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proven varies. However, one common characteristic of each provision is liability
accrues if the company’s finance is unhealthy.
Once the company crosses the threshold from solvent to insolvent, and the company
continues to trade, whether liability can be imposed depending on the directors’ next
cause of action. The UK provision requires directors to take positive steps once they
knew or should have known the company could not avoid insolvent liquidation. In
this circumstance, directors do not have clear guidelines as to what steps should be
taken in order to avoid liability and there is a tendency for them to put the company
into formal insolvency proceedings. Directors would not take the risk to continue
trading in order to bring the company back to liquidity although the prospect to do so
is high for fear of liability. Consequently, company with high chance of survival is
put into liquidation.
Further, the purpose of insolvent trading should be to protect interests of parties
involved as opposed to punishing errant directors or protecting public interests. It is
important for this objective to be stated clearly in the provision so as to avoid the
earlier confusion as illustrated in cases from the UK and New Zealand. In this aspect,
the Malaysian courts have taken the right approach by ordering directors/persons
responsible to compensate creditors for their losses.
12.2 Recommendations
Directors have been held to be personally liable in situations where they have
breached their duties to the company. The law as it stands now imposes an indirect
duty on directors to consider creditors’ interests when the company is insolvent or on
the verge of insolvent. It is the extent to which the law is willing to compromise and
it is very unlikely for both statutes and common law to impose duty on directors to
consider the interests of creditors when the company is solvent. To do so means
creditors would be able to interfere in the management decision because there is a
possibility for creditors to object to the high risk project which will yield high returns
to shareholders. The right for creditors to interfere in the management decisions is
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