A recent unreported case in the County Court highlights the need to keep business and friendship separate.
Litigation: 23 March 2019
In this case a concreter, whose company had a credit line with a supplier, was asked by a friend for permission to use his account to obtain a concrete on credit for his jobs. The concreter accepted the request and the arrangement was a casual one with no paperwork or documentation.
Before long the friend had run up a $50,000 debt on the account. The concreter contacted him to ask him for payment. He was told that he would be paid in a week or two, during which the friend claimed a further $30,000 of supplies on credit. When confronted with legal action, the friend told the concreter that he needed further supplies to complete jobs that would allow him to trade out of the debt. He also said that if he was cut off from the account he would refuse to pay the debt. He subsequently purchased $40,000 more stock on the account.
Shortly after, the supplier instituted proceedings to reclaim the $120,000 debt from the concreter's company. The concreter was unable to pay and, to make matters worse, his father had acted as guarantor, potentially putting the family home in jeopardy.
As sole director of the debtor company, the concreter had duties to act in the company's best interests and for a proper purpose, as well as duties to keep proper books and records. Allowing a third party to use the company's account breached all of those duties.
The lessons from the case are:
- Don't allow a friend or family member access to use your company accounts. at least without formalising the arrangement in writing and on commercial terms.
- Companies of which one person is the sole director and shareholder cannot be used as the personal property of the director. Directors owe duties to their companies which cannot be overcome for which they are accountable.
Aitken Partners has extensive experience in advising on commercial agreements and disputes. Please contact us before entering any serious commercial arrangements or in the event that a dispute arises in relation to such an agreement.