Melbourne University Law Review
[Since the comments of Mason J in Walker v Wimborne, a strong line of judicial opinion has developed whereby in certain circumstances it is mandatory for directors, in discharging their duties to their companies, to take into account the interests of their companies’ creditors. But there is uncertainty as to what the actual circumstances are that will lead to directors being required to do this. This article, after briefly discussing the rationale for the duty to take into account the interests of creditors, and its development, identifies and examines the circumstances that have been said to trigger the duty. Next, the article assesses the positions taken in the various cases and considers what circumstances should exist before directors are obliged to consider creditors’ interests.]
It is a well-established principle in company law that directors owe duties to their companies as a whole but not to any individual members or other persons, such as creditors; in fact directors would be acting beyond the scope of their powers if they acted for the benefit of creditors. Yet, by way of exception to this principle, and to the principle established in Salomon v Salomon, it has been held in a significant number of cases in Australia as well as in New Zealand, the United Kingdom and the United States that in certain circumstances it is mandatory for directors, in discharging their duties to their companies, to take into account the interests of their companies’ creditors. However, this exception is ill-defined for there is a distinct lack of judicial unanimity as to the actual circumstances which will cause directors to have to consider creditors’ interests. The lack of precision in delineating the point at which directors are to have regard for creditor interests, and may potentially become liable, is highly unsatisfactory. While acknowledging the fact that establishing guidelines in this area of the law is not easy, it is submitted that directors in undertaking their decision-making need to be guided by consistent and clear principles so that they know the ground rules and at what point in time, if at all, they are subject to this duty. As a matter of legal certainty and fairness, lines have to be drawn so that directors can be confident that when they act they are taking into account the appropriate interests and that their action is safe from attack. If directors are unable to ascertain, with a fair degree of certainty, what they can do and when they are potentially liable, then, from an academic viewpoint, the law is unjust, and, from a practical perspective, directors will nearly always take the safest option in order to prevent any possible lawsuits. In doing this, directors are likely to act defensively and make decisions not on the basis of what is best for the company, but of what will avoid liability.
This article, after briefly discussing the rationale for the duty to take into account the interests of creditors and its development, will identify and examine the circumstances that have been said to trigger the need for directors to take into account creditors’ interests. Next, the article will assess the positions taken in the various cases and consider what circumstances should exist before directors are obliged to consider creditors’ interests. It is asserted that there is a clear relationship between the extent of the risk of insolvency and the extent of the permissible risk to which directors can expose the assets of the company. Hence, the duty considered here is designed to protect the assets of the company when they are at risk of being lost. The assets may well be at risk because the directors are tempted to embrace a lucrative deal from which the shareholders will gain (and, if they are shareholders, from which the directors themselves will gain), but which will cause loss to the creditors if the deal is not successful.
There are two issues that have excited some consideration in the case law and academic commentaries that are worth mentioning. The first concerns the kind of creditors to whom a duty is owed. The main debate in this regard has been over whether a duty is owed to future creditors. For the purposes of this article only, it is assumed that a duty is not owed to such creditors; it is only owed to present creditors, that is, creditors in existence at the time when the appropriate circumstances triggering the duty come into being. The second issue is whether the duty owed by directors is a direct duty owed to the creditors, or whether it is an indirect duty in that the duty is owed not to creditors, but to the company to consider creditor interests. Undoubtedly the predominance of opinion is that the latter is correct (with the usual enforcer of the duty on behalf of the company being a liquidator), and this article does not seek to challenge that view. However, for ease of exposition, the article will refer, from time to time, to the duty discussed as a duty to creditors. Given the present state of the law, this is not correct technically, but it is a generally accepted shorthand way of referring to the duty, provided that the necessary caveats are mentioned.
As will be discussed later, the predominant amount of case law in all jurisdictions considered in this article has taken the view that if a company is in various states of financial difficulty the creditors warrant some special consideration. Certainly if the company is insolvent, in the vicinity of solvency or embarking on a venture which it cannot sustain without relying totally on creditor funds, ‘the interests of the company are in reality the interests of existing creditors alone.’ At this time, because the company is effectively trading with the creditors’ money, the creditors may be seen as the major stakeholders in the company. The creditors are protected only by contractual rights, but when companies are financially stressed perhaps it is only fair that their position warrants some form of fiduciary protection, whereby the directors become accountable principally to the creditors. Unless this occurs, then the directors have every reason, at this time, to engage in risky ventures that could bring in substantial benefits, but could, if they fail, imperil the company. The shareholders have little or nothing to lose by such a gamble as they have already lost the money that they invested in the company and they cannot be pursued by creditors because of the concept of limited liability. A venture, however risky, could conceivably turn the company around and provide the shareholders with some return, but such action, if it failed, would see the creditors suffer an even greater loss as they would be the ones to lose out if the company collapsed. The fact is that creditors will receive the same sum irrespective of how well the company performs; therefore, they have the most to lose from risky actions being taken by directors. So, while the doctrine of limited liability shifts the risk of failure from the shareholders to the creditors, the duty to take account of creditors’ interests seeks to mitigate the shift. Breach of the duty is usually claimed when the company is in liquidation and the duty is a way of compensating unsecured creditors for whom liquidation is frequently perceived as an empty formality. While most jurisprudence sees debtors as the weaker party in the lending situation, the fact of the matter is that when a company is in financial distress it is the creditors who often occupy a position of weakness.
Finally, while there are provisions in legislation that may protect, or, more correctly, provide some compensation for creditors on liquidation occurring, these provisions are often limited in their application. Hence, prescribing a duty to creditors could be the only way of ensuring some protection for creditors where a company is financially distressed. It is not possible, given the focus of this article, to set out all of the instances in which the duty to creditors might protect creditors more adequately than existing legislative provisions, but a couple of examples might assist the following discussion. First, to establish a breach of s 588G of the Corporations Act 2001 (Cth) it must be proved that the company incurred a debt. There is a plethora of commentaries which identify the problems which exist in establishing this element of s 588G. Second, in order to argue successfully that a payment is, for instance, an unfair preference and, hence, a voidable transaction within s 588FF, a liquidator must prove, inter alia, two elements. Firstly, the liquidator must prove that the payment was given in the six months before the relation-back day (usually the date on which a winding-up application was filed or the company resolved to wind up). Secondly, it must be shown that the payment results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the payment were set aside and the creditor were to prove for the debt in a winding-up of the company. Claiming that directors owe a duty to creditors means that these foregoing matters are bypassed.
Whilst it is unnecessary to provide a substantial discussion in relation to how the law has developed, for this has been done admirably by a number of learned commentators, little has been written on the subject for some years and it is appropriate to set out some of the major developments as a precursor to the discussion which is at the heart of this article.
The duty to creditors is seen as having its genesis in the leading judgment delivered by Mason J in Walker v Wimborne. His Honour said:
In this respect it should be emphasised that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.
While his Honour’s statement may have been of a rather casual nature, the impact of the dictum is not to be diminished as it has been either acknowledged or eagerly taken up by many other courts, not only in Australia, but elsewhere in the Commonwealth, including courts in New Zealand and the United Kingdom. By the 1980s, the idea of directors owing some duty to take into account the interests of creditors had been regarded as providing a real protection for creditors of companies. Notwithstanding the robust criticisms of the duty, or aspects of it, by some leading academic commentators, and the rather ambiguous remarks of Hayne JA in the Victorian Court of Appeal decision in Fitzroy Football Club Ltd v Bondborough Pty Ltd concerning the existence of the duty, the duty has been referred to and applied in recent cases in jurisdictions which have traditionally embraced it, as well as being accepted for the first time in an appellate court in the Republic of Ireland. Only last year the High Court in Spies v The Queen, in obiter comments, implicitly acknowledged the existence of the duty. So, while there remain misgivings concerning the time from which it operates, the duty has been supported widely as an important protection for creditors in certain circumstances.
The courts have, in general, preferred to found the duty on a traditional basis in that they have said that the duty is owed to the company to take into account the interests of creditors, that is the duty is mediated through the company, rather than holding that the directors owe a duty directly to the creditors. Nonetheless there have been some who have taken the view that directors should owe a duty to creditors directly. It has been pointed out that Mason J in Walker v Wimborne did not exclude a direct duty to creditors, and one can perhaps read the judgments of Lord Templeman in Winkworth v Edward Baron Development Co Ltd and the Full Court of the Supreme Court of Western Australia in Jeffree v National Companies and Securities Commission as providing some support for an independent duty being owed to creditors. However, recent judicial comments are set against such a duty. First, Gaudron, McHugh, Gummow and Hayne JJ of the High Court in a joint judgment in Spies v The Queen said by way of obiter that ‘it is extremely doubtful whether Mason J intended to suggest that directors owe an independent duty directly to creditors.’ Second, in the English case of Yukong Lines Ltd of Korea v Rendsburg Investments Corporation, Toulson J clearly rejected the notion of a direct duty being owed to creditors. However, there are indications in the United States, which has seen different avenues being followed in the development of its law in the area, that, while no duty is extended to creditors in general, there is a direct duty owed in certain limited circumstances, such as when the company is insolvent.
