Can a “social” director be personally liable for insolvent trading?

Can a “social” director be personally liable for insolvent trading?

By Daniel Fleming

May 11, 2018

This article appeared in the March 2018 issue of Club Life.

Some clubs struggle to find experienced directors and, in some cases, members have volunteered to “help out” their club by agreeing to be a director without appreciating the full scope of their responsibilities, and potential liability for not carrying out those responsibilities. It certainly appears that this was the case in a recent decision of the District Court in which a liquidator pursued a club director for debts that the Camperdown Bowling & Recreation Club Limited incurred whilst trading insolvent.

In Mansfield v Townend [2017] NSWDC 370 Judge Wilson considered whether a “social” director, who was described as having a “lack of intellectual sophistication”, was liable for approximately $190,000 claimed by the liquidator for debts incurred by the Club.

Amongst other things, the director claimed that she had thought she was only a “social” director responsible for merely organising bowls and selling raffle tickets. The “social” director left all of the financial matters up to the other directors. That is, she claimed she was not a director for the purposes of the Corporations Act.

This argument was, unsurprisingly, rejected by Judge Wilson and is a timely reminder that all directors need to understand the finances of the Club.

After determining that the “social” director was in fact a director, Judge Wilson also concluded that:

  1. the Club had been continuing to incur debts by trading whilst insolvent during the relevant period; and
  2. there were reasonable grounds for suspecting that the Club was insolvent (or would become so) during the relevant period.

However, the director also argued that she should not be personally liable for the debt on the basis that she was not personally aware that there were grounds for suspecting that the Club was insolvent. However, for this to be successful the director also had to prove that a “reasonable person” in a like position in the company’s circumstances would also not be aware of such grounds. This objective test is a particularly high bar. It is to ensure that a “lazy or inefficient director cannot hide behind the shield of ignorance, laziness or inefficiency”.

Ultimately, Judge Wilson found in favour of the director. His Honour found that Ms Townsend’s role was limited to social matters concerning the Club, and not only did her role not involve financial decisions, but that she did not have access to any of the Club’s financial information.

Although the director avoided liability in this case, directors should not interpret this case to mean that they can avoid liability by turning a blind eye to the club’s finances. Ordinarily, directors are expected to be across the club’s finances. All directors have a duty to prevent a club from trading whilst insolvent, and should not take comfort that they will be able to avail themselves of the same defence in this case that turned on a very specific set of facts.

If any director has any grounds to suspect that their club may have difficulty in paying its debts as and when they fall due they should insist that the club seeks urgent legal advice to protect themselves.

An expanded piece on the issues raised in this case will be detailed in May’s edition of Club Life, please keep an eye out for it.

For more information contact Bruce Gotterson at b.gotterson@pigott.com.au or Daniel Fleming at d.fleming@pigott.com.au or call 02 8251 7777.

 

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.

 

Prepared by Bruce Gotterson and Daniel Fleming