CDC Services Limited (in liquidation) v Clark
[2023] NZHC 2392
•31 August 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-374
[2023] NZHC 2392
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of CDC Services Limited (in liquidation)
BETWEEN
CDC SERVICES LIMITED (IN LIQUIDATION)
First Plaintiff
KEATON PRONK and IAIN McLENNAN,
as liquidators of CDC Services Limited (in liquidation)
Second Plaintiffs
AND
DAVID WAYNE CLARK
Defendant
Hearing: 14 August 2023 Appearances:
A W Johnson for Plaintiffs
B J Norling and A Cherkashina for Defendant
Judgment:
31 August 2023
JUDGMENT OF ASSOCIATE JUDGE LESTER
(summary judgment application)
This judgment was delivered by me on 31 August 2023 at 2:30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
……
CDC SERVICES LIMITED (IN LIQUIDATION) v CLARK [2023] NZHC 2392 [31 August 2023]
[1] CDC Services Limited (in liq) (CDC) was incorporated in mid-2016 and was originally called Clark Global Limited after its sole director and shareholder, David Clark, the defendant. While incorporated in 2016, it seems common ground the company did not commence trading until February 2020 – Mr Clark giving that date at the hearing with which counsel for CDC did not take issue. The company failed within a little over 20 months. It was liquidated by Mr Clark on 8 November 2021. The liquidator appointed by Mr Clark was replaced by Messrs Pronk and McLennan, the second plaintiffs, on 17 November 2021.
[2]Messrs Pronk and McLennan have accepted creditors’ claims in excess of
$1,000,000.00 from customers of CDC, albeit those claims are disputed by Mr Clark. Also accepted is a claim by the Inland Revenue Department (IRD) of $99,617.01 including GST $73,432.29 of which $58,515.17 was owing as at 31 March 2021 with unpaid amounts owing going back to 29 February 2020 and employer activities (that is PAYE et cetera) of $13,044.41. Mr Clark does not dispute CDC owed money to the IRD but says: “I am yet to review the quantum claimed”. The accounts as at 31 March 2021, signed by Mr Clark, include GST payable of $60,959 as a current liability, which is close to the figure claimed by the IRD of $58,515.17, as outstanding as at 31 March 2021.
[3] The liquidators claim that Mr Clark’s current account requires substantial adjustment, that he breached his director’s duties and failed to keep adequate company records. Summary judgment is sought in respect of the claims relating to Mr Clark’s current account and for liability only in respect of the failure to keep company records.
The nature of CDC’s business
[4] CDC’s website listed its business as: “Custom build luxury 4x4 Motorhomes & Expedition vehicles built for all adventurers and off-road explorers”. They advertised their services for 4x4 motor homes and expedition vehicles as including “Design, development & consultancy, Base Vehicle procurement & management, Upgrades & renovations, Emergency works, Global Vehicle Shipping consultancy & management and Parts”. The company also claimed: “20 years of experience in the building and fabrication industry”.
[5] Trucks either sourced by the company or supplied by customers would be converted to motorhomes or expedition vehicles – the later could be built on Unimog trucks.
[6] The liquidators identified a number of clients of CDC and who paid substantial amounts to CDC for work the liquidators say was never done, or never completed, or completed poorly. For example, the liquidators refer to the following claims by clients:
(a)Client [R] paid CDC $242,971.89. The admitted claim is $103,369.00;
(b)Client [N] paid CDC $237,658.00, including the purchase price of the vehicle of $66,480.00. The admitted claim $162,658.00;
(c)Client [H] paid CDC an initial payment in October 2020 of
$277,913.00. The admitted claim is $257,213.00.
[7] The liquidators say CDC does not have records to support the work done on the above clients’ vehicles, the cost of labour or materials used on these builds or for clients, nor any details of certifications undertaken in relation to the modification of the vehicles. I will return to the records kept, or on the liquidators case not kept, when addressing that claim below.
Company financial records
[8] Accounts for the years ending March 2020 and March 2021 were not completed until 20 September 2021, being signed by Mr Clark on 6 October 2021, shortly before liquidation. Those accounts show that CDD was insolvent in terms of the definition in s 4 of the Companies Act 1993 (the Act) as in both years, liabilities exceeded assets, albeit DCD’s liabilities were, to a significant part, made up by Mr Clark’s current account. In each trading year CDC made a loss. In the year ending 31 March 2020, the loss was very small, perhaps due to on Mr Clark’s case, CDC only commencing trading in February 2020.
Summary judgment principles
[9] These are well known but I go into them in some detail here as Mr Norling, counsel for Mr Clark, throughout his oral submissions emphasised the burden on the liquidators and what he considered were the practical difficulties facing Mr Clark dealing with CDC’s claim. This is despite, on Mr Clark’s case, all the records of CDC being made available to the liquidators and a request by Mr Norling after the proceedings were issued for further information from the liquidators to assist Mr Clark went unanswered.
