Tuesday, November 15, 2022

Does a scribble** amount to the acknowledgment of a debt?

Following on from last week’s post, a further issue that often arises in the context of division 7A is whether the accounts of a debtor company can be enough to create an acknowledgement by a debtor.

In the case mentioned in last week’s post (VL Finance Pty Ltd v Legudi [2003] VSC 57), an argument that the annual company return of the creditor company was sufficient to create the relevant acknowledgment was rejected even though the returns were signed by the directors who were debtors and when read with the accounts identified the debts.

A key issue in this regard was the fact that the annual return was not a statement 'made' by the directors in their capacity as debtors 'to' the company in its capacity as the creditor.

Instead, the annual return was simply a statement 'by' the company.

In contrast however, the case of Lonsdale Sand & Metal v FCT 38 ATR 384, a statement in the accounts of a debtor company was accepted as being sufficient to amount to an acknowledgement by a debtor.

Despite the decision in Lonsdale, the better argument appears to be that the financial statements of a creditor company cannot, without more, create a valid acknowledgement by a debtor company via its directors, even if those directors sign the financial statements.

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** For the trainspotters, the title of today's post is riffed from the Underworld song 'Scribble’.

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