JPD Media & Design

The administrator Simon Cathroclaimed that Jamie Durie might have traded in the conditions of insolvency for last two years.[1]The documents of court and creditors also emphasized on the collapse of his company JPD Media & Design when former licensing agent of the company Mike Curnow took legal action against the company. Under the Corporations Act 2001, a person is considered as solvent when he or she is able to pay all the debts as they become due or payable and the one who is not solvent is considered as insolvent.

Mr. Cathro informed the creditors of Mr. Durie that it has been found that the director Mr. Durie was trading in insolvency and potential voidable transactions have also been found. ‘Voidable transactions’ are payment of money, transfer of property or other transactions from the assets of the company to third party during insolvency of the company.  On the other hand, ‘insolvent trading’ occurs when a company is insolvent and a director allows the company to incur new debt. In such a situation, the director of the company can be held liable for new debts acquired.[2]

In documents filed with ASIC, the administrator ticked ‘Yes’ in response to the question if he found any offence committed by the officers of the company.[3]Mr. Durie was the shareholder and director of the company that is why, Mr. Curnow took legal action against Mr. Durie after the termination of his services. After five years, the NSW Supreme Court ruled in his favor and allowed him to issue payment demand which was more than $563000. He was later awarded more than $1 million. The company owed around $215000 to the ATO also. Before lapse of payment period, Mr. Durie put the company into voluntary administration as the company had $1 in the bank. A company can be put into ‘voluntary administration’ in situation of financial trouble.[4]

It was informed by Mr. Cathro that the company might have been insolvent since February 2018 when the tax became due but ATO revealed that garnishee notices were issued in January 2018.[5] ‘Garnishee notice’ is a type of order acquired from court by a creditor which allows the creditor to seek payment of debt due by the debtor through third party who possess funds or assets on behalf of debtor.[6] The issuance of Garnishee Notice is considered as an initial step in the process of taking legal action against debtor and ATO was going to take legal action against Mr. Durie. It was determined that the company might have been insolvent since 2016, investigations were required to determine the exact insolvency date.

 The claim was disputed by the lawyers of Mr. Durie on the basis of minutes of creditors’ meeting. ‘Minutes’ refers to the written record in a minute book, of the resolutions and meetings of the members of a company. It was stated by the lawyers of Mr. Durie that when the income taxation defaulted by ATO in 2016, the company had sufficient assets from the alleged default point to fulfill the terms of arrangement. Furthermore, creditors were being paid during this period as Mr. Durie was personally paying the company debts through repayment of his loan account.

Later, the administrator informed creditors that the situation was not clear as there was doubt about the ability of pursuing the director for insolvent trading. He emphasized on asset sales of the company in 2015 to one of his own companies in $10000 and mentioned that the deal might have been considered as uncommercial. Under section 588FB (1) of the Corporations Act, a transaction does not need to be one at undervalue in order to be characterized as an uncommercial transaction and it depends on the benefits to the company in entering into transaction, detriment to the company, respective benefits to other parties or other relevant issues.[7]He told that he reviewed the balance sheet five months before the sale in which the book value of assets was around $278000 and he opined the transaction to be uncommercial because the value of transaction was less than the market value.

The lawyers of Mr. Durie agreed to defend the claims regarding insolvent trading and uncommercial transactions and stated that the administrator had limited information because additional information with an offer by Mr. Durie was accepted by the creditors and the administrator in the second meeting. It was revealed through ‘minutes’ that Mr. Durie has sold a property recently to repay the overdraft facility of the company to ANZ.

Facts of Case

Model Haircuts is a private company successful in hairdressing business. There are five members in the company having equal shares of 20% each since its formation. There are two directors of company Elle and Belle and as per the constitution of the company, the directors have to be retired after 3 years and any of the members can apply to be elected as a director. However, the directors may be appointed or re-appointed at the annual general meeting. Being a member of the company, Billy wants to get nominated for next election, however, he does not have experience of business or finance. Before the general meeting, the two directors issued additional shares to themselves in order to alter the voting power and to make it impossible for Billy to be elected.

Issue: What are the legal rights of Billy in this situation?

Law:

It is common for a company to devise a constitution which sets out the rules through which the company is governed as well as in regulating the relationships between the company, its members and officers. The constitution of the company should include provisions related to the share capital of the company along with the procedures for issuing and transferring the shares within the company. It should also include the powers, rights and duties of the members. [8]

The duties of the directors are owed to the benefit of the company which means that directors must act in the interests of all the members in a collective manner. Furthermore, the directors do not owe duties directly towards individual members of the company. In performing their roles and responsibilities, the directors of a company are subject to wide range of duties and obligations under the Corporations Act, the constitution of the company and the common law. Major duties of directors include;

  • Performing in good faith for the best interests of the organization
  • Using the powers for which they are conferred
  • Performing with reasonable care and conscientiousness
  • Avoiding conflicts of interests
  • Avoiding indecorous use of the company information or undue advantage of the position for themselves or others to cause disadvantage to the company.[9]

If the directors are found to be in breach of any of their duties, they can be held liable to civil penalties and if breach amounts to irresponsible or dishonest act, the director can also be held liable for criminal penalties.

