Does director breach the statutory duties?

[newtolaw]

Some advice needs on the following scenario (recently having a fight with friends):

- A, B & C form a company (vintage clothes shop)
- According to the constitution of the company, A, B & C are directors of the company all time.
- Each director holds 30 shares and A, B & C are the only shareholders
- One day, only A & B in the company, and a customer came in to sell a 2nd hand clothes to the company.
- Due to the insufficient fund of the company, the company can only pay the customer half of the value ($500). The remaining $1000 was paid by A & B (each contribute $500).
- The company re-sell the clothes and made a profit from it but only A & B share the profit.

Wonder if A & B have breached any statutory duties under the Corporations Act?

Thank you so much!

 

[Tim W]

You may have a bigger problem.
If you had "insufficient funds in the company" then it may have been insolvent.
Trading while insolvent can be a problem... for all the directors.

 

[newtolaw]

You may have a bigger problem.
If you had "insufficient funds in the company" then it may have been insolvent.
Trading while insolvent can be a problem... for all the directors.

Thanks Tim,

I didn't expect the issue could be that big. Since this is just a small business running with my friends.
The shop just didn't have enough cash flow that day, and A & B thought they could contribute (kind of like investing in their own business) to complete the purchase.
But even for that act done by A & B, "Trading while insolvent" also counts?

also, in that situation, does C also should receive profit from re-selling that clothes?

 

[Docupedia]

I wouldn't consider the insolvency aspect because financial accommodation was available to the company on reasonable terms at the time.

To my mind, this falls under the s180-182 range of directors' duties - but particularly s182: directors must not improperly use their position to gain an advantage for themselves.

Lending the company the money - fine. However, the terms were not negotiated, so it's arguable they're entitled to reimbursement only. That would indicate that all the profit from the sale belongs to the company and, therefore, attributable to all of the shareholders. By keeping the profit, that's a clear breach to my mind of s182. Even keeping half of the profit (i.e. that part according to the money they put in) would be a breach - because there has not be an agreement on the terms of the 'loan', and the company as a whole has not been given a sufficient opportunity to partake in the opportunity that came to it - in other words the customer approached the company, not the two directors individually.

 

[Tim W]

I didn't expect the issue could be that big. Since this is just a small business running with my friends.

A company is a company, pretty much no matter the numerical size or dollar value of the business it operates.
There are many ways for a business to be something other than a company - such as being a partnership.
I am assuming that when you say "form a company", that you actually mean a company.

Now, going only by what you have said here, missing facts missing,
and with all the unstated ifs, buts, maybes, unlesses, exceptions, and confusions of the English language not allowed for,
what I'm wondering is....

Maybe A and B made a couple of spontaneous unsecured loan(s) to the company,
so that the company (the company, and not A and B personally) could complete one particular transaction on one particular day?
That's less likely to be a breach of duties.
If (very, very "if") that's the case, then the company (the whole company) owes them each the $500 it borrowed.
But the company does NOT automatically owe them any extra cut of gross sale proceeds, just for that.
Not without a loan deal of some sort being set up in advance to provide for it.

But, there's another way to look at it.
Maybe, A and B decided to buy this bundle themselves, and
rather than loan the money to the company, they (in effect) stole $500 from the company,
to fund a purchase they made on their own account,
which they then sold through the shop, at the company's expense.
Such a scenario could indeed be the start of a problem.

 

[newtolaw]

Thank you so much guys!