An important point to note is that hitherto all of the cases where a director has been found to be in breach of the duty have involved closely-held companies in which the director is also a shareholder. Directors in these sorts of companies are more likely to be the subject of attack as it is in their interests as shareholders to take on risky ventures. Perhaps in cases involving larger companies, courts might be more reluctant to impose the duty. This remains to be seen.
Again, it is unnecessary to discuss in detail most of the cases which have considered the duty to creditors, because they have been examined by previous commentators. While several of the most important cases are considered in some depth, the ensuing discussion focuses on the issues and problems surrounding the points in time at which courts have found that the duty arises.
It is almost non-contentious to say that directors have a duty to take account of the interests of creditors when the company is insolvent. While Mason J in Walker v Wimborne did not limit the duty to cases of insolvency or even of financial distress, several of the cases in the 1980s introduced insolvency as a requirement.
In one of the leading cases in the area, Kinsela, a case cited with approval in a number of jurisdictions, the New South Wales Court of Appeal was faced with a claim against directors who, on behalf of their company, entered into a lease of the company’s premises in favour of themselves for a three-year period with a three-year option at a rental which was well below market value. At the time, the company was in a financially precarious state. Shortly after the lease was given, the company entered into liquidation pursuant to a winding-up order. Subsequently the liquidator sought a declaration that the lease was voidable. Street CJ, in delivering the leading judgment, found against the directors of the company because of the fact that the company was clearly insolvent when the lease was executed. His Honour left open the door for extending the scope of the duty to encompass other states of financial distress short of insolvency, preferring not to comment on the degree of financial instability required before a duty was imposed on directors as he was not required to do so given the facts of the case.
A majority of the High Court in Spies v The Queen approved of the comments of Gummow J in Re New World Alliance Pty Ltd when his Honour said that insolvency created a duty to creditors.
Certainly it is possible to say that when insolvency exists the notions of corporate ownership and creditors’ rights converge. The creditors then are the real owners of the company, the ownership rights of the shareholders having been expunged as there is nothing over which they have a claim. Hence, if a company is insolvent, directors act improperly if they employ funds that are payable to creditors in order to continue the activities of the company.
If the trigger for the liability of directors to creditors is insolvency, one major problem is: what definition of insolvency applies? Some have said that insolvency is a broad and ambiguous term, while others have focused on the indefinite nature of the concept.
Accounting details are often critical in assessing whether a company is insolvent or not and, in this regard, David Wishart is concerned that accounting practice is bedevilled by a lack of definitions and difficulties with valuations. He has stated that:
[A]ccounting information is being called on to draw a definite line on which liability hangs yet which in many ways does not yield certain results. In emphasising legal form through the definition of status, consideration of the ambivalence of the position of creditors in insolvent companies is shifted from directors’ duties to accounting requirements.
All of these criticisms are fair, certainly in relation to the past, when there was no statutory definition of ‘insolvency.’ But now in the Corporations Act 2001 (Cth) there is a definition, albeit a little convoluted. Section 95A(1) provides that ‘[a] person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.’ This is followed in s 95A(2) with the rather redundant statement that ‘[a] person who is not solvent is insolvent.’
This section provides for commercial or, as it is more frequently known, cash-flow insolvency. It is clear that the test is not without its problems. The main difficulties with the cash-flow test have been said to be that it is vague in meaning, and the decision as to whether a company, on a particular day, is insolvent is often a difficult and imprecise one. While these comments continue to hold some water, it is fair to say that in recent years, especially in Australia, there has been greater certainty in assessing whether or not a company is insolvent (on the cash-flow basis) at a particular point of time.
The United Kingdom also provides in its insolvency legislation for a definition. For instance, in relation to preferences and transactions at an undervalue, insolvency means either cash-flow or balance-sheet insolvency. Hence, in Yukong Lines Ltd of Korea v Rendsburg Investments Corporation, Toulson J applied the balance sheet test and said that in the case before him there was a clear breach of duty because the liability to a creditor was well in excess of the company’s assets. In the United States, the balance-sheet test is invoked.
Professor Len Sealy raises, in his attack on the use of insolvency as the trigger for the advent of the duty, the fact that a company may move in and out of insolvency as its fortunes fluctuate, and that the duties of directors should be evaluated from a broad perspective and not on the basis of technicalities. Undoubtedly the riposte to this view is that, if a company does move in and out of insolvency, obviously indicating that it is highly unstable from a financial point of view, then it is exactly the type of company whose affairs should be run with consideration for the creditors’ interests; it is likely to collapse without much warning. In fact, the point Professor Sealy makes may well be a good reason for having a less definite point at which the duty is triggered. Professor Ross Grantham has similarly commented that:
[I]nsolvency is the most obvious indication that the residual risk is no longer borne by the shareholders. Thus the question posed by the court is not simply whether the company is insolvent, but that given the distribution of risk does it continue to be appropriate to regard the interests of shareholders as exclusively reflecting the corporate interest.
It is not unusual to find that insolvency is the point at which liability attaches to someone. For instance, Division 2 of Part 5.7B of the Corporations Act 2001 (Cth) provides that a preference may only be avoided if either the company was insolvent when the transaction that constituted a preference was entered into or the entering into of the transaction caused the company to become insolvent. The difficulties which can exist with the notion of insolvency have not prevented the use of the concept in s 588G of the Corporations Act 2001 (Cth) in relation to insolvent trading, nor has the UK legislature been reluctant to use the idea of insolvent liquidation in relation to wrongful trading in setting out the point from which directors may be liable for the losses of creditors. It is submitted that many of the concerns over the definition of insolvency are illusory.
Another important point to note is that insolvency rarely occurs overnight, save where there are events like the share collapse in October 1987, and where there are telltale signs of a company’s demise well before the point that technical insolvency occurs.
If the trigger for the duty to creditors is insolvency, should the duty apply strictly or only when it is, or should have been, clear to the directors that the company is insolvent? In Liquidator of West Mercia Safetywear Ltd v Dodd, Dillon LJ found against the director who was being pursued for breach of duty because that director knew that his company was insolvent when he gave a preference payment to a related company. While his Lordship did not specify knowledge of insolvency as a prerequisite for the duty to arise, it is worth considering whether knowledge should be taken into account. There is, it is submitted, a grave danger in introducing any notion of knowledge. Establishing a person’s knowledge is, like establishing intention, never very easy. If there is a need for knowledge, the duty may well be tantamount to useless on many occasions because of the difficulty of proving knowledge. Perhaps it would be fairer to introduce, in addition to knowledge, an objective element, that is, ought the director have known that the company was insolvent. This is the approach employed in the UK in relation to wrongful trading, for a director is liable if he or she knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation. Taking such an approach would be the most equitable standard for creditors and directors alike. It seems that the jurisprudence that has developed, and is developing, in relation to ss 180(1), 588G and 588H of the Corporations Act 2001 (Cth) should be able to be pressed into service as far as possible in determining what directors should be taken to know.
All reported cases in Australia, New Zealand and the United Kingdom appear to have been concerned with what may loosely be called ‘closely-held companies’, and, if this is indicative, as it probably is, of the kind of cases which will be pursued, one might think that all directors sued ought to have known that their companies were insolvent, if in fact they were. This sort of requirement might have the added benefit of encouraging directors into taking time, and obtaining assistance, in ascertaining the state of their companies’ finances. The consequence of imposing such a requirement could be that directors will discover the plight of the company early enough to be able to do something to save it, such as commencing voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth).
There are two concerns that may be voiced in relation to the identification of insolvency as the trigger-point for the duty. First, there is the problem of establishing insolvency, which is encountered by liquidators pursuing directors for breach of duty. Proving insolvency is not infrequently onerous, and consequently this may mean that directors are being given the benefit of the doubt. Second, a goal of creditors usually is the avoidance of insolvency, so the point when the company becomes insolvent is too late for the duty to creditors to arise.
Some cases have, however, given indications that a duty to take into account creditors’ interests arises before the company enters an insolvent state. The next sections of the article address this matter.
As mentioned earlier, a majority of the High Court in Spies v The Queen approved of the comments of Gummow J in Re New World Alliance Pty Ltd, when his Honour said that if a company is nearing insolvency directors have a duty to creditors. In New Zealand in Permakraft, Cooke J included near insolvency, along with insolvency or doubtful solvency, as the trigger for the imposition on directors of a duty to creditors. But perhaps the most important developments in this regard have occurred in the United States and particularly in Credit Lyonnais Bank Nederlander NV v Pathe Communications Corporation. In this case, Chancellor Allen of the Delaware Court of Chancery stated that ‘[a]t least where a corporation is operating in the vicinity of insolvency, a board of directors is not merely the agent of the residual risk bearers [the shareholders], but owes its duty to the corporate enterprise.’ The corporate enterprise to which the learned judge refers clearly comprises both shareholders and creditors.
