Landmark directors’ duties decision

Yesterday the Supreme Court released its long-awaited decision in Debut Homes Ltd (in liquidation) v Cooper (pdf). The primary issue in the case was whether a director was in breach of his directors’ duties under the Companies Act 1993. This is the first time that the Supreme Court has considered these duties in detail.

Background

Mr Cooper was the sole director of a residential property development company, Debut Homes Ltd (Debut Homes). He was also a shareholder with his wife.

By late 2012 Debut Homes was in real financial difficulty and Mr Cooper decided to wind down its activities by completing existing developments but not taking on any new work. It was forecasted at this time that there would be a deficit of over $300,000 in GST once this wind-down was completed. Debut Homes was eventually liquidated in March 2014 – on application by Inland Revenue. GST owing at this time was over $450,000 (which included interest and penalties).

High Court and Court of Appeal decisions

The liquidators of Debut Homes argued that Mr Cooper breached the following directors’ duties in the Companies Act:

• Duty to act in good faith and in best interests of company (s 131)
• Duty not to trade recklessly (s 135)
• Duty not to agree to a company incurring inappropriate obligations (s 136)

The High Court found that Mr Cooper breached these duties and ordered him to contribute $280,000 towards the assets of Debut Homes as a result.

Last year, the Court of Appeal overturned the High Court’s decision in relation to directors’ duties.

Supreme Court decision

The Supreme Court held that Debut Homes “was insolvent by the beginning of November 2012. It was unable to pay its debts and continued trading was projected to result in a shortfall of GST of at least $300,000. It should have stopped trading at that point unless a viable formal or informal mechanism [to address insolvency] was found.”

In the final analysis, the Supreme Court essentially agreed with the High Court decision that Mr Cooper breached his directors’ duties and that he was personally liable to pay $280,000.

The judgment is relevant to directors of all companies in New Zealand and it will be subject to significant analysis by the legal community. The Court discussed in detail how sections 131, 135 and 136 operate and the approach to granting relief under section 301. This clarity from our highest Court is a welcome development.

The IoD will share further insights and learnings from the case for members shortly.

Also see:

• Our 2 October webcast on the case and its implications for directors (member-only access)
• The Supreme Court’s decision and media release
• Supreme Court raises the stakes for directors of distressed businesses (MinterEllisonRuddWatts article)
• Under pressure – D&O insurance in a hard market (by the IoD, Marsh and MinterEllisonRuddWatts.