Section 131 of the Companies Act 1993

Introduction

Section 131 of the Companies Act 1993 provides that directors owe a duty to the company. Nevertheless, the Courts have determined that creditors’ interests should also be protected in case of insolvency. Claims against directors for reckless trading have usually been argued based on the counter-factual test. However, recently the Courts have used the trust analogy approach.

Discussion

In Mason v Lewis , the Judge has described s 135 of the Companies Act 1993 (reckless trading) as one that “provides that a director must not permit the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors”.

Section 131(1) of the Companies Act 1993:

• (1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.

In “Company Law Reform and Restatement”, the Law Commission recommended that a duty not to take unreasonable risks of breaching the solvency test should be owed to the company, not to the creditors, on the basis to provide creditors with such a remedy would be to undermine the statutory regime for liquidations. In Kings Wharf Coldstore Ltd v Wilson , the Court held that it is clear from the Act that such a duty to act in good faith is not owed to creditors.

However, a different decision was made in Winkworth v Edward Baron Development Ltd . Lord Templeman held that the directors owe a duty to the company and to its creditors to ensure that the company's affairs are properly administered and that its property is not exploited for the benefit of the directors themselves.

This approach was also used in Sojourner v Robb . Here, the Court of Appeal Judge mentioned Gummow J in Sycotex Pty Ltd v Baseler , who stated that “where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the...