[10] Mr Norling emphasised the plaintiffs must prove a negative. They must demonstrate Mr Clark has no defence to the claims, that is, there is no real question to be tried.1
[11] The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated.2 “The Court will not normally resolve material conflicts of evidence or assess the creditability of opponents but it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponents or is inherently improbable.3”
[12] In the end, the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.4
[13] Against that robustness, it is equally important that a defendant should not be shut out of a genuine defence.5
[14] There has to be a balance between the right of a defendant to have his or her day in court and to have the proper defences explored and an appropriately robust and
1 Pemberton v Chappell [1987] 1 NZLR 1 (CA).
2 MacLean v Stewart (1997) 11 PRNZ 66 (CA).
3 Eng Mee Yong v Letchunanan [1980] AC 331 at 341.
4 Bilbie Dymock Corp Ltd v Patel & Bajaj (1987) 1 PRNZ 84 (CA).
5 Doyles Trading Co Ltd v West End Services Ltd [1989] 1 NZLR 38 (CA).
realistic approach called for by the particular facts of the case.6 Excessive robustness must not result in injustice.7
[15] The plaintiff must comply with the requisite formality and put forward sufficient evidence for the Court to be confident there is no defence. It is then for the defendant to provide some evidential foundation for a bona fide defence otherwise the plaintiff’s evidence ought to be accepted unless it is patently wrong.8
[16] Common-sense, flexibility and justice are required. The defendant should identify any arguable defence with a reasonable level of detail.9
[17]The above summary is taken largely from Sim’s Court Practice.10
Evidence and onus
[18] In part, the competing themes of the parties’ submissions, namely Mr Norling’s focus on evidentiary gaps or areas where Mr Clark required access to further information to properly answer the claims, meant there were areas which were unsuitable for summary judgment, whereas Mr Johnson, counsel for the plaintiffs, relying on Mr Clark’s own evidence submits that Mr Clark was:
… the Company’s sole director, project manager, office manager, production manager, new business development manager, and head builder until the Company made its first full-time hire in January 2021.
Mr Johnson submits this meant Mr Clark must have full first-hand knowledge of all the issues and he cannot now throw dust in the air by saying he cannot provide an explanation without the relevant documents.
[19] As is often the case, the position to be adopted lies somewhere between the two positions adopted by counsel. When the liquidators have relied on their own
6 Australian Guarantee Corporation (NZ) Ltd v McBeth [1992] 3 NZLR 54 (CA).
7 Lindale Financial Services v Colonial Mutual Life Assurance Society Ltd (1998) 12 PRNZ 320 (CA).
8 Doyles Trading Co Ltd v West End Services Ltd, above n 5 and Australian Guarantee Corporation (NZ) Ltd v McBeth, above n 6.
9 Haines v Carter [2001] 2 NZLR 167 (CA).
10 Sim’s Court Practice (online ed, Lexis Nexis) at [HCR12.1].
analysis of material to arrive at amounts they say are due by Mr Clark, he is entitled to review and challenge how those calculations were carried out and what they were based on, when such are at the heart of some aspects of CDC’s claim in respect of Mr Clark’s current account. Conversely, when the liquidators rely on records produced by CDC, that is by Mr Clark, the liquidators are entitled to say it is for Mr Clark to explain why that material is not reliable or, if the material required an explanation, that it had to come from Mr Clark. Even if Mr Clark were to say he could not provide a full explanation without having access to the documents, he could nonetheless provide a basic outline of his position or a general explanation of his position. As I will address below, in many cases Mr Clark’s evidence does not reach even that level.
The current account adjustment claim
[20] The first cause of action pleaded against Mr Clark is headed “Defendant’s Current Account”. In six short paragraphs the plaintiffs set out claimed current account adjustments that would leave Mr Clark’s current account in arrears to the sum of $370,022. This cause of action is in fact five separate claims of different types.
[21] Mr Norling submitted, in effect, that adjustment to the current account is not a recognised cause of action. That is true. However, in some cases the nature of the claim and its quantum is abundantly clear, and in other cases, more opaque.
[22] Each of the five claims said to require an adjustment to the current account must be considered separately.
(a)Claim 1: Retention of company funds
[23] The liquidators claim that Mr Clark or his partner received company funds totalling $50,345.20 (made up of NZD$30,000 cash and two lots of AUD$9,500) deposited to Mr Clark’s bank account in Australia or to his partner’s bank account. These payments came from Customer [S].
[24] As to the NZ$30,000 in cash, Mr Clark does not deny receiving the money. He provides a reasonably full explanation of the circumstances in which he received this
cash, saying that Customer [S] insisted on making a cash payment. Mr Clark describes being uncomfortable in dealing with cash, that he felt he had no choice but to take the cash, that he was pressured to do so and he describes the cash being counted by Customer [S]’s wife in Mr Clark’s presence.
[25] Despite this detailed evidence as to Mr Clark’s dealings with Customer [S], Mr Clark says nothing of what he did with the cash.
