Mercantile Credits Ltd v Chow & Chow

Mercantile Credits Limited brought proceedings against Cherng-Yun Chow and Wei-Ping Chow, alleging that the defendants had guaranteed loans provided by the plaintiff to Lyndoch Pty Ltd, a company of which the defendants were directors or participated in its management. The plaintiff further sought relief under s.556 of the Companies (Queensland) Code, which imposes liability on directors or managers of a company if certain debts are incurred when there are reasonable grounds to expect the company will be unable to pay its debts as they fall due. The defendants sought to strike out the relevant paragraphs of the plaintiff's statement of claim, arguing that the debtor company was not a company to which s.556 applied and that the extension of time for repayment of pre-existing loans did not constitute the incurring of a debt.

The court considered the interpretation of s.553(1)(e) of the Companies (Queensland) Code, which designates the types of companies to which certain sections apply, including s.556. The court found that the debtor company qualified as one to which s.556 applied, despite the defendants' argument that s.553(1)(e) only applied to a company "in respect of property" rather than the company itself. The court also rejected the defendants' argument that they were not liable under s.556 because they were not directors at the time the debts were incurred, noting that the relevant provision imposes liability on both actual directors and persons who take part in the management of the company. Finally, the court found that the extension of time for repayment of the loans did not preclude the application of s.556, as the alteration of the repayment terms did not amount to the incurring of a debt, but rather the incurring of additional interest.

The court dismissed the defendants' application to strike out the relevant paragraphs of the plaintiff's statement of claim, finding that the lack of a cause of action was not clearly demonstrated. The summons was dismissed with costs.