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section will analyse the extent protection is granted to creditors, and whether the unsecured creditors who need it the most really benefit from the imposition of such duty. The basis for protection to be given to creditors is that they are vulnerable and the market is not sufficient to safeguard their interests, especially unsecured and involuntary creditors. In the UK, what actions constitute wrongful trading are not defined, the courts are concerned with director‘s knowledge of whether the company can avoid insolvent trading and if so what steps were taken to minimise the losses. Therefore, if a certain action is committed on a creditor, and as a result of that, the company‘s insolvent liquidation is inevitable, a director has to take steps to minimise the potential loss to the company‘s creditors. It is submitted that the action could include a tort committed by the company. It is also important to note that the definitions of wrongful trading recommended by the Cork Committee were wide enough to cover all types of liabilities. 258 As for New Zealand, the reckless trading provision concentrates on whether the manner in which business is conducted creates substantial risks of serious loss to creditors. Although the wording of the statute could include involuntary creditors, judicial decisions have indicated otherwise. This is apparent from the courts‘ insistence on a company‘s financial capability to generate profit in order to ascertain whether or not the risk taking is legitimate. 259 258 Cork Report above n115 at [1806] ―Responsibility for wrongful trading (1) A company shall be trading wrongfully within the meaning of this section if: (a) any business is carried on with intent to defraud creditors of the company or creditors of any other person or otherwise for any fraudulent purpose; or (b) at a time when the company is insolvent or unable to pay its debts as they fall due it incurs further debts or other liabilities to other persons without a reasonable prospect of meeting them in full." 259 Re South Pacific Shipping Ltd (in liq); Lower v Traveller (2004) NZCLC 263, 570; see also Re Group Hub Ltd (in liq); The PC Company v Sanderson, Unreported case HC Hamilton, CP 18-00 November 2001; Priestly J; Re Gellert Developments Ltd; McCullagh & Anor v Gellert & Anor (2002) 9 NZCLC 262, 942. 372
The position in Australia has clearly indicated that only contractual creditors are governed under the section. The courts in Australia have specifically excluded involuntary creditors from insolvent trading actions, and it is submitted that it produces a result that is inconsistent with the legislative drafting adopted by the statute. Directors who breach the duty, will have to contribute towards the company‘s general funds and this will increase the chances of creditors getting paid. When the company is liquidated, the assets are often not enough to pay off all creditors in full, and contributions from directors in this event would have increased the general funds available for distribution. Although it is very unlikely that creditors will be paid in full, the distribution based on the pari passu principle would at least provide them some equitable distribution. Another criticism on distribution is that the rewards are available for all past and present creditors when the real victims in this situation are those who become creditors after trading occurred. However, the overall effect of the wrongful/reckless/insolvent trading provision would be the reduction of the company‘s net assets and therefore it could be argued that all creditors will be affected because the likelihood of their obtaining their payment in full is doubtful. In Malaysia, the proceeds of the claim are not to be paid to the company but to the creditor who made the application, hence only the one who suffers losses will be compensated. Likewise in Australia, if a creditor brings an action under section 588M, then only he or she is entitled to the sums. 11.4 Disqualification of Directors 11.4.1 The Statutory Provisions 11.4.1.1 Introduction This part of the thesis will look at director‘s disqualification as a consequence of his or her actions in the company. The analysis of this issue will focus on section 6 of 373
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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
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Voluntary creditors can be divided
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are not personally liable for any l
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confidence, a trustee who has been
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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
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9.3.3 Duty not to Fetter Discretion
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The decisions of the Federal Court
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case, directors should disclose the
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misconception that the case law and
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other reference as to the developme
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Australia and Malaysia have express
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out “ ...the judgment is in the b
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the prospect of success as well as
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judge adopted the principle of iden
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individual trading through a compan
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liability can be imposed on them wh
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liquidators when it is insolvent. C
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CHAPTER 10 DIRECTORS’ DUTY TO PRE
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Malaysia did not make any changes o
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interpretation of these provisions.
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sum of money that is owed or due.
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Hence, action can be brought agains
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Directors in Australia can be held
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to the director to prove that he or
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expect that the company was solvent
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In the case of Secretary of State f
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trading at a deficit. 64 In other w
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maintained in section 213 of the In
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not „a party‟ if he knew that m
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econcile the two judgments with one
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carrying it on (whether because of
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10.3.1.3 For any other Fraudulent P
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company. In this aspect, section 21
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to Australia and New Zealand which
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even though it was evident from the
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the steps taken were with the aim o
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decisions. 150 Therefore, directors
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The Law Commission proposed that th
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to reform the law, namely to reduce
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A similar issue was raised in the E
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The decision was later upheld by th
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10.4.3 Duty in relation Obligation
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fraudulent purpose.” 201 Although
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from the carrying on of the busines
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The first civil version of the inso
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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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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
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Page 405 and 406: also be enforced by the company. 11
Page 407 and 408: The court has the power if it think
Page 409 and 410: contravention or pecuniary penalty
Page 411 and 412: discretion to order the director‘
Page 413 and 414: Marketing Consortium (No 2) 147 cle
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Page 417 and 418: compensatory. 163 Damages are asses
Page 419 and 420: 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
Page 425 and 426: 11.3.7.2.3 Duration The court also
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Page 429 and 430: This is similar to the case of frau
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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: Investments Commission is entitled
Page 445 and 446: Disqualification on the grounds of
Page 447 and 448: As a result of the recommendations
Page 449 and 450: 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
Page 457 and 458: 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
Page 465 and 466: 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
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What are the criteria for determini
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addition it provides incentive for
Page 515 and 516:
See also Secretary of State for Tra
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Most jurisdictions in Australia hav
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