[26] The liquidators refer to a document headed “Customer [S]” and below that “Hino Build”. This is a finance summary for the job for Customer [S]. Mr Norling submitted the liquidators had not identified the source of this document and it was wrong to assume it was CDC’s document. It was for Mr Clark to say it was not a document prepared by him and that he had not seen it before. Mr Clark does not deny the document was prepared by him.
[27] On its face, the document appears to be CDC’s document recording the budget and payments made for the job for Customer [S], with records of when the deposit was paid, progress payments made and a narration as to what was completed at the time of the first progress payment.
[28] The liquidators refer to two bank statements from Customer [S]’s wife for a bank account in Australia. The two bank statements show two payments of AUD$9,500.00; the first to David Clark on 1 June 2021 and the second to Mr Clark’s partner on 12 July 2021.
[29] Back to the finance summary. The narrations must have been generated by Mr Clark given his description of his role. The narration for the $30,000.00 payment is; “Cash given in CG offices/include GST, client request/not indicative of build progression”. The narration for the two AUD$9,500.00 payments, albeit not converted into NZ dollars, is: “Australian – repayment of loan – client request/not indicative of build progression”. Why there is the narration “repayment of loan” is not explained by Mr Clark.
[30] Mr Clark’s evidence in respect of this issue is at paragraph 4.11 of his affidavit affirmed 15 June 2023:
At paragraph 20.8 of Keaton’s Affidavit, he alleges that I directed Mark Sellars (Mark) to pay $55,078.22 into my personal bank account so that Mark met his liability to the Company. I deny this allegation and have requested evidence from the Liquidators to support this allegation which, to date, has not been received. I explain my dealings with Mark further in the Creditors’ Claim section of this affidavit.
[31] As Mr Johnson submitted, this evidence appears to be carefully drafted, being targeted at the idea that there was a direction that all of the money be paid to Mr Clark’s personal bank account. Given Mr Clark’s evidence explains in detail the circumstances where he received cash of $30,000.00 his silence in respect of what happened to the $30,000.00 and the money paid to his account and his partner’s account is telling.
[32] Where a director or shareholder retains company property or receives company funds, an adjustment to their current account to reflect the value of the benefit they have received is appropriate. Mr Clark does not claim he did not understand the nature of this claim.
Outcome
[33]This aspect of the plaintiffs’ first cause of action succeeds.
[34] I mention here that Mr Norling referred to a document headed David Clark’s drawing transactions for the period 1 April 2021 to 8 November 2021. There is an entry for 15 July 2021 called: “Manual Journal Payment for Unimog went to personal account – Payment for Unir [rest of the word removed] #2604 $20,000.00”. Mr Norling suggested that this could represent Mr Clark debiting his current account for the Australian funds. Mr Norling accepted he had only just recognised the dates were approximately similar.
[35] The two payments of AUD$9,500.00 would be approximately $20,000.00 but the narrations in the list of drawings are wrong as they refer to a “Unimog Truck” whereas the Build Sheet for Customer [S] is for a Hino Truck.
[36] I have no doubt that Mr Clark, had he included the Australian payments in his current accounts, would have said so.
(b)Claim 2: Unimog in the United States of America (USA)
[37] CDC’s accounts record it owning a Unimog truck which at one point had been in New Zealand but was subsequently shipped to the USA by Mr Clark. Mr Clark introduced that vehicle to CDC at a value of $52,500.00 for which he received a credit in his current account. The Unimog remains in the USA. Mr Clark refuses to disclose any details of its whereabouts. No company records exist as to whereabouts of the Unimog in the USA.
[38] Mr Clark does not give any evidence in his affidavit in relation to the USA Unimog. The liquidators say that Mr Clark, having effectively reversed his introduction of the Unimog to CDC by retaining it, or at least retaining control over it, is not entitled to maintain the credit he claims for introducing it to CDC.
[39] This claim could have been pleaded with Mr Clark converting the property of CDC but again, Mr Clark does not say he is not aware of what this claim involves.
[40] Mr Norling was handicapped in attempting to mount a defence in respect of the USA Unimog, given his client’s failure to co-operate with the liquidators over the whereabouts of the USA Unimog, and Mr Clark’s silence in his affidavit on this issue.
[41] Mr Clark relied on evidence from a Mr Botterill who is a liquidator practising in Auckland.11 Mr Norling relied on Mr Botterill’s opinion that failing evidence that Mr Clark has disposed of the USA Unimog, the proposed adjustment was not appropriate. Mr Botterill also suggested it was unclear what steps the liquidators have taken to verify the vehicle is located in the USA and that it is unable to be sold by them within the liquidation.
11 Mr Johnson disputed Mr Botterill’s qualifications to give expert evidence. Given the tight timeframes to produce evidence for a summary judgment and given issues of qualifications are not easily susceptible to determination at summary judgment and/or relate to weight, I simply record Mr Johnson’s objection but I did not consider Mr Botterill’s evidence inadmissible.
