Bay Metal Fabricators Ltd (in liq) v Steenson
[2016] NZHC 1634
•19 July 2016
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV-2015-463-0069 [2016] NZHC 1634
UNDER The Companies Act 1993 IN THE MATTER
of the liquidation of Bay Metal Fabricators
Limited (in Liquidation)BETWEEN
BAY METAL FABRICATORS LIMITED (IN LIQUIDATION)
First Plaintiff
VIVIEN JUDITH MADSEN-RIES AND DAVID LEVIN AS LIQUIDATORS OF BAY METAL FABRICATORS LIMITED (IN LIQUIDATION)
Second Plaintiff
AND
GRAHAM DOUGLAS STEENSON First Defendant
CAROL GRACE STEENSON Second Defendant
Hearing: 28 June 2016 Counsel:
K Wakelin and G Campbell for plaintiffs
No appearance for defendantsJudgment:
19 July 2016
JUDGMENT OF KATZ J [Formal proof]
This judgment was delivered by me on19 July 2016 at 12:00pm pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Meredith Connell, Auckland
BAY METAL FABRICATORS LIMITED (IN LIQUIDATION) v STEENSON [2016] NZHC 1634 [19 July 2016]
Introduction
[1] Bay Metal Fabricators Ltd (in liq) (“Company”) and its liquidators, Henry David Levin and Vivien Judith Madsen-Ries, seek judgment by way of formal proof against Graham and Carol Steenson. Mr Levin has sworn an affidavit in support of the formal proof application, annexing various relevant documents. My factual findings are based on Mr Levin’s undisputed evidence.
[2] Mr Steenson is the current director of the Company and holds an 80 per cent shareholding in it. Mrs Steenson was a director of the Company from 10 October
1983 until 3 September 2002. She was appointed as a director again on 31 March
2009 but was subsequently removed on an unknown date. She holds a 20 per cent shareholding in the Company.
[3] Until October 2013 the Company carried out the business of fabricating and installing stainless steel. It also operated a bookkeeping business, which continued up until the company was placed in liquidation by the High Court on 4 December
2013.
[4] The Company was unable to pay its debts as they fell due (and was therefore insolvent) from at least 31 March 2008. By the time of its liquidation the Company had very few assets, essentially comprising a van, trailer and welder which were sold to Mr Steenson for $4,300. The Company’s only other significant assets were its legal claims against Mr and Mrs Steenson. The Commissioner of Inland Revenue (“Inland Revenue”) has filed a claim in the liquidation for $94,010.07. ANZ Bank Ltd has submitted a claim for $2,709.18. The Steenson Family Trust is also owed
$31,508, but has not filed a claim in the liquidation. [5] The plaintiffs’ allege that:
(a) Mr and Mrs Steenson took drawings from the Company under their joint current account, which were advances repayable on demand;
(b)Mr and Mrs Steenson preferred their own interests over other creditors of the Company by causing the Company to repay its debt to them before other creditors;
(c) Mr Steenson drew a salary from the Company in breach of the relevant provisions of the Companies Act 1993 (“Act”), at a time when the Company was insolvent and when it was unfair to the Company; and
(d)Mr Steenson breached his duties as a director by causing or allowing the Company to continue to trade after it became insolvent, which has resulted in serious loss to creditors.
[6] The Company seeks to recover funds advanced to Mr and Mrs Steenson under their joint current account, salary paid to Mr Steenson, and also seeks compensation for breach of Mr Steenson’s duties as a director of the Company.
First and third causes of action – Current account/voidable transaction
Current account
[7] The Company seeks to recover from Mr and Mrs Steenson the amount outstanding under their current account with the Company. A portion of the drawings under the current account also repaid the Company’s debt to Mr and Mrs Steenson during the specified period under s 292 of the Companies Act. The liquidators accordingly served Mr and Mrs Steenson with a notice to set aside voidable transactions under s 294(1) of the Act on 6 May 2015. No notice of objection was received from Mr and Mrs Steenson.
