Directors' duties in the context of insolvency

Table of Contents

Abstract

Statement of word length

I INTRODUCTION

II DEFINITION OF “DIRECTOR”?

III THE CONTENTS OF DIRECTORS’ DUTIES
A Directors’ Duties in General
1 The Duty to Act in Good Faith and in the Company’s Best Interest (s 131 CA)
2 The Duty to Exercise Powers for a Proper Purpose (s 133 CA)
3 The Duty to Comply with the Act and the Constitution (s 134 CA)
4 The Duty of Care, Diligence and Skill (s 137 CA)
5 Ratification of Breach of Duty
B Change of Directors’ Duties In or Near Insolvency
1 Reckless Trading (s 135 CA)
(a) Contents and Objectives of s 135 CA
(b) Substantial Risk of Serious Loss
(c) Standard of s 135 CA
(d) Non-executive Directors
(e) Summary
2 The Duty in Relation to Obligations (s 136 CA)
(a) Contents and Objectives of s 136 CA
(b) Standard of s 136 CA
(c) Main Points of Criticism Against s 136 CA
(i) Lack of Exception for Risk-Conscious Creditors
(ii) Uncertainty of s 136 CA
(d) Summary
3 The Duty to Act in the Company’s Best Interest (s 131 CA)
(a) Contents and Background
(b) When Is This Duty Triggered?
(c) Summary
4 Solvency Test
5 Tort of “Deepening Insolvency”
6 Ratification of Breach of Duty
7 Evaluation of Insolvent Trading Provisions in General
(a) Concern That Directors Get Too Cautious
(b) Balance Between Entrepreneurial Freedom and Creditor Protection
(c) Concern of Lack of Business Experience and Fairness among Judges
(d) Ways of Protection: Deterring Effect and Compensation
(e) Concerns about the Deterrent Effect of Insolvent Trading Provisions
(f) A Director’s Conflict of Interest in the (Pre-) Insolvency Situation
(g) Summary

IV THE DIRECTOR’S CIVIL LIABILITY – ENFORCEMENT OF DIRECTORS’ DUTIES
A Enforcement of Directors’ Duties in General
1 Overview of the Available Remedies
2 Who Can Generally Enforce Directors’ Duties?
B Enforcement of Directors’ Duties in Course of Liquidation
1 Additional Possibilities of Enforcement in Course of Liquidation – s 301 CA
2 Enforcement by Individual Creditors
3 Possibility of Enforcement for Creditors Outside of s 301 CA
4 Summary
V SEPARATE DUTIES DIRECTLY OWED TO CREDITORS?
A Alleged Benefit of Solving System Inconsistencies
B Alleged Benefit of Discrimination of Creditors
C Policy Considerations Against Separate Duties to Creditors

VI CONCLUSION

Bibliography

ABSTRACT

This essay deals with directors’ duties, focusing on the duties that specially arise in the context of a company becoming insolvent. The relevant duties are those under sections 131, 135 and 136 of the Companies Act 1993. The drafting of these insolvent trading provisions in New Zealand has been criticised in the legal literature. This research paper considers not only this criticism but also deals with the more general debate about the value of insolvent trading provisions in general. Although the current drafting of the relevant provisions in New Zealand is not without minor flaws, the need for creditor protection requires the maintenance of insolvent trading provisions in general. Besides that, this essay looks at the remedies for breaches of directors’ duties. The most important provision in this context is s 301 Companies Act 1993. Pursuant to this provision both the liquidator and individual creditors can enforce directors’ civil liability. However, the possibilities of individual creditors to obtain payment directly to themselves are restricted. The final part of this essay considers the question whether a separate duty directly owed to individual creditors should be introduced. Although such a duty seems to have some benefits, it would not be commensurate with leading principles and ideas of Insolvency Law and should therefore not be introduced.

It is the concern of this research paper to point out the many issues that arise in context of directors’ duties and insolvency law and to show that it is important to strike an appropriate balance between the intended creditor protection and the entrepreneurial freedom of company directors.

STATEMENT OF WORD LENGTH

The text of this research paper (excluding table of contents, abstract, footnotes and bibliography) comprises approximately 15.102 words.

