Document or face ‘Divine’ Intervention.
Liquidators investigate and review payments made by the company preceding the date of liquidation, to determine if any of the monies paid were for improper purposes and could be clawed back.
Often payments are identified as having been paid not for the company’s benefit, but rather for the director’s benefit e.g. paying personal credit card, school fees etc.
The risk a director faces when allowing a company to make payments of a private nature, when no service or remuneration agreements exist between the company and the director, is highlighted in Fisher v Divine Homes Pty Ltd (In Liquidation).
The director of Divine Homes was sued by the liquidator for numerous payments that the company paid on his behalf, including the director’s personal credit card.
The Director acknowledged that the payments were made to meet his personal credit card bills. The director submitted, however, that although he performed significant services for Divine Homes in the course of its building activities, he was not paid salary or wages; and it was therefore reasonable that the company pay his personal bills; or, perhaps more explicitly, that payment by the company of his personal bills was proper and legitimate remuneration for his services.
The Judge said that the director’s submission cannot be accepted. "If a company is to enter into a service contract with its director, it must do so in some clearly observable manner. The fact that the same person is the sole director and shareholder and therefore the only human instrumentality by which the company may act, does not change this. Corporate decisions and acts can only be achieved in explicit ways", the Judge said.
Importantly, the Judge said that a person who is the sole director, the sole shareholder and the person by whom services are provided, does not mean that the corporate decision to enter into a service contract and the actual formation of the contract can take place wholly within the individual's mind and be revealed, if at all, only when it suits him or her to reveal it.
Nor, in the present context, said the Judge would it avail the director to say that he was entitled to some form of quantum merit and was merely helping himself to what was due to him accordingly.
The lessons for directors and their advisors are clear from this judgement—document service and remuneration agreements, and be specific as to what constitutes director entitlements.