Duties and liabilities of directors of companies in financial distress

Abstract

The scope of this dissertation is not to give a comprehensive list of the duties and liabilities of company directors in the situation where the company is in financial distress for certain duties subsist regardless of the financial state of the company. Rather the discussion will focus on select duties and liabilities of directors that are of special relevance as a result of the financially distressed situation of the company. The dissertation is organised into three chapters. Chapter 1 considers the state of financial distress (a term which is not defined in Maltese company law although commonly found in texts on corporate insolvency law) by reference to the expressions ‘unable to pay its debts’ and ‘imminently likely to become unable to pay its debts’ used in the Companies Act in relation to a limited liability company. Chapter 2 looks at the effects that financial distress has on directors’ duties with a view to identify changes to existing duties, new duties that arise and existing duties that assume special importance. A practical approach is also included as to the manner in which directors ought to conduct themselves in view of the provisions on wrongful trading. Having considered director’s duties, Chapter 3 looks at directors’ liabilities which arise by reason of the directors’ failures in their duties discussed in Chapter 2. The discussion is conducted by reference primarily to Maltese law and judgements although reference to English, Australian and New Zealand judgements is made as appropriate.