[8] The Financial Statements record that as at 31 March 2012 the Company owed Mr and Mrs Steenson $84,966 under Mr and Mrs Steenson’s joint current account (“Company Debt”). The Company did not prepare financial statements for the financial year ending (“FYE”) 2013 and FYE 2014. However, the general ledgers show that, for FYE 2013 and the 11 months to 28 February 2014, Mr and Mrs Steenson took drawings of $120,606. As a result, as at the date of liquidation,
the Company Debt had been repaid and Mr and Mrs Steenson owed the Company
$35,640. The plaintiffs seek recovery of $35,640 under the current account (“Current Account Debt”) and $84,966 under their voidable transactions cause of action.
[9] Advances made on a shareholder’s current account are a due debt, owed by the shareholder to the company, repayable on demand.1 The transactions recorded in the general ledgers for FYE 2013 and FYE 2014 included payments that appear to be personal in nature, rather than business expenses, such as to coffee shops, takeaways and retail outlets, and are classed as “drawings”. Other transactions of a personal nature are also identified in the ledgers as rental property expenses, life
insurance, donations and school fees, private house expenses and taxation paid. Mr Levin has outlined in his affidavit the reasons why the plaintiffs consider the transactions to be inconsistent with legitimate business expenditure.
[10] I accept the plaintiffs’ submission that the appropriate inference is that the drawings were for the personal benefit of Mr and Mrs Steenson, who were the only directors and shareholders of the Company and therefore likely to have solely controlled the Company and its financial affairs. If the drawings were legitimate business expenditure of the Company I would expect them to have been properly documented as such. I note that Mr Steenson, as a director, was obliged under the Act to keep proper records. The onus is on Mr Steenson, as director and fiduciary of the Company, to account to the Company for its funds and establish the legitimacy of any funds taken from the Company or paid on its behalf. It is incumbent on a
director to explain what has become of company property in his or her hands.2
Accordingly, in the absence of any evidence to the contrary, the Current Account
Debt remains due and owing to the Company by Mr and Mrs Steenson.
[11] By letter dated 6 October 2014, the Company and the liquidators made demand on Mr and Mrs Steenson for repayment of the Current Account Debt, and
1 See for example Thom Contractors Ltd (in liq) v Thom HC Auckland CIV-2008-404-006829, 28
April 2009 at [16]; Re Samarang Developments Ltd (In liq) HC Christchurch CIV-2003-409-
2094, 30 September 2004 at [55]; Chesterton Holdings Ltd (in liq) v Durney HC Napier CIV-2011-411-007, 19 May 2011 at [15].
2 Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [58].
advised them that they considered the payments by the Company, which effectively repaid the Company Debt, to be a voidable preference. No payment has been received from Mr and Mrs Steenson.
Voidable transaction
[12] Section 292 of the Act provides that a transaction by a company is voidable by the liquidator if it is an insolvent transaction that is entered into within a period of two years prior to the application to the Court to liquidate the Company and the date of liquidation. An insolvent transaction is a transaction by a company that:
(a) is entered into at a time when the company is unable to pay its due debts; and
(b)enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
[13] Section 294(3) of the Act states that a transaction is automatically set aside as against the person on whom the liquidator has served the liquidator’s notice, if that person has not objected by sending to the liquidator a written notice of objection that is received by the liquidator within 20 working days after service of the liquidator ’s notice on that person.
[14] The liquidators filed and served a notice to set aside voidable transactions under s 294(1) on 6 May 2015. No notice of objection was received from Mr and Mrs Steenson. It necessarily follows that the transactions totalling $84,966, constituting repayment of the Company Debt, were insolvent transactions which must be repaid to the Company.
[15] The plaintiffs are therefore entitled to:
(a) under the first cause of action, recovery of the Current Account Debt, being $35,640; and
(b) under the third cause of action, reverse the repayment of the Company
Debt to Mr and Mrs Steenson, being $84,966.
