Company law; directors’ duties; duty to prevent insolvent trading
Facts: The Scholz Motor Group Pty Ltd incurred debts of almost four million dollars over a period in which the directors had reasonable grounds for suspecting the company was insolvent. The company argued that the directors should have prevented the company from incurring those debts.
Issue: In the circumstances, were the directors liable for insolvent trading?
Decision: The directors had breached their duty to avoid insolvent trading.
Reason: The directors knew that:
the company was unprofitable and had accumulated losses;
the company had exceeded its overdraft facilities on more than one occasion, and cheques drawn by the company on its account had been dishonoured;
the bank had said that no further overdraft facilities for the company would be approved.
In these circumstances, it was not credible to think the defendants were not aware of the company’s deteriorating financial circumstances. They should have wound up the company rather than allowing it to incur the debts.