Company's liquidation Archives

Facts of the case (Williams v Scholz)

The case involves a liquidator trying to recover money from the directors of a company called Scholz Motor Group Pty Ltd. The liquidator claims the company incurred debts while it was insolvent and that the directors should have known this.

As per Section 588G of the Corporations Act 2001 (Cth), directors must ensure that their company can pay its debts when due. If the company is insolvent (unable to pay its debts) and the directors know or should know this, it’s illegal for them to let the company take on new debts. If directors break the law by allowing the company to take on debts while insolvent, they can be sued by the liquidator to recover the losses incurred by creditors (Section 588M).

The company was set up in April 2004 and struggled financially from the start. It accumulated significant losses, amounting to over $3 million by October 2005. Despite increasing its overdraft limit multiple times, the company couldn’t manage its financial problems and frequently bounced cheques. By September 2005, the bank terminated its relationship with the company due to its financial troubles.

Trial’s decision and Appeal court

The trial judge agreed with the liquidator and decided the directors should pay $3,101,145.78. This amount represented the debts incurred after the company was insolvent (i.e., from 1^st July 2005).

The judge concluded that there were clear signs of insolvency that the directors should have noticed. This included frequent overdraft limit breaches and dishonoured cheques. The directors were informed of these issues through bank statements and communications, making it unreasonable for them to claim they were unaware of the company’s financial troubles.

On 4 October 2007, it was ordered that the directors pay to the respondent (the liquidator) $3,422,900.27, including interest of $321,754.49.

The appeal court confirmed that the trial judge’s decision was well-founded based on the evidence of insolvency. The directors should have wound up the company instead of allowing it to incur the debts, while it was insolvent.

List of references:

YOU MIGHT ALSO LIKE:

MORE FROM CORPORATE LAW:

Case name & citation: Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1

Court: High Court of Australia
The bench of judges: Barwick C.J., Mason and Jacobs JJ.
Decision date: 03 March 1976
Area of law: Company Liquidation; Duties of directors; General policy for movement of funds between companies

Facts of the case

The case involves an appeal by the liquidator of Asiatic Electric Co. Pty. Ltd. against the dismissal of a misfeasance summons. The summons was filed under Section 367B of the Companies Act, 1961 (N.S.W.) against former directors of the company. They were also directors of other companies administered as a group with Asiatic.

The company’s financial troubles stemmed from a contract with Chevron Sydney Ltd. for some work related to a hotel. Asiatic was owed over $100,000 by Chevron and it could not pay most of this debt. This caused a cash shortage within the group of companies, leading to a practice to transfer funds between the companies to address immediate financial needs.

The liquidator’s case included four separate claims:

$10,000 paid by Asiatic to Australian Sound and Communications Pty. Ltd. on December 14, 1967.

$40,523.82 paid to Starkstrom Control Gear (Australia) Pty. Ltd. in March 1967.

$17,960.93 paid as salaries and wages between March 18, 1967, and January 2, 1968.

$15,400 paid to A.B. Wimborne between 1961 and 1966, either as wages or pension.

The liquidator argued that these payments were not made bona fide in the company’s interest and represented a misapplication of funds.

Court’s Findings

Asiatic did not receive any benefit or advantage from the $10,000 payment to Australian Sound. The only consideration was the implied promise of repayment on demand. No security or promise of interest was obtained from Australian Sound. The directors likely failed to recognize that each company was a separate legal entity and that each transaction needed to be evaluated based on the interests of the individual companies involved. The transaction was not only disadvantageous to Asiatic but also likely to result in loss. Australian Sound was in financial trouble at the time and lacked the funds to repay the loan. Further, at the time of the $10,000 payment to Australian Sound, Asiatic was itself insolvent. Thus, it was deemed a misapplication of Asiatic’s funds, thereby constituting misfeasance.

The Court emphasized the essential legal principle that each company within a group is a separate and independent legal entity. It said:

“………the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.”

The remaining payments also followed the same layout. They suggested a misapplication of company funds, driven by the directors’ neglect and disregard for their duty to act in the best interests of Asiatic.

Decision in Walker v Wimborne

Chief Justice Barwick concurred with Justice Mason’s reasons. Barwick agreed that the payments of $10,000, $40,523.82, and $17,960.93 were unjustifiable from the company’s funds. The directors were ordered to compensate the liquidator for the loss suffered by Asiatic due to these transactions. However, though with some doubt, he concluded that the appellant should not succeed in respect of the payment of $15,400.

List if references:

YOU MIGHT ALSO LIKE:

MORE FROM CORPORATE LAW:

Tag: Company’s liquidation

A Case Summary of Williams v Scholz [2008]

Facts of the case (Williams v Scholz)

Issue that arose

Trial’s decision and Appeal court

A Case Analysis of Walker v Wimborne [1976]

Facts of the case

Court’s Findings

Decision in Walker v Wimborne