While Chancellor Allen failed to explain exactly what he meant by ‘in the vicinity of insolvency’, he seemed to be suggesting that the duty to creditors arises when the company is nearing insolvency. This requirement means that, if a company is in the vicinity of insolvency, directors should take stock of the company’s position to ascertain whether the company will remain solvent after the action which is contemplated.
Although insolvency may suffer from imprecision, prescribing the triggering of the duty when the company is near to insolvency suffers even more from that problem, for it is impossible in many situations to say from what point a company is nearing insolvency, except where one is viewing the company’s dealings ex post facto.
While some commentators have been concerned about prescribing insolvency as the trigger for the duty to creditors because, inter alia, the company may move in and out of technical insolvency and the directors may not be aware of the company’s insolvent state, providing that doubtful solvency is the trigger allows for more leeway for liquidators in proving cases and means that directors do not have to ascertain whether their companies are in fact insolvent. Several cases have held that directors may be under a duty when doubtful solvency exists.
The argument that may be levelled at doubtful solvency as the trigger-point is that it is also imprecise. Unlike insolvency, which is now defined in the insolvency legislation of most common law countries, there is no definition of doubtful solvency. Who must doubt the solvency of the company? Directors could probably ascertain when the solvency of their company is doubtful more easily than when insolvency has occurred. Insolvency occurs at one point. Doubtful solvency is broader. Yet, as with ‘near insolvency’, from what point is a court going to say that a company was doubtfully solvent?
Moving further away from the point of insolvency, some cases suggest either expressly or implicitly that directors have a duty to creditors once there is a risk of insolvency. For instance, Cooke J in Permakraft stated that directors owed a duty where a ‘contemplated payment or other course of action would jeopardise solvency.’ In Liquidator of West Mercia Safetywear Ltd v Dodd, Dillon LJ referred to his earlier judgment in Multinational Gas, a case in which the Court of Appeal rejected the argument that the directors owed a duty to take into account creditors’ interests after the directors made a bad decision and this led to the company becoming insolvent. His Lordship said that the reason for his decision in that case was the fact that the company was amply solvent and the decision of the directors was made in good faith. His Lordship implied in Liquidator of West Mercia Safetywear Ltd v Dodd that, if the company in Multinational Gas had not been amply solvent, and there was a risk of insolvency as a result of the directors’ decision, then he would have held there to have been a duty. The same approach has been employed in relation to the avoidance of preferences in England. In Katz v McNally, the Court of Appeal upheld the reasoning of the judge at first instance that it was not necessary for it to be established that the directors knew that the company was insolvent when giving a preferential payment before the payment could be avoided under the Insolvency Act 1986 (UK) c 45; it was enough that the directors knew that there was a real risk of insolvency if they made the payment.
Taking up what Cooke J said in Permakraft, one is moved to ask whether the directors must know either that there is a risk of insolvency or that the action could lead to insolvency. Again, as with the case where insolvency is the trigger, requiring knowledge is leaving the creditors too exposed. Such a requirement could too easily favour the indigent director who has not sought to apprise himself or herself of the state of the company’s affairs and, as a result, did not know that there was a risk of the company becoming insolvent. Consequently, in addition to prescribing knowledge of the risk of insolvency, an objective test has to be employed. Therefore, the trigger for the duty would be either where the directors knew of the risk of insolvency, or where they ought to have known of the risk of insolvency or that one of the reasonably expected consequences of their action could be insolvency.
Other cases have not sought to identify with any precision how close to insolvency the company must be before the duty arises. They have been content to say that the company must be in a dangerous financial position or financially unstable. These phrases can mean a number of things and can be regarded as indefinite, but it is fair to say that for the most part, from a financial economist’s viewpoint, they mean that the company is facing insolvency, and this appears to have been the meaning given in the cases. Therefore, the trigger point is probably close to ‘doubtful solvency’ or a ‘risk of insolvency’.
Perhaps the first thing to note is that the preponderance of authority favours the view that a duty to take into account the interests of creditors does not arise where a company is clearly solvent. But, as already noted in this article, there is a significant amount of judicial opinion that supports the view that the duty is triggered before a company actually becomes technically insolvent. That said, it is plain, as indicated at the outset, that, while there is significant agreement amongst judges both on the need for a duty to creditors and the fact that the duty should not arise until the company is suffering some degree of financial difficulty, there is no unanimity on the question of when the duty is triggered.
If the duty is imposed at one extreme of the financial spectrum, namely insolvency, there is a significant danger that creditors will not benefit, for the reasons discussed below. If the duty was to apply at the other extreme, namely when the company is clearly solvent, then it would have the effect of unreasonably interfering with the decision-making of directors, hamper the business of the company, and would be likely to lead to directors being over-cautious.
The New South Wales Court of Appeal in Linton v Telnet Pty Ltd recognised that the time when directors should pay attention to the interests of creditors was dependent on the facts. In Kinsela, Street CJ said, ‘I hesitate to attempt to formulate a general test of the degree of financial instability which would impose upon directors an obligation to consider the interests of creditors.’
While the comment in Linton v Telnet Pty Ltd is undoubtedly true, and the latter comment in Kinsela understandable, some guidelines are needed in order to be fair to directors so that they can plan and know when they must exhibit some loyalty to creditors. Also, guidelines must be identified if this development of the law is not to suffer further criticism on the basis that it is imprecise and produces uncertainty.
Some of the cases that have been decided are of limited assistance as they involve situations that are relatively clear-cut and because they failed to establish any specific guidelines to assist in more difficult and marginal cases. Instances are such cases as Kinsela and Liquidator of West Mercia Safetywear Ltd v Dodd, where all would probably agree that the directors should have been held liable for breach of duty. In the former case the liquidator of RK, which carried on business as a funeral director, brought proceedings to set aside a lease over premises granted by RK to directors of the company three months before the commencement of winding-up. The lease had been granted at a time when the company’s financial position was precarious. The company had sustained a significant loss during the previous year, had suffered less severe losses for several years, and, some six months before the lease was entered into, the accounts showed that the company’s liabilities exceeded its assets by nearly $200 000. Also of importance was the fact that the company had committed itself to performing services in relation to prepaid funerals. The lease involved the directors being given a term of three years at a below-market rental. There was no escalator clause to cover inflation and the directors were entitled, during the life of the lease, to purchase part of the premises for a sum which was well below true value. As Street CJ said, in delivering his leading judgment in the New South Wales Court of Appeal,
this insolvent company [RK], in a state of imminent and foreseen collapse, entered into a transaction which plainly had the effect, and was intended to have the effect, of placing its assets beyond the immediate reach of its creditors ... by means of ... the terms of [a] ... lease [which] were, to say the least, commercially questionable.
In Liquidator of West Mercia Safetywear Ltd v Dodd, D, a director of WMS, transferred £4000 to WMS’s parent company on 21 May 1984. WMS entered liquidation on 4 June 1984. The liquidator of WMS brought misfeasance proceedings against D, seeking the recovery of the £4000, on the basis that D breached his duty to WMS. D had paid the money to the parent company because he had guaranteed the parent’s debts and he wanted to reduce his financial exposure. Of critical importance to Dillon LJ, in delivering the leading judgment of the Court of Appeal, was that D knew that WMS, at the time of the payment, was insolvent.
At the other extreme, but equally as clear-cut, are cases like Multinational Gas. In that case, three oil companies agreed to a joint venture in relation to liquefied petroleum gas and liquefied natural gas, which involved forming company X in Liberia. Another company, S, was registered in England to act as the adviser and agent of X. The directors of X made a number of decisions which resulted in X chartering or acquiring some 20 tankers. This led to the incurring of future financial liabilities. A downturn in the market caused X financial difficulties and it halted trading. Both X and S went into liquidation. X sued, amongst others, S and those exercising powers of management in relation to S, for breach of duty, namely making decisions which resulted in X becoming insolvent. In that case, according to Dillon LJ in Liquidator of West Mercia Safetywear Ltd v Dodd, who was also a member of the Court of Appeal bench in Multinational Gas, X was amply solvent at the time of the impugned transactions and the directors made business decisions in good faith and were not liable for breach of duty.
In determining what should be the trigger for the duty, one must take into account a number of factors. First, undoubtedly companies need, at times, to take risks to prosper. One can even say that without risks being taken we would not enjoy some of the things that we do enjoy in society today, such as the railways. The corollary of this, certainly from a theoretical perspective, is that one of the functions of the directors, being the persons who manage a risk-taking enterprise, is to engage in overseeing the very action of risk-taking. The argument of those who question the existence of a duty to creditors is, inter alia, that directors are placed under greater pressure when making decisions and the company’s development might be stifled as directors become extremely cautious and refuse to take risks. This is the point on which Vladimir Jelisavcic focuses when discussing the Delaware decision of Credit Lyonnais Bank Nederland NV v Pathe Communications Corp. The learned commentator states in relation to the ‘in the vicinity of insolvency’ test that it
exposes directors to liability for breach of fiduciary duty to creditors without clearly defining the point at which this new duty springs forth. This poorly defined, potentially large personal liability could chill directors’ exercise of their business judgment when confronted with difficult choices. Directors may feel constrained to make overly-conservative decisions when they are unsure whether their corporation is in the ‘vicinity of insolvency’.
