Question

7. Indri runs a soil testing business. He decides to form a company to take over the business. He is the sole shareholder and sole director. Indri sells his business to the company at an inflated price and lends the company $90,000 to help meet the cost of purchase. As security for the loan, Indri arranges a mortgage over a vacant block of land, which he transferred to the company as part of the business sale. In the first year of operation, the business makes a small profit (after paying both Indri and his daughter’s wages), but by the end of 2012 it is clear that the building industry is going through a major slump. Indri becomes desperate and works even harder. While working late into the night, Indri badly injures his hand and needs surgery. He is away from the business for 2 weeks. His efforts to keep the business afloat are in vain and the company is forced into liquidation. On realization of the assets, it is found that the company has approximately $95,000 to go towards meeting creditors’ claims of $210,000:

(i) If Indri is the only secured creditor, will he get his $90,000 back?

(ii)Can Indri claim workers’ compensation for the injuries to his hand and his time off work?

Answer 1

i. Yes, if Indri is the only secured creditor, he will get his $ 90,000 back.

It was established in the landmark case of Solomon V. Solomon & Co., that once a company has been incorporated, it is a separate legal entity, distinct from its members or shareholders. Therefore, though Indri was already a shareholder of the company, and therefore an owner of the company, he being an entity separate from that of his company, can lawfully make secured loans to his company. A secured creditor ranks superior to an unsecured creditor. Provided his charge on the land was registered with the appropriate authorities, his claim to the $ 90,000 repayment of loan should be paid out before the claims of the unsecured creditors.

ii. Yes.

Indri was a regular employee, and not a contractor or consultant or temp, as he was drawing wages from the company. Moreover, he was injured in the course of employment while tending to job related duties, and he was incapacitated for two weeks as a result.