Auckland Crash Repairs Limited (in liquidation) v Van Rooy
[2015] NZHC 2640
•28 October 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-000633 [2015] NZHC 2640
IN THE MATTER OF the liquidation of Auckland Crash Repairs
Limited (in Liquidation)
BETWEEN
AUCKLAND CRASH REPAIRS LIMITED (IN LIQUIDATION) First Plaintiff
HENRY DAVID LEVIN and
VIVIEN JUDITH MADSEN-RIES as Liquidators of Auckland Crash Repairs Limited (in Liquidation)
Second Plaintiffs
AND
KEITH SYDNEY VAN ROOY First Defendant
CHANTAL ELIZABETH VAN ROOY Second Defendant
Hearing: 10 September 2015 Counsel:
W R Potter and K M Wakelin for the Plaintiffs
No Appearance of, or for the DefendantsJudgment:
28 October 2015
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 28 October 2015 at 10.00 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: Meredith Connell, Auckland
AUCKLAND CRASH REPAIRS LTD (IN LIQ) v VAN ROOY [2015] NZHC 2640 [28 October 2015]
Introduction
[1] Auckland Crash Repairs Limited (in liq) (Company) and its liquidators seek judgment against the Company’s directors and sole shareholders, being the first and second defendants.
[2] The plaintiffs’ claims are as follows:
(a) A claim against the first defendant on his overdrawn current account in the sum of $65,663.
(b) Claims against both defendants for salaries paid to them as directors.
Judgment is sought against the first defendant for the sum of $135,843 and against the second defendant in the sum of $104,424.
(c) Claims against both defendants for breaches of the directors’ duties imposed under ss 131(1), 135, 136 and 137 and pursuant to s 301 of the Companies Act 1993 (Act). Damages are sought in the sum of
$454,167.08, being the amount of creditors’ claims in the liquidation.
Formal proof
[3] The proceeding was filed in the High Court at Auckland on 23 March 2015, and was served on the defendants on 13 April 2015. An affidavit of service sworn on
27 May 2015 has been filed.
[4] Any statement of defence was due to be filed and served by the defendants on
19 May 2015. No statement of defence has been received, although a letter dated
19 May 2015 from the defendants’ solicitor advised that the defendants did not
intend to defend the proceeding.
[5] Accordingly, the plaintiffs seek judgment by way of formal proof.
Factual background
[6] The Company was incorporated on 28 May 2001. It traded as an automotive repairer. The defendants were the only directors and shareholders of the Company.
[7] The Company ceased trading on 5 August 2013 when the automotive repair business was sold. It was placed into liquidation on 16 May 2014 on the application of the Inland Revenue. The second plaintiffs were appointed liquidators at that time.
[8] Claims in the liquidation total $454,167.08. Of that sum, a total of
$420,921.45 is owed to the Inland Revenue. That sum comprises a preferential claim for court liquidation costs, preferential claims for core PAYE, GST, student loan employer deductions, KiwiSaver employee deductions and employer contributions and an unsecured claim for employer Superannuation contributions, tax, interest and penalties.
[9] Upon liquidation, the Company’s only assets were the first defendant’s current account, related party loans and the legal claims the subject of this proceeding. The only physical asset remaining was a vehicle subject to a security interest which was more than the value of the vehicle.
[10] Financial statements have been prepared for financial years ending 31 March
2009 to 31 March 2012. There are no financial statements after that date and the plaintiffs have had to have recourse to bank statements and other documents after this date.
Insolvency of the company
[11] Mr Levin, the first named liquidator, has sworn a comprehensive affidavit in support of the plaintiffs’ claims. Mr Levin is an insolvency specialist with extensive experience dealing with insolvent companies, liquidations and receiverships. He has particular experience in calculating shareholder current accounts/director loan account balances using companies’ bank statements where there are incomplete, unreliable or no accounting records available.
[12] Mr Levin’s evidence is that the Company was insolvent from 31 March 2010. He deposes that at that date, the Company was unable to pay its debts as they fell due in the normal course of business. The debts that the Company was unable to pay were primarily its tax obligations to the Inland Revenue.
[13] Mr Levin deposes to the Company’s default on its GST obligations which
began on 30 November 2009 with subsequent default on its PAYE obligations from
31 March 2010. Defaults in terms of KiwiSaver contributions and deductions, student loan deductions and superannuation contribution tax obligations were incurred in addition. As the Company continued to fail to meet its tax obligations, its debt continued to grow and was compounded by the interest and penalties imposed by the Inland Revenue.