[42] Mr Botterill’s views on this issue do not assist. The only person who knows the whereabouts of the Unimog in the USA or what has become of it, is Mr Clark. What he has done with it is completely unknown. What is known is that Mr Clark had control of it and it has now essentially become his asset. Having made the decision not to co-operate in returning a company asset he introduced, he cannot retain the current account credit he claimed for this Unimog. Mr Clark has elected to breach his obligation to answer the liquidators’ question about this asset, he cannot complain of the consequences of his own actions.
Outcome
[43]This aspect of the liquidators’ claim to current account adjustment is granted.
(c)Claim 3: Opening stock introduced
[44]Mr Clark’s current account includes the following credits:
(a) 31 December 2018 - $23,301.00
(b) 5 February 2019 - $7,158.47.00
(c) 31 March 2019 - $10,723.85.
[45] For each of the above amounts, the narration is “Purchase for stock units”. The liquidators say they have no information as to what was introduced by these transactions. Other than the manual journey entry, the liquidators say there is no evidence to support the existence of the assets alleged to be introduced. In effect, the liquidators say these were not genuine transactions and should be disallowed.
[46]Mr Clark’s evidence on this issue is as follows:
At paragraph 20.6 of Keaton’s Affidavit, he alleges there is no information regarding $41,183.32 of stock units introduced into the Company. I deny this allegation and have requested details of steps the Liquidators took to conclude this. To date, I have not received that information and not in a position to provide a detailed response.
[47] This is an area where Mr Clark’s evidence is unsatisfactory. Just what are “stock units”? Mr Clark offers no explanation as to what was introduced. Nor is it clear why CDC was acquiring “stock units” in December 2018, February 2019 and
March 2019, when on Mr Clark’s evidence, CDC did not start trading until February 2020. These are all matters within Mr Clark’s knowledge. Mr Clark is obliged to assist the liquidators in their role. It is disingenuous for Mr Clark to ask the liquidators to provide details of the steps they took to conclude the “stock units” were not introduced when such matters are within Mr Clark’s knowledge.
[48] The liquidators’ evidence is that they have found no information whatsoever setting out the whereabouts or details of the stock units or how these were utilised in the business.
[49] While Mr Clark’s evidence is, as I have said, unsatisfactory, the only way this adjustment could be allowed in full is that if the liquidators were alleging the transactions were fraudulent, that is, the credits were false and no “stock units” were introduced by Mr Clark. That is the not the liquidators’ allegation and of course, if that is what the liquidators were to allege, then fraud would have to be pleaded expressly.
Outcome
[50] This aspect of the current account adjustment is declined – what amounts to an impleaded allegation of fraud is not suitable for summary judgment.
(d)Claim 4: Unaccounted for stock
[51] This claim relates to stock purchased while CDC was trading. The liquidators have identified that CDC purchased stock to the value of $1,538,095.41. Disregarding small value items, but taking into account items fitted to vehicles and stock on hand at liquidation, the liquidators say there is stock to the value of $229,021.70 unaccounted for. The liquidators produce the schedule of items they say make up the unaccounted for stock.
[52] Mr Johnson, counsel for the liquidators, noted in reply that Mr Clark had reviewed the schedule as Mr Clark referred to what he considered was the incorrect inclusion of labour items and/or duplicate items.
[53] Mr Johnson noted that Mr Clark in his reply affidavit does not deny that he retains stock. Mr Clark denies that the figures produced by the liquidators are accurate.
[54] It will be recalled that the liquidators complain that they do not have Build Sheets/Build Records for at least some of the builds undertaken by CDC. The liquidators therefore, on their own case, have an incomplete set of records from which to attempt to reconstruct stock and the use of stock.
[55] This is one of the largest adjustments claimed which, after issues raised by Mr Clark and accepted by the liquidators as arguable, still exceeds $200,000.00.
[56] The liquidators’ case amounts to saying the only explanation for the missing stock is that it was retained by Mr Clark at liquidation or he sold or used it for his personal benefit prior to liquidation of CDC.
[57] Mr Clark denies there is unaccounted for stock, but he does not provide any further details. He says the liquidators’ calculations do not factor in stock that was left at the workshop at liquidation. He says he has requested clarification of how the liquidators’ figures were calculated.
[58] While the liquidators’ spreadsheet identifying the unaccounted for stock is produced, how that was produced and the documents it was produced from have not been made available to Mr Clark.
[59] I do not consider this claim suitable for summary judgment. I would have to be satisfied that the only explanation for the unaccounted stock is that it was taken by Mr Clark or used for his benefit. That Mr Clark has not had a chance to review how the liquidators’ spreadsheet was prepared, stands against that proposition, as does the liquidators’ own criticisms of CDC’s records.
Outcome
[60]Summary judgment on this part of the current account adjustment claim is
declined.
(e)Claim 5: The New Zealand Unimog – GBLMOG
[61] This Unimog registered GBLMOG was introduced, that is, sold by Mr Clark to CDC on 15 February 2020 for $262,000.00 (no GST content) with that sum recorded as a credit in Mr Clark’s current account.
[62] Mr Clark had purchased GBLMOG for $35,000.00 and claims to have converted it into a motorhome/expedition vehicle.
