A recent decision by the Supreme Court highlights the consequences of breaching directors duties, even if the director believes they are acting in the best interests of their creditors. The case of Debut Homes Limited v Cooper has big implications for directors involved in a business that is struggling financially and is a timely reminder that directors need to take their duties extremely seriously. It also provides some really good guidance on what to do and more importantly, what not to do, if you’re a director of a company in financial difficulty.

The background

Debut Homes Ltd was a residential property development company owned by Mr. Leonard Cooper, who was also the sole director. The company was incorporated in 2005 but by the end of 2012 Mr. Cooper, on advice from his accountant, decided to wind down Debut’s operations. 

Debut’s assets had been less than its liabilities (balance sheet insolvency) since March 2009 but it had been supported by shareholder advances from Mr. Cooper, up until the end of October 2012, and had paid all its debts as they fell due. It had, however, been experiencing cost overruns and increasing debt and by the end of October 2012, was in real financial difficulty.

Mr. Cooper decided that four existing developments would be completed and sold in order to pay some of its creditors but no new developments would be undertaken. Mr. Cooper would have owed the Inland Revenue over $300,000 in GST once the wind-down was completed but he didn't engage with the IRD in any way at all.

Debut Homes was finally placed into liquidation in 2014 by the IRD with an unpaid GST bill of $450,000 (including penalties and interest).

The decision

The High Court initially found Mr Cooper had breached his duties as a director and ordered him to pay the liquidators $280,000. The Court of Appeal overruled that decision and found Mr Cooper’s decision to continue trading was for the benefit of all of the company’s creditors. 

However, the Supreme Court overturned the Court of Appeal’s decision and found Mr Cooper to be in breach of the key duties of the Companies Act. 

Read more here.