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should also facilitate economic activities more generally by providing deterrent to
irresponsible risk taking by directors and contributing to reducing perceptions of counter-
party risk in the economy. 11
The law performs a valuable public function in contributing to combating fraud and in
maintaining and fostering ethical commercial behavior and standard. 12 The debtor‘s
inability to pay its debts as they fall due can be a good indication that the debtor may not
be able to repay any fresh debts it may incur. 13 Therefore insolvency is a strong
indication that any person who transacts with the company during that time may be
exposing themselves to increased risk of loss. 14 Such a person‘s resources would be
better applied to activities involving less risk and contributing to economic growth.
Factors that adversely affect perception of credit risk within the market have also
potential to adversely affect economic activities. 15 A decrease in the general level of
confidence in market solvency may lead to creditors having negative perceptions of the
company; the willingness to provide credit (through lending or provide goods and
services on credit); the costs of credit and the conditions upon which credit is provided. 16
A clear solvency provision would be able to provide assurance that the company is
solvent and would be able to meet its obligations. 17
Insolvency law may contribute to reducing transaction and monitoring costs. 18 The
imposition of liability helps to reduce monitoring costs because it would encourage
directors to proactively monitor and address the company‘s financial position. In
11 at [1.2]
23 September 2011; see also Roy Goode, Principles of Corporate Insolvency Law (Thompson, Sweet &
Maxwell, 2005) at chapter 2; Vanessa Finch Corporate Insolvency Law Perspective and Principles (2 nd
ed, Cambridge University Press, 2009 at chapter 16; Rizwaan Mokal ‗An Agency Cost analysis of the
Wrongful Trading Provisions: Redistribution, Perverse Incentives and the Creditors‘ Bargain‘ (2000) 59
CLJ 335.
12 Ibid, at [3.1];Finch at 677.
13 Ibid, at [3.2].
14 Ibid, at [3.3]-[3.4].
15 Ibid, at[3.3]-[3.4]
16 Ibid, at [3.9]
17 Ibid, at [3.9]-[3.10].
18 Ibid, at [3.10].
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