[63] Mr Clark, in a document he prepared for this proceeding called “GBLMOG Value – Introduced Breakdown”, provides what might be called a ‘value added’ summary. It lists work undertaken on the base vehicle, engine, chassis and the building of the motorhome body, together with engineering work. All of the sums in Mr Clark’s breakdown are round sums. Mr Clark has included $20,000.00 for “Design and Procurement”. Mr Clark claims to have expended $230,035.00 on GBLMOG which he sold to his company for $262,000.00.
[64] The liquidators’ sold GBLMOG after a long marketing programme through Turners’ Auctions for $68,677.78 (including GST). GBLMOG, at the time of sale, was not capable of being road registered. There is a robust critique of GBLMOG, albeit as Mr Norling points out, from a tenderer for the vehicle who had an interest in talking the vehicle down. However, there is a VTNZ inspection report called a “Vehicle Condition Assessment” which cannot be said to be partisan which, while it lists a number of items which at first glance appear to be minor, includes the need for a LT400 Certificate. This is a New Zealand Transport Agency Certificate that a heavy vehicle specialist certifier issues upon completion of repair and modification work. GBLMOG was not capable of being road registered without such a certificate.
[65] Other than Mr Clark’s list of expenditure in relation to the improvements he said he undertook to the vehicle, there is nothing to justify the difference between the purchase price of $35,000.00 and the sale price to the company of $262,000.00.
[66] This is a claim by the liquidators that Mr Clark introduced the vehicle to CDC on 15 February 2020 at an inflated price. Why CDC needed to buy GBLMOG from
Mr Clark is unexplained by him. Mr Clark does not say that GBLMOG was offered for sale by CDC, that is, CDC was able to make a profit on GBLMOG.
[67] The liquidators seek an adjustment to Mr Clark’s current account representing the difference between the price at which GBLMOG was introduced and the price for which it was sold.
[68] Mr Johnson submits that Turners Auctions, who sold GBLMOG, are experienced in selling Unimogs and undertook a nine-month marketing campaign and that this was not a fire sale by the liquidators. Mr Norling submits that details of the marketing campaign have not been produced. While Mr Norling did not put it this way, his submission was the onus on the liquidators was similar to that on a mortgagee when seeking judgment against a debtor following the sale of a secured property; such a plaintiff has an obligation to provide at least basic details of the marketing programme and usually a valuation.
[69] Under s 298 of the Act, if a company has acquired property from a director within three years of the commencement of the liquidation, then the liquidator may recover from that director any amount by which the value of the consideration given to acquire the property exceeded the value of the property. Mr Norling included s 298 in his bundle of authorities. The statement of claim does not refer to s 298 of the Act.
[70] Mr Clark rejects that GBLMOG was introduced at an over-value, he asserts GBLMOG was sold at an under-value.
[71] Shortly before liquidation, Mr Clark purported to acquire GBLMOG from CDC at a value of $125,000.00 by way of a credit against the amount due to him under his current account. GBLMOG was recovered from Mr Clark following the liquidators issuing voidable transaction proceedings. It might be thought it would be hard for Mr Clark to distance himself from the $125,000.00 value he, as a director, put on a company asset he was acquiring. Mr Clark does not offer any explanation as to why he considered it was appropriate for him to acquire GBLMOG at $125,000.00 when he had 20 months earlier sold the same vehicle to CDC at $262,000.00.
[72] Mr Norling robustly rejected the proposition that the liquidators or the Court could treat Mr Clark’s $125,000.00 figure as being an assessment of value. It is hard to see what else it can be, given Mr Clark’s professed expertise and experience in the area, as noted on the website, referred to at [4] above.
[73] At the end of the day, I am not satisfied this is a claim suitable for summary judgment. I hold that view for the following reasons:
(1)The accuracy of the starting point to calculate the adjustment, that is, what GBLMOG was worth when it was introduced, is unclear. Money spent on a vehicle does not necessarily equate to an effect on its value either negatively or positively. There is evidence that the motorhome addition to the truck was of value as there is reference during the sale process by Turners Auction to one option being to remove it and fit it to another truck. Just what GBLMOG was actually worth when transferred is not a summary judgment issue.
(2)Mr Clark says he has not had details of the marketing programme by Turners Auction and thus no opportunity to critique that programme.
(3)The liquidators did not seek to adopt Mr Clark’s value of $125,000 for the purpose of its claim and made no application to do so during the hearing. In those circumstances, I do not consider it appropriate to approach GBLMOG’s value either at the time it was sold to CDC by Mr Clark or at liquidation on the basis of Mr Clark’s figure.
(4)While it is clear that the basis of the claim was a sale at an under-value, the claim was not pleaded as a claim under s 298 of the Act. Had this been the only factor it probably would not have been determinative but it is a factor that stands against the application.
Outcome
[74] Accordingly, summary judgment for this aspect of the plaintiffs’ first cause of action is declined.
Summary
[75] Accordingly, the plaintiffs’ application for summary judgment succeeds as to claim 1, $52,500.00, and claim 2 for the US Unimog and $50,345.20 for the cash and bank deposit received by Mr Clark or as directed by Mr Clark and not accounted for by him.
