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However, extracting promise of indemnities could be a difficult task because most
creditors are reluctant to do so. Creditors‘ reluctance in this case is probably justified
because the proceeds of such claim will have to be distributed among all unsecured
creditors. Hence, creditors may in some cases find it is not to their advantage to
provide indemnities.
The combination of both misfeasance and reckless trading remedies in the same
section has proven to be problematic in New Zealand in the issue of distribution of
the sums claimed. Courts have treated contributions made by directors to be part of
the assets of the company and as such they are covered under a floating charge. The
secured creditors, therefore, are able to recover the company‘s assets leaving the
unsecured creditors often without any compensation.
Despite the objective of these provisions being mainly to protect creditors when the
company‘s financial health is deteriorating, in most jurisdictions their rights to bring
an action is either restricted or not available at all. In the UK, the right to bring an
action under section 214 rests with the liquidator, and creditors have no other avenue
to seek a contribution from directors should the liquidator decide not to proceed.
In Australia, creditors are allowed to take action against the director for breach of
section 588G(2), subject to the restriction in section 588R. Creditors are required to
wait at least six months after winding-up and to obtain a written consent from
liquidator before they can proceed with their claim. 248 If the liquidator has
commenced the proceeding under section 588M or wishes to bring a preference
claim, then the creditor‘s right to take action is extinguished. 249 The approach seems
appropriate in order to ensure there is no duplication of action against directors since
a liquidator is also taking action on behalf of creditors of the company. This right
nevertheless is not available to creditors in respect of the liability of the holding
company for insolvent trading by its subsidiary under section 588V.
248 Section 588R of the Australia Corporations Act 2001.
249 Section 588U of the Australia Corporations Act 2001.
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