Second cause of action – recovery of director’s salary
[16] The plaintiffs claim that Mr Steenson drew a salary from the Company which was not authorised and not recorded in the Company’s interests register. As the salary was paid to Mr Steenson when the Company was insolvent, the payments were detrimental to the Company and its creditors. Mr Steenson knew or ought to have known that the salary paid to him was not fair to the Company. The plaintiffs seek recovery of the salary under s 161(5) of the Act.
[17] Notwithstanding that the Company had become insolvent from, at the latest,
31 March 2008, Mr Steenson continued to trade the Company, and receive a salary, in the period FYE 2009 to FYE 2012. The salary payments are recorded in the Financial Statements as set out below:
(a) FYE 2009 - $12,150; (b) FYE 2010 - $35,885;
(c) FYE 2011 - $32,693; and
(d) FYE 2012 - $38,662.
Requirements for salary payments under the Act
[18] The requirements for the payment of directors’ salaries are set out in s 161(1), (2) and (4) of the Act. Importantly:
(a) the Board may authorise payment of remuneration to a director if satisfied that to do so is fair to the company;3
(b)the Board must ensure that, forthwith after authorising the payment, particulars of it are entered in the interests register;4
(c) directors who vote in favour of authorising a payment must sign a certificate stating that, in their opinion, the making of the payment is fair to the company, and the grounds for that opinion.5
[19] Under s 161(5) of the Act:
(a) if (a) and/or (c) above, are not complied with; or
(b)if reasonable grounds did not exist for the opinion set out in the certificate pursuant to s 161(4);
then the director who received the payment is personally liable to the company for the amount of the payment, except to the extent that the director proves that the payment was fair to the company at the time it was made.
Mr Steenson’s non-compliance with the Act
[20] The liquidators have found no evidence that the board of the Company authorised the payment of remuneration to Mr Steenson. Further, there is no evidence that Mr Steenson, as director, signed a certificate stating that, in his opinion, the payment of salaries was fair to the Company. I therefore find that Mr Steenson’s salary did not comply with the relevant statutory criteria in relation to the payment of salaries to a director. Because of the failure to comply with the statutory requirements, s 161(5) applies and Mr Steenson is personally liable to the Company for the salary he received.
[21] There is an exception to s 161(5): the director is personally liable “except to the extent to which [the director] proves that the payment…was fair to the company
at the time it was made”. This exception puts the burden of proof on
4 Section 161(2).
Mr Steenson. He has not adduced any evidence to establish that the payment was fair to the company at the time it was made.
Sixth cause of action: Breach of director’s duties
[22] The plaintiffs submit that Mr Steenson breached his duties as a director contained in ss 131(1), 135 and 136 of the Act. The plaintiffs seek compensation for the loss resulting from these alleged breaches. In particular, the plaintiffs submitted that:
(a) Mr Steenson failed to act in good faith and in what he believed was the best interests of the Company;6
(b)Mr Steenson failed to ensure that the business of the Company was not carried on in a manner that created a substantial risk of serious loss to its creditors, and in particular Inland Revenue;7 and
(c) Mr Steenson caused the Company to continue trading notwithstanding no reasonable grounds existed to believe the Company would be able to meet its obligations when required, in particular to Inland Revenue.8
[23] The plaintiffs attribute the losses suffered by the Company and its creditors to Mr Steenson taking a salary at a time when it was not authorised or fair to the Company and advancing funds to himself and Mrs Steenson under their current accounts. The plaintiffs say that Mr Steenson failed to properly discharge his responsibilities as a director of the Company and failed to protect the interests of the Company and its creditors. The plaintiffs assert that there were significant failures of corporate governance and that Mr Steenson fell well short of appropriate
compliance with the Act.
