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CHAPTER 2 DEFINING THE RESEARCH QUESTION AND
METHODOLOGY
2.1. The Research Question
The law has long established that the directors must exercise their duty or discretion
“bona fide in what they consider –not what a court may consider- is in the interest of
the company, and not for any collateral purposes.” 1 The term “in the interest of the
company” has always been associated with the interest of the shareholders, present
and future. This approach is also known as the shareholder primacy principle (or
paradigm), shareholder value principle or the shareholder wealth maximization
norm. 2 It requires that the company is managed in such a way as to maximize the
interest of the shareholders ahead of other interested parties who may have claim
against the company. 3
Creditors, on the other hand, have always been regarded as outsiders; thus their
interests are seldom taken into account by the directors. The creditors themselves
may not be overly concerned with the directors’ actions when the company’s
financial state is healthy, but when it is not so, how far should directors be allowed to
take the risks and pursue trade without regard to interest of the creditors, in particular,
the unsecured creditors? The shareholders whose liability was limited to the amount
unpaid on the shares they subscribed to in the company could not be held liable for
any debts of the company. Creditors could not take any action against them in
respect of the unpaid debts. Due to this, when times are hard shareholders would
want directors to take risks and continue to trade in the hope to the turn the company
around. This was usually at the expense of creditors.
1 Re Smith and Fawcett Ltd [1942] Ch 304 at 306.
2 Andrew Keay “Enlightened Shareholder Value, The Reform Of The Duties Of Companies Directors
And The Corporate Objective” [2006] LMCLQ 335 at 336.
3 Ibid.
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