It has been said that the duty ‘results in the inability of directors to take risks with corporate assets for the purposes of extinguishing or minimising the firm’s temporary financial distress’ and that it changes the role of directors from an ‘active management mode to one of passive asset-preservation.’
However, on the issue of risks and in line with the wisdom of the Preacher in Ecclesiastes, there is a time for everything. There is a time to take high risks (where the success rate is low), such as marketing a new untried product; there are times to take calculated risks; and there are times when few risks or actions involving little risk should be taken. The degree of the risk permitted will depend on the actual level of financial difficulty. If the company is financially embarrassed, the shareholders and directors may have nothing to lose by embracing a high-risk strategy; the taking of big risks could be highly profitable and ‘make the company’. But if the gamble does fail then the ones ‘picking up the tab’ are the creditors. The directors do not have the right to gamble with the creditors’ money. This does not mean that directors must sit on their hands or refrain from seeking to take the company forward; their only obligation is to refrain from taking action that cannot be calculated overall to be in the interests of the creditors. The degree of financial instability and the degree of risk are interrelated and the latter must be determined by the former. As Clarke and Cripps JJA of the New South Wales Court of Appeal stated in Equiticorp Finance Ltd (in liq) v BNZ:
[T]he question whether directors are required to consider the interests of creditors in determining whether particular action is or is not for the benefit of the company depends upon the state of solvency of the company at the time of the contemplated action.
Hence, the more obvious it is that the creditors’ interests are at risk, the lower must be the risk to which directors should expose the company. So, providing that a director must, in certain cases, have concern for the interests of creditors does not mean that risk-taking is to be totally proscribed.
Also, it is submitted that too much is often made of the argument that the duty will stifle the development of a company’s business. Requiring directors to take into account the interests of creditors does not automatically mean that directors are hamstrung, unable to take some risks and liable if things do not work. Hitherto, courts have demonstrated a good deal of understanding when reviewing what occurred to a company, often some years before the hearing of the breach of duty action. For instance, in Permakraft the New Zealand Court of Appeal did not hold directors liable for taking action to implement a scheme of reconstruction as the action was commercially justifiable. The court may, as it did in that case, look at the company’s position at the time when directors took the action that is argued to have caused a breach of duty to creditors.
It must be acknowledged that the existence of a duty to creditors might, in some cases, produce an increase in a company’s costs as directors may well have to undertake investigations to ascertain whether their contemplated actions could precipitate insolvency. Such investigations, it may be argued, could occupy inordinate periods of time and perhaps even limit the company’s profitability. This might entail, by way of protection for the directors, the securing of more expert opinions than is normal, undertaking copious checks, and even some valuations of the company’s assets — all of which would add to the company’s operating costs. While this must be seen as a cost of doing business, courts must surely take into account the costs that are associated with undertaking inquiries and realise that companies’ finances cannot be used for every check possible and that directors must act quickly in some situations.
A third factor to consider is that concern has been voiced about the difficulty of stating with precision when the shift in duty is to occur. But the law does not seem to have a problem with requiring courts to do this in other areas. For instance, a director is liable for the English equivalent of insolvent trading, wrongful trading, if he or she knew or ought to have concluded that there was no reasonable prospect of the company avoiding going into insolvent liquidation. This is imprecise, and the provision does not set out the kind of conduct which will constitute wrongful trading, but there has been relatively little criticism of the test.
It is submitted that there must be a balance. On one side, the law must not unduly hamper directors and must allow companies to be governed in a commercial manner for, as Lockhart J said in Australian Innovation Ltd v Petrovsky, ‘[i]t is important that the courts do not impose burdens upon directors which make their task so onerous that capable people would be deterred from serving as directors.’
But, on the other side of the coin, the law must ensure that it does not permit directors to do whatever they like so that the position of the creditors is ignored. Limited liability is a privilege and it must not be forgotten that it can work to the disadvantage of creditors. As Cooke J stated in Permakraft:
[Limited liability] is a privilege healthy as tending to the expansion of opportunities and commerce, but it is open to abuse. Irresponsible structural engineering — involving the creating, dissolving and transforming of incorporated companies to the prejudice of creditors — is a mischief to which the courts should be alive.
If a duty is imposed on directors before the advent of insolvency, then they will have the task of reconciling the interests of the creditors on the one hand and the shareholders on the other. It is submitted that directors are often seeking to balance interests in the decisions which they make. And in the United Kingdom directors are required by s 309 of the Companies Act 1985 (UK) c 6 to have regard for company employees as well as members in carrying out their functions. Even when subject to the duty, directors may still take action to serve the interests of members, provided that that action does not prejudice the interests of creditors.
Is the existence of a duty, when a company is subject to financial distress, likely to make directors panic and place their company into administration or even liquidation prematurely, thereby ensuring that all stakeholders lose out? There is no indication in the empirical studies conducted in relation to administration that this is the case. It is more likely that directors will take the decision to appoint an administrator or liquidate because of fear of liability for insolvent trading or liability under Division 9 of Part VI of the Income Tax Assessment Act 1936 (Cth) in respect of unremitted tax deductions.
It is submitted that the most appropriate trigger would be where the circumstances of a company are such that its directors know, or can reasonably expect, that the action upon which they are going to embark could lead to the insolvency of the company. If this were adopted, then the point of liability would not be the same across the board as the court would have to take into account the circumstances of each company, so that the more obvious it is that the creditors’ money is at risk, the lower the risk to which directors are justified in exposing the company. So, while a company will usually be experiencing some significant financial problems before the duty arises, at one extreme the duty could conceivably be triggered where a company, while not financially strong, has no obvious major financial concerns, but is contemplating action which constitutes a very substantial risk such that if the venture fails the company may well fall into insolvency.
Implementing this point as the trigger for the duty would mean that directors, before they take any action which might have a substantially negative effect on creditors’ interests, must inquire into the affairs of their company and review all material information relative to the financial standing of the company as well as take advice on the extent of the effects of the action being proposed. Directors must investigate a number of matters. One might be, if directors are leading the company into a venture, whether the company will be able to pay its debts as they fall due if the venture fails. If the company is going to be transferring assets, directors should ask whether the remaining assets are likely to be sufficient to pay off creditors. Guidelines for what action directors should take may be found in s 189 of the Corporations Act 2001 (Cth). That section provides what directors should do in order to be deemed to have acted reasonably in relying on advice. The director must undertake an independent assessment of the advice which they receive. In relation to the exercise of an independent assessment, the ‘extent to which an independent assessment will be required will vary in the circumstances.’ It would not be necessary in every case for directors to obtain the assessment of advice received from a professional person such as an accountant, although in some cases it would be appropriate. Naturally, the complexity and size of operations of the company would dictate what investigations are undertaken.
The test set out above is objective. Is this fair? Objective tests have been invoked in relation to a number of the duties owed by directors. For instance, s 181 of the Corporations Act 2001 (Cth), introduced by the Corporate Law Economic Reform Program Act 1999 (Cth), provides for an objective test. Unless one provides for an objective test, one can have directors, like the defendants in Wright v Frisina, claiming that it is easy to be wise after the event and that at the time of the alleged shift they were not aware of the company’s predicament. Also, as indicated earlier, if a subjective test is applied it could make the directors’ position close to impregnable.
