Andrew and Sue Colson put their company Installer Services (Hutt Valley) Ltd into liquidation under threat of legal action for payment of disputed franchise fees. The High Court ordered they pay $19,900 damages for taking drawings from the company at a time when fees potentially due threatened company solvency.
Services (Hutt Valley) provided mobile technology such as phones, car stereos and band expanders. Under franchise from Installer Services (Group) Ltd, the company was required to pay annual fees calculated at five per cent of annual turnover. Having paid fees for six years to 2008, Services (Hutt Valley) stopped making payments. Communications from Christchurch-based Services (Group) were disrupted for a time by the series of Canterbury earthquakes. By April 2012, Services (Group) was back in business. It was pressing for payment of franchise fees.
The High Court was told the Colsons put Services (Hutt Valley) into liquidation when Services (Group) sued. It was not economic to defend any court action, Mr Colson said, while claiming he had a good defence. He alleges Services (Group) agreed franchise fees were to be payable only for referred work. Services (Group) got judgment by default against Services (Hutt Valley) for claimed fees. Liquidators for Services (Hutt Valley) later sued Mr and Mrs Colson to recover company losses. The most recent liquidators’ report lists creditor claims at $168,900. Services (Group)’s claim is in excess of $100,000.
Liquidators sued to recover cash benefits received by the Colsons from their company in the two years prior to liquidation: $44,800 in ‘shareholder salaries’ and $81,000 for ‘drawings’. Justice Grice ruled the salaries could be kept; these payment were reasonable remuneration for the time spent on company business. It did not matter that the Colsons did not follow required Companies Act procedures for approving director payments. Neither Mr nor Mrs Colson had written employment contracts with their company. $19,900 of drawings taken in the 2012 year had to be repaid. Drawings were in the nature of ‘distributions’ to shareholders. Distributions cannot be made when a company is insolvent; creditor interests come first. Taking into account Services (Group)’s disputed claim to franchise fees as a contingent liability at a time when drawings were taken would have left the company insolvent. In making its repayment calculation, the court discounted the amount then claimed by Services (Group) by fifty per cent to reflect the fact it had not at that time proved its claim.
Installer Services (Hutt Valley) Ltd v. Colson – High Court (20.02.19)
19.043