[14] Mr Levin’s evidence is that, based on his experience, a failure to pay PAYE and GST on a regular basis is a sure sign of a company in trouble. That is because these funds are only ever meant to be held by the company for a short period of time prior to payment to the Inland Revenue Department.
[15] The Company’s financial statements for the years ended 2008 to 2012 reported a net asset surplus in each year except for year ended 31 March 2012. However, Mr Levin deposes to having adjusted these statements to remove the loans provided to related parties and the shareholder current accounts, which Mr Levin deposes were unlikely to be repaid and thus of no value. The adjusted financial statements tell a different story. Mr Levin’s evidence is that in reality the Company was operating with a net asset deficit in 31 March 2011 and 31 March 2012. The Company’s financial statements also record a working capital deficit each year from
2008 to 2012. After Mr Levin’s adjustment, the working capital deficits were even greater. In particular, Mr Levin deposes that the working capital deficit of $38,070 at
31 March 2010 is indicative of liquidity stress.
[16] Finally, in the period between 4 May 2010 and 4 February 2014, bank statements show that the Company frequently incurred unarranged overdraft fees and dishonoured payments because of an inability to meet payments with the Company’s banking facilities.
[17] On this basis, Mr Levin’s evidence is that the Company did not have sufficient assets available to pay its debts as they became due in the ordinary course of business from 31 March 2010 and thereafter to the date of liquidation.
[18] Following the liquidation, the second defendant completed a business profile questionnaire. In that questionnaire she states that in her opinion the Company became insolvent in 2011. This was when the defendants closed another business they owned following the withdrawal of insurance work by AMI Insurance.
[19] I accept Mr Levin’s evidence. I am satisfied that the Company was unable to
satisfy the solvency test in s 4 of the Act and was therefore insolvent from at least
31 March 2010.
First cause of action – first defendant’s current account
[20] The first cause of action is against the first defendant only in relation to debts due on his current account with the Company.
[21] The debt comprises of two sums:
(a) the current account debt recorded in the Company’s financial statements as at 31 March 2012 totalling $31,338 (FYE 2012 current account debt); and
(b)transactions by the Company between 1 April 2012 and August 2013 (when the Company ceased trading) that the plaintiffs contend constitute drawings on the current account totalling $34,275 (Transactions).
FYE 2012 current account debt
[22] The Company’s financial statements for year ended 31 March 2012 record a shareholder’s current account debt of $31,388 owed to the Company by the first defendant. There is no record of that current account debt having been repaid.
[23] I accept that the plaintiffs are entitled to rely on these financial statements in order to prove this component of the debt owed by the first defendant. The accounts of the Company are prepared at the direction of the Company directors who are responsible for the accuracy of those accounts.1 Under s 194 of the Act, the first defendant is also responsible for the records of the Company. The first defendant has also signed the accounts.
[24] I am satisfied that the plaintiffs have proved their claim against the first defendant for this amount in reliance on the quantum of debt as stated in the financial statements.
Transactions
[25] As there are no financial statements for the Company after 31 March 2012, the plaintiffs have identified activity on the bank statements for the Company’s bank account which they have characterised as transactions on the first defendant’s current
account. Those transactions are:
Type of payment Total amount
$
Personal in nature ATM withdrawals Transfers to Mr van Rooy
Payments to Sovereign Total Care
Payments to Partners Life
Less: transfers to/from bank account
01-130082882-00 / 46
Total
9,034
5,780
2,692
12,406
5,570 (1,208)
$34,275
[26] Mr Levin outlines in detail why he says these transactions are to be treated as
drawings. In broad terms:
1 Chesterton Holdings Ltd (in liq) v Durney HC Napier CIV-2011-441-7, 19 May 2011 at [31].
(a) The transactions which are personal in nature comprise of payments made to supermarkets and hardware stores and also payments for lawn mowing.
(b)The ATM withdrawals were made from various automated teller machines. There is no evidence to suggest that any of those withdrawals related to the business of the Company.
(c) There are a number of payments narrated as KS van Rooy in the Company bank statements but there is no evidence to suggest that those payments relate to the business of the Company.
(d)The liquidators have confirmed that the Company did not hold any policies with Sovereign Insurance. Accordingly, payments made to Sovereign are presumed to be for the personal benefit of the first defendant.
(e) There is similarly no evidence that the Company had a policy with Partners’ Life. Prior payments to Partners’ Life were classified as drawings on the first defendant’s current account in the general ledger. Accordingly, these payments have also been treated as personal in nature.