[76] The application for summary judgment on the remaining aspects of the plaintiffs’ first cause of action (that is, claims 3, 4 and 5) are dismissed.
Were Mr Clark’s drawings in reality a salary?
[77] The liquidators in calculating the adjustment claimed in their first cause of action had to arrive at a correct starting point for Mr Clark’s current account. The liquidators approach to that issue was subject to review by Mr Botterill. Mr Botterill’s calculation showed an opening credit balance of $336,161.00. Mr Botterill then in his evidence, debits against that credit balance the following sums: $77,881.03 from a ledger maintained by the company (that is by Mr Clark) called “Drawings account” and a further sum of $44,861.58 being a further ledger kept by the company, again by Mr Clark, being “Drawings (no. 2 account)”. That arrived at what appeared to be a common starting position of $213,418.39.
[78] However, notwithstanding Mr Botterill’s evidence for Mr Clark being that the above two deductions from Mr Clark’s credit account were acceptable, as they were sourced from the records of CDC, Mr Norling sought to suggest they could be characterised as payments of salary, or at least that Mr Clark might have a claim on a quantum meruit type basis relying on Shadbolt v Creative Concrete and Landscaping Limited.12
[79] There are a number of difficulties with Mr Norling’s proposition. Firstly, Mr Clark did not raise this matter with his accountant. Just why amounts received by Mr Clark prior to 31 March 2021 were drawings and thereafter should be salary, or characterised differently, was not explained. Nor is Mr Norling’s submission the basis
12 Shadbolt v Creative Concrete and Landscaping Limited HC Hamilton CIV-2007-419-1476, 16 May 2008.
upon which Mr Clark instructed his expert and certainly not the view that Mr Botterill reached from CDC’s records. There are no records in evidence that amounts received by Mr Clark were intended to be salary. I understood Mr Norling to accept it was not open to Mr Clark to reclassify amounts received prior to 31 March 2021 which Mr Clark accepted were drawings on his signing the CDC accounts.
[80] As to the idea that Mr Clark might be able to raise a claim against CDC on a quantum meruit basis for salary for amounts post 31 March 2021, that runs into the difficulty of s 310 of the Act which prevents a related person, that is, a person in Mr Clark’s position claiming the benefit of a set-off unless that person proves they did not have reason to suspect that CDC was unable to pay its debts as they fell due. Given it seems Mr Clark was aware that CDC had unpaid GST arrears from 31 March 2021, it would appear unlikely he could meet this requirement. In any event, given this issue was only raised in an oblique way by Mr Clark in his evidence and is inconsistent with his own expert’s evidence, I do not consider it founds an arguable set-off in respect of the adjustments I have found are warranted. The alleged set-off is unquantified and again, has not been fully developed.
Claim for inadequate records – s 194 Companies Act 1993
[81] Section 300 of the Act applies if a company is in liquidation and is unable to pay its debts. Only a liquidator can bring an application under s 300 of the Act. If it is found that a company in liquidation which cannot pay its debts has failed to keep accounting records in accordance with the requirements of s 194 of the Act, or prepare financial statements pursuant to any enactment, the Court may, if it considers such a failure has contributed to the company’s failure or has adversely affected the course of the liquidation, order that any of the company’s directors are personally liable for all or any part of the company’s debts.13
[82] Here the liquidators claim Mr Clark breached the record keeping requirements contained in s 194 of the Act. Section 194 provides:
194 Accounting records must be kept
13 Grant and Khov (as liquidators of K-pack International Ltd (in liq)) v Gifford [2018] NZHC 26 at [4].
(1)The board of a company must ensure that there are kept at all times accounting records that—
(a)correctly record the transactions of the company; and
(b)will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
(c)will enable the financial statements or group financial statements of the company to be readily and properly audited (if those statements are required to be audited).
(1A) For the purpose of subsection (1), the transactions of the company include any transaction that constitutes an act of the type described in section 105C(3) of the Crimes Act 1961.
(2)The board of a company must establish and maintain a satisfactory system of control of its accounting records.
(3)The accounting records must be kept—
(a)in written form in English; or
(b)in a form or manner in which they are easily accessible and convertible into written form in English.
(4)If the board of a company fails to comply with the requirements of this section, every director of the company commits an offence and is liable on conviction to the penalty set out in section 374(3).
[83] Section 189 of the Act confirms the company must keep company records that include all the accounting records defined under s 194.
[84] The liquidators claim Mr Clark failed to keep adequate accounting records on behalf of CDC and that the failure contributed to CDC’s inability to pay all its debts, resulted in substantial uncertainty as to the assets and liabilities of the company and substantially impeded the orderly liquidation.
[85] The liquidators seek judgment for liability only in respect of this cause of action.
[86] It is clear that the obligations upon company directors are ongoing and not static.
[87] In Maloc Construction Ltd (in liq) v Chadwick, the High Court set out the standards to which accounting records were to be held under the Companies Act 1955.
