Chris De Ruyter Painting Limited (in liquidation) v De Ruyter
[2017] NZHC 1810
•1 August 2017
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
CIV-2016-476-000043 [2017] NZHC 1810
BETWEEN CHRIS DE RUYTER PAINTING
LIMITED (IN LIQUIDATION) First Plaintiff
AND
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN AS LIQUIDATORS OF CHRIS DE RUYTER PAINTING LIMITED (IN LIQUIDATION)
Second Plaintiffs
AND
CHRIS DE RUYTER First Defendant
AND
LESLEY DE RUYTER Second Defendant
AND
CHRIS DE RUYTER, LESLEY DE RUYTER AND ROBERT JOHN SHAW AS TRUSTEES OF THE BOZTARLUC TRUST
Third Defendants
Hearing: 13 March 2017 Appearances:
K Wakelin and S Farnell for Plaintiffs
M J Borcoski for Third-Third Defendant, Robert John Shaw
No appearance for First and Second DefendantsJudgment:
1 August 2017
Reissued:
8 August 2017
JUDGMENT OF DUNNINGHAM J
[1] Chris de Ruyter Painting Limited (In Liquidation) (the company) was placed in liquidation on 1 October 2015 on the application of the Commissioner of Inland
Revenue. The Commissioner is the sole creditor of the company. The second
CHRIS DE RUYTER PAINTING LIMITED (IN LIQ) v DE RUYTER [2017] NZHC 1810 [1 August 2017]
plaintiffs, Vivien Judith Madsen-Ries and Henry David Levin, were appointed liquidators of the company.
[2] The first defendant, Chris de Ruyter, was the sole director of the company and, at the date of liquidation, held a 99.9 per cent shareholding in the company. He is also a trustee of the BozTarLuc Trust (the Trust).
[3] The second defendant, Lesley de Ruyter, is a shareholder in the company, holding a 0.1 per cent shareholding at the date of liquidation. She is also a trustee of the Trust.
[4] Mr Robert John Shaw, the third named third defendant, is a trustee of the
Trust.
[5] The company ceased trading in June 2015. When it went into liquidation it owed $104,122.45 to Inland Revenue including court costs. The plaintiffs attribute the loss suffered by the company and its creditor to the first defendant’s failure to properly discharge his responsibilities as director of the company. In particular, they say he failed to call up his and his wife’s overdrawn current accounts, and he caused the company to make dispositions of its remaining assets without requiring any reasonably equivalent value to be obtained in the exchange. The plaintiffs also allege that, in doing that, the first defendant failed to prefer the interests of the company and the company’s creditors, over the interests of himself and those of the second and third defendants.
[6] In these proceedings, the company seeks:
(a) repayment by the first and second defendant of their total current account balances owing of $228,795;
(b) the setting aside of dispositions to the third defendants to the value of
$66,175; and
(c) compensation from the first defendant for breaches of director’s duties under ss 131(1), 135, 136 and 137 of the Companies Act 1993 (the Act).
Procedural issues
[7] These proceedings were filed in the High Court at Timaru on
16 August 2016. Service was effected on all three defendants but no statement of defence was filed by any of them by the due date. Accordingly, on 6 December 2016
I set the matter down for a formal proof hearing.
[8] On 26 January 2017, the first defendant was adjudicated bankrupt. As a consequence of his adjudication, leave is required to continue the proceedings against him pursuant to s 76(2) Insolvency Act 2006.
[9] An interlocutory application for leave has been filed by the plaintiffs supported by the affidavit of Henry David Levin, one of the liquidators, which sets out the reasons for seeking to proceed.
[10] In summary, the liquidators say that the proceeding was commenced prior to the first defendant’s adjudication and that the claims in the proceeding are more suitably determined by the Court than by requiring the Official Assignee to consider and adjudicate on the plaintiffs’ claims.
[11] I accept, as was held in the De Alwis v Luvit Foods International Ltd, that s 76(2) of the Insolvency Act 2006 confers a wide discretion as to whether to grant leave to continue proceedings, and the considerations which led to the grant of leave in that case are also applicable here.1 In particular, I place weight on the fact that if the plaintiffs are not allowed to continue the proceedings, they will still be required to prove their claim in the first defendant’s bankruptcy. That will place an additional burden on the Official Assignee to consider and determine the plaintiffs’ claims. Furthermore, there would be no prejudice to other creditors (because there are none),
or to the orderly administration of the bankruptcy, if the proceeding is to continue.