[27] The transfers to or from the bank account 01-130082882-00/46 relate to payments made by the first defendant to the Company and an appropriate credit has been provided for these transactions in the sum of $1,208.
[28] I am satisfied that the transactions are not consistent with business expenditure, and are separate to any additional salary or wages that were paid to the defendants. They are therefore to be characterised as drawings on the first defendant’s current account,2 and I accept that the plaintiffs have proved their claim
in respect of the Transactions in a total of $34,275.
2 Re Samarang Developments Ltd HC Christchurch CIV-2003-409-2094, 30 September 2004 at
[55]; Madsen-Ries v Petera [2015] NZHC 538 at [18]-[19].
Failure to repay
[29] The advances made on a shareholder’s current account are a due debt owed
by the shareholder to the company, repayable on demand. Evidence of a demand of
$65,663 by way of letter from the plaintiffs’ solicitor to the first defendant dated
3 March 2015 was annexed to Mr Levin’s affidavit. No payment has been received.
[30] Demand having been made, the Company is entitled to recover the debt due on the current account from the first defendant, and judgment will be entered accordingly.
Second and third causes of action
[31] The plaintiffs claim as an alternative to the first cause of action that the transactions were for inadequate consideration under s 298 of the Act and/or that payments made after 31 March 2012 were transactions at an undervalue under s 297 of the Act.
[32] My findings on the first cause of action make it unnecessary to address the second and third causes of action.
Fourth cause of action – unfair directors’ salaries
[33] The plaintiffs claim repayment of unfair directors’ salaries against both
defendants pursuant to s 161(5) of the Act.
[34] Mr Levin deposes that a resolution signed by the defendants for the year ended 31 March 2012 authorised remuneration to the first defendant in the sum of
$67,600; and to the second defendant in the sum of $50,700. Those amounts are consistent with the first defendant’s declared salary to the Inland Revenue for the year ended 31 March 2012. Mr Levin deposes that the differences between the resolutions and what was shown as net payments to both defendants in the Company’s bank statements differ only in a minor, and immaterial way.
[35] Because there are no financial statements after 31 March 2012, the plaintiffs
rely on the Company’s bank statements, which show salary payments up until
5 August 2013 of $68,243 for the first defendant, and $53,723 for the second defendant.
[36] Pursuant to s 161(1) of the Act, remuneration paid to a director may be authorised if the board of directors is satisfied that to do so is fair to the company. Particulars of the salary payment must be entered into the interests register,3 and directors who vote in favour of the payment must sign a certificate stating that in their opinion it is fair to the company, with grounds for that opinion also stated.4
[37] If the above requirements are not complied with, then pursuant to s 161(5) of the Act, the director who received the payment is personally liable to the company for the amount of their payment except to the extent that the director proves that the payment was fair to the company at the time it was made.
[38] In this case, Mr Levin deposes that there is no record that the particulars of the salary payments were entered into the interests register, and no record of any certificate as required by s 161(2) and (4) respectively. After 31 March 2012, there is no record authorising payment of the defendants’ salaries either.
[39] I am therefore satisfied on the evidence produced before me that the salary payments to the defendants between 1 April 2012 and August 2013 were made in breach of the statutory requirements for such payments.
[40] Accordingly, the consequence in s 161(5) applies and the defendants are personally liable to the Company for the salaries they received, except to the extent that they are able to prove that the payment was fair to the Company at the time it was made.
[41] In Madsen-Ries v Petera, Lang J confirmed that payments to a director may not be regarded as being fair to a company when they are made at the expense of a company’s creditors.5 In that case, Lang J held that despite the salaries having been
paid at a time when the company was unable to meet its tax obligations, the
3 Companies Act 1993, s 161(2).
4 Section 161(4).
5 Madsen-Ries v Petera, above n 2 at [49].
company gained full value for the work of the directors and so the salaries paid were not held to be unfair in those circumstances.6
[42] In Richard Geewiz Gee Consultants, Brown J found that the salary of
$34,591 was a relatively modest one and that assessed in terms of quantum relative to the services which were being provided, it could reasonably be described as fair.7
However, even a relatively modest salary was not fair to the company when considered against the solvency of the company and the liabilities it faced at the time.
[43] I am satisfied that at the time the payments were made, the salaries were not fair to the Company. That is because, at the time the payments were made, the company was insolvent, and had been insolvent since at least 31 March 2010.
