Directors’ duties to creditors

Abstract

Creditors of the corporate business form are in a vulnerable position. Recognition of the plight of corporate creditors led to the implementation of various legal measures aimed at protecting their financial interest in the company. These measures proved disappointingly inadequate in many instances. As a result the judiciary in some jurisdictions felt compelled to develop existing legal principles pertaining to directors’ duties in such a way that they could be used to facilitate protection of corporate creditors’ interests. This development did not meet with universal approval. Those opposed to the extension of directors’ duties to protect creditors’ interests have three main arguments against it. The first is related to conceptual issues and policy concerns. The second argument is that existing remedies are more than adequate to protect creditors’ interests. A last argument against a directorial duty to creditors pertains to the practical implementation of this extended duty. It is argued that the existing legal framework with regard to directors’ duties is not suitable to provide protection for creditors’ interests. However, it was shown in this study that the extension of directors’ duties to protect creditors’ interests is indeed justifiable on a sound conceptual basis and that policy concerns regarding such an extension are either unfounded, or should be addressed in some other way. An analysis of existing protective measures and remedies often referred to by opponents of an extension of directors’ duties, namely statutory personal liability of directors, traditional insolvency remedies, and the piercing of the veil doctrine furthermore showed that these measures are inadequate. This leads to the conclusion that there is a definite need for an alternative remedy, such as the extension of directors’ duties to include creditors’ interests. The existing legal framework in respect of directors’ duties furthermore proved to be capable of being successfully adapted to include creditors’ interests. Central issues in this respect, as was indicated by an analysis of case law, are the point in time when the duty to creditors is triggered, the beneficiary of the duty, in other words who would have locus standi in case of a breach of the duty, and the type of protection afforded to creditors’ interests by way of fiduciary duties and the duty of care and skill. The existing legal framework also provides measures in terms of which honest and diligent directors may be relieved from liability, such as indemnification, relief granted by the courts and director liability insurance. These measures, if formulated correctly, may achieve and maintain the essential balance between accountability and entrepreneurial freedom. The legislature appears to have adopted a cautious approach to the issue of directors’ duties to creditors. It thus seems to be up to the judiciary to develop directors’ duties to creditors in a meaningful way. Pioneering in this respect has already been done in Australia, New Zealand, England, Canada and the United States of America. It is to be hoped that the South African judiciary will follow suit when the opportunity to do so arises.