Barring Horticulture New Zealand Limited (in liquidation) v Barring
[2016] NZHC 304
•9 March 2016
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2014-441-000128 [2016] NZHC 304
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of Barring Horticulture
NZ Limited (In Liquidation)BETWEEN
BARRING HORTICULTURE NEW ZEALAND LIMITED (IN LIQUIDATION)
First Plaintiff
HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES as liquidators of Barring Horticulture NZ Limited (In Liquidation)
Second Plaintiffs
AND
AMARJIT SINGH BARRING First Defendant
BARRING BROTHERS LIMITED Second Defendant
Hearing: 16 November 2015 Appearances:
K M Wakelin and D M Kerr for Plaintiffs
No appearance for DefendantsJudgment:
9 March 2016
JUDGMENT OF HINTON J
This judgment is delivered by me on 9 March 2016 at 5.00 pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors/Counsel:
Meredith Connell, Auckland
D M Kerr, Barrister, Napier
BARRING HORTICULTURE NEW ZEALAND LTD (IN LIQ) v BARRING & ANOR [2016] NZHC 304 [9 March 2016]
Introduction
[1] This case involves claims by company liquidators against a former shareholder/director of a company and against a related company, for debts allegedly owing and for compensation for breaches of duty by the director.
Background
[2] The first plaintiff, Barring Horticulture New Zealand Ltd (BHNZL), was incorporated in March 2009. The company traded as a horticultural contractor. It was put into liquidation on 23 April 2013. The second plaintiffs were appointed liquidators.
[3] The first defendant, Mr Barring, was the sole director and shareholder of BHNZL. The second defendant, Barring Brothers Ltd (BBL), had an association with BHNZL in that Mr Barring was a director and shareholder of both companies at all relevant times.
[4] The plaintiffs seek to recover $413,463 from Mr Barring, being the amount allegedly owing by him under his current account with BHNZL. In the alternative, they say that Mr Barring is liable under ss 297 and/or 298 of the Companies Act
1993 (the Act) for the sum of $352,409 for transacting at an undervalue or for inadequate consideration.
[5] The plaintiffs also seek compensation from Mr Barring in the sum of
$219,184 for breaches of directors’ duties under ss 131, 135 and 136 of the Act.
[6] The plaintiffs seek to recover from BBL the sum of $144,370, being advances that BHNZL allegedly made to BBL. In the alternative they say that BBL is liable under ss 297 and/or 298 of the Act because the payments were transactions at an undervalue or for inadequate consideration.
[7] Mr Barring has not filed a statement of defence or otherwise disputed the claims made against him.
[8] BBL contested the plaintiffs’ claims both in correspondence and by filing a statement of defence. On 13 August 2015, Associate Judge Smith struck out BBL’s statement of defence due to a failure to file and serve documents under timetable orders made on 13 March 2015.
[9] The Associate Judge directed that the plaintiffs’ claims proceed on an
undefended basis against both defendants.
[10] On liquidation, BHNZL’s only significant assets were the loans allegedly made to the defendants.
[11] The Inland Revenue Department (IRD) is the only creditor to have submitted a claim in BHNZL’s liquidation. Its claim totals $219,184, this being in turn the amount that features in the compensation claim against Mr Barring. There may be other creditors.
First cause of action: claim against Mr Barring for current account debt
[12] Mr Barring maintained a current account with BHNZL. Current accounts are commonly used to record advances made by a company to its shareholders or vice versa.
[13] It is well settled that advances made on a current account are a debt due to the company, repayable on demand, unless and until a company resolution classifies such advances otherwise.1
[14] One of the liquidators, Mr Levin, has carried out an analysis of Mr Barring’s current account. Mr Levin has the requisite expertise to do this. He is a partner at Deloitte and practises as an insolvency specialist. He testified to having particular experience in the calculations he has carried out.
[15] Mr Levin has deposed that the liquidators have analysed BHNZL’s financial
statements for the years ending 2010 and 2011. They then used the general ledger
1 Thom Contractors Ltd (in liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009 at [16];
Re Samarang Developments Ltd (in liq) HC Christchurch CIV-2003-409-2094, 30 September
2004 at [55].
for the year ending 2012, in the absence of financial statements in that year. They then looked at the bank statements for the company’s bank account between 1 April
2012 and 23 April 2013.