6 Section 131(1).
7 Section 135.
8 Section 136.
[24] The limitations of liability provided by incorporation of a company are conditional upon proper compliance with the Act.9 A director’s duty to the company under the Act extends to protecting the interests of creditors when the company approaches insolvency.10
Section 301
[25] The plaintiffs’ claims for various breaches of director ’s duties are brought under the procedural mechanism provided by s 301 of the Act, which provides that:
301 Power of Court to require persons to repay money or return property
(1) If, in the course of the liquidation of a company, it appears to the Court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the Court may, on the application of the liquidator or a creditor or shareholder,—
(a) Inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b) Order that person—
(i) To repay or restore the money or property or any part of it with interest at a rate the Court thinks just; or
(ii) To contribute such sum to the assets of the company by way of compensation as the Court thinks just; or
(c) Where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the Court thinks just to the creditor.
[26] The principal purpose of s 301 is to compensate those who have suffered loss as a result of illegitimate trading.11 Section 301 has been described by the Court of Appeal as being analogous to a derivative type of action and as “a procedural short cut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against”, inter alia, its directors.12 Section 301
does not, of itself, create any duties on directors but is, rather, a means of
9 Mason v Lewis [2006] 3 NZLR 225 (CA) at [83].
10 Sojourner v Robb [2008] NZCA 493, [2008] 1 NZLR 751 at [25].
11 Löwer v Traveller [2005] 3 NZLR 479 (CA) at [78].
12 Sojourner v Robb, above n 10, at [15] and [53].
enforcement against directors who fall within the categories articulated in s 301(1). Claims brought pursuant to s 301 involve a two-stage evaluation:13
(a) Has there been a breach of a duty owed by a director to the company?
(b)If so, to what extent should the director contribute to the losses of the company?
Did Mr Steenson breach s 131 of the Act?
[27] Section 131(1) of the Act relevantly provides:
131 Duty of directors to act in good faith and in best interests of company
(1) Subject to this section, 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.
[…]
[28] The duty imposed by s 131(1) is a subjective one. However, where it is inconceivable that a director with any appreciation of fiduciary responsibilities could cause a company to enter a transaction, a director will generally be regarded as breaching the duty regardless of the subjective belief held.14
[29] Once a company is of doubtful solvency, the duty is also owed to its creditors.15 In Sojourner v Robb Fogarty J, at first instance, made a number of observations regarding the need for directors to pay careful attention to the interests of creditors. 16 In particular, he observed that:17
In this context, the standard in s 131 is 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 believe to be right. The standard does not allow a director to discharge the
13 See Mason v Lewis, above n 9, at [52]: “We observe that it is important not to conflate the provisions of s 135 and s 301 of the Companies Act when determining the “liability” issue. The issues are twofold; should there be liability, then, what is the appropriate relief?”
14 Australian Growth Resources Corp Ltd (recs and mgrs apptd) v Van Reesema (1988) 13 ACLR
261 (SASC) at 270.
15 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) per Cooke J at 249.
16 Sojourner v Robb [2006] 3 NZLR 808 (HC).
17 At [102].
duty by acting with a belief that what he is doing is in the best interest of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company. … Creditors are persons to whom the company has ongoing obligations. The best interests of the company include the obligation to discharge those obligations before rewarding the shareholders.
[30] As I have found above, Mr Steenson failed to ensure that the Company met its tax obligations as they became due. By doing so, Mr Steenson allowed the Company to continue trading and incur further debts to creditors for a further five years after it had become insolvent. Mr Steenson was sole director at all the relevant times and therefore can be taken to have known of the Company’s increasing debt to Inland Revenue.
[31] The Company’s inability to pay its taxes was due, in part, to Mr Steenson’s use of the Company’s funds to pay himself a salary and also due to his causing the Company to repay the Company Debt and meet his personal expenses and those of Mrs Steenson, prior to liquidation. The relevant funds, which included amounts received by the Company on behalf of the Crown for GST, ought to have been paid to Inland Revenue shortly after receipt.
