Directors have a duty to act in good faith and in the best interests of the company. This means that they must make decisions that are in the company’s best interests, rather than their own personal interests or those of the shareholders and creditors save in special circumstances. Acting in good faith requires directors to act honestly and with integrity, taking into account all relevant information and considering the potential impact of their decisions on the company and its stakeholders. This duty is essential for maintaining the trust and confidence of stakeholders and ensuring the long-term success and sustainability of the company. It involves being truthful, trustworthy, and acting in a way that is morally upright, without deceit or ulterior motives.

The Companies Act provides that directors owe their duties to the company and in certain limited circumstances, to the shareholders. However, it is important to note that section 162 of the Companies Act provides that a director must also consider the interests of creditors if the director believes that the company is unable to pay its debts as they fall due. Such director then must forthwith call a meeting of the board of directors to consider whether they should appoint a liquidator or an administrator.

If the director fails to do so and the company is subsequently placed in liquidation, the Bankruptcy Division of the Supreme Court (‘Bankruptcy Division’) may, on the application of the liquidator or of a creditor of the company, make an order that the director shall be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade. Therefore, the Companies Act confirms that directors’ statutory duties could shift to the creditors’ interests because, in such situations, the directors have a responsibility to ensure that the company’s debts are paid off and that the creditors’ interests are preserved. In effect, the shift in focus reflects the overreaching need to prioritize the financial stability of the company and its ability to meet its obligations. It is thus crucial for directors to understand this change in their duties and act accordingly to navigate the challenging circumstances.

This issue was debated in Gamma Materials v Rambhujoo 2016 SCJ 172 where the Bankruptcy Division relied on English law for guidance and more specifically to Palmer’s Company Law, Volume 4, Part 15 –Winding up –Chapter 15.5 –Wrongful trading at paragraph 15.599.30–

“In principle therefore, a director’s responsibility for a company’s wrongful trading commences from the moment when he has either actual or constructive knowledge that there is no reasonable prospect of the company’s avoiding insolvent liquidation. That moment – whose determination will require a careful analysis of all the relevant circumstances in the individual case may be termed “the moment of truth” and must be separately calculated for each director. …/… the courts have read the section as requiring that directors shall be accountable for losses incurred after the “moment of truth”.

In Gamma Materials (supra), the Bankruptcy Division analysed the timeline and events in full detail. Having done so, the Bankruptcy Division set aside the application to find Mr Rambhujoo (i.e. the Respondent) liable under Section 162 of the Companies Act because (i) explained all his actions and, (ii) justified the timing of when he felt the company was unable to pay its debts which led him to call a meeting of the directors. This in turn led to the start of the winding up on a particular date. So, a director, in exercising his duties must be able to determine that “moment of truth”, that is a cut-off date when the company was unable to pay its debts as they fall due in line with the requirements of Section 162 of the Companies Act.

Thus, in practice, the following non-exhaustive actions are those which, in our view, a director can take to ensure that he is fully aware of the financial situation of the company and to ensure compliance with his duties under section 162 of the Companies Act:

continuously monitor the performance and prospects of the company;
ensure that financial records are kept;
monitor key financial indicators;
consider a broad objective view of the company’s performance;
remain actively involved in the running of the company;
document fully his actions with dates and reasoning behind actions taken;
seek professional and expert advice from sources independent to the company if required.

If you require further information please reach out to Melissa Virahsawmy-Naik