Can courts undertake this inquiry into the state of a company and the investigations made by directors, and then make the necessary determination? David Wishart has questioned the expertise of judges to ‘determine the limits of acceptable business decisions.’ He also points out that it is because of this fact that judges have not interfered in the internal workings of companies. But he relies on a very old case and, while Street CJ in Kinsela accepted that courts have traditionally and properly been cautious about entering boardrooms when deciding the commercial justification of executive actions, his Honour approved of the opinion of Cooke J in Permakraft who said that, inter alia, creditors’ interests were to be considered ‘if a contemplated payment or other course of action would jeopardise [the company’s] solvency’, and this requires, as a matter of necessity, an examination of the decision of the board. Also, there are indications in recent cases that many judges no longer see the boardroom as sacrosanct and there are examples of courts in the past 20 years demonstrating a readiness to review the way in which companies operate and the merits of decisions which have been made at a managerial level. Admittedly there is a potential danger that courts will see everything with hindsight, always a most wonderful thing, and allow that unreasonably to influence them in the final outcome of a case. Obviously courts must take into account all relevant factors at the time of the director’s decision. Decisions like Permakraft, Re Welfab Engineers Ltd, Linton v Telnet Pty Ltd and Brady v Brady indicate that they have done so. For instance, in Linton v Telnet Pty Ltd the liquidator of T brought an action against L, the wife of one of the company’s directors, claiming that she, L, held a house on trust for the company because some of the purchase price was paid with cheques drawn on T. The allegation was that L’s husband who gave the cheques to L was, in doing so, in breach of his fiduciary duty to T. It had been agreed by the directors that the sums represented by the cheques were part of an interest-free loan to L’s husband. At first instance, Hulme J of the New South Wales Supreme Court found for the liquidator on the basis, inter alia, that as L’s husband was a bankrupt he would have little prospect of repaying the loan, and the giving of an unsecured loan was a breach of duty. L appealed to the Court of Appeal, which upheld the appeal. The cheques had been given to L in August 1992 and Giles JA in delivering the leading judgment (with Beazley JA and Sheppard AJA concurring) noted that the figures for the group of which T was a part were, at June 1992, reasonably healthy and sales and gross profits in fact increased in 1993. His Honour went on to say, most poignantly, that ‘[w]hile the net loss for the year ended 30 June 1993 could later be seen as the beginning of its decline, peril to creditors on a group basis as at August 1992 did not leap out from the figures.’
In Re Welfab Engineers Ltd, Hoffmann J had to decide whether or not directors had breached their duty to the company (by not taking into account the interests of creditors) in accepting one bid for the company’s property and not others at a time when the company was in desperate financial straits. The learned judge, in coming to his decision, took into account the commercial environment at the time of the making of the transaction alleged to constitute the breach, even though it occurred some seven years in the past. At the time of the alleged breach, the region in which the company’s business operated was suffering a harsh recession and this impacted markedly on the decision made.
In sum, while judges will, it is acknowledged, often have to wrestle with difficult questions flowing from differing views of what constitutes the right action in the circumstances in which companies are to be found, they are able to make the necessary assessment of the actions of creditors.
Are creditors being favoured unreasonably if the duty is set in the terms suggested above? First, it might be said, quite adroitly in many ways, that traditional doctrine states that creditors should be able to look after themselves — they are not forced to extend credit to companies, so should they not take the risk of not getting paid in full, or at all? Creditors have to accept that directors may lose their funds in endeavouring to benefit the company. Second, as Professor Sealy asserts, ‘creditors deal with a company as a matter of bargain, not of trust, and bargain involves risk.’ Creditors, as traditional doctrine again asserts, build compensation for the risk into the price they charge for extending the credit. It has been said that there is no room for the employment of a fiduciary duty in the circumstances contemplated here as it is the fault of creditors if they do not either negotiate an adequate remedy for non-performance or ensure that they are protected in some way if insolvency eventuates. The response to these points is four-fold. First, many creditors, and particularly smaller trade creditors, are not able to demand security or require the inclusion of retention of title clauses in contracts. Others do not have a choice in extending credit and cannot build a satisfactory sum into the bargain to protect themselves. If they did not give credit, then their competitors would get the company’s business. Consumer customers of companies, who would not regard themselves as creditors of a company to which they have given prepayments for goods or given deposits, are incapable of, or never think of, negotiating better terms for themselves. Furthermore, whilst not creditors in the sense in which we have considered creditors in this article, what about those who are creditors because of torts committed against them by the company? They are not consensual creditors and could not negotiate a bargain. Second, whilst creditors must accept some risk in granting credit to a limited liability company, one must always remember that the very existence of the limited liability concept provides an incentive for a company that is in financial difficulty to continue to do business. Imposing a duty, with consequent liability if it is breached, reduces the chances of a company continuing to trade at the expense of the creditors. Third, a good proportion of creditors are not in a position to protect themselves because information about a company’s finances may well be deficient when creditors make the decision to give credit, and in any event finances can change quickly. Fourth, if the creditors who extend credit were asked ex ante they might well have not agreed to give the credit if they knew what the directors were going to do with the money. The creditors would not quibble with the directors using the credit to endeavour to build the business, but creditors would not approve of decisions which are highly risky or even reckless given the state of the company’s affairs and the nature of the risk involved.
In fact, a perusal of the cases in Australia, New Zealand and the United Kingdom suggests that courts have erred on the side of magnanimity when confronted with evidence of alleged breaches of directors’ duties. Arguably, the only occasions on which courts have found directors liable in Australia, New Zealand and the United Kingdom are when the directors have done something either commercially improper or verging on the improper. Where directors have made decisions that have turned out to be bad ones, but they acted in good faith, the courts have refrained from holding them liable. This latter trend may be a result of the courts’ concern that there is little guidance for directors as to when they are to take into account creditors’ interests. The courts, therefore, have not felt it proper to hold directors liable on this ground except where there is impropriety or a complete disregard for the solvency of the company.
Finally, providing that the duty to take into account the interests of creditors is triggered where the circumstances of a company are such that its directors know, or can reasonably expect, that the action upon which they are going to embark could lead to the insolvency of the company could be advantageous for interests other than the creditors’. If directors are required to have consideration for creditors’ interests, they are less likely to set in train a course of action that could precipitate the collapse of their companies, which in turn could lead to redundancies for employees. Furthermore, if a company has a large workforce or is an important part of a community, its collapse would have a deleterious impact on that community, including schools and shops.
Requiring directors to take into account the interests of creditors is a duty that is laudable. It has been argued in this article that without the duty many creditors are left with little or no protection from companies that are in financial straits. The duty cannot be a continuing one, but arises when the directors are considering actions which could imperil the creditors’ interests. This will usually be where the company is in some financial difficulty. It is submitted that this achieves a balance between protecting creditors, on the one hand, and not discouraging companies and their directors from taking what are, in the circumstances, appropriate risks, on the other hand.
The duty did not really begin to develop until the 1980s. The development of the duty has appeared to have slowed in the mid to late 1990s due partially perhaps to the fact that the courts have failed to arrive at a consistent approach concerning the point in time from which the duty operates. This is a concern for both directors and liquidators. The former, who probably feel that they have been the target of several attacks from both the legislature and the courts in recent years, need to know what can trigger the duty. Also, a failure to provide a defined standard affects directors in the making of business decisions and this can be prejudicial to the performance of their companies, as the directors may well be inclined to make decisions on the basis of avoiding liability rather than what is commercially appropriate. On the other side, liquidators need to know in what kind of situations they are at liberty to pursue directors of failed companies for breach of duty.
Hitherto, while a little disconcerting for those who require certainty in the law at all times, the uncertainty as to the circumstances which will provoke the duty is not an unusual situation for a developing area of law. As Justin Dabner has said: ‘Whenever the judiciary embarks upon new developments a degree of uncertainty must eventuate. This is the price of a dynamic legal system which recognises current social attitudes and attempts to update the law accordingly.’
The circumstances that have been held to precipitate the triggering of the duty to take into account the interests of creditors have varied from the insolvency of companies to financial instability. There are problems, of either a legal or practical nature, with all of the suggested triggers that have been identified. To provide adequate protection for creditors and to ensure that directors of companies are diligent in reviewing their companies’ affairs and particularly their financial positions before committing their companies to transactions, it has been submitted that the most appropriate trigger would be where a company’s situation is such that a director can reasonably expect that the action upon which he or she is going to embark could lead to the insolvency of the company. This, it has been submitted, is the most appropriate and fair test to employ. It does not seek to stultify the risk-taking activities of directors, except where the company’s financial position could be severely imperilled, but it provides creditors with greater protection than they have previously enjoyed.
[∗] LLB (Adel), MDiv (Hons) (Denver), LLM, PhD (Qld); Professor of Law, University of Wolverhampton, England. This article is based on a paper presented at the 11th Annual Corporate Law Teachers’ Association Conference held at Victoria University, Melbourne, 13 February 2001. I thank the anonymous referees for some helpful comments. Of course, responsibility for any errors lies with the author.
 If authority is necessary, see Percival v Wright  UKLawRpCh 125;  2 Ch 421; Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd  Ch 258 (‘Multinational Gas’); Grove v Flavel (1986) 43 SASR 410, 417 (Jacobs J); Peskin v Anderson  BCC 1110; aff’d  EWCA Civ 326 (Unreported, England and Wales Court of Appeal, Simon Brown, Mummery and Latham LJJ, 14 December 2000). For the US, see, eg, Revlon Inc v MacAndrews & Forbes Holdings Inc, 506 A 2d 173, 179 (Del, 1986); Polk v Good, 507 A 2d 531, 536 (Del, 1986). See also the comments of the Jenkins Committee: United Kingdom, Report of the Company Law Committee (Cmnd 1749, 1962) .
  AC 22.
 Amongst other things, this allows directors to contract more efficiently. See William Allen, ‘Ambiguity in Corporation Law’ (1997) 22 Delaware Journal of Corporate Law 894, 898.