[32] I therefore accept the plaintiffs’ submission that Mr Steenson favoured his own interests over the best interests of the Company by advancing funds to himself and Mrs Steenson at a time when the Company was not in a financial position to be making loans, particularly without any security for repayment. He also favoured his own interests over those of the Company and its creditors by continuing to take a salary. As a result, the Company and its creditors suffered increasing losses until the Company eventually ceased trading. Such losses were causally linked to Mr Steenson’s failure to act in good faith and the best interests of the Company.
Did Mr Steenson breach s 135 of the Act?
[33] Section 135 of the Act provides:
135 Reckless trading
A director of a company must not—
(a) Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
(b) 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.
[34] In Mason v Lewis, the Court of Appeal set out the “essential pillars” of a claim under s 135as follows:18
• the duty which is imposed by s 135 is one owed by directors to the company (rather than to any particular creditors);
• the test is an objective one;
• it focuses not on a director’s belief, but rather on the manner in which a company’s business is carried on, and whether that modus operandi creates a substantial risk of serious loss; and
• what is required when the company enters troubled financial waters is what Ross … accurately described as a “sober assessment” by the directors, we would add of an ongoing character, as to the company’s likely future income and prospects.
[35] The duty contained in s 135 reflects a director’s fundamental duty to protect the interests of creditors when the company approaches insolvency. The Court of Appeal recognised this in Sojourner v Robb, where it was common ground that the obligations owed by the directors to the company extended to a requirement to take
into account the interests of creditors.19 The Court cited with approval a passage
from the judgment of Gummow J in Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (recs and mgrs apptd), where his Honour noted, amongst other things, that:20
Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and that interest cannot be overridden by the shareholders.
[36] The plaintiffs submitted that there are a number of similarities between this case and Boutique Tanneries Ltd (in liq) v Handley.21 There, the defendant ran a tannery and leather-goods retailer. The Court formed the view that the company had
been kept afloat for a number of years by paying all its creditors and suppliers, with
18 Mason v Lewis, above n 9, at [51].
19 Sojourner v Robb (CA), above n 10, at [25].
20 Re New World Alliance Pty Ltd; Sycotex Pty Ltd v Baseler (recs and mgrs apptd) (1994) 51 FCR
425 (FCA) at 444.
21 Boutique Tanneries Ltd (in liq) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008.
the exception of Inland Revenue.22 Like the Company in this case, Boutique Tanneries began missing GST and PAYE payments some time before it went into liquidation. There, Dobson J accepted the following evidence:23
Mr Weir’s evidence was that businesses with cash flow difficulties may be tempted to defer obligations to IRD because that Department does not provide services or materials required to continue trading. However, the reality is that the penalties imposed for late payment mean that deferral of obligations to the IRD for any significant period reflect very poor business judgement and, in Mr Weir’s experience, companies that have unpaid PAYE and GST for six months or more often have a fundamental issue as to whether they are able to pay their debts as they fall due.
[37] Mr Levin gives similar evidence in this case. As noted above, I accept his evidence that the Company was unable to pay its debts as they fell due, and was therefore insolvent, from 31 March 2008 at the latest. The only responsible course was to cease trading when the Company had overdue and increasing tax debts that it had no realistic prospect of paying. Mr Steenson, however, continued to trade the Company until October 2013. By continuing to trade whilst insolvent for over five years Mr Steenson created a substantial risk of serious loss to the Company’s creditors. Mr Steenson exacerbated that risk by repaying the Company Debt, taking drawings and continuing to take a salary during this period. 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.
[38] In the circumstances, I am satisfied that Mr Steenson’s decision to continue trading the Company while it was insolvent, and to remove cash assets that would otherwise have been available to meet its obligations, caused and/or allowed significant loss to the Company’s main creditor, Inland Revenue.
Did Mr Steenson breach s 136 of the Act?