Application:

Belle and Elle are the directors of the company and it is their duty under the Corporations Act, the constitution of the company and the common law that they should act in a manner for the overall benefit of the organization.

Firstly, it is evident from the procedure of retirement of the directors of the company that the constitution of the company is well-written and framed in an effective manner. So, it is clear that the constitution of the company must also have the provisions related to the share capital of the company along with the procedures for issuing and transferring the shares within the company. Along with it, it must also include the powers, rights and duties of the members. In this situation, the directors cannot act on their own for their personal benefits. The decisions related to the division and transfer of shares cannot be taken without the consent of all the members of the company until there is such a provision in the constitution of the company.

The duties of the directors are owed to the benefit of the company which means that directors must act in the interests of all the members in a collective manner and these two directors have acted for their own benefits. Furthermore, it is also a provision that the directors cannot act for the benefit of individual members of the company, so it is illegal on part of any of the directors to issue shares to any of them and act for the benefits of any of the members individually instead of company benefits. Furthermore, it is expected from the directors that they would avoid conflicts of interests, so it is not acceptable that the two directors issued additional shares for themselves without the consent of other members and to make it impossible for Billy to get nominated in elections.

Even if Billy do not have sufficient knowledge of business and finance, he has the right to get nominated in the elections as it has been mentioned in the constitution of the company that any of the members may stand for elections.

Conclusion: Billy has legal right to stand in elections and directors have acted in breach of their duties towards the company by issuing the additional shares for themselves just to make it impossible for Billy to stand in the elections. So, Billy can take legal action against them being a member of the company.

References

Baker Mckenzie, “Duties And Liabilities Of Directors Of Australian Companies” (2017) <https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirectors_dec17.pdf?la=en>

ASIC, Company Shareholders | ASIC – Australian Securities And Investments Commission(2014) Asic.gov.au https://asic.gov.au/for-business/running-a-company/company-shareholders/

ASIC, Voluntary Administration: A Guide For Creditors | ASIC – Australian Securities And Investments Commission (2017) Asic.gov.au <https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/voluntary-administration-a-guide-for-creditors/>

Australian Government, Federal Register Of Legislation- Corporations Act 2001 (2018) legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00129/Html/Volume_2>

Breen, Gerard et al, Uncommercial Transactions In Corporations Law – Corporate/Commercial Law – Australia (2011) Mondaq.com <http://www.mondaq.com/australia/x/147372/Corporate+Company+Law/Uncommercial+transactions+in+corporations+law>

Dissolve, What Is Insolvent Trading? | Free, Confidential Advice | Dissolve (2012) Dissolve <https://www.dissolve.com.au/definitions/insolvent-trading/>

Evans, Michael, Jamie Durie Calls In Lawyers To Dispel Insolvent Trading Claim (2018) The Sydney Morning Herald <https://www.smh.com.au/entertainment/celebrity/jamie-durie-calls-in-lawyers-to-dispel-insolvent-trading-claim-20180622-p4zn43.html>

Gupta, DrNitin, Insolvency Laws In Australia – Parliament Of Australia (2018) Aph.gov.au <https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/InsolvencyLaws>

Reidy, Rodgers, Garnishee Notices: When To Act (2017) Rodgers Reidy<http://www.rodgersreidy.com.au/articles/articles/garnishee-notices-when-to-act>

[1]Michael Evans, Jamie Durie Calls In Lawyers To Dispel Insolvent Trading Claim (2018) The Sydney Morning Herald <https://www.smh.com.au/entertainment/celebrity/jamie-durie-calls-in-lawyers-to-dispel-insolvent-trading-claim-20180622-p4zn43.html>.

[2]Dissolve, What Is Insolvent Trading? | Free, Confidential Advice | Dissolve (2012) Dissolve <https://www.dissolve.com.au/definitions/insolvent-trading/>.

[3]Australian Government, Federal Register Of Legislation- Corporations Act 2001 (2018) legislation.gov.au <https://www.legislation.gov.au/Details/C2017C00129/Html/Volume_2>.

[4]ASIC, Voluntary Administration: A Guide For Creditors | ASIC – Australian Securities And Investments Commission (2017) Asic.gov.au <https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/voluntary-administration-a-guide-for-creditors/>.

[5]Dr Nitin Gupta, Insolvency Laws In Australia – Parliament Of Australia (2018) Aph.gov.au <https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/InsolvencyLaws>.

[6]Rodgers Reidy, Garnishee Notices: When To Act (2017) Rodgers Reidy<http://www.rodgersreidy.com.au/articles/articles/garnishee-notices-when-to-act>.

[7]Gerard Breen et al, Uncommercial Transactions In Corporations Law – Corporate/Commercial Law – Australia (2011) Mondaq.com <http://www.mondaq.com/australia/x/147372/Corporate+Company+Law/Uncommercial+transactions+in+corporations+law>.

[8]ASIC, Company Shareholders | ASIC – Australian Securities And Investments Commission (2014) Asic.gov.au <https://asic.gov.au/for-business/running-a-company/company-shareholders/>.

[9]Baker Mckenzie, “Duties And Liabilities Of Directors Of Australian Companies” (2017) <https://www.bakermckenzie.com/-/media/files/locations/australia/bk_australia_dutiesliabilitiesofdirectors_dec17.pdf?la=en>.

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