1 De Alwis v Luvit Foods International Ltd (2007) 10 NZCLC 264,304.
Furthermore, the plaintiffs confirm they would not enforce any judgment against the first defendant without leave of the Court.
[12] Leave to continue the proceeding against the first defendant is therefore granted on the condition that no attempt is made to enforce the judgment without leave of the Court.
Relevant factual background
[13] The company was incorporated on 16 January 2012 and traded as a painting and decorating business. During its period of trading, the company incurred significant debt to the Inland Revenue and it ceased trading in June 2015. At the point of liquidation the company’s only assets were the first and second defendants’ overdrawn current accounts and legal claims.
[14] The company first defaulted on its income tax obligations to Inland Revenue during the financial year ending 31 March 2013. It then began defaulting on its employer superannuation contributions, followed by its PAYE obligations, Kiwisaver employee deduction obligations, child support employer obligations and GST obligations. Inland Revenue’s claim in the liquidation, totalling $104,122.45, comprises:
(a) A preferential claim for unpaid GST $27,450.64 (b) An unsecured claim for income tax debt along
with interest and penalties on that, and on other
obligations, totalling $72,702.39 (c) Court costs $3,969.42
[15] On 12 May 2016, Inland Revenue notified the company of its intention to serve a statutory demand for the outstanding tax debt. On 10 June 2015 a statutory demand for the company’s tax arrears was served on the company.
[16] The liquidators have ascertained that in the weeks immediately following service of the statutory demand, the company withdrew the bulk of its funds and distributed those to the first, second and third defendants. The liquidators submit that these payments stripped the company of its remaining assets, thus causing the company’s insolvency to the prejudice of its creditor. To establish the date of insolvency they rely on the presumption under s 287 of the Companies Act 1993 which provides that, unless the contrary is proved, a company is presumed unable to pay its debts if it has failed to comply with the statutory demand. Thus, they submit that the company was insolvent by 10 June 2015.
First cause of action - debt owing by the first and second defendants under their current account
[17] Mr Levin has given detailed evidence explaining why the company’s financial statements and general ledgers do not correctly record the current account balances for the company. The company’s financial statements for the financial year ending 2015 reported that the first defendant owed the company $188,470 and the second defendant owed the company no money.
[18] However, Mr Levin’s evidence is that, having reviewed the company’s bank statements, which reveal transactions of a personal nature by the first and second defendants in the period from 1 April 2014 until the date of liquidation, the company’s financial statements do not correctly report the shareholder’s current account and they should not be relied on. Instead, reliance should be placed on the liquidators’ reconstructed accounts which establish that the current account balances owed by the first and second defendant total $228,795.00, which is made up as follows:
First Defendant $55,810.48
Second Defendant $110,529.75
First and Second Defendant $62,454.77
[19] Mr Levin’s evidence sets out why he believes these totals represent the current account balances owed by the first and second defendant. In summary, this is because these amounts comprise transactions that were:
(a) personal in nature (for example, ATM withdrawals and payments to supermarkets, department stores and utilities);
(b) repayment of a personal loan for the benefit of the first defendant;
(c) payments into the first and second defendants’ personal bank
accounts;
(d)payments to Inland Revenue for the personal benefit of the first defendant; and
(e) payment of insurance premiums for the personal benefit of the first and second defendants.
Having reviewed the documentary evidence relating to these payments, I am satisfied that they were not legitimate expenditure of the company, but were for the personal benefit of the first and second defendants.