[39] Section 136 of the Act provides:
136 Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that
22 At [12].
23 At [16]. See also Jeffreys v Morgenstern [2014] NZHC 308 at [112].
the company will be able to perform the obligation when it is required to do so.
[40] The Court of Appeal in Peace and Glory Society Ltd (in liq) v Samsa
identified the three key elements to a claim for a breach of s 136 as follows:24
(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.
[41] As regards the third limb, in the earlier case of 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 that obligation when required to do so.25
[42] Although s 136 imposes a separate and distinct obligation from s 135, in practice there is often an overlap between the two – particularly as a Company approaches insolvency.26
[43] In this case the Company defaulted on its tax obligations from 31 March
2008. The scale of Inland Revenue’s claim at the date of liquidation ($94,010.07) is indicative of the extent to which Mr Steenson allowed the Company to incur obligations that it was unable to perform.
[44] I accept the plaintiffs’ submission that, from the date on which the Company became insolvent, there were no reasonable grounds for Mr Steenson to believe that the Company would be able to meet its further tax liabilities as they were incurred from the continuation of the Company’s trading. There is no evidence that Mr Steenson prepared any forecasts or properly assessed the Company’s prospects
going forward. The Company had little or no prospects of returning to a sound
24 Peace and Glory Society Ltd (in liq) v Samsa [2009] NZCA 396, [2010] 2 NZLR 57 at [45].
25 Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [80].
26 See for example Peace and Glory Society, above n 25, at [44] and Re Condrens Parking Ltd (in rec and in liq); Jordan v O’Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008 at [69].
financial position as long as Mr Steenson continued to use the Company’s available cash funds, which ought to have been earmarked for payment to the Crown for GST, for his personal benefit and for the benefit of related companies. Further, any assessment by Mr Steenson ought to have taken into account the existing overdue debts to Inland Revenue, which objectively represented a significant obstacle to paying new debts as they arose. Despite this, Mr Steenson caused the Company to continue to trade, and thereby incur further obligations to its creditors.
[45] As sole director Mr Steenson must have been aware of the true financial position of the Company, including that GST was not being paid and there was therefore a large existing tax debt that the Company had not paid as it fell due. This represented a significant obstacle to paying ongoing tax obligations as they arose. Given the amount of the debt that was being incurred and accumulating with Inland Revenue, and the worsening financial position of the Company recorded in the Financial Statements, Mr Steenson could not have honestly believed that the Company would be able to satisfy its past debts while incurring new obligations.
[46] For these reasons, I accept the plaintiffs’ submission that Mr Steenson has also breached s 136 of the Act.
Quantum of relief to be granted under s 301
[47] A three-factor approach to relief under s 301 was articulated by the Court of
Appeal in Mason v Lewis:27
[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.
27 Mason v Lewis, above n 9, at [109], [110] and [118].
[48] In Löwer v Traveller, the Court of Appeal discussed the three factors as follows:28
(a) 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.29
(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.30
(c) As to the element of duration of the wrongful trading, the Court of Appeal found in that case that a duration of two years and 10 months was “lengthy”.31
[49] In Löwer v Traveller the Court of Appeal upheld the trial judge’s finding of
100 per cent 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.
[50] In Rowmata Holdings Ltd (In liq) v Hildred, the Court ordered the directors to pay 70 per cent of the company’s losses.32 However, in reaching this conclusion, the Court found that the global financial crisis (“GFC”) “was in part responsible for
the [directors’] predicament, and the GFC was not their fault”.33
28 Löwer v Traveller, above n 11.
29 At [79].
30 At [83].
31 At [86].
32 Rowmata Holdings Ltd (in liq) v Hildred [2013] NZHC 2435, (2013) 26 NZTC 21-039 at [150];
upheld on appeal: Hildred v Rowmata Holdings Ltd (in liq)[2015] NZCA 106.