[16] Their analysis concluded that Mr Barring owes the company $413,463 under the current account as at the date of liquidation.
[17] The plaintiffs are entitled to rely on the accounts of the company prepared at the direction of the company director.2 With regard to the use of bank statements, the plaintiffs identified transactions that are inconsistent with business expenditure, for example, transactions that are personal in nature (supermarket expenditure and similar) and transfers to Mr Barring’s personal accounts. I am satisfied with the plaintiffs’ analysis of the bank statements and am prepared to rely on their calculations overall in connection with this cause of action.
[18] There is no evidence of a company resolution classifying the relevant receipts by Mr Barring as distributions or otherwise. The total sum advanced is therefore a debt due to BHNZL, repayable on demand.
[19] By letter dated 5 March 2014, the plaintiffs through their solicitors made demand on Mr Barring for repayment of $413,463 as the amount owing under the current account. To date, no payment has been received nor, as I have mentioned, was any defence filed by Mr Barring.
[20] I am satisfied that, under the first cause of action, judgment should be entered against Mr Barring in the sum of $413,463.
[21] As they are alternative claims, there is therefore no need to consider the second and third causes of action against Mr Barring, under ss 297 and 298 of the
Act.
2 Thom Contractors Ltd, above n 1, at [17]. See also, Chesterton Holdings Ltd (in liq) v Durney
HC Napier CIV-2011-441-7, 19 May 2011 at [31].
Fourth cause of action: claim against BBL for advances made
[22] On or about 26 May 2011, BBL purchased Supa Value Supermarket Ltd
(Supa Value) in Glen Innes for $575,000 plus stock at valuation.
[23] The plaintiffs claim that between 31 March 2011 and 19 January 2012, BHNZL made three payments to BBL totalling $158,500, which were applied to the purchase of Supa Value. The three payments to BBL were:
(a) $50,000 to assist with the deposit on 31 March 2011;
(b) $98,500 to assist with the balance of the purchase price on 20 May
2011; and
(c) $10,000 on 19 January 2012.
[24] The $50,000 sum is recorded in the general ledger of BHNZL as “Deposit on shop in Auckland”. A receipt was issued by BBL’s solicitors, Lunn and Associates. The $50,000 payment was recorded in Lunn & Associates’ reconciliation statement. The liquidators could not find any written agreement recording the terms on which the $50,000 payment was made, nor any other explanation for it, nor did there appear to be any security for repayment of that sum.
[25] Turning to the sum of $98,500, BHNZL borrowed that amount from Westpac New Zealand Ltd (Westpac). The Westpac loan was guaranteed by Mr Barring personally and by Mr Barring and Ranjit Singh as trustees of the Barring Family Trust (BFT). In Lunn and Associates’ reconciliation statement, the on-payment of the $98,500 by BHNZL to BBL is described as a “loan advance”. The liquidators could not find any written agreement recording the terms of the $98,500 advance, nor does there appear to be any security for repayment of the advance. After the Westpac loan was drawn down, and prior to liquidation, some repayments were made to Westpac, although it is not clear by whom. The amount outstanding to Westpac, as at the date of liquidation in April 2013, was $84,370.62.
[26] It seems that the balance of $84,370 still owed to Westpac was then fully repaid by the trustees of BFT as guarantors, after a loan restructure in about July
2014. The liquidators say that this does not absolve BBL from liability to the plaintiffs as the first plaintiff is liable to BFT for any payments made by BFT under the guarantee. They also say that BBL is not entitled to set off against the amount owed by it to BHNZL, the amount repaid by the guarantors to Westpac, in the absence of an agreement between BHNZL, BBL and the guarantors. I agree with these submissions.
[27] The additional $10,000 advance is evident in BHNZL’s bank statements.
[28] I agree with the plaintiffs that the principle applicable to shareholder/director current accounts that advances made without consideration, in the absence of evidence otherwise, are repayable on demand, must apply equally to advances to related entities. The case law relating to shareholder/director current accounts is a
specific example of a more general principle espoused in Seldon v Davidson.3
[29] The three payments made to BBL are all advances without consideration where the liquidators have no documents relating to terms. The three advances are therefore repayable on demand.
