An insolvent company cannot legally continue to perform its contract by which debts are incurred. Hence it has no claim for repudiation of the contract by the other party.
Gilligan’s Backpackers conducted a hotel business in Cairns.
Mad Dogs was under contract to supply food and catering services at the hotel.
On 26 September 2007 the contract was duly terminated by Mad Dogs because of Gilligan’s alleged repudiation of it.
The day after, on 27 September 2007, voluntary administrators were appointed to Mad Dogs and they became its liquidators on 24 October 2007.
Mad Dogs, then in liquidation, sued Gilligan’s and was awarded damages of $350,000.
Appeal decision
Gilligan’s successfully argued on appeal that Mad Dogs was in fact insolvent at the time of termination and was therefore barred from recovering damages because it was not ready, willing and able to perform, and hence was not entitled to damages upon its termination of the agreement.
Mad Dogs’ insolvency meant that it was thereby unable to lawfully conduct its business as the agreement required, given that the performance of the contract necessarily involved the incurring of debts. Its director was bound by s 588G to prevent Mad Dogs from incurring any debt. Indeed, it should not have been carrying on business at all.
It is against public policy for the court to award damages for the loss of the performance of a contract, when that performance involves a contravention of s 588G. Such an agreement could be performed only by an illegality.
Mad Dogs should not have been awarded damages for the loss of its contract and the judgment in favour of, in effect, the liquidator, was set aside.
Gilligan’s Backpackers Hotel & Resort Pty Ltd & Anor v Mad Dogs Pty Ltd [2016] QCA 304, 18 November 2016.
