Directors of companies that own and operate small or family-owned enterprises often think that the company is “their own”, especially if they are also shareholders. In a way, they’re right. And being effectively the “owners” of their company, directors often see no problem with lending money to the company out of their own pockets.

But what if the borrower-company is later wound up, the shareholders are all fully paid up and have no further liability towards the company’s creditors and the lender-director wants his fellow directors, as “business partners” to help repay the loan? Will the Courts order fellow directors to contribute towards the loan repayments? After all, the directors were all in it together, right? “All for one and one for all, right?” According to the High Court of Australia in Friend v Brooker [2009] HCA 21 (28 May 2009), the answer is no.

In Friend v Brooker, the lender-director asked the Court to order his fellow director to contribute towards repayments of a loan to the company which he had secured against his home because, he said, the money had been borrowed:

(a) with the knowledge and assent of the other director;

(b) in order to give effect to or facilitate the common purpose or benefit of both the directors which was the object of their “common design” (i.e. the business being run by the company); and

(c) in reality, the parties were more than just co-directors: they were business partners or joint venturers such that it would be unfair to expect the lender-director to bear the liability for repaying the loan by himself in the absence of a contract that specifically said he should.

The High Court rejected these arguments and said that if people want to have a business partnership or joint venture, they should say so in a partnership deed or joint venture agreement rather than setting up a corporate vehicle for their enterprise.

We at Havilah Legal can advise you on the best way to structure your business and draft the paperwork that you need to protect your business, yourself, your home and your family.

Related Havilah Legal service(s): Commercial Litigation