 David Wishart, ‘Models and Theories of Directors’ Duties to Creditors’ (1991) 14 New Zealand Universities Law Review 323, 329. There is strong support from the business community for there to be the removal of uncertainty in relation to directors’ duties: Explanatory Memorandum, Corporate Law Economic Reform Bill 1998 (Cth) [2.3].
 Ramesh Rao, David Sokolow and Derek White, ‘Fiduciary Duty a la Lyonnais: An Economic Perspective on Corporate Governance in a Financially-Distressed Firm’ (1996) 22 Journal of Corporation Law 53, 65.
 See, eg, Winkworth v Edward Baron Development Co Ltd  1 WLR 1512, 1516 (Lord Templeman) and the rather robust criticism from L S Sealy, ‘Directors’ Duties — An Unnecessary Gloss’  Cambridge Law Journal 175, John Farrar, ‘The Responsibility of Directors and Shareholders for a Company’s Debts’  CanterLawRw 2; (1989) 4 Canterbury Law Review 12 and Brian Cheffins, Company Law: Theory, Structure and Operation (1997) 338.
 See the argument mounted by Razeen Sappideen, ‘Fiduciary Obligations to Corporate Creditors’  Journal of Business Law 365. See also Walter Hinnant, ‘Fiduciary Duties of Directors: How Far Do They Go?’ (1988) 23 Wake Forest Law Review 163, and the obiter comments of Lord Templeman in Winkworth v Edward Baron Development Co Ltd  1 WLR 1512, 1516.
 Arguably the duty cannot be enforced by creditors, so they must wait until a liquidator is appointed and able to champion their cause. See Mills v Northern Railway of Buenos Ayres Co  UKLawRpCh 73; (1870) 5 Ch App 621. If creditors could bring actions, then it has been said that a number of problems might ensue, eg, a multiplicity of proceedings.
 See, eg, D D Prentice, ‘Creditor’s Interests and Director’s Duties’ (1990) 10 Oxford Journal of Legal Studies 265, 275; Sarah Worthington, ‘Directors’ Duties, Creditors’ Rights and Shareholder Intervention’  MelbULawRw 5; (1991) 18 Melbourne University Law Review 121, 151; L S Sealy, ‘Personal Liability of Directors and Officers for Debts of Insolvent Corporations: A Jurisdictional Perspective (England)’ in Jacob Ziegel (ed), Current Developments in International and Comparative Corporate Insolvency Law (1994) 485, 486.
 Brady v Brady (1987) 3 BCC 535, 552 (Nourse LJ). See Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50, 146 (Clarke and Cripps JJA).
 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, 730 (Street CJ) (‘Kinsela’); R M Goode, Principles of Corporate Insolvency Law (2nd ed, 1997) 455; Stephen McDonnell, ‘Geyer v Ingersoll Publications Co: Insolvency Shifts Directors’ Burden from Shareholders to Creditors’ (1994) 19 Delaware Journal of Corporate Law 177, 185.
 Mark Van der Weide, ‘Against Fiduciary Duties to Corporate Stakeholders’ (1996) 21 Delaware Journal of Corporate Law 27, 43; Rao, Sokolow and White, above n 5, 64.
 This is especially so where the directors are major shareholders in the company. See Paul Halpern, Michael Trebilcock and Stuart Turnbull, ‘An Economic Analysis of Limited Liability in Corporation Law’ (1980) 20 University of Toronto Law Journal 117, 135, 141.
 While creditors always have to accept the risk that the post-contractual actions of a company will increase the expected risk of default (Van der Weide, above n 12, 43–4), it is unfair that creditors are not able to be compensated when directors engage in action which clearly was not part of the ex ante bargain, and may in some ways be regarded as improper activity. The fact of the matter is that creditors cannot be expected to foresee every action that directors take.
 Kinsela (1986) 4 NSWLR 722, 732–3. See David Thomson, ‘Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress?’ (2000) 58 University of Toronto Faculty of Law Review 31, 33.
 McDonnell, above n 11, 190.
 Richard Posner, Economic Analysis of Law (4th ed, 1992) 394.
 Vanessa Finch, ‘Directors’ Duties: Insolvency and the Unsecured Creditor’ in Alison Clarke (ed), Current Issues in Insolvency Law (1991) 87, 91.
 See the comments of Steven Schwarcz, ‘Rethinking a Corporation’s Obligations to Creditors’ (1996) 17 Cardozo Law Review 647, 658.
 Eg, Corporations Act 2001 (Cth) ss 588G (insolvent trading), 588FB (uncommercial transactions), 588FE(5) (transfers to defeat creditors) and 588FA (unfair preferences).
 See Richard Fisher, ‘Preferences and Other Antecedent Transactions: Do Directors Owe a Duty to Creditors?’ (1995) 8 Corporate and Business Law Journal 203. But cf Anil Hargovan, ‘Should Directors Owe an Independent Duty to Consider the Interests of Creditors?’ (Paper presented at the 11th Annual Corporate Law Teachers’ Association Conference, Victoria University, Melbourne, 13 February 2001).
 See, eg, Niall Coburn, Insolvent Trading: A Practical Guide (1998) 40; Theresa Noble, ‘When Does a Company Incur a Debt under the Insolvent Trading Provisions of the Corporations Law?’ (1994) 12 Company and Securities Law Journal 297; John Mosley, ‘Insolvent Trading: What Is a Debt and When Is One Incurred?’ (1996) 4 Insolvency Law Journal 155.
 Corporations Act 2001 (Cth) s 588FE(2)(b)(ii). This is unless the recipient of the payment was a related entity within s 5 (s 588FE(4)(c)) in which case the time period is four years.
 Corporations Act 2001 (Cth) s 5 (‘relation-back day’).
 Corporations Act 2001 (Cth) s 588FA(1)(b).
 See, eg, Francis Dawson, ‘Acting in the Best Interests of the Company — For Whom Are Directors “Trustees”?’ (1984) 11 New Zealand Universities Law Review 68; L S Sealy, ‘Directors’ “Wider” Responsibilities — Problems Conceptual, Practical and Procedural’  MonashULawRw 7; (1987) 13 Monash University Law Review 164; Justin Dabner, ‘Directors’ Duties — The Schizoid Company’ (1988) 6 Company and Securities Law Journal 105; Farrar, above n 6; C A Riley, ‘Directors’ Duties and the Interests of Creditors’ (1989) 10 Company Lawyer 87; Neil Hawke, ‘Creditors’ Interests in Solvent and Insolvent Companies’  Journal of Business Law 54; Prentice, ‘Creditor’s Interests’, above n 9, 275; Finch, above n 18, 87; Ross Grantham, ‘The Judicial Extension of Directors’ Duties to Creditors’  Journal of Business Law 1; Sappideen, above n 7; Worthington, above n 9; Wishart, above n 4; Jacob Ziegel, ‘Creditors as Corporate Stakeholders: The Quiet Revolution — An Anglo-Canadian Perspective’ (1993) 43 University of Toronto Law Journal 511; Fisher, above n 21.
  HCA 7; (1976) 137 CLR 1.
 Ibid 6–7.
 See, eg, Ring v Sutton (1980) 5 ACLR 546; Hooker Investments Pty Ltd v Email Ltd (1986) 10 ACLR 443; Grove v Flavel (1986) 43 SASR 410; Kinsela (1986) 4 NSWLR 722; Jeffree v National Companies & Securities Commission  WAR 183; Galladin Pty Ltd v Aimnorth Pty Ltd (in liq) (1993) 11 ACSR 23; Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465.
 See, eg, Re Avon Chambers Ltd  2 NZLR 638; Nicholson v Permakraft (NZ) Ltd (in liq) (1985) 3 ACLC 453 (‘Permakraft’); Hilton International Ltd v Hilton  NZHC 605;  1 NZLR 442.
 See, eg, Lonrho Ltd v Shell Petroleum Co Ltd  1 WLR 627; Re Horsley & Weight Ltd  Ch 442; Winkworth v Edward Baron Development Co Ltd  1 WLR 1512; Brady v Brady (1987) 3 BCC 535; Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30; Facia Footwear Ltd (in administration) v Hinchliffe  1 BCLC 218. The duty had already been embraced in a different guise in the United States. See, eg, Harff v Kerkorian, 324 A 2d 215 (Del Ch, 1974); Clarkson Co Ltd v Shaheen,  USCA2 740; 660 F 2d 506 (2nd Cir, 1981); Federal Deposit Insurance Corporation v Sea Pines Co,  USCA4 1805; 692 F 2d 973 (4th Cir, 1982); Re STN Enterprises,  USCA2 1100; 779 F 2d 901 (2nd Cir, 1985); Credit Lyonnais Bank Nederland NV v Pathe Communications Corporation (Unreported, Delaware Court of Chancery, Chancellor Allen, 30 December 991).
 Finch, above n 18, 91; Cheffins, above n 6, 539.