It remains a key authority under the 1993 Act. Tompkins J relevantly held that:14
(a)records must be such that they will, at any time, enable the financial position to be determined with reasonable accuracy, without requiring explanation or reconstruction;
(b)the records must “speak for themselves” and basic account records such as “cheque books, deposit books, bank statements, invoices and the like” will not comply with the statutory requirements; and
(c)the meaning of “kept” is not confined to the retention and storage of such records but imports an obligation to create records that comply with statute.
[88] I have already referred to the fact that CDC’s financial records for the years ending March 2020 and March 2021 were not signed by Mr Clark until 6 October 2021. The accounts record they were completed by the accountant on 20 September 2021. The records of CDC, along with information provided by Mr Clark, was sufficient to allow the accountant engaged by CDC to prepare those accounts. Again, the accounts record that CDC was insolvent and so at least in that regard the accounts were not “manipulated” to distort that picture.
[89] There is no evidence of what enquiries were made by the liquidators of CDC’s accountants.
[90] The liquidators consider a large amount of company information has not been provided to them. There is a dispute of fact over what happened to CDC records Mr Clark says were in a filing cabinet in CDC’s premises at the time of liquidation. Mr Clark says the filing cabinet with the CDC records was picked up by a removal company engaged by the liquidators. The liquidators deny that is the case and say the
14 Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794.
filing cabinet was empty but that, even taking into account the records Mr Clark says were in the cabinet, there are further missing records.
[91]That is a factual dispute that cannot be resolved by me.
[92] Mr Clark says, at least in the early days of his operation, he was paper driven, albeit later with the assistance of his accountant, he started to use the Xero Accounting Software.
What do the liquidators say is missing?
[93] The liquidators say that valuations of assets introduced by a shareholder and director would normally be on hand to support the value of assets.
[94] The liquidators say costing records are considered conventional business management records as trading successfully relies on cost control.
[95]The liquidators also say the following are missing:
(a)invoices in relation to materials supplied to customers other than the six remaining customers who have filed creditors’ claims would normally be available so as to establish all sales of the company;
(b)supply invoices;
(c)a detailed asset and stock register along with proper stocktaking records; and
(d)records in respect of the USA Unimog.
[96] Mr Clark, in his evidence says the filing cabinet contained the following: “Employee contracts, WIP documents, employee timesheets, hardcopy quotes, business receipts and other financial documents of the Company.”
[97] Mr Norling submitted there was no expert evidence as to the type of records that a business of this type should hold, nor expert evidence as to what “… generally accepted accounting practice…” (s 194(1)(b)) was required at a general level.
The expression ‘accounting records’ is not defined in the Act. This is no doubt deliberate. Instead of defining accounting records, the scheme of the section is to require the company to keep whatever records in whatever form as may be necessary to achieve the objectives specified in … subs (1).15
[98] The accounting records that must be kept under s 194 of the Act must contain information that is real, that is, reasonably accurate. Satisfying s 194 is not a form filling exercise – the records must reflect the company’s true financial position. When the company does not have records that demonstrate there is a reasonable basis for the values contained in the accounts, then the accounts may not reflect the company’s true position.
[99] What will be required in a particular case will depend on the nature of the company’s business, its assets and how they were acquired. There can be greater confidence in the value of an item purchased new or in an arms-length transaction than values ascribed in closed transactions with directors. Newly purchased items may well be subject to depreciation in the company’s accounts and those depreciated values may or may not reflect what an item can be realised for in the open market. But the more dependent a company’s solvency is on the value of individual items, then the more a director must be sure the values are accurate.
Records in relation to Unimog GBMOLG
[100] Here, the total assets of CDC were recorded in the accounts as $561,044.00 of which the GBMOLG made up $202,613.00 (its depreciated value). There are no records justifying the value paid by CDC to Mr Clark. The difficulties faced by the liquidators in their first cause of action in respect of this issue in part arise from the absence of proper records in respect of the value of GBLMOG when it was introduced.
15 Maloc Construction (in liq) v Chadwick, above n 14.
[101] It is in this context that I can take into account the value ascribed to GBLMOG by Mr Clark, that is $125,000.00. Nothing in CDC’s records justifies how GBLMOG’s value went from $262,000.00 to $125,000.00 in the space of 20 months.
[102] I am satisfied the records Mr Clark had CDC keep did not comply with s 194 of the Act as they did not record the true financial position of CDC. That is because an asset which represented over one-third of the value of CDC’s assets (at its depreciated value) was in the accounts at a value that Mr Clark had no way of justifying.
[103] In short, the accounts did no more than reflect a form filling exercise of adopting values that cannot now be supported other than by Mr Clark’s post liquidation reconstruction of amounts spent on GBLMOG. This does not mean that every company must be constantly valuing all its assets. As I have said, much depends on the circumstances. Here, CDC’s most valuable asset was of a very specialised nature acquired from one of its directors with no independent assessment of its value. This can be compared to vehicles purchased new or where the price has been set in the open market.
