Directors beware: Always maintain your books and records accurately

Articles, Restructuring + Insolvency

The Supreme Court of Victoria recently handed down its judgement in ACN 103 220 766 Pty Ltd (Formerly ispONE Pty Ltd) (In Liquidation) [2016] VSC 275.

What happened?

The Director of ispONE Pty Ltd (the Company) had been in his position since 2003. From 2007 to 2012 payments totalling $504,567.20 appeared as loan account balances in the Company’s records. Shortly after in 2013 the Company went into voluntary administration. Some of the payments were traced to the Australian Taxation Office (ATO) in discharge of the Director’s personal taxation liabilities. Other payments were traced back to a real estate agent in connection with the Director’s purchase of property. The Director claimed that he was unaware that the Company was making payments on his behalf to the ATO and all other payments were made as bonuses. However, records of a Directors resolution passed a month before the Company went into administration were found amongst the Company’s books. The details on the records showed that the purpose of the resolution was to forgive the loans owed to the Company by various debtors including the Director. The Director claimed that he had no part in the resolution. The Company’s secretary was also recording the payments in MYOB as loans to the Director.

Liquidator’s claims

Following their appointment, the liquidators of the Company brought claims against the Director, which were put in the following ways:

  • The payments were loans made by the Company to the Director. Meaning the Director would have to pay them back;
  • Alternatively, the payments were unreasonable Director related transactions and therefore voidable under section 588FDA of the Corporations Act 2001 (Cth) (the Act); and
  • Lastly, the Director was vin breach of his duties under section 181 and 182 of the Act and liable for damages under section 1317H of the Act.

Decision

Justice Gardiner stated that ‘the relevance of [the Company resolution] in the present instance is the implicit acceptance of the existence of liabilities in the form of loans on [the Director’s] part, which required forgiveness’. Accordingly, he concluded that advances which were the subject of the liquidator’s claim were in the nature of loans.

Justice Gardiner said it was not necessary for him to consider whether the advances were in the nature of unreasonable director-related transactions as he had already determined the advances as loans and repayable by the Director.

The liquidator was entitled to judgment against the Director for all of the payments particularised as loans to him from the Company save for certain loans that His Honour determined were barred because they fell outside of the four year time period prescribed by section 588FE(6A) of the Act.

In relation to the breach of duties, Justice Gardiner concluded there was not enough evidence for the Director to be liable under section 181 and 182 of the Act. Therefore, the Director was not subject to a finding of damages pursuant to section 1317H of the Act.

Takeaway

Directors should always take care to record payments correctly in a company’s books. If this is not done, it will be difficult to argue otherwise given that section 1305 of the Act provides a prima facie presumption that what is recorded in the books is true and can be admitted as evidence of the relevant facts.  Any attempt to rebut that presumption will require more than just the director’s word.

 

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