The directors of a company are planning to change the business of their company significantly from that of fast-food retailer, to a company that supplies fine foods, and exotic tasting delicacies. The...

The directors of a company are planning to change the business of their company significantly from that of fast-food retailer, to a company that supplies fine foods, and exotic tasting delicacies. The company does several studies on behalf of the directors before embarking on the new business, the reports appear that this will be very profitable as a venture. The company invests a lot of money into the new project, and the executive directors are very busy a whole year getting up the business.

Things do not go well, and at the end of the year it is quite evident that this new venture is not going to succeed due to the number of competitors, the high costs and the small target market. The company has lost a lot of money and owes quite a bit as well. The Chief Financial Officer tells the directors that the company is in serious financial trouble, but he will see if he can fix it! The directors leave it to the CFO to come up with a solution. But one month later the creditors move in on the company and place it under external administration. The creditors discover the company has been unsustainable for more than six months and should not have been trading. Explain with reference to law.

• What are the liabilities of the directors in this situation for the losses and the poor business decisions?


• Do the directors have any defences to the fact that so much money has been lost on this venture.


• Will the directors be liable to creditors for the insolvency of the company? Refer to appropriate law in your answer.