I INTRODUCTION

Since directors run a company’s affairs their decisions dictate the company’s success or can lead the company into financial difficulties or even insolvency. Directors are usually vested with broad discretionary powers to optimise efficiency. Since in corporate governance management and ownership of a company’s business are distinct, it is very important that the exercise of these powers is guided and controlled.^[1] This is even more true when a company is in or near to insolvency, because directors will want to “continue trading as they have everything to gain and nothing to lose”^[2]. Where further trading rescues a company they will have saved their jobs and shares (if they have any). Upon entering liquidation they will have not lost more than what they would have, had they immediately ceased trading. In order to guide and control the execution of a director’s powers, a director has to comply with several duties.

This essay describes and discusses the contents of these duties. After providing a brief overview of the most important duties a director has in general, the paper focuses on directors’ duties as they appear in context of insolvency and investigates these duties in more detail. The most relevant duties in this context are the duties under sections 131, 135 and 136 of the Companies Act 1993 (CA). This essay deals not only with the current drafting of New Zealand’s insolvent trading provisions by presenting and discussing the criticism that has arisen against them. It also takes part in the more general discussion about the benefits and disadvantages of insolvent trading provisions in general. Although the current drafting of the mentioned provisions in New Zealand is not without minor flaws, their value and importance in view of the need to protect creditors of insolvent companies is not to be underestimated. Therefore, the current regime of directors’ duties as they appear in context of insolvency finally will be supported by this research paper.

Pointing out both the value and the contents of directors’ duties leads to the questions how and by whom compliance with these duties can be enforced (respectively how and by whom a directors’ civil liability can be enforced) once a breach of duty has occurred. Although breaches of directors’ duties can trigger other legal consequences as well, such as the director’s disqualification, this essay will focus only on the director’s civil liability. The analysis of the current remedy system will show that - although directors’ duties in context of insolvency are implemented to protect the creditors of insolvent companies – individual creditors have only very restricted means to assert their individual interests.

Finally the question will be considered whether a separate duty owed to individual creditors directly should be introduced. This proposal will be rejected, mainly because it would run counter leading principles and ideas of Insolvency Law.

All discussed aspects considered, the times for company directors appear to be rough. But the requirement of a high standard of care, diligence and consideration is justified when having regard to the influential and responsible positions company directors are vested with.

II DEFINITION OF “DIRECTOR”?

Talking about directors’ duties first of all requires the awareness of who is a director. Section 126 CA provides an extended definition, generally and in respect of certain provisions of the Act.^[3]

For the purposes of directors’ duties every person who is expressly appointed as a director is a director – irrespective of the position’s designation (de jure director^[4]). But directors’ duties also apply to anybody who happens to exercise the powers of a director (de facto director^[5]).^[6] Common examples of a de facto director include people whose appointment as director is either invalid or expired,^[7] or who act – for some other reason - as if they were directors. This broad understanding of a director seems to include receivers as well, but s 126 (1A) CA expressly exempts them from being deemed directors.

Besides to de jure directors and de facto directors, directors’ duties apply to so-called shadow directors as well,^[8] ie people in the background of a company’s management who have the power to direct the actions of the appointed director; either by giving binding instructions or by instructions the appointed director is accustomed to follow.^[9] The latter was interpreted by the English case Re Hydrodan (Corby) Ltd (in liq)^[10] as requiring “a pattern of behaviour in which the directors did not exercise any discretion or judgment of their own, but acted in accordance with the directions of others”. A shadow director can be a single natural person, eg a shareholder,^[11] but is more often a bank or the holding company.

