Recent Supreme Court Decision a Warning to Directors

A recent decision of the Supreme Court of South Australia should serve as a warning to company directors who treat company assets as their own.

The Court’s decision in Scott v Carabelas involved a company, Angas Law Services Pty Ltd ("ALS"), that had been placed into liquidation because of taxation debts.

The liquidators investigated the records of the company and eventually sued its directors, Mr and Mrs Carabelas, claiming, amongst other things that Mr and Mrs Carabelas improperly used ALS’s assets in a manner that was not in ALS’s interests.

It was alleged that Mr Carabelas mortgaged ALS’s assets to secure loans made to other companies and later rearranged the borrowings as recorded in the books of ALS so as to relieve Mr Carabelas, without justification, of his primary liability. It was said that these transactions caused ALS a loss of in excess of $400,000.

The claim was successful and the Court ordered Mr and Mrs Carabelas to pay compensation to the liquidator of ALS.

The point of the decision is that, so far as the law is concerned, companies are "persons" separate from their directors. Company directors owe companies important duties. It is not lawful for company directors to use company assets for their own benefit, if there is no benefit to the company. If directors do that, they can be ordered to compensate their company for any loss or damage that they cause.