Insolvency – every director’s biggest nightmare. Under the Corporations Act s 459C, when a creditor serves a statutory demand on a company for an outstanding debt, the company will be presumed insolvent if it fails to comply with, or set aside, the demand. But what happens when the creditor is also a director of the company? This was an issue recently considered by the Supreme Court of Queensland in Re CSSC (QLD) Pty Ltd  QSC 282.
Mr Scroope and Ms Commons were the only directors and shareholders of CSSC (Qld) Pty Ltd (CSSC) (the Company). Following a breakdown in their personal relationship, Ms Commons served a creditor’s statutory demand on the Company for a debt of almost $700,000. Mr Scroope filed an application on behalf of CSSC seeking to set aside the statutory demand on two grounds – firstly, that there was a genuine dispute in relation to the debt and, secondly, that the use of a statutory demand by Ms Commons was an abuse of process due to her position as a director of the applicant.
The Court found there was no genuine dispute in relation to the debt and relied upon the fact that the debt was recorded in the Company’s books and records. The only remaining issue to consider was whether there was an abuse of process in issuing a statutory demand.
Personal interests and the duties of a director
Evidence was put before Mullins J that Ms Commons preferred her personal interests at the expense of the interests of the Company, and thus breached her fiduciary duties owed to the Company as a director.
In finding that there was no breach of her fiduciary duties, Mullins J confirmed the position that a director is not prevented from pursuing a debt against the company to which they have been appointed simply because they hold the position of director. The Court reasoned that a person’s decision to pursue an amount legitimately owing to them, whether a director or not, did not amount to making a gain at a company’s expense.
There was no breach of the directors’ duties owed by Ms Commons to the Company.
Abuse of process
Interestingly, the Court found that Mr Scroope did not in fact have authority to file an application on behalf of the Company seeking to set aside a statutory demand, although the Court did not elaborate on the reasons for why Mr Scroope did not have authority. The result is that the Company was inherently unable to challenge the statutory demand because Ms Commons was the only person with the requisite authority, unless a special application was brought by Mr Scroope seeking permission to bring the proceedings on behalf of the Company.
Mullins J found that Ms Commons was within her rights to pursue the debt but found the means she used to be inappropriate in the circumstances and, in particular, because she was the only director who could challenge the statutory demand. On that basis, the Court found there was an abuse of process and, using the Court’s discretionary power in the Corporations Act s 459J, the Court set aside the statutory demand.
From a practical perspective, one would expect that Ms Commons, in her capacity as director of the Company, would be in a position to discharge the debts of the Company by causing it to pay herself and thereby avoid the need to issue a statutory demand. There may be good reasons for why this approach was not taken but it is not apparent from the judgment. If the Company is solvent, it would need to discharge its debts. If the Company is insolvent, there would be an obligation on the directors to appoint an administrator.
What this means for companies and directors
This case demonstrates that directors should be extra careful when engaging in conduct that could be seen to benefit personal interests over the interests of the company to which they are appointed. Not every personal endeavour will be categorised as a breach of director’s duties but, where there is doubt, advice should be sought beforehand.