Although this definition of a shadow director seems to include solicitors and accountants whose advice the appointed director is accustomed to follow, professional advisers are expressly not deemed directors, as long as they work only in their professional capacity.^[12]

Besides de jure directors, de facto directors and shadow directors the forth important group of deemed directors are the delegates. When the board of directors or single directors delegate their powers to others, also the delegate has to comply with the duties of a director when exercising these powers.^[13]

This broad definition also includes non-executive directors. While these directors are normally not involved in the company’s day to day management, they get appointed as directors because they are able to provide additional expertise, the possibility of conflict-free decisions when the executive directors find themselves in a conflict of interest, and controlling observation of the executive management.^[14] Since they are expressly appointed, they are de jure directors and have to comply with directors’ duties, even though they do not exercise directors’ powers in the day to day management. But executive and non-executive directors are not treated all the same. The distinction between executive and non-executive directors remains relevant when determining the contents of the particular director’s duties. The required standards are different and shall be discussed later together with the respective duties.^[15]

III THE CONTENTS OF DIRECTORS’ DUTIES

A Directors’ Duties in General

A company’s director has to comply with a multitude of duties. Some are more general (such as the duty to act in good faith and in the company’s best interest^[16]), others are more specific (such as the duty to keep accounting records^[17]). This essay restricts itself to the more general duties. This chapter deals with their contents and investigates how directors’ duties change when the company becomes insolvent or nears insolvency.

Directors’ duties can be divided into two groups: duties of care and fiduciary duties. While duties of care require certain standards of skill, care and expertise, fiduciary duties, which have been developed from the law of trusts,^[18] demand the director’s loyalty to the company in the first place.^[19]

Prior to the Companies Act 1993 coming into effect standards for directors exercising their powers were governed by Common Law.^[20] The most important case was Re City Equitable Fire Insurance Co.^[21] One of the objectives of the Companies Act 1993 was to distil general principles from relevant cases in order to make these principles more accessible.^[22] The duties under the Act therefore resemble those under Common Law,^[23] even though the Act requires in part a higher standard of care.^[24]

Another question is whether the Companies Act 1993 abrogated the former Common Law rules or whether these remain relevant. While the Act appears to be incomplete as regards remedies,^[25] it could be read as a code for duties of directors,^[26] although this has not yet been authoritatively decided.^[27]

1 The Duty to Act in Good Faith and in the Company’s Best Interest (s 131 CA)

Section 131 CA describes the core duty of a director: A director must act in good faith and in what the director believes to be in the company’s best interests. Since this duty is a fiduciary duty, the director’s loyalty is demanded in the first place. The duty is characterised by its subjective standard. The director’s belief to act in the company’s best interest does not have to be based on reasonable grounds.^[28] As long as the director’s belief is honest, the duty of s 131 CA is not breached. Cases of negligent misbelief are subject to the duty of care under s 137 CA.^[29]

The duty to act in the company’s best interest is not without exceptions. According to s 132 CA the director may provide for the benefit of employees where the company ceases to continue its business, even where this is not in the company’s best interest.^[30] Besides that, subsections (2) to (4) of s 131 CA allow to act in the best interest of the holding company or the shareholders rather than in the best interest of the concerned company where the concerned company is a subsidiary or part of a joint venture and when the company’s constitution permits it expressly.

2 The Duty to Exercise Powers for a Proper Purpose (s 133 CA)

The fiduciary duty to exercise directors’ powers only for proper purposes was originally adopted from the law of equity, which sets out that a holder of fiduciary powers must not exercise these powers for other purposes than that for which they were granted.^[31]

A common example of the breach of this duty is the allotment of shares in order to prevent majority control of a takeover. In Howard Smith Limited v Ampol Petroleum Limited^[32] it was stated that the proper purpose of issuing shares was only to receive new capital when needed, and not to prevent takeovers.

In contrast to s 131 CA, this duty sets out an objective standard. A director’s belief that he or she is acting in accordance with the proper purpose is therefore not relevant.^[33]

This duty was incorporated against the Law Commission’s recommendation. Their reservation was that the proper purpose duty was uncertain in terms of drawing the line between exercising powers for improper purposes and making legitimate business judgments.^[34]

3 The Duty to Comply with the Act and the Constitution (s 134 CA)

Pursuant to s 134 CA the director must act in accordance with the provisions of the Companies Act 1993 and the company’s constitution. This duty is therefore to be understood only in the context of the respective breached provision.

