FORMULATING A FRAMEWORK FOR DIRECTORS’ DUTIES TO CREDITORS: AN ENTITY MAXIMISATION APPROACH

Extract

IT is now well settled in English law, as well as in several other common law jurisdictions, that when their company is in some form of financial difficulty, directors cannot ignore the interests of their companies’ creditors, but rather they have a duty to their company to consider those interests. This is all well and good, but while this general principle has been stated on many occasions by various courts, the courts have been slow to define important aspects of this responsibility. There are two major issues that have not been clarified. The first is this: from what point is the duty to consider creditor interests imposed on directors? There has been no unanimous judicial pronouncement on this issue, and this has produced some uncertainty. We know with some certainty that the duty does not operate where a company is clearly solvent. At the other extreme, we have certainty in that courts have said that the duty does apply where a company is insolvent.