[44] During the period which the defendants drew a salary, the Company’s PAYE and GST liabilities increased. Furthermore, the Company had been operating with working capital deficits each year since 31 March 2008. There was a net asset deficit reported in the financial accounts for year end 31 March 2012.
[45] I accept that in these circumstances, the defendants knew or ought to have known that the allocation of a salary to them would be to the detriment of the Company’s creditors and in that respect those salary payments were not fair to the Company within the meaning of s 161(5) of the Act.
[46] Accordingly, I am satisfied that the defendants are personally liable to the Company for those salaries and I intend to make orders that the defendants repay the salaries claimed.
Fifth cause of action – breach of directors’ duties and claim under s 301 of the
Act
[47] The plaintiffs also seek relief under s 301 of the Act for alleged breaches of duties by the defendants as contained in ss 131(1), 135, 136 and 137 of the Act.
6 At [50]-[51].
7 Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [54]-[55].
Section 301
[48] Section 301 of the Act provides a mechanism by which compensation may be sought for illegitimate trading. It provides a means of enforcement of directors’ duties, including those statutory duties under the Act.
[49] Claims brought under s 301 involve a two-stage evaluation:
(a) Has there been a breach of duty owed by a director to the company?
(b)If so, to what extent should the director contribute to the losses of the company?
[50] Each section of the Act alleged to be breached is considered below.
Section 131(1) – breach of good faith and acting in the best interests of the company
[51] Section 131(1) of the Act provides that a director of a company when exercising powers or performing duties must act in good faith and in what the director believes to be the best interests of the company.
[52] In Sojourner v Robb, Fogarty J observed that the duty imposed under s 131 was an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criterion as to whether the directors have done what they honestly believed to be right.8 Further, as observed in that case, the duty is owed to creditors once a company is of doubtful solvency.9
[53] The plaintiffs rely on the defendants’ failure to ensure the Company met its tax obligations as they fell due as evidence of a breach of s 131(1). They also rely on the directors’ acts in allowing the Company to continue trading and incurring further tax debts for over three years after it had become insolvent as further
evidence of a breach.
8 Sojourner v Robb [2006] 3 NZLR 808 (HC) at [102].
9 At [102]; Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242 (CA) per Cooke J at
249-250.
[54] I am satisfied that the Company was unable to meet its tax obligations as they fell due. This was due to the defendants failing to act in the best interests of the Company. Instead of meeting these obligations or ceasing trading when it became clear that the Company could no longer meet those obligations, the directors resolved to continue trading. Furthermore, the defendants preferred their own interests to those of the Company by continuing to draw funds from the Company in preference to meeting the Company’s debts. As a result, the Company and its creditors, particularly Inland Revenue, suffered increasing losses leading ultimately to the Company being placed into liquidation.
[55] I am satisfied that the plaintiffs have proved a breach of s 131(1) of the Act.
Section 135 – reckless trading
[56] Section 135 of the Act provides that a director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[57] The duty is one owed by the directors to the company, as opposed to particular creditors. The test is an objective one and focuses not on the director’s belief but on the manner in which the company’s business is carried on and whether that creates a substantial risk of serious loss. What is required under the Act is a “sober assessment” by the directors of an ongoing character as to the company’s likely future income and prospects.10
[58] Mr Levin’s evidence is that the Company was insolvent from 31 March 2010. In a director’s questionnaire completed by the second defendant, she notes that in her own opinion, the company was insolvent from 2011.
[59] Even on the second defendant’s own statement, the only responsible course was to cease trading a company that had overdue and increasing tax debts that it had no realistic prospect of paying. However, the defendants continued to trade the
Company until August 2013 and in doing so created a substantial risk of serious loss
10 Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].
to the Company’s creditors. A “sober assessment” of the Company’s prospects at any time during this period would have left no room for doubt that the Company should cease trading.
[60] I am satisfied that the plaintiffs have proved a breach of s 135.
Section 136 – obligations incurred without reasonable belief that the Company could perform them
[61] Section 136 of the Act provides that a director must not agree to the company incurring an obligation unless he or she believes on reasonable grounds that the company will be able to perform the obligation when required to do so.
[62] The Court of Appeal in Peace and Glory Society Ltd (in liq) v Samsa
accepted the following breakdown of the elements of s 136:11
(a) That the defendant was a director of the company;
(b) That an obligation was incurred by the company; and
(c) That at the time of incurring the obligation, the defendant did not honestly believe on reasonable grounds that the company would be able to perform the obligation when it was required to do so.
