Dodgy dividends fail to satisfy the solvency test

In this case1, a liquidator successfully sought repayment of two dividends totalling $330,000 made to the company's shareholders (the defendants) on the basis that the distributions breached section 52 of the Companies Act 1993 (the Act) (i.e. the directors could not be satisfied on reasonable grounds that the company would satisfy the solvency test).

The liquidator also argued in the alternative that the defendants had failed as directors to exercise the care, diligence and skill of reasonable directors (as required by section 137 of the Act).

Prior to its liquidation, the company imported T-shirts from Australian manufacturers and took advantage of the "Australian preference" rule in the Customs and Excise Act and its Regulations. This meant that, if more than 50% of the cost of the goods arose in Australia, it could import the goods from Australia free of duty.

Customs investigated the company and found that claims made under the Australian preference rule could not be substantiated. Accordingly, the company was found to be liable for duty of more than $130,000. In the meantime, the company had made certain payments to its shareholders.

The Court held in favour of the liquidator in respect of both causes of action, finding that:

  • at the date of the distributions, the defendants were well aware of at least a contingent debt to Customs and could not make the required declaration of solvency at the date of the resolution; and


  • such approach accorded with the policy behind the whole distributions regime of avoiding prejudice to creditors and the term distribution ought not to be construed in a narrow manner.

 

1 Samarang Developments (in liquidation) Walker v Campbell (High Court, Christchurch, CIV-2003-409-002094, 30 September 2004, John Hansen J)

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