[51] In Boutique Tanneries, the company had gone into liquidation owing
$178,400.34 Inland Revenue’s debt was $129,000, including $80,000 preferential debt and $48,000 in interest and penalties.35 The Court ultimately awarded $100,000 under s 301, reflecting the extent to which Mr Handley could be held responsible for the deterioration in the company’s fortunes between the “breach date” and the actual date of liquidation.36
[52] The plaintiffs submit that Mr Steenson’s actions were the cause of the Company’s losses as he had sole responsibility for the management of the Company as its director during the relevant period. If he had ceased to trade the Company shortly after it became insolvent the outstanding debts to creditors would have been substantially reduced. This did not occur, however. Rather, the debts were exacerbated by the accumulation of interest and penalties, and by Mr Steenson’s decision to remove cash from the Company for his personal benefit by drawing a salary and advancing funds to himself and Mrs Steenson.
[53] In the circumstances, I accept the plaintiffs’ submission that there is a causal link between Mr Steenson’s breaches of his director’s duties and the loss suffered by the Company.
[54] The plaintiffs invited the Court to look globally at Mr Steenson’s conduct. They submitted that Mr Steenson’s actions were at the upper end of the range of culpability. In particular, Mr Steenson knew or ought to have known of the increasing levels of overdue tax liability, signified by the large amounts of penalties and interest that the Company was accruing. The amount owing to Inland Revenue at liquidation was significant. Mr Steenson chose, however, to continue trading to allow himself to continue drawing remuneration and get repayment of the Company’s current account debt to Mr and Mrs Steenson. The plaintiffs say the loss suffered by the Company is directly attributable to Mr Steenson’s decisions to withdraw the cash that would have otherwise been available to meet the Company’s
liabilities, and to cause the Company to continue trading.
34 Boutique Tanneries above n 22, at [1].
35 At [43].
[55] In the circumstances outlined, I accept the plaintiffs’ submission that the creditors’ losses cannot be categorised as simply resulting from the impact of the commercial risks of trading, but are attributable to decisions by the director to deprive the Company of money that would have otherwise been available to allow the Company to meet its liabilities. As to the duration of the wrongful trading, the Company traded for approximately five years from the date of insolvency. The duration of the wrongful trading was therefore lengthy.
[56] The plaintiffs submitted that, in all the circumstances, the Court should direct Mr Steenson to contribute a sum equivalent to the entire amount owed by the Company to its external creditors.
[57] In the passage from Mason v Lewis cited above, the Court of Appeal noted that the “standard approach” (to reckless trading cases) is to assess compensation by reference to the deterioration in the Company’s financial position between the date inadequate corporate governance became evident and the date of the liquidation. I accept the plaintiffs’ submission that, in this case, the deterioration is reflected in the amount owed to creditors in the liquidation – being the sum of the Company’s financial decline from a position of apparent solvency prior to the “breach date” (31
March 2008).
[58] Creditor claims total $96,719.25, together with $31,508 owed to the Steenson Family Trust (which has not filed a claim in the liquidation, but may yet do so). The plaintiffs accordingly seek an award of this amount, being $128,227.25, together with interest from the date of liquidation. I am satisfied that such an award is appropriate in all the circumstances of this case.
Result
[59] I order that:
(a) Mr and Mrs Steenson pay the Company the sum of $35,640 in respect of the first cause of action (together with interest from the date of demand, being 6 October 2014);
(b)Mr Steenson pay the Company $119,390 in respect of the second cause of action (together with interest from the date of liquidation);
(c) Mr and Mrs Steenson pay the Company the sum of $84,966 in respect of the third cause of action (together with interest from the date of liquidation); and
(d)Mr Steenson pay the Company the sum of $128,227.25 in respect of the sixth cause of action (together with interest from the date of liquidation).
[60] I further order that Mr and Mrs Steenson pay the plaintiffs’ scale costs on a
2B basis, together with reasonable disbursements (as fixed by the Registrar).
Katz J
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