A recent decision handed down by the Supreme Court of Western Australian has highlighted the weak findings in the qualification of directors, creditors and companies’ solvency in the absence of evidence.

In the matter of Barboutis v The Kart Centre Pty Ltd [No 2] [2020] WASCA 41, the Supreme Court of Western Australia considered the deadlock in the management of affairs of a Company and the solvency of a company, looking to the official status of a director and payments made to the company.

Background

The facts of the case revolve around the management of the affairs of The Kart Centre Pty Ltd (the Company). Mr Colin Barboutis and Mr Andrew Freeman formed the Company, The Kart Centre Pty Ltd, which was incorporated in September 2016.

On incorporation, the directors of the Company were Mr Freeman and Mr Barboutis’s son, Nicholas Barboutis, however a form lodged to the ASIC shortly afterwards recorded that Mr Barboutis had replaced Nicholas Barboutis’s position as director. The initial shareholders of the Company were Bullsbrook (associated with Mr Barboutis) and Rilyla (associated with Mr Freeman).

Eventually the relationship between Mr Barboutis and Mr Freeman broke down and there were disputes of various amounts and contributions paid to the Company.

In 2016, Bullsbrook and Rilyla entered into a Share Sale Agreement, whereby Rilyla agreed to purchase all of Bullsbrook’s shares in the Company. Bullsbrook issued a letter of demand for an amount said to be an outstanding loan amount due by the Company to Bullsbrook. The Company did not pay the amount claimed.

On 5 April 2019 the appellants made an application for the Company to be wound up on the ground of insolvency or alternatively, on the ground that it was just and equitable to wind-up the Company on the proposition that there was a deadlock in the management of the affairs of the Company. The appellants had standing to seek an order on the grounds that (a) Mr Barboutis was a director of the Company and that (b) Bullsbrook was a creditor of the Company.

Valid appointment as a director

There was no written evidence to suggest the resignation of Nicholas Barboutis as a director, and the subsequent appointment of Mr Barboutis as a director, except for the registered change in the ASIC records. The Courts emphasised s 1274B(2) of the Corporations Act which provides that ASIC records are admissible as prima facie evidence in the absence of evidence to the contrary. The appellants failed to provide any evidence such as a signed letter of resignation, notice of resignation, signed and written consent to act as a director and records of appointment.

The Court found that the absence of relevant documents constituted evidence to the contrary, thus the appellants could not rely on the ASIC records. In addition to the absence of evidentiary support by the appellants, their submissions that Nicholas Barboutis had resigned to be a director and that Mr Barboutis had been validly appointed as a director were dismissed, consistent with the master of the previous court’s findings.

Bullsbrook as a creditor and debt due and payable

The issue of whether Bullsbrook was a creditor with a debt owed by the Company depended on the characterisation of the funds paid by Bullsbrook as a loan or a capital contribution.

The evidence supported Bullsbrook’s contributions being made and received as a loan. Despite Mr Freeman’s evidence disputing the character of the contributions as a form of capital, he signed off on the Company’s financial statements which recorded the contributions as a loan, thereby unequivocally accepting the Company’s financial position. The terminology used of the funds received as a ‘capital asset’ in the broader sense is not determinative of the proper legal characterisation of the transaction.

Therefore, the Court upheld the ground of appeal finding that Bullsbrook was a creditor of the Company.

The appellants did not however establish that Bullsbrook’s loan to the Company was repayable on demand and presently due and payable, thus the winding-up application was to proceed.

Solvency of the Company

The appellant’s argued that the Company’s insolvency was dependent on the contention that the Company was unable to pay the Bullsbrook loan. Since the debt could not be established as due and payable, this was a weak case. There was no further detailed examination by the appellants of the Company’s financial position (i.e. projected cash flows or aged creditor analyses). In conclusion, having assessed the Company’s available assets and financial position, the Company was not found to be insolvent.

Wound up on just and equitable grounds

The order of winding up on just and equitable grounds considered the question of whether or not there a deadlock in the management of the affairs of the Company. This was dismissed upon the failed contention that Mr Barboutis was a director of the Company. Mr Freeman’s decisions for the Company without the knowledge, consent or approval of Mr Barboutis as co-director, were not sufficient as he was not a director of the Company.

Since that ground of appeal failed, so too must the winding up on just and equitable grounds.

Decision

The appeal was dismissed and the parties were to be heard on costs.

Takeaways

It is extremely important to have evidence such as letters of intention, written consent and financial statements, to support assertions of changes in directorship and the status of payments by creditors. Even the use of terminology is not enough for a payment to be characterised in a particular way, as it is the actual intention and subsequent handling of the payments that will characterise their status.