DIRECTORS DUTIES TO CREDITORS

Transcription

1 DIRECTORS DUTIES TO CREDITORS by SULETTE LOMBARD submitted in partial fulfilment of the requirements for the degree DOCTOR LEGUM in the FACULTY OF LAW UNIVERSITY OF PRETORIA PROMOTOR: PROF DR PA DELPORT Pretoria AUGUST 2006

2 VOORWOORD Met opregte dank en waardering aan die volgende persone vir die bydrae wat hulle tot hierdie proefskrif gelewer het: Prof Piet Delport, my promotor, vir sy deurlopende bystand, waardevolle advies en bekwame leiding. Prof Chris Nagel vir hulp met die redigering van die proefskrif. My familie, vriende en kollegas vir hul deurlopende belangstelling, aanmoediging en ondersteuning. n Besondere woord van dank aan my ouers, Isak en Erika Roos, vir hul liefde, geloof in my vermoëns en getroue ondersteuning met hierdie proefskrif en al my ander studies. Hierdie proefskrif word opgedra aan my man, Gerrit en ons kinders, Cara, Jeanne en Gerrit. n Spesiale woord van dank kom hulle toe vir volgehoue aanmoediging, ondersteuning, geduld, begrip en opoffering. Die proefskrif sluit relevante regsontwikkelings tot en met 30 April 2006 in. Sulette Lombard Augustus 2006

3 TABLE OF CONTENTS PART I: GENERAL ORIENTATION Chapter 1: Introduction BACKGROUND PURPOSE OF STUDY EXPOSITION LIMITATION OF SCOPE METHODOLOGY...8 PART II: JUSTIFICATION OF A DUTY TO CREDITORS Chapter 2: Conceptual Justification INTRODUCTION THEORIES ON THE NATURE OF THE COMPANY General Contractual Theories General Legal Contractualism Economic Contractualism Communitarian Theories Concessionary Theories General Dual Concession Theory Associative Theories Application to a Duty to Creditors Contractual Theories Communitarian Theories Concessionary Theories...25 i

4 Associative Theories CREDITORS CONTRACTUAL RELATIONSHIP WITH THE COMPANY General Freedom to Negotiate Adequacy of Contractual Protective Measures Risk Compensation Guarantees and Loan Covenants Efficiency Concerns Conclusion SHAREHOLDERS V CREDITORS AS PRIMARY CORPORATE CONSTITUENTS General Owners of the Company Relative Strength of Bargaining Power Residual Risk-bearers Efficient Monitors of Managerial Performance Differences Between Equityholders and Debtholders Conclusion EFFECT OF A DUTY TO CREDITORS ON DIRECTORS BEHAVIOUR General Fragmentation of Duties Increased Risk Averseness Reluctance to Serve on Company Boards EFFECT OF A DUTY TO CREDITORS ON LIMITED LIABILITY CONCLUSION...52 Chapter 3: Evaluation of Alternative Remedies INTRODUCTION STATUTORY MEASURES PROVIDING FOR DIRECTORS PERSONAL LIABILITY...57 ii

5 3.2.1 South Africa Applicants Question as to Whether Claim Should be Quantified Effect of Implementation of Compromise in terms of Section 311 on Locus Standi of Creditor Winding-Up, Judicial Management or Otherwise Recklessly Fraudulently Consequences of a Successful Application Liability for Which Debts? Creditors Who Are Benefited Punitive Element Evaluation Comparative Study Australia New Zealand England Canada TYPICAL INSOLVENCY REMEDIES General Statutory Voidable Dispositions Dispositions Not for Value Voidable Preferences Undue Preferences Common Law Remedy: Actio Pauliana Evaluation PIERCING THE CORPORATE VEIL CONCLUSION...93 iii

6 PART III: FRAMEWORK FOR A DUTY TO CREDITORS Chapter 4: Judicial Framework INTRODUCTION TYPE OF DUTY Introduction Australia New Zealand England Canada United States of America POINT IN TIME WHEN THE DUTY ARISES Introduction Australia New Zealand England Canada United States of America BENEFICIARY OF THE DUTY Introduction Australia New Zealand England Canada United States of America PROTECTED CREDITORS Introduction Australia New Zealand England iv

7 4.5.5 Canada United States of America POWER OF THE GENERAL MEETING TO RATIFY A BREACH OF THE DUTY Introduction Australia New Zealand England Canada United States of America CONCLUSION Chapter 5: Protection Afforded by Fiduciary Duties INTRODUCTION SOURCES AND FORMULATION South Africa Australia New Zealand England Canada United States of America RELEVANT ELEMENTS Acting in Good Faith in the Best Interests of the Company General Requirement of Good Faith Defining the Interests of the Company Maintaining an Unfettered Discretion General Nominee Directors Avoiding a Conflict of Interests General v

8 Unwarranted Personal Benefit Contracts with the Company CONSEQUENCES OF BREACH OF DUTY General Setting Aside of Transaction Civil Personal Liability Extent of Personal Liability Basis of Personal Liability Defendant Definining Director De Facto Directors Non-executive Directors Puppet, Dummy or Stooge Directors and Shadow Directors Pecuniary Penalty Orders APPLICATION TO A DUTY TO CREDITORS Sources Formulation Relevant Elements of Fiduciary Duties Acting in Good Faith in the Best Interests of the Company Maintaining an Unfettered Discretion Avoiding a Conflict of Interests Consequences of Breach Remedy Personal Liability Pecuniary Penalty Order Basis of Liability Defendant CONCLUSION vi

