question archive Georgia Ford is a director and 60 per cent shareholder of Ford’s Catering Services Pty Ltd

Georgia Ford is a director and 60 per cent shareholder of Ford’s Catering Services Pty Ltd

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Georgia Ford is a director and 60 per cent shareholder of Ford’s Catering Services Pty Ltd. Her sisters Ellen and Molly are the other directors and each own 20 per cent of the shares. For most of this year Ford’s Catering Services Pty Ltd has suffered acute financial problems. It has been continually late in paying debts due to its major suppliers.

The directors soon realise that the company’s liquidation is imminent, but they want to continue trading using the company’s name as it is well known to the company’s numerous customers. At the suggestion of the company’s accountant, a shareholders’ meeting of Ford’s Catering Services Pty Ltd is convened and a resolution is passed changing the company’s name to Black Pudding Pty Ltd. At the same time a new company is incorporated called Ford’s Catering Services (Aust) Pty Ltd, with Georgia, Ellen and Molly as its directors and shareholders. After the name change, Black Pudding Pty Ltd ceases operations and the new company simply takes over the business formerly conducted by Black Pudding Pty Ltd. Recently the court, on the application of Acme Food Suppliers Ltd, orders that Black Pudding Pty Ltd be wound up in insolvency.

Required:

Advise the liquidator what legal action, if any, can be taken against Georgia, Ellen and Molly in connection with the transfer of the business and the name Ford’s Catering Services to Ford’s Catering Services (Aust) Pty Ltd.                                                                                   

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Answers:

Relevant Law- s 181 and fiduciary duty

S 181- That a director or other officer of a corporation must exercise their powers and discharge their duties.

a. In good faith in the best interests in the corporation and

b. For a proper purpose (not relevant, linked to an issue of shares)

The duty is breached if a director acts in a way that no reasonable director would have considered to be in the best interests of the company: ASIC v Adler

What are the best interests of the company?

As long as the company is solvent, the interest of the company is the interest of the shareholders as a collective group

When the company is approaching insolvency?

The interests of the company ‘include the interests of the creditors when the company’s approaching insolvency’: Walker and Kinsela.

In this question the company is clearly approaching insolvency. Therefore, the duty to act in the best interests of the company requires the directors to act in the best interests of the creditors. No reasonable directors would have considered the actions of the directors in this question to be in the best interest of the creditors (ASIC vs Adler)

  • Can’t do anything that prejudices or undermines the creditors
  • Change the name: Wind the other company up with no assets to pay the creditors then you are prejudicing the interests of creditors.
  • Leaving one company with nothing in it, so there is no assets or money there to pay the creditors.

Solvent company =  Best interest = Shareholder’s interests

Insolvent company = Best interest = Creditor’s interests

How have directors breached duty? G E and M have transferred the business name, the business and any goodwill associated with it. The goodwill is an asset that could have been sold by the liquidator of Ford No 1 for the benefit of the creditors of that company.

They created a phoenix company. .

When creditors threaten to liquidate the company because of its insolvency, the directors form a new company and therefore transfer to it the old coy’s business and its most valuable assets for no consideration. The old company is left an asset less shell and may be would up by its creditors who receive very little in liquidation.

Case law: McNamara v Flavel

Director may improper use of information that the coy was in financial troubles when he transferred business name to the advantage of his other company

The coy’s creditor’s suffered detriment. The director’s actions deprived them of any value attaching to the goodwill associated with the company’s name.

Conclusion

The liquidator could commence action against the directors for breach of duty and seek compensation. Breach of the best interest of the company, but now because the company is going into liquidation, they have breached the duty to act in the best interests of the creditors.