[104] I am satisfied that Mr Clark failed to keep the records required by s 194 of the Act in respect of GBLMOG as the records did not allow the true financial position of CDC to be ascertained there being no way of determining whether the value ascribed to GBLMOG was reasonable.
[105] As to other records the liquidators say are missing, in respect of those which Mr Clark says were in the filing cabinet, I cannot resolve that factual dispute.
Records in relation to stock
[106] The financial statements as at 31 March 2021 record inventory of $68,450.00 and as at 31 March 2020, $64,700.00. The source of this information is unknown. The liquidators have not advised what they learnt from the accountants as to the source of this or other information in the accounts. However, as already noted, Mr Clark does not claim to have kept an inventory record or a stock register. Unless such were included in the “other financial documents” referred to by Mr Clark as being in the
filing cabinet, then this is another area where records the liquidators consider should have been kept, do not appear to exist.
[107] The discussion of the adjustment sought by the liquidators to Mr Clark’s current account for unaccounted stock again highlights the difficulties the liquidators face in their task as a result of incomplete stock records.
[108] I am satisfied Mr Clark failed to keep proper stock records. The liquidators say they do not have the stock records. Mr Clark does not say that he kept stock records, does not say they were in the filing cabinet of missing records, and he does not explain how the figures in CDC’s accounts were arrived at.
Should judgment for liability be entered in respect of the record keeping cause of action?
[109] I have already said that I cannot determine whether all of the records the liquidators say Mr Clark failed to maintain were in the missing filing cabinet or not. A finding of liability in respect of the value of GBLMOG and in respect of stock records will not conclude liability issues on the basis of the pleadings as they stand. There will need to be a further hearing in respect of the outstanding categories of allegedly missing documents as well as a hearing in respect of quantum. That said, a judgment for liability in respect of what are two major items in the assets of the company may assist resolution of this proceeding.16
[110]Rule 12.3 of the High Court Rules 2016 (the Rules) provides:
12.13 Summary judgment on liability
The court may give judgment on the issue of liability, and direct a trial of the issue of amount (at the time and place it thinks just), if the party applying for summary judgment satisfies the court that the only issue to be tried is one about the amount claimed.
16 Taking the Unimog GBLMOG at its depreciated value as at 31 March 2021 ($202,613.00) and the inventory at $68,450.00 these two items are just over 48 per cent of the total assets held by the company.
[111] Associate Judge Osborne (as he then was) said in 246 Investments Ltd v Herbert, which concerned a claim for contravention of s 9 of the Fair Trading Act 1986:17
The dearth of “liability only” judgments has come about not by chance, but by principled reasoning. That reasoning is exemplified in the judgment of Eichelbaum J in Ghent v Brinkman.18 That case involved a claim for breach of fiduciary duty and breach of a duty of care. At pages 12-13 Eichelbaum J said this:
Even had I taken a different view of the issues discussed so far, I would not have felt able to accede to the plaintiffs’ application for judgment on liability. This is not a case where there is any clear dichotomy between issues affecting liability on the one hand and damages on the other. The claims for aggravated and exemplary damages appear to open up virtually the whole field of the conduct of the respective parties, necessarily leading to an examination of all aspects of the relationship between them. Likewise with the question of the possible reduction of the plaintiffs’ damages, whether on the basis dealt with in Day v Mead or (on the second cause of action), by way of a plea of contributory negligence on conventional grounds. Thus the Court would perforce have to examine and pronounce upon the very issues which by virtue of a summary judgment would have been presumed to have been decided in favour of the plaintiffs. Not only would that mean that the summary judgment procedure would have conferred little advantage from the point of view of saving expense and time but it would put the Court in the position where it might make findings which would not readily be reconciled with a holding that there was no tenable defence. For these reasons therefore I would in any event decline to enter summary judgment.
[112]In McRaeway Group Ltd v Lane Neave the Court said:19
[there is no] no hard and fast rule as to the inappropriateness of summary judgment in professional negligence cases or in relation to judgment for liability only ... the Court will be cautious before granting summary judgment on liability only.
[113] Notwithstanding the conclusions I have reached in respect of Mr Clark’s failure to keep records in respect of the two categories of documents I have considered, I have determined by a narrow margin that it is not appropriate to enter judgment for liability.
17 246 Investments Ltd v Herbert HC Auckland CIV-2008-404-6612, 10 July 2009.
18 Ghent v Brinkman HC Wellington CP379/87, 11 September 1987.
19 McRaeway Group Ltd v Lane Neave [2017] NZHC 1138.
[114] There is a fair bit of water to go under the bridge in respect of this proceeding as regards the first and second causes of action.
Costs
[115] Costs are reserved. The plaintiff has had a measure of success. Submissions in respect of costs are to be filed within five working days and not more than five pages in length. Any response on behalf of the defendant is to be filed within a further five working days and again, not more than five pages. I will then deal with costs on the papers.
Associate Judge Lester
Solicitors:
Martelli McKegg, Auckland (for Plaintiffs) Norling Law Limited (for Defendant)
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