9 Chapter 6: Protection Afforded by the Duty of Care and Skill INTRODUCTION SOURCES AND FORMULATION South Africa Australia New Zealand England Canada United States of America RELEVANT ASPECTS Elements of Care, Skill and Diligence Duty of Care Duty of Skill Duty of Diligence Required Standard South Africa Australia New Zealand England Canada United States of America Distinction Between Executive and Non-Executive Directors South Africa Australia New Zealand England Canada United States of America Reliance on Others South Africa vii

10 Australia New Zealand England Canada United States of America CONSEQUENCES OF BREACH South Africa Australia New Zealand England Canada United States of America APPLICATION TO A DUTY TO CREDITORS Sources Formulation Relevant Aspects Required Standard Duty of Care Duty of Skill Distinction Between Executive and Non-executive Directors Reliance on Others Consequences of Breach Basis of Liability Suitability of Remedy Inadequate Information Judicial Reluctance CONCLUSION viii

11 Chapter 7: Point in Time When the Duty Arises INTRODUCTION DEFINING THE TRIGGERS Insolvency General Definition of Insolvency in Cases dealing with Directors Duties to Creditors Australia New Zealand England United States of America Definition of Insolvency in Context of Application of Section 424(1) Commercial or Factual Insolvency? Debt Subordination Definition of Insolvency in Other Statutory Measures Aimed at the Protection of Creditors Suggested Definition of Insolvency Balance Sheet and/or Commercial Insolvency? Objective Test Under-capitalized Companies and Debt Subordination Insolvency in Fact Doubtful Solvency General Definitions and Guidelines Provided by Commentators Suggested Definition of Doubtful Solvency Actions Causing Insolvency General Suggested Formulation of Actions Causing Insolvency FACTORS INFLUENCING PREFERENCE FOR A TRIGGER General ix

12 7.3.2 Need for Precision Need for Risk-taking Director Reaction Increase in Cost Role of the Judiciary Reconciling Triggers with Conceptual Justification for a Duty to Creditors General Insolvency and Doubtful Solvency Actions Causing Insolvency PRACTICAL APPLICATION OF THE TRIGGERS Insolvency and Doubtful Solvency Actions Causing Insolvency Summary Insolvency or Doubtful Solvency as Triggers Actions Causing Insolvency as Trigger CONCLUSION Chapter 8: Beneficiary of the Duty INTRODUCTION ORTHODOX VIEW Interest of the Company Enforcement of Directors Duties Ratification of a Breach of Directors Duties Distinction between Ratifiable and Unratifiable Wrongs Ratification by Directors as Shareholders Ratification by Unanimous Consent JUDICIAL METHODS FOR EXTENDING DIRECTORS DUTIES TO CREDITORS Indirect Duty Method Beneficiary of Duty x

13 Right of Action Power of Ratification Direct Duty Method Beneficiary of Duty Right of Action Power of Ratification EVALUATION OF JUDICIAL METHODS Indirect Duty Method Perceived Advantages Perceived Problems Direct Duty Method Perceived Advantages Perceived Problems Summary SUGGESTED METHOD Beneficiary of Duty Classes of Creditors Right of Action Creditors Derivative Action Flexible Definition of Membership Summary Power of Ratification CONCLUSION Chapter 9: Relief from Liability INTRODUCTION RELIEF BY THE COURT Introduction Statutory Provisions Empowering Courts to Grant Relief South Africa xi

14 Australia England Evaluation Applicability of Relieving Provisions in Case of Statutory Liability Uncertainty Regarding Proceedings to which Relieving Provisions Will Apply Anomaly in that Person who Acted Negligently Is Entitled to Relief if He Acted Reasonably Extent of the Court s Discretion The Business Judgment Rule United States of America Australia Evaluation Arguments in Favour of a Statutory Business Judgment Rule Judiciary s Stance on Pronouncing on Business Decisions Encouragement of Risk-Taking Need for Protection at the Moment When Directors Take Business Judgments Arguments from Fairness and Expediency Arguments against a Statutory Business Judgment Rule Superfluity of a Statutory Business Judgment Rule Limited Application of and Protection Afforded by the Rule Creation of Formalism Realism About Shareholder Litigation Risk Effect of a Statutory Rule On the Content of a Duty of Care Doctrinal Conflicts Uncertainty Regarding Parameters of the Business Judgment Rule Application to a Duty to Creditors INDEMNIFICATION xii

15 9.3.1 Introduction Statutory Regulation South Africa Australia New Zealand England Canada United States of America Application to a Duty to Creditors General Indemnity and Exemption General Section 247(1) and Modifying or Releasing Provisions in Articles of Association Application of Section 247(1) in a Group Context Indemnity against Liability for Legal Expenses DIRECTOR LIABILITY INSURANCE Introduction Statutory Regulation South Africa Australia New Zealand England Canada United States of America Application to a Duty to Creditors General Statutory Regulated Access Consequences of Non-compliance with Statutory Requirements CONCLUSION xiii

16 PART IV: CONCLUSION Chapter 10: Conclusion BACKGROUND JUSTIFICATION OF A DUTY TO CREDITORS Conceptual Justification of a Duty to Creditors Need for a Duty to Creditors Statutory Personal Liability Typical Insolvency Remedies Piercing the Veil FRAMEWORK FOR A DUTY TO CREDITORS DEVELOPMENT OF A DUTY TO CREDITORS CONCLUDING REMARKS APPENDICES Summary Opsomming Bibliography: Books and Theses Bibliography: Law Journals Bibliography: Bills and Reports Table of Cases Table of Statutes xiv