4 The Duty of Care, Diligence and Skill (s 137 CA)

According to s 137 CA directors must exercise their powers with the same care, diligence and skill that a “reasonable director” would apply in the same circumstances taking into account (a) the nature of the company, (b) the nature of the decision, and (c) the position of the director and the nature of the responsibilities undertaken by him or her.

In terms of this general duty of skill, care and diligence the Companies Act 1993 requires a stricter standard than that which was usually applied under the Common Law. The former Common Law duty applied a subjective standard of care in that it only took the acting director’s knowledge and experience into account. Thus, a director only had to apply his or her already existing knowledge, experience and skill, even where these were insufficient to comply with the management task satisfyingly.^[35] In contrast to that, s 137 CA sets up an objective and consequently higher standard. Where directors do not have as much as knowledge, experience and skill a “reasonable director” would have, they must fill this gap. They have to put themselves in a state of capability that allows them to fulfil their tasks as director properly.^[36]

As s 137 CA expressly says, the standard of a “reasonable director” depends on the circumstances in which the particular director exercises his or her powers, including the director’s position and the nature of the responsibilities undertaken by him or her. Since executive and non-executive directors have distinctive functions within a company’s corporate governance,^[37] the standard of care which is to be applied differs, depending on whether the actions of an executive or non-executive director are at issue. A non-executive director does not have to have all that knowledge about the company’s affairs an executive director must acquire to fulfil his or her tasks properly. However, this does not mean that a non-executive director could simply lay back and close his or her eyes on the company’s affairs. The distinction between executive and non-executive directors is no longer held up as strictly as it was before.^[38] As a consequence of this development non-executive directors are now (more than in former times) required to become familiar with the business’ affairs and must make inquiries where necessary. Nevertheless, the expected standard is lower than that expected from an executive director.^[39]

5 Ratification of Breach of Duty

Both according to s 177 CA and to Common Law^[40] breaches of directors’ duties can be redressed by ratification of the majority of shareholders. The background for this possibility is that the company’s shareholders’ investment can be understood as constituting the assets of the company. Thus, directors effectively deal with the shareholders’ equity when managing the company’s affairs.^[41] Considering this, it becomes intelligible that the “real” owners of the company’s business should be able to redress breaches of directors’ duties.

However, this possibility is not without restrictions. Ratification is not possible where the director has acted against the company’s best interest.^[42] In MacFarlane v Barlow,^[43] for example, the Court held that the payment of excessive salaries to the directors was not in the company’s best interest and could therefore not be ratified by the majority of shareholders.

B Change of Directors’ Duties In or Near Insolvency

Where a company gets into serious financial difficulties or even becomes insolvent, the situation in terms of the involved interests changes decisively. When the company faces insolvency liquidation the shareholders’ investment can be regarded as as good as lost. Instead it is the interests of the creditors that are jeopardised in the first place, because the creditors’ chance of getting paid (respectively their share in the distribution) depends on the amount of company assets that finally remains for distribution. In the (pre-) insolvency situation directors can therefore be regarded as dealing with creditor funds instead of shareholder funds.^[44]

This change regarding the relevant interests is reflected and accompanied by a change of directors’ duties in the (pre-) insolvency situation. Although the duties under sections 135 and 136 CA theoretically apply at any time, they are of practical importance only when the company is in or near insolvency. That is why they are discussed here and not together with the general duties of directors. In addition to outlining the duties under sections 135 and 136 CA, this chapter will discuss how the core duty of directors (the duty to act in good faith and in the company’s best interest under s 131 CA) changes when the company nears insolvency or is already insolvent.

Firstly, this chapter will present and discuss these duties under sections 135, 136 and 131 CA in context of insolvency by considering the main criticism that has been put forward against them. Thereby, the focus will be on the special drafting of these duties in New Zealand. After that, the debate about the benefits and disadvantages of insolvent trading provisions in general will be addressed. Although a few of the many concerns that arose in the legal literature against these duties – in particular and in general - are justified, this essay by and large supports the existence of insolvent trading provisions. They are necessary and important to protect creditor interests, especially when regarding the conflict of interests directors of (nearly) insolvent companies find themselves in.