[63] In Fatupaito v Bates, O’Regan J held that to establish a breach of s 136, the plaintiff must show that the defendant agreed to the company incurring an obligation at a time when he or she did not believe (a subjective test), on reasonable grounds (an objective test), that the company would be able to perform the obligation when
required to do so.12
[64] The plaintiffs rely primarily on the Company’s default in relation to its tax
obligations as evidence of breach of this section also.
[65] The purpose of s 136 has been described as dealing with obligations on capital account such as major investments, and more appropriately directed to
particular transactions or specific liabilities rather than the general conduct of the
11 Peace and Glory Society Ltd (in liq) v Samsa [2009] NZCA 396, [2010] 2 NZLR 57 at [45].
12 Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [80].
company’s business.13 However, failure to meet ongoing tax obligations has been found to be sufficient proof of breach of s 136 in a number of cases.14
[66] I consider the circumstances of this case fall more readily within s 135, rather than s 136. Liability having been established under s 135, it is unnecessary to find breach under s 136 also, and I decline to do so.
Section 137 – failure to act as reasonable directors
[67] Section 137 of the Act provides that a director must exercise the care, diligence and skill of a reasonable director in the same circumstances.
[68] The test under s 137 is an objective one based on the standard of a reasonable director.15 The particular position or circumstances of the director must be taken into account, which in this case means someone assuming responsibilities as a director of a relatively small trading business without the opportunity for detached guidance from a board.16
[69] I am persuaded that a reasonable director in the position of the defendants would not have continued to trade the Company after 31 March 2010, or at the very latest 2011, when it was insolvent and acknowledged to be insolvent by the second defendant. Neither would they use the Company’s limited cash funds to pay themselves salaries or drawings on the first defendant’s current account in preference to mounting debts and liabilities.
[70] The breach of s 137 is proved.
13 See Peace and Glory Society Ltd (in liq) v Samsa, above n 11, at [44]; Richard Geewiz Gee
Consultants Ltd (in liq) v Gee, above n 7 at [108]-[109].
14 See Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826; Madsen-Ries v Petera, above n 2.
15 Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [89].
16 Boutique Tanneries Ltd (in liq) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008 at
[31].
[71] Relief for breach of any or all of the above statutory duties is considered under s 301 of the Act.
[72] The approach to the grant of relief under that section was articulated by the
Court of Appeal in Mason v Lewis, as follows:17
[109] The standard approach has been to begin by looking to the deterioration in the company’s financial position between the date inadequate corporate governance became evident (really the “breach” date) and the date of liquidation.
[110] Once that figure has been ascertained, New Zealand courts have seen three factors – causation, culpability and the duration of the trading – as being distinctly relevant to the exercise of the court’s discretion …
…
[118] Finally, claims of this character necessarily have to be approached in a relatively broad-brushed way. The jurisdiction to order recompense is of an “equitable” character.
[73] In Löwer v Traveller, the Court of Appeal upheld the trial judge’s finding of liability for loss during the relevant period. The director was found to have been unreasonably optimistic and put his own interests ahead of other unsecured creditors over an extended period of time.18 The Court of Appeal discussed the factors of causation, culpability and the duration of the trading in more detail.
[74] In relation to causation, the Court of Appeal said:19
[79] The element of causation is concerned with the link between the carrying on of the company's business recklessly, to the knowledge of the impugned director, and the indebtedness of the company for which it is sought to impose personal liability. In a case such as the present that involves an assessment of how much the liabilities of the company were increased because of the illegitimate delay in its ceasing to trade and the identification of a point in time when the director knew that continuing to trade would be reckless. The resulting figure however is no more than a relevant consideration for the Court although the amount of the director's liability would not exceed the sum identified as caused by the known reckless trading.
17 Mason v Lewis above n 10 at [109], [110] and [118].
18 Löwer v Traveller [2005] 3 NZLR 479 at [79]-[86].
[83] The relevance of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of Mr Löwer's conduct, bearing in mind that at one end of the range the nature of a director's involvement will be blind faith or muddleheadedness, while at the other end there will be actions or instances of inaction which are plainly dishonest: Thompson v Innes (1985) 2 NZCLC 99,463. The deterrent purpose of the section is served in cases involving a high degree of culpability by orders which are punitive as well as compensatory: Re Cyona Distributors Ltd (Supra) at p902.
[76] As to the element of duration, the Court of Appeal found that the duration of two years and 10 months was a lengthy one for the company to continue its wrongful trading.21
[77] I have considered causation, culpability and duration of the trading in this case in light of the Court of Appeal’s observations.
