannot use their inexperience or lack of skills as a means to avoid
liability because they will be judged on the skills and experience of a reasonable
director in a similar situation.
A director who has greater experience and knowledge than a reasonable director
on the other hand, is expected to take steps in accordance with his or her
experience and knowledge. Therefore, a director could escape liability if he or
there was no reasonable prospect that the company would avoid going into insolvent
liquidation) he ought to have taken.
143 See section 214(3) of the UK Insolvency Act 1986- „ The court shall not make a declaration
under this section with respect to any person if it is satisfied that after the condition specified in
subsection (2)(b) was first satisfied in relation to him that person took every step with a view to
minimising the potential loss to the company‟s creditors as (assuming him to have known that
there was no reasonable prospect that the company would avoid going into insolvent
liquidation) he ought to have taken.
144 See Re Produce Marketing Consortium Ltd [1989] BCLC 513; section 727 of the UK
Companies Act 1985 has been replaced by section 1157 of the Companies Act 2006.
145 Roy Goode Principles of Corporate Insolvency Law (Sweet & Maxwell, London , 2005) at
[12-37]; Keay above n2 at 113-114.
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