 See, eg, Dawson, above n 26; Sealy, ‘Directors’ “Wider” Responsibilities’, above n 26, 177; Worthington, above n 9, 121; Sealy, ‘Personal Liability of Directors’, above n 9, 488. Following an oblique reference to Professor Sealy’s view, the Company Law Review Steering Group, UK Department of Trade and Industry, Modern Company Law for a Competitive Economy: Developing the Framework (2000) 43 has stated that it would not recommend that a director’s duty to take into account the interests of creditors should be included in the principles which it laid down to govern the functions of directors.
 (1997) 15 ACLC 638, 643. Interestingly, later, when his Honour was a member of the High Court, his Honour, in a joint judgment, appeared to acknowledge the existence of the duty: Spies v The Queen  HCA 43; (2000) 173 ALR 529.
 See the criticism of the remarks of Hayne JA in Robert Baxt, ‘Do Directors Owe Duties to Creditors — Some Doubts Raised by the Victorian Court of Appeal’ (1997) 15 Company and Securities Law Journal 373, 374–5.
 Yukong Lines Ltd of Korea v Rendsburg Investments Corporation  BCC 870; Facia Footwear Ltd (in administration) v Hinchliffe  1 BCLC 218; Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465.
 Re Frederick Inns Ltd (in liq)  1 ILRM 387 (Ir SC).
  HCA 43; (2000) 173 ALR 529, 554–5 (Gaudron, McHugh, Gummow and Hayne JJ).
 Prentice, ‘Creditor’s Interests’, above n 9, 275.
 This has the support of the predominance of academic commentators. See, eg, ibid 275; Worthington, above n 9, 151; Sealy, ‘Personal Liability of Directors’, above n 9, 486. See also the trenchant comments of Richardson J in Permakraft (1985) 3 ACLC 453, 463, against an independent duty.
 Hinnant, above n 7, 163; Sappideen, above n 7.
  1 WLR 1512.
  WAR 183.
 See also the comments of Young J in Hooker Investments Pty Ltd v Email Ltd (1986) 10 ACLR 443, 445.
  HCA 43; (2000) 173 ALR 529, 555, where the Court quoted J D Heydon, ‘Directors’ Duties and the Company‘s Interests’ in P D Finn (ed), Equity and Commercial Relationships (1987) 120, 126. Their Honours went on to explicitly disagree with the Court in Grove v Flavel (1986) 43 SASR 410, if the Court was in that latter case advocating an independent duty to creditors: Spies v The Queen  HCA 43; (2000) 173 ALR 529, 555. With respect, it seems from a reading of the leading judgment of Jacobs J in Grove v Flavel that this was not in fact being advocated.
  BCC 870, 884.
 Clarkson Co Ltd v Shaheen,  USCA2 740; 660 F 2d 506 (2nd Cir, 1981); Federal Deposit Insurance Corporation v Sea Pines Co,  USCA4 1805; 692 F 2d 973 (4th Cir, 1982); Re STN Enterprises,  USCA2 1100; 779 F 2d 901 (2nd Cir, 1985); Re DeLorean Motor Co, 49 BR 900 (Bkrtcy, Mich, 1985); Geyer v Ingersoll Publications Co, 621 A 2d 784 (Del Ch, 1992). See Lewis Davis et al, ‘Corporate Reorganisation in the 1990s: Guiding Directors of Troubled Corporations through Uncertain Territory’ (1991) 47 Business Lawyer 1, 2–3; McDonnell, above n 11, 180.
 Worthington, above n 9, 139; Laura Lin, ‘Shift of Fiduciary Duty upon Corporate Insolvency: Proper Scope of Directors’ Duty to Creditors’ (1993) 46 Vanderbilt Law Review 1485, 1518. Some American cases have involved companies that are under common ownership and control.
 See Halpern, Trebilcock and Turnbull, above n 13.
 See the works listed in above n 26.
 This is the case in the United States: Harvey Miller, ‘Corporate Governance in Chapter 11: The Fiduciary Relationship between Directors and Stockholders of Solvent and Insolvent Corporations’ (1993) 23 Seton Hall Law Review 1467, 1485.
 See, eg, the comments of Clarke and Cripps JJA of the NSW Court of Appeal in Equiticorp Finance Ltd (in liq) v BNZ (1993) 32 NSWLR 50, 145.
 (1986) 4 NSWLR 722.
 Ibid 733.
  HCA 43; (2000) 173 ALR 529, 555.
  FCA 1117; (1994) 51 FCR 425, 444.
 Schwarcz, above n 19, 666. The learned author sees the creditors’ rights being transformed into equity-type rights with the advent of insolvency: at 668.
 Brady v Brady (1987) 3 BCC 535, 552 (Nourse LJ); Kinsela (1986) 4 NSWLR 722, 730; Goode, above n 11, 455; McDonnell, above n 11, 185.
 Eilis Ferran, ‘Creditors’ Interests and “Core” Company Law’ (1999) 20 Company Lawyer 314, 316.
 Mike Ross, ‘Directors’ Liability on Corporate Restructuring’ in Charles Rickett (ed), Essays on Corporate Restructuring and Insolvency (1996) 173, 177. Some courts in the United States have gone as far as to say that, in certain circumstances, directors owe a duty to creditors: Davis et al, above n 47, 3; Lynn Lo Pucki and William Whitford, ‘Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies’ (1993) 141 University of Pennsylvania Law Review 669, 707.
 Anne Conway Stilson, ‘Reexamining the Fiduciary Paradigm at Corporate Insolvency and Dissolution: Defining Directors’ Duties to Creditors’ (1995) 20 Delaware Journal of Corporate Law 1, 113; Rao, Sokolow and White, above n 5, 62.
 Sealy, ‘Directors’ “Wider” Responsibilities’, above n 26, 179.
 Wishart, above n 4, 344.
 Ibid 345.
 See, eg, see Andrew Keay, ‘The Insolvency Factor in the Avoidance of Antecedent Transactions in Corporate Liquidations’  MonashULawRw 12; (1995) 21 Monash University Law Review 305; John Duns, ‘“Insolvency”: Problems of Concept, Definition and Proof’ (2000) 28 Australian Business Law Review 22.
 David Milman, ‘Test of Commercial Solvency Rejected’ (1983) 4 Company Lawyer 231, 232; Stilson, above n 61, 113.
 Kim Chai Chiah, ‘Voidable Preference’ (1986) 12 New Zealand Universities Law Review 1, 6; Riley, above n 26, 88–9.
 See Insolvency Act 1986 (UK) c 45, ss 123, 240(2).
  BCC 870, 884.
 Geyer v Ingersoll Publications Co, 621 A 2d 784, 787, 789 (Del Ch, 1992) (Chandler V-C).
 Sealy, ‘Directors’ “Wider” Responsibilities’, above n 26, 179.
 See the comments of Cooke J in Permakraft (1985) 3 ACLC 453, 459.
 Grantham, above n 26, 15.
 (1988) 4 BCC 30, 33.
 See Insolvency Act 1986 (UK) c 45, s 214.
 McDonnell, above n 11, 208.
 This for the most part appears to be the situation in the United States as well: Lin, above n 48, 1518.
 See Duns, above n 65, 33–4.
 Rima Fawal Hartman, ‘Situation-Specific Fiduciary Duties for Corporate Directors: Enforceable Obligations or Toothless Ideals?’ (1993) 50 Washington and Lee Law Review 1761, 1784.
  HCA 43; (2000) 173 ALR 529, 555.
  FCA 1117; (1994) 51 FCR 425, 444.
 (1985) 3 ACLC 453, 459.
 (Unreported, Delaware Court of Chancery, Chancellor Allen, 30 December 1991.)
 Ibid 34 (emphasis added).
 Alan Tompkins, ‘Directors’ Duties to Corporate Creditors: Delaware and the Insolvency Exception’ (1993) 47 Southern Methodist University Law Review 165, 168; Norwood Beveridge, ‘Does a Corporation’s Board of Directors Owe a Fiduciary Duty to Its Creditors’ (1994) 25 St Mary’s Law Journal 589, 590.
 Geyer v Ingersoll Publications Co, 621 A 2d 784 (Del Ch, 1992); Rao, Sokolow and White, above n 5, 65. The duty is owed, in the US, to creditors, and not, as in Commonwealth jurisdictions, to the company to take into account creditor interests. This is known in the US as the ‘trust fund doctrine’: Pepper v Litton,  USSC 145; 308 US 295, 307 (1939); Geyer v Ingersoll Publications Co, 621 A 2d 784, 786, 788–90 (Del Ch, 1992) (Chandler V-C).
 See the comments of Richardson J in Permakraft (1985) 3 ACLC 453, 463. It has been suggested that ‘in the vicinity of insolvency’ may, like ‘obscenity’, be difficult to define, but a reasonable director can be expected to know it when he or she sees it: Rao, Sokolow and White, above n 5, 64, fn 78.