1 Reckless Trading (s 135 CA)

According to s 135 CA a director must not agree to a company’s business being carried on in a manner likely to create a substantial risk of serious loss to creditors, nor cause or allow for this to happen.

This duty is derived from Common Law and based on s 320(1)(b) Companies Act 1955. Therefore, the decisions under s 320(1)(b) CA 1955 will remain relevant for the interpretation of s 135 CA.^[45]

(a) Contents and Objectives of s 135 CA

According to s 169 CA the duty imposed by s 135 CA is expressly owed to the company, not to the company’s shareholders or to its individual creditors. Having said this, the question remains - and is important to be answered - who actually is “the company”. The term requires interpretation. The question can only be answered by having a closer look at the duty’s contents, its purpose and the concept of a company as a separate legal entity. As having outlined above,^[46] a company can be equated with the shareholders as a whole as long as it is a running concern. This is because it is the shareholders’ investment that constitutes the company’s assets and with that the directors run the company’s business. Once these funds are exhausted and the company enters or nears insolvency, the company’s creditors as a whole have the priority interest in the company’s economic performance, because this performance is crucial for what they can get out of the liquidation process. Therefore, the creditors as a whole can be regarded as the ones whose funds constitute the assets of the company.^[47]

Consequently, the duty imposed by s 135 CA has regard to the creditors as a whole in this situation where the company is or becomes insolvent. Its purpose is to prevent a director’s decision in favour of carrying-on the company’s business where this decision would include a substantial risk of serious loss to the company’s creditors. In other words, the contents of the duty under s 135 CA can be described as a duty not to misappropriate or mismanage the assets of the company in a way that could harm the duty’s beneficiary: the company’s creditors as a whole.^[48] To be even more precise, the focus of s 135 CA lies on the protection of the already existing rather than only potential creditors of the company, because the former already have their funds in the company’s business involved.^[49]

(b) Substantial Risk of Serious Loss

The duty imposed by s 135 CA is only breached where the director’s decision to trade-on causes “substantial risk” of “serious loss” to the company’s creditors.

This wording has been criticised for being uncertain.^[50] However, the adjectives “substantial” and “serious” are expressive terms and define the dimension of danger for creditor interests sufficiently. It is clarified that the possibility of loss must be more than a negligible risk.^[51] The terms “substantial risk” and “serious loss” are to be interpreted narrowly.^[52] Thus, the risk of loss has to be very high and the expected loss has to be of significant extent.^[53] This viewpoint is supported by the section’s lucid heading “Reckless Trading”,^[54] as it spells out that only very irresponsible trading is subject to s 135 CA.^[55] For this reason the provision applies only theoretically at all times.^[56] In practice, trading-on can only result in a substantial risk of serious loss to creditors where the company faces serious financial difficulties.^[57] Otherwise (if the company was completely healthy) the taking of an extraordinary business risk would not affect the creditors’ chance of getting paid.

There has been brought up also another concern regarding the interpretation of these terms (“substantial risk” and “serious loss”). It has been criticised that the provision was not open to an entrepreneurial approach of interpretation, because it does not admit to balance possible losses against achievable returns.^[58] The expectation of a possibly higher return should justify a higher risk.^[59] Hon Justice Tompkins tried to mitigate this concern and argued, extra-judicially, that the question whether a substantial risk of serious loss was taken or not, could only be answered by considering the transaction as a whole. This requires - besides the assessment of the risk itself - a consideration of the expected profit. A very high achievable profit would indirectly benefit the company’s creditors and could turn a “high” risk into a “reasonable” risk that was allowed to be taken by the director.^[60] This argumentation is problematic for two reasons. Firstly - as stated obiter by Justice O’Regan in Fatupaito v Bates^[61] - the wording of s 135 CA refers only to the “risk” and does not provide any exception in that a potential high profit would justify the taking of high risks. However, this concern is not necessarily persuasive, because single words in legislature often have to be interpreted from a wider angle. But secondly, even where the expected profit is high and would – in case of its realisation - indirectly benefit the company’s creditors, it remains the fact that the risk of loss is high as well. In other words, from the creditors’ point of view where the chance of realising the profit is low the whole transaction often appears not to be in their interest. The purpose of s 135 CA is to protect creditor interests by preventing directors from taking extremely risky decisions. Where a company is solvent, directors are allowed to take high business risks and can justify doing so with a possibly high profit. But s 135 CA precludes this possibility of directors’ business discretion when the company is insolvent or near insolvency, in order to protect creditor interests. Therefore, it is no flaw of the section that it does not allow for having regard to expected profits when determining whether a risk is a substantial risk of serious loss or not. This view is justified by the aim of creditor protection.

