Australia: directors’ duties, distributions and creditor interests

This post, Australia: directors' duties, distributions and creditor interests,  by noreply@blogger.com (Robert Goddard), first appeared on  at http://corporatelawandgovernance.blogspot.com/.

Last week I noted an English decision in which the directors’ failure to adopt a dividend policy was regarded as a breach of duty: see here. Today I note an Australian decision – Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2) [2019] FCA 354 – also from last week, but one in which the trial judge (White J.) held that directors had acted in breach of duty in adopting, and failing to review and revise, a distribution policy.

The decision contains a useful review of directors’ duties and is noteworthy because of the discussion it contains of the circumstances in which directors are required to consider the interests of creditors. Regarding the latter, the trial judge rejected a narrow interpretation and stated (paras. [209], [708]):

…I do not accept the submission … to the effect that the directors or officers of a company are required to consider the specific interests of creditors only when their actions are likely, on a balance of probabilities, to lead to the insolvency of the company. That was so, the defendants submitted, because it is only at that point that their decisions are effectively managing assets which belong to the creditors and not to the shareholders. I agree … that that is one circumstance in which directors and officers of a company will be obliged to consider the interests of the company’s creditors, but the authorities …. indicate that it is not the only circumstance…

…. the authorities … indicate that test is broader than ‘nearing insolvency’ or ‘doubtful solvency’. They indicate that the duty of directors to consider the interests of creditors is enlivened when there is a ‘real and not remote risk of insolvency’ and when the objective circumstances require consideration of the interest of creditors”.

Note:

Some of the authorities cited by White J. were considered recently at appellate level in England: see BTI 2014 LLC v Sequana S.A. & Ors [2019] EWCA Civ 112, [2019] WLR(D) 68. The Court of Appeal unanimously rejected the view that the creditor interests duty (to adopt its description) should apply in English law where there was a “real risk” of insolvency; the court nevertheless accepted that the duty could be triggered where a company’s circumstances fell short of actual insolvency.

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