A liquidator of a company sought to obligate directors to pay company debts because they approved three distributions of dividends prior to the company entering liquidation.
The Court held that a company may make a distribution if there is no reasonable suspicion that the distribution may prevent the company from meeting its existing and expected debts. The test is a cashflow test and if a director approved a distribution without properly reviewing the facts the director may be personally liable to debts of the company The Court examined the minutes of the meetings of the board of directors and determined that the directors did not properly examine the company's ability to meet its obligations and therefore the burden of proof to prove that the cashflow enabled the distribution at the time is shifted to the directors. In this case, the obligations for which the company faced insolvency were created only after the first distribution, but when the second and third took place there was reasonable suspicion that the company may not be able to repay debts due to a conflict with a significant customer who refused to pay the company.
The Court rejected an argument by the directors that the business judgment rule protects their decisions because it is a public company in which the controlling shareholder is also a director and the CEO and thus the duty of care of the directors is enhanced. However, the Court found that it was not proven that the company collapsed because of the distribution and therefore the directors are responsible only for the amount of the second and third distributions, but not for all the company's debts.