Directors’ duties and the need to enhance creditor protection: section 172(3) of the UK Companies Act 2006

The law requires that directors act in a way they consider in good faith, to promote the success of the company for the benefit of its members. However, under certain circumstances directors are required to consider or act in the interests of creditors. In construing the law, particularly section 172, when the company is in financial distress, section 172(1) is substituted by section 172(3) hence the focus is no longer the members but creditors. This duty is applicable to directors when the company is insolvent, nearing insolvency or in doubtful insolvency. However, the interpretation of this section has attracted a lot of debate because the law is not clear on the actual aspects of application. Even though the duty flows from the traditional fiduciary duty to act in the best interest of the company, courts have been tentative in stating when the duty arises or comes into effect.

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