A direct duty to creditors?

An issue which has been the subject of some significant debate, and which warrants discussion in this book, is whether directors owe an independent or direct duty to creditors when the obligation to creditors is said to arise (an issue considered in passing in earlier chapters), or the duty is owed to the company and that duty requires directors to consider the interests of creditors. In other words, is the duty owed directly to creditors, or is it an indirect duty in that the duty is owed not to creditors, but to the company (whose interests do not include those of the creditors) to consider creditor interests, and the duty is mediated through the company? The concept of imperfect obligation may be used to describe this latter concept (Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (1994) 51 FCR 425 at 444-445; (1994) 122 ALR 531 at 550 (Aust Fed Ct)). The issue as to whether directors owe a direct or an indirect duty is not merely an academic one, but can have several practical consequences. One important one is the identity of the person who has standing to take legal proceedings for a breach of the duty. It follows that while a direct duty would enable directors to enforce any breach, if the indirect duty approach is adopted, the creditors cannot enforce a breach of the duty; that can only be done by the company itself, to whom the duty is owed, or an office-holder such as a liquidator, an administrator or an administrative receiver acting for the company. In fact, it would seem that all of the UK, Irish and Commonwealth cases that have involved claims against directors for failing to consider creditor interests have been initiated by a liquidator. The situation has been a little different in the United States. In parts of the Commonwealth, most notably in the UK and Australia, administrators appointed to insolvent companies are entitled to bring proceedings in the name of companies in order to enforce a breach of duty.1