[...]

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^[1] Paul L Davies Principles of Modern Company Law (7ed, Sweet&Maxwell, London, 2003) 370, 371.

^[2] D D Prentice “Creditor’s Interests and Director’s Duties” (1990) 10 OJLS 265, 265.

^[3] This definition is not exhaustive so that Common Law and other provisions of the Act, eg s 151(4), are relevant in addition. See Brookers Company Law (online commentary, Brookers, Wellington, 2003) para CA 126.01(1) <http://helicon.vuw.ac.nz:4580/databases/modus/cns/cscom law/toc?si=15&expand-tid=37&j=tid.37> (last assessed 24 August 2006).

^[4] See the English case Re Hydrodan (Corby) Ltd (in liq) [1994] 2 BCLC 180, 182 (Ch) Millet J.

^[5] See the English case Re Hydrodan (Corby) Ltd (in liq), above n 4, 182 Millet J.

^[6] Companies Act 1993, s 126(1)(a) and s 126(1)(b)(iii) and (c).

^[7] Brookers Company Law, above n 3, para CA 126.04.

^[8] For this notion see John McDermott Understanding Company Law (LexisNexis, Wellington, 2005) para 6.2.2.

^[9] Companies Act 1993, 126(1)(b).

^[10] Above n 4, 182 Millet J.

^[11] Companies Act 1993, s 126(2) and (3).

^[12] Companies Act 1993, 126(4).

^[13] Companies Act 126, s 126(1)(c); see Fatupaito v Bates [2001] 3 NZLR 386, 598 (HC) O’Regan J.

^[14] Dale A Oesterle “Corporate Directors’ Personal Liability for “Insolvent Trading” in Australia, “Reckless Trading” in New Zealand and “Wrongful Trading” in England: A Recipe for Timid Directors, Hamstrung Controlling Shareholders and Skittish Lenders” in Ian M Ramsay (ed) Company Directors’ Liability for Insolvent Trading (Centre for Corporate Law and Securities Regulation and CCH Australia Limited, Melbourne, 2000) 19, 31; see also Mike Ross Corporate Reconstructions – Strategies for Directors (CCH New Zealand Limited, Auckland, 1999) 26.

^[15] See below Part III Contents of Directors’ Duties.

^[16] See Companies Act 1993, s 131 and below.

^[17] See Companies Act 1993, s 194.

^[18] Davies, above n 1, 371.

^[19] See Ross, above n 14, 23.

^[20] The Companies Act 1955 formulated directors’ duties only in the context of the court’s possibilities in case of non-compliance, without expressing them as positive duties, see Companies Act 1955 s 320.

^[21] [1925] 1 Ch 407, 419 (CA) Romer J.

^[22] McDermott, above n 8, para 6.4.3.

^[23] McDermott, above n 8, para 6.4.3.

^[24] See below Part III A 4 The Duty of Care, Diligence and Skill (s 137 CA); McDermott, above n 8, para 6.4.3.

^[25] McDermott, above n 8, para 6.4.4.

^[26] In Benton v Priore (2003) 9 NZCLC 263, para 47 (HC) Heath J stated that the Common Law duties remain relevant. This decision has recently be followed by Sojourner & Anor v Robb & Anor (4 July 2006) HC CHCH CIV-2004-476-586, para 100 Fogarty J. On the contrary Hugh Rennie and Peter Watts “Directors’ Duties and Shareholders’ Rights” (New Zealand Law Society, Wellington, 1996) NZLS Seminar August - September 1996, 2 hold the view that directors’ duties are regulated exhaustively in the Companies Act 1993.

