Financial distressed companies and directors' obligation to consider creditors' interests: An Anglo-Australian comparison of the obligation's trigger and application

• Published in: Common law world review 2024-09, Vol.53 (3), p.107-131
• Main Authors: Keay, Andrew, Lombard, Sulette
• Format: Article
• Language: English
• Subjects: Corporation law; Debtor and creditor; Directors of corporations; Economic aspects; Law and legislation; Legal status, laws, etc; Obligations (Law); Stockholders
• ISSN: 1473-7795; 1740-5556
• DOI: 10.1177/14737795241231987

Many common law jurisdictions recognise that directors have an obligation to consider the interests of company creditors when the company is experiencing financial distress. Despite numerous cases attempting to crystalise legal principles related to this obligation and significant academic commentary on the topic, the parameters of the obligation remain uncertain. This paper provides an analytical comparison of the latest case law in Australia and the UK concerning the two most important issues that exist in relation to this obligation, namely when is the obligation triggered and what do directors have to do to ensure that they comply with the obligation. We found that the UK courts appear to be adopting a much more restrictive approach regarding the trigger for the obligation, whereas the obligation may arise much earlier in Australia, due to the liberal framing of the trigger. An analysis of case law also revealed that the weight attached to the interests of creditors once the obligation is triggered seems to be much more significant in the UK, compared to Australia. This analysis is important as there is no doubt that courts in other common law jurisdictions, and particularly in the Commonwealth, will examine the Australian and UK jurisprudence in making their decisions in relation to any claim that directors have failed to comply with the obligation to consider the interests of creditors.