The recent Decision of the Supreme Court in a claim bought by Moira Carter as Liquidator against Aaron Watts and Tracy Watts provides a reminder of the extent of duties owed by directors, and the ability of liquidators to seek to set aside uncommercial transactions.
The factual background was that Mr and Mrs Watts were directors of a company known as Watts Excavations (Qld) Pty Ltd. That company changed its name in June 2009 on formation of a new company by the same name.
Mr and Mrs Watts arranged a transaction involving the new company buying the old company’s business and assets. However, the new company did not pay full market value for the assets. Additionally, the purchase price was not paid to the old company but rather was paid to discharge personal debts of Mr and Mrs Watts.
The nature of the transaction was one often described as a phoenix transaction where a new company is formed to take over the business of an existing company often without payment of proper consideration.
The Supreme Court found that the transaction was an uncommercial transaction which offered no, or negligible, benefit to the old company. The transaction was also found to be an insolvent transaction. As a consequence Mr and Mrs Watts were ordered to pay the Liquidator of the old company in excess of $600,000.00.
Directors, and accountants and lawyers advising directors, should always be mindful of the obligations that directors have under the Corporations Act. Mr and Mrs Watts attempted to rely on what they claimed was accounting and legal advice to proceed with the transaction (although no evidence was called from the accounting and legal advisors). The Watts evidence about this was not believed. Claims that directors relied on advice, do not provide a defence if the underlying transaction is uncommercial.