^[27] McDermott, above n 8, para 6.4.4.

^[28] See Re Smith & Fawcett Ltd [1942] Ch 304, 306 (CA) Lord Greene MR. The Law Commission’s request for an objective standard was rejected, see Brookers Company Law, above n 3, para CA 131.02.

^[29] Brookers Company Law, above n 3, para CA 131.02.

^[30] Under Common Law this was not permitted, see Parke v Daily News Ltd [1962] Ch 927, 930 (Ch) Plowman J.

^[31] McDermott, above n 8, para 6.4.8.

^[32] Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 (PC).

^[33] Brookers Company Law, above n 3, para CA 133.01.

^[34] See Brookers Company Law, above n 3, para CA 133.02.

^[35] Ross, above n 14, 24.

^[36] Brookers Company Law. above n 3, para CA 137.02(2).

^[37] See above Part II Definition of “Director”.

^[38] In AWA Ltd v Daniels (1992) 10 ACLC 933, 941(SC NSW) CJ Rogers made this distinction and stated that non-executive directors do not have the duty to investigate matters presented to them.

^[39] See Daniels v Anderson (1995) 13 ACLC 614, 621 (SC NSW); Deloitte Haskins & Sells v National Mutual Life Nominees (1991) 5 NZCLC 67, para 418 (CA) Casey J.

^[40] See Companies Act 1993, s 177(4). The consequence of this subsection is that the possibilities of ratification under the Common Law stay relevant, see Brookers Company Law, above n 3, para CA 177.02.

^[41] Andrew Keay „Formulating a Framework for Directors’ Duties to Creditors: An Entity Maximisation Approach“ 64 CLJ 614, 617 [„Formulating a Framework for Directors’ Duties to Creditors: An Entity Maximasation Approach“]

^[42] MacFarlane v Barlow (1997) 8 NZCLC 261, para 470 (HC) Master Venning; Daniels v Daniels [1978] Ch 406, 413 (Ch) Templeman J.

^[43] Above n 42, 470, Master Venning.

^[44] Ross, above n 14, 36; Gregory V Varallo and Jesse A Finkelstein “Fiduciary Obligations of Directors of the Financially Troubled Company” (1992) 48 BusLaw 239, 244.

^[45] Fatupaito v Bates, above n 13, 598, O’Regan; Brookers Company Law, above n 3, para CA 135.02.

^[46] See above Part III A 5 Ratification of Breach of Duty.

^[47] Chris Noonan and Susan Watson “Rethinking the Misunderstood and Much Maligned Remedies for Reckless and Insolvent Trading” (2004) 21 NZULR 26, 45.

^[48] See Fatupaito v Bates, above n 13, 598, O’Regan; Noonan/Watson, above n 47, 58.

^[49] Noonan/Watson, above n 47, 52.

^[50] Michael Bos and Martin Wiseman “Directors’ liabilities to creditors” (2003) NZLJ 262, 266.

^[51] Re Wait Investments Ltd (in liq) [1997] 3 NZLR 96, 103 (HC) Barker J.

^[52] Nippon Express (NZ) Ltd v Woodward (1998) 8 NZCLC 261, 773 (HC) Anderson J.

^[53] Brookers Company Law, above n 3, para CA 135.04.

^[54] McDermott, above n 8, para 6.4.12.

^[55] Brookers Company Law, above n 3, para CA 301.07 (3)(a).

^[56] But see David Goddard “Directors’ Liability for Trading While Insolvent: A Critical Review of the New Zealand Regime” in Ian M Ramsay (ed) Company Directors’ Liability for Insolvent Trading (Centre for Corporate Law and Securities Regulation and CCH Australia Limited, Melbourne, 2000) 169, 186, who argues that the provision applies at all times with the consequence of imposing a too strict duty on directors.

^[57] Ross, above n 14, 40.

^[58] Goddard, above n 56, 185.

^[59] Goddard, above n 56, 185.

^[60] Hon Justice Tompkins “Directing the Directors: The Duties of Directors Under the Companies Act 1993” (1994) 2 Waikato Law Review 13, 27.

^[61] Above n 13, 386, O’Regan J.