[30] By letter dated 5 March 2014, the first plaintiff through its solicitors made formal demand on BBL for repayment of the advances. I am satisfied, despite earlier unsubstantiated claims otherwise by BBL, that there has been no repayment of the advances.
[31] I am satisfied that BBL owes the first plaintiff $144,370.62 comprising the sums of $50,000, $84,370.62 and $10,000.
[32] Under the fourth cause of action, judgment should be entered against BBL in the sum of $144,370.62.
[33] There is therefore no need to consider the fifth and sixth alternative causes of action against BBL under ss 297 and 298 of the Act.
3 Seldon v Davidson [1968] 1 WLR 1083 (CA): the starting point is that payment of a sum of money from one person to another prima facie imports an obligation to repay it (at least if the payment was not made by one close family member to another, or in one of a small number of other circumstances where the law will presume, until the contrary is shown, that the payment was a gift). See also Ohnuma v Jiang HC Auckland CP301/96, 29 October 1997 at 6.
Seventh, eighth and ninth causes of action: claims against Mr Barring for breaches of directors’ duties
[34] The plaintiffs seek, in addition, compensation from Mr Barring for breaches of directors’ duties as set out in ss 131, 135 and 136 of the Companies Act.
[35] By way of background, the plaintiffs say that BHNZL first began incurring debt (as opposed to making payment when due) to the IRD, in the period ending 31
January 2011. BHNZL had virtually zero net assets from which to pay new debts arising after 31 March 2011. Despite this, BHNZL continued to advance unrecoverable funds to Mr Barring and BBL. The liquidators say that BHNZL was operating with a net asset deficit position from 1 April 2011 until its liquidation.
[36] I agree that BHNZL was unable to meet the solvency test and was therefore insolvent from 31 January 2011.
[37] Mr Barring was a director of BHNZL from incorporation and was the only director. Under his directorship, BHNZL became unable to pay its debts as they became due from 31 January 2011. BHNZL thereafter incurred and failed to meet significant tax debts that remained outstanding at liquidation. Mr Barring therefore did not ensure that BHNZL had sufficient funds to satisfy its debts as they arose. He did not prepare or did not conclude financial statements for the year ending 2012. In the face of increasing tax debts, Mr Barring continued to trade BHNZL and to withdraw funds for his personal benefit. He should have allowed BHNZL to cease trading when it became insolvent but did not do so. He also made, or was responsible for BHNZL making, advances to related companies, including BBL and Taj of India Ltd, of which he is a director and shareholder. Mr Barring could not reasonably have believed that BHNZL would be able to satisfy its existing debts while it incurred new tax obligations. It would also not have been reasonable for him to believe that BHNZL could keep up with the repayments for the Westpac loan.
[38] For these reasons, I am satisfied that Mr Barring breached his duty to
BHNZL:
(a) to act in good faith and in the best interests of the company under s 131(1);
(b)not to cause or allow the business of the company to be carried on in a manner likely to cause serious loss to the company’s creditors under s 135; and
(c) not to incur an obligation unless he believed at the time on reasonable grounds that the company would be able to perform the obligation under s 136.
[39] Compensation is sought under s 301 in the amount of $219,184 plus interest from the date of liquidation. That section confers power on the court to order a director to pay or restore money supplied or retained or to contribute such sums to the assets of a company by way of compensation as the court thinks just. As noted by Lang J in Madsen-Ries v Petera, the compensation must relate to the loss the company has suffered as a result of the acts or omissions underpinning the relevant
breach of duty.4
[40] The approach to compensation has been described by the Court of Appeal in
Mason v Lewis as follows:5
[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-brush way. The jurisdiction to order recompense is of an “equitable” character.
[41] In Löwer v Traveller, the Court of Appeal discussed the three factors as follows:6
(a) The element of causation is concerned with the link between the
carrying on of the company’s business recklessly, to the knowledge of
4 Madsen-Ries v Petera [2015] NZHC 538 at [94].
5 Mason v Lewis [2006] 3 NZLR 225 (CA).
6 Löwer v Traveller [2005] 3 NZLR 479 (CA) at [79], [83] and [86].
the impugned director, and the indebtedness of the company for which it is sought to impose personal liability.
(b)The element of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of the director’s conduct, bearing in mind that at one end of the range the nature of a director’s involvement will be blind faith or muddle- headedness, while at the other end there will be actions or instances of inaction which are plainly dishonest. 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.
