Statement of facts
Asiatic Electric Co Pty Ltd. loaned money to three companies when it was at a point of insolvency. The payments were as follows: the payment of $10,00 to Australian sound on 14th December, payment of $40,523.82 to Starkstrom Control Gear Pty Ltd, payment of $17,960.93 by way of wages and salaries and payments if $15,400 made to A.B Wimborne on account of pensions.
A liquidator of a company made an application to recover money that was paid out by the company under the sec 367B of the companies Act 1961(NSW) 17. Asiatic Electric Co Pty Ltd gave out a loan that was not recovered and the liquidator was looking to make the directors of the company responsible for the loss. The liquidator claimed that the directors had a breach of duty when they lend the money because there was no profit that was forth coming to the company.
The primary court dismissed the case in favor of the directors citing that the liquidator did not present a strong case and evidence.
The case was previously in the Supreme Court of New South Wales where it was dismissed. The appeal was filed by the liquidator of Asiatic Electric Co. Pty Ltd because he felt that the judge had failed to put into consideration all the evidence that was put forward. the liquidator appealed in the High Court of Australia.
- Substantive Issue
The issue therefore is a company is responsible for its shareholders as well as the creditors. Should the creditors be found liable for misapplications of funds when it involves a group of companies? Should it be viewed as a breach of duty?
The judge reversed the judgment of the primary court and ordered the case to be remitted back to Supreme Court of South Wales for assessment of the losses incurred in claims 1 and 2. The high court held that the directors of the company had broken their duties in allowing loans to a related company. The loan that was awarded did not have any advantage to the lending company and carried the risk of a huge loss because the borrower was in financial difficulties and unlikely to repay the loan.
Yes: The court found that the directors had a breach of duty and did not act according to the good of the company. They loaned out money to companies that had no capability of paying and also when the company was on the verge of insolvency which serves as a breach of duty because they did not put in mind the interests of the company.
Rule of law or legal principle applied:
When the directors adopted a routine of free movement of funds within a group of companies it disregarded the interests of individual companies. The directors therefore had a legal right towards the company to protect its interest by not lending money to companies that could not prepay the money. According to sec 367B of the companies Act 1961(NSW) 17 the directors should be found liable because it is in their best interest to protect the interest of the company.
Mason J. reasoned that the failure to look after the interests of the creditors amounts to the failure to look up for the interest of the company which means a breach of duty. The primary judge felt that giving out the loans was a benefit to one of the companies in the group and the fact that the company received money from its debtors Estoril amounting to $10,000. The word ‘group’ may refer to a number of companies that have interlocking shareholders. Therefore lending money from one company to another within the group should be for beneficial purposes for both parties.
The majority felt that all the payments made were made with bona-fide interest of the company. The Justices found that all the payments made were not made with bona-fide reasons of the interests of the company and were a misapplication of the company’s funds.
The court was satisfied that the officers were in breach of fiduciary duties and should therefore be held liable for their actions.
Additional Comments/personal Impressions
When directors of a company are lending out money they should do so knowing that it will indeed be in the good of the company. The company’s interest should come first before any other company. Lending out money to companies that might end up not paying might be disastrous to any company. There are other cases that also found that the directors were indeed responsible for any decisions that is made regarding the company.