 Permakraft (1985) 3 ACLC 453, 459, 463, 464; Brady v Brady (1987) 3 BCC 535, 553. See also the comments of Templeman LJ in the case of Re Horsley & Weight Ltd  Ch 442, 455; Geyer v Ingersoll Publications Co, 621 A 2d 784 (Del Ch, 1992).
 See, eg, Wright v Frisina (1983) 1 ACLC 716; Grove v Flavel (1986) 43 SASR 410; Kinsela (1986) 4 NSWLR 722, 733 (agreeing with Cooke J in Permakraft (1985) 3 ACLC 453); Winkworth v Edward Baron Development Co Ltd  1 WLR 1512; Hilton International Ltd v Hilton  NZHC 605;  1 NZLR 442.
 (1985) 3 ACLC 453, 459. Similar language is used by Giles JA in Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465, 478.
 (1988) 4 BCC 30, 33.
  Ch 258, 284.
 (1988) 4 BCC 30, 33.
  BCC 291.
 This approach was favoured by Cooke J in Permakraft (1985) 3 ACLC 453, 460.
 Facia Footwear Ltd (in administration) v Hinchliffe  1 BCLC 218.
 Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465, 471 (Giles JA).
 Rao, Sokolow and White, above n 5, 62.
 See, eg, Multinational Gas  Ch 258; Permakraft (1985) 3 ACLC 453; Brady v Brady (1987) 3 BCC 535; Kinsela (1986) 4 NSWLR 722; Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30; Equiticorp Finance Ltd (in liq) v BNZ (1993) 32 NSWLR 50. In this last case, the NSW Court of Appeal said that Mason J’s comments in Walker v Wimborne  HCA 7; (1976) 137 CLR 1 were made in the context of an insolvent company: at 145.
 The controversial dictum of Lord Templeman in Winkworth v Edward Baron Development Co Ltd  1 WLR 1512, 1517 seems to provide that directors of companies which are solvent are under the duty. But, save for the decision in Jeffree v National Companies and Securities Commission  WAR 183, no court seems to have followed that view.
  NSWCA 33; (1999) 17 ACLC 619, 626.
 (1986) 4 NSWLR 722, 733.
 (1988) 4 BCC 30.
 Kinsela (1986) 4 NSWLR 722, 727–8.
 (1988) 4 BCC 30.
 Although the payment was clearly a voidable preference, preference proceedings against the parent company, under the then equivalent of s 588FA of the Corporations Act 2001 (Cth), were not issued, because, one assumes, the parent company was insolvent.
 Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30, 33.
  Ch 258.
 (1988) 4 BCC 30, 33.
 Allen, above n 3, 896.
 Sealy, ‘Directors’ “Wider” Responsibilities’, above n 26, 181. See also Frank Easterbrook and Daniel Fischel, The Economic Structure of Company Law (1991) 41–4, referred to in Thomas Telfer, ‘Risk and Insolvent Trading’ in Charles Rickett and Ross Grantham (eds), Corporate Personality in the 20th Century (1998) 127, 127–8.
 See Michael Whincop, ‘Taking the Corporate Contract More Seriously: The Economic Cases against, and a Transaction Cost Rationale for, the Insolvent Trading Provisions’  GriffLawRw 1; (1996) 5 Griffith Law Review 1, 13.
 (Unreported, Delaware Court of Chancery, Chancellor Allen, 30 December 1991.)
 Vladimir Jelisavcic, ‘A Safe Harbour Proposal to Define the Limits of Directors’ Fiduciary Duty to Creditors in the “Vicinity of Insolvency”’  Journal of Corporation Law 145, 159 (citation omitted).
 Stilson, above n 61, 91. See also Victor Yeo and Joyce Lee Suet Lin, ‘Insolvent Trading — A Comparative and Economic Approach’ (1996) 10 Australian Journal of Corporate Law 216.
 Yeo and Lin, above n 116, 216.
 See Ecclesiastes 1:1.
 Ecclesiastes 3:1.
 Eg in Multinational Gas  Ch 258 it was acceptable as the company was plainly solvent.
 Ironically, directors might in such circumstances, absent any duty to take creditors’ interests into account, not be liable in taking such action even though the action is close to reckless, because the shareholders would not complain.
 See Kinsela (1986) 4 NSWLR 722, 733; Equiticorp Finance Ltd (in liq) v BNZ (1993) 32 NSWLR 50, 146.
 (1993) 32 NSWLR 50, 146.
 Ibid. See also the view of Rao, Sokolow and White, above n 5, 65.
 Even Lord Templeman in Winkworth v Edward Baron Development Co Ltd  1 WLR 1512, perhaps the high-water mark as far as decisions go in this area, did not suggest that the taking of a risk should be prohibited.
 (1985) 3 ACLC 453.
 Directors might be concerned that a court might not see the commercial justification for the action that the directors took, but such a concern applies across the board when considering directors’ duties.
 Insolvency Act 1986 (UK) c 45, s 214.
 (1996) 14 ACLC 1357, 1361.
 (1985) 3 ACLC 453, 459.
 See, eg, Michael Rose and Larelle Law, ‘Voluntary Administrations: Will They Work?’ (1995) 3 Insolvency Law Journal 11; James Routledge, ‘An Exploratory Empirical Analysis of Part 5.3A of the Corporations Law (Voluntary Administration)’ (1998) 16 Company and Securities Law Journal 4.
 See the comments of Cooke J in Permakraft (1985) 3 ACLC 453, 460. See also Schwarcz, above n 19, 671–2; Finch, above n 18, 106.
 See Kinsela (1986) 4 NSWLR 722, 733.
 See the comments of Tipping J in Hilton International Ltd v Hilton  NZHC 605;  1 NZLR 442, 476.
 See Brady v Brady (1987) 3 BCC 535, 552 (Nourse LJ).
 Ashley Black et al, CLERP and the New Corporations Law (2nd ed, 2000) [4.10], referred to in John Kluver, ‘Sections 181 and 189 of the Corporations Law and Directors of Corporate Group Companies’ (Paper presented at the Centre for Corporate Law and Securities Regulation Seminar, ‘Directors’ Duties: Recent Developments’, Melbourne, 8 November 2000) 4.
 H A J Ford, R P Austin and I M Ramsay, An Introduction to the CLERP Act 1999: Australia’s New Company Law (2000) 13.
 (1983) 1 ACLC 716, 717 (Wallace J).
 Wishart, above n 4, 341.
 Burland v Earle  UKLawRpAC 43;  AC 83. See also Carlen v Drury  EngR 594; (1812) 1 Ves & B 154; 35 ER 61; Dovey v Cory  UKLawRpAC 39;  AC 477, 488 (Lord Macnaghten).
 (1986) 4 NSWLR 722, 733.
 (1985) 3 ACLC 453, 459.
 Eg AWA Ltd v Daniels (1992) 7 ACSR 759. See also the comments of Brooking J in Knightswood Nominees Pty Ltd v Sherin Pastoral Co Ltd (1989) 15 ACLR 151, 159.
 Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465, 475 (Giles JA).
 (1985) 3 ACLC 453.
  BCC 600.
  NSWCA 33; (1999) 30 ACSR 465.
 (1987) 3 BCC 535.
 Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465, 475.
 Ibid (emphasis added).
  BCC 600.
 Allen, above n 3, 899.
 Sealy, ‘Directors’ “Wider” Responsibilities’, above n 26, 176.
 By contractarians: see Stilson, above n 61, 115–16.
 Dan Prentice, ‘Corporate Personality, Limited Liability and the Protection of Creditors’ in Charles Rickett and Ross Grantham (eds), Corporate Personality in the 20th Century (1998) 99, 109.
 Prentice, ‘Creditor’s Interests’, above n 9, 277.
 Telfer, above n 112, 128.
 Ziegel, above n 26, 530.
 See, eg, Grove v Flavel (1986) 43 SASR 410; Kinsela (1986) 4 NSWLR 722; Liquidator of West Mercia Safetywear Ltd v Dodd (1988) 4 BCC 30; Hilton International Ltd v Hilton  NZHC 605;  1 NZLR 442; Jeffree v National Companies and Securities Commission  WAR 183; Galladin Pty Ltd v Aimnorth Pty Ltd (in liq) (1993) 11 ACSR 23.
 See, eg, Permakraft (1985) 3 ACLC 453; Re Welfab Engineers Ltd  BCC 600; Linton v Telnet Pty Ltd  NSWCA 33; (1999) 30 ACSR 465.
 See Julie Veach, ‘On Considering the Public Interest in Bankruptcy: Looking to the Railroads for Answers’ (1997) 72 Indiana Law Journal 1211, 1225; Andrew Keay, ‘Insolvency Law: A Matter of Public Interest?’ (2000) 51 Northern Ireland Legal Quarterly 509, 517–18.
 Rao, Sokolow and White, above n 5, 65.
 Dabner, above n 26, 112.
 See the comments of Cooke J in Permakraft (1985) 3 ACLC 453, 460. See also Schwarcz, above n 19, 671–2; Finch, above n 18, 106.