[78] I am satisfied that by continuing to trade the Company past 31 March 2010, the defendants’ actions effectively caused the Company’s losses. The first and second defendants had the sole responsibility for the management of the Company as its directors. The outstanding debts owed to the creditors would have been substantially reduced if they had taken the responsible action and ceased to trade shortly after the Company became insolvent. Rather, the debts were exacerbated by the accumulation of interest and penalties owed to the Inland Revenue and by the decision to remove funds from the Company for their personal benefit.
[79] I accept the plaintiffs’ submissions that whilst the defendants’ conduct of the company may not have been dishonest, it fell well below the standard of care required to discharge their directors’ duties under the Act and in that respect both directors are to be considered culpable.
[80] The Company traded for approximately 12 years. It continued to trade for over three years past the date of effective insolvency. The duration of the wrongful
trading was substantial. In Löwer, a trading period of two years and 10 months was
20 At [83].
described by the Court of Appeal as “lengthy” and justified judgment being entered in that case.
[81] I accept that relief under s 301 of the Act is warranted in this case. The next issue is the quantum of damages to be awarded.
Quantum
[82] The plaintiffs seek damages in the sum of $454,167.08 which is the sum of the outstanding creditor claims in the liquidation. They also seek interest on this sum from the date of liquidation.
[83] As the Court of Appeal noted in Mason v Lewis, damages claims pursuant to s 301 have to be assessed in a broad brush way.22 The sum is usually determined by considering the net deterioration in the Company’s financial position due to the wrongful trading.
[84] The Court of Appeal approved of the High Court’s methodology in the assessment of damages in Löwer v Traveller which involved ascertaining the difference between liquidation at the hypothetical breach date, and the position as at the actual liquidation date. Adjustments were then made to those figures to reach an
overall “fair” result.23
[85] Similarly, in Richard Geewiz, Brown J disregarded those debts which pre- dated the effective breach date (i.e. the date of insolvency), and assessed quantum only on the basis of those debts which had been incurred after the effective breach date.24
[86] I adopt that approach in this case. The total sum of $454,167.08 includes debts owed to the IRD in the sum of $4,810.89, and a debt owed to Bartercard of
$23,265.72 which predate the effective breach date of 31 March 2010. Those debts
cannot be said to be caused by the defendants continuing to trade after 31 March
22 Mason v Lewis above n 10 at [118].
23 Löwer v Traveller above n 18 at [89]-[91].
24 Richard Geewiz Gee Consultants Ltd (in liq) v Gee above n 7 at [117]-[118].
2010 and should not be taken into account in an award of damages. The total sum awarded will therefore be $426,090.45.
[87] This award is considered in addition to judgment on the current account and salaries’ causes of action. I accept that the claims are conceptually different. Recovery on the current account and salaries’ causes of action does not depend on findings of breach of directors’ duties, nor findings relating to the effective insolvency of the Company. They are separate and distinct from the damages claim on the fifth cause of action. I am also satisfied that there is no double recovery. Judgment on the first two causes of action does not diminish the loss caused to the Company by the breach of statutory duties proved under the fifth cause of action.
[88] Cumulative awards have been made in a number of cases in similar circumstances.25 In those cases, the total sum of the awards made exceeded the total outstanding creditor claims. That is the position in this case, although the plaintiffs submit that there is still likely to be a loss to creditors, even if the plaintiffs succeed on all causes of action due to the costs of the liquidation and the costs of the proceedings. If there is a surplus in the liquidation, this amount will be returned to the shareholders.26
[89] In all these circumstances, I accept that an award under s 301 in the sum of
$426,090.45 is appropriate and judgment will be entered for that sum.
Result
[90] Judgment is entered on the first cause of action against the first defendant in the sum of $65,663. Interest on this sum is awarded at the Judicature Act 1908 rate from the date of demand to the date of judgment.
[91] Judgment is entered on the fourth cause of action against the first defendant in the sum of $135,843 and as against the second defendant in the sum of $104,424.
25 See Mizeen Painters Ltd (in liq) v Tapusoa, above n 14 at [61] and the cases cited in that paragraph.
26 This was recognised by the Court of Appeal in Morgenstern v Jeffreys, above n 15.
Interest is awarded at the Judicature Act rate from the date the salaries were paid, to the date of judgment.
[92] Judgment is entered on the fifth cause of action against the defendants jointly and severally in the sum of $426,090.45. Interest is awarded at the Judicature Act rate from the date of liquidation to the date of judgment.
[93] Costs are awarded to the plaintiffs on a 2B basis.
Edwards J
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