When it comes to a Family Trust or Trusts for business, fulfilling your duties as a director are critical and if not managed in the proper way can have serious and negative consequences.

The Case

The defendants were Directors of Goatlands Limited, formed to purchase a farm property. On signing the Agreement for Sale and Purchase, they chose to take immediate possession of the farm under a lease arrangement and also to make a GST claim which they used to pay the deposit on the farm.

To have enough money to complete the farm purchase, the Directors relied on the sale of their existing property. When their existing property did not sell, the vendor cancelled the Agreement he had with Goatlands for the purchase of the farm.

Goatlands was then liable to repay the GST to the IRD. It was placed in liquidation and the Directors were pursued personally for the GST the company owed the IRD.

The Courts Decision

The Court found that the Directors had breached the duties they owed under the Companies Act because they had taken a real and significant risk in spending the GST refund before they knew the company could complete the farm purchase transaction.

The Court said the Directors' actions "fell outside the scope of orthodox commercial behaviour, because an orthodox approach would have been to protect the company against the risk that [the defendants] had identified".

The Directors tried to say that a reasonable person would have taken the actions that they took based on advice that they received from their solicitor and a real estate agent. However the Court tested the decision of the Directors against the standard of a reasonable person and said that no reasonable person would have relied on the advice to make such a decision.

Cough Up, Directors

Ultimately, the Court found that the Directors did not meet the standard of care that a Director has to exercise under the Companies Act.

Because of this, the Court ordered the Directors pay $34,500 towards the debts of the company for the breach of the Directors duties that they had committed.

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