(c) As to the element of duration of the wrongful trading, the Court of Appeal found in that case that a duration of 2 years and 10 months as “lengthy”.
[42] In Mason v Lewis, the Court of Appeal recognised that where the duties breached include trading recklessly, an approach which focused on losses to creditors was the most appropriate.7
[43] An award of the full compensation sought under this head will mean the total judgment debt will far exceed the creditor losses and likely liquidation costs. If there is a surplus in the liquidation, the money will be returned to the first defendant as the sole shareholder. Bearing in mind the jurisdiction to award recompense is of an equitable character, I was concerned that the potential surplus in such circumstances and the potential circularity of a significant part of the total award, might be a relevant factor in fixing quantum.
[44] However, the Court of Appeal has recently rejected such an argument, considering it sufficient that if there were a surplus, the money would be returned.8
[45] Counsel for the plaintiff also referred me to the decision of Alpha Box
Property Holdings Limited (in liq) v Wiekart, wherein Peters J commented that,
7 Mason v Lewis, above n 5, at [83].
8 Morgenstern v Jeffreys [2014] NZCA 449.
notwithstanding there is a degree of circularity, it was fair and just to make the orders sought and that, ultimately, it will be for the liquidators to determine whether the company’s requirements and best interests might be met by the contribution of a lesser sum.9
[46] It seems that must be the correct course. Further, the liquidators are under a duty to act impartially between all parties involved in the liquidation. The court has a supervisory power to intervene if a liquidator acts unreasonably. There is also the ability to seek a stay against enforcement in an appropriate case. On the other hand, there would be no clear or logical basis for fixing a lesser sum by way of
compensation.10
[47] Regarding the deterioration in BHNZL’s financial position, the “breach” date can be said to be 31 January 2011, which was when BHNZL began defaulting on its obligations to the IRD. Only two months after this date was the first advance made to BBL. The financial position was such that the IRD debt grew to over $200,000.
[48] Mr Barring’s actions were no doubt the cause of BHNZL’s indebtedness. He had sole responsibility for the management of BHNZL. His culpability is high. It seems that he deliberately withdrew money for his (including related companies) personal benefit, instead of paying the ever-increasing IRD debt. He acted with reckless abandon as to the interests of the company’s creditors. The duration of wrongful trading in this case was about two years, from the time BHNZL was first unable to meet its tax obligations to the date of liquidation.
[49] The plaintiffs have sought the full extent of the IRD debt as compensation, being the sum of $219,184. I consider that amount to be appropriate (equating to
100 per cent of creditor losses), this being the approach generally followed.
Result
[50] Judgment is entered as follows:
9 Alpha Box Property Holdings Ltd (in liq) v Wiekart [2015] NZHC 1257 at [48]-[49].
10 Consolidated Technologies Development (NZ) Limited v McCullagh (2006) 9 NZCLC 264,056 (HC) at [46].
(a) On the first cause of action in favour of the first plaintiff, against the first defendant, in the sum of $413,463 plus interest from the date of demand (5 March 2014) to the date of judgment.
(b)On the fourth cause of action in favour of the first plaintiff against the second defendant in the sum of $144,370, plus interest from the date of demand (5 March 2014) to the date of judgment.
(c) On the seventh, eighth and ninth causes of action, I make a declaration under s 300(1) of the Act that Mr Barring breached his director’s duties under ss 131, 135 and 136 of the Act and order that the first defendant pay compensation to the plaintiffs in the sum of
$219,184, plus interest from the date of liquidation to the date of
judgment.
Costs
[51] The plaintiffs are entitled to costs on a 2B basis. They have filed a memorandum scheduling costs on that basis, for which both defendants are jointly and severally liable. In accordance with that memorandum, I award costs of
$25,533.50 and disbursements of $458.85 against the first and second defendants.
[52] In addition, the plaintiffs seek costs on a 2B basis against the second defendant only, for steps taken in respect of that party alone, including filing of a reply to the second defendant’s statement of defence and attendances to case management conferences and discovery. Again I am satisfied that these additional costs are appropriate and I award costs in favour of the plaintiffs against the second
defendant in the sum of $11,819 plus disbursements of $152.95.
Hinton J
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