[20] I also accept Mr Levin’s reasoning that these payments do not comprise salary or wage payments. The liquidators have identified payments which are in the nature and frequency of wage and salary payments to both the first and second defendants and these have been excluded from the company’s claim. Furthermore, there is no basis to consider the amounts as “extra” remuneration over and above wages to the first and second defendant. They were not declared as shareholder income in the relevant financial years’ accounts and, given the company’s financial circumstances, such payments could not have been made without following the process set out in s 161 of the Act and having regard to the current condition of the
company.2
[21] As these are advances made on a shareholder’s current account, they are a debt owed by the shareholders of the company and are repayable on demand.3 The plaintiffs have issued demands for the amounts set out at [18] above. No payment has been received by the company from the first or second defendants. I am satisfied, therefore, that the total balance of the shareholder current accounts which remain owing to the company are as follows:
First defendant $55,810.48
Second defendant $110,529.75
First and second defendant $62,454.77
Total $228,795.00
The second cause of action – prejudicial disposition of property (s 348 of the
Property Law Act 2007)
[22] Mr Levin gives evidence that the bank statements for the company in the period immediately following service of the statutory demand show the Trust received $66,175.84 from the company’s bank account. This amount was transferred in four separate payments as follows:
(a) $15,000 on 13 June 2015; (b) $50,000 on 30 June 2015; (c) $1,000 on 14 July 2015;
(d) $175.84 on 18 August 2015.
[23] The transfer of $66,175.84, to the Trust, in combination with the payments made to the first and second defendant described above, removed the remaining assets from the company which would otherwise have been available to meet the
debts of the company. The plaintiffs therefore claim, under Subpart 6 of Part 6 of the Property Law Act 2007 (PLA 2007), that this is a prejudicial disposition of property. Consequently, the Court can direct the restoration of that property to the company, or require the person who acquired or received that property to pay reasonable compensation for that property.4
[24] I am satisfied that the transfers of funds from the company’s bank account to the bank account owned by the third defendant were dispositions as defined in s 345(2) of the PLA 2007, because they each were “a conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property, whether at
law or in equity”.5
[25] The transfers also fall within the circumstances described in s 346 of
PLA 2007 as follows:
(1) This subpart applies only to dispositions of property made after 31
December 2007—
(a) by a debtor to whom subsection (2) applies; and
(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2) This subsection applies only to a debtor who—
(a) was insolvent at the time, or became insolvent as a result, of making the isposition; or
(b) was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c) intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
[26] In reliance on Mr Levin’s evidence, I consider that until the financial year ending 2015, the company had a strong net asset position and sufficient working capital to meet its obligations. However, the payments made to shareholders,
coupled with the disposition to the trustees, had the effect of removing the remaining
4 Property Law Act 2007, s 350.
5 Section 345(2)(a).
assets of the company and causing its insolvency. Thus the requirements of s 346(2)(a) are met.
[27] The other element of the statutory test which must be satisfied is whether it was done so with the intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange. I consider this test is met whichever of the three grounds is chosen. There is no evidence of any value received for the disposition. Furthermore, because the transfers began shortly after the service of the statutory demand on the company, it is a reasonable inference that the dispositions were made with intent to prejudice the creditor which served the statutory deed. Thus, the requirements of s 346(1)(b) are met.
[28] Under s 348(2) of the PLA 2007, where the Court is satisfied that the applicant has been prejudiced by a disposition of property, the Court must either:
(a) vest the property that is the subject of the disposition in the debtor; or
(b)require the person who acquired or received the property to pay reasonable compensation to the debtor.
[29] Having concluded that the transfer of $66,175.84 to the trustees is a prejudicial disposition of property under Subpart 6 of Part 6 of the PLA 2007, I consider it is appropriate to require the trustees to pay compensation of $66,175.84, together with interest from the date of liquidation, to the company.
[30] The only other issue I am required to consider is whether the liability of Mr Shaw, the third trustee, is joint and several or is limited to the assets of the trust. In this regard, the plaintiffs and Mr Shaw agree that any judgment entered against the third defendants in this proceeding shall, in respect of Mr Shaw only, be limited to the assets of the Trust available for distribution from time to time. Accordingly, judgment will be entered on that basis. That will not affect the liability of the first and second named third defendants, which is unlimited personal liability.
Third cause of action: breach of director’s duties and claim under s 301 of the
Act
[31] The third cause of action alleges that the first defendant breached a range of
director’s duties which he was required to comply with under the Companies Act
1993, including duties to the company to protect the interests of creditors when the company approaches insolvency.6
[32] Section 301 of the Act provides the procedural mechanism under which the claims for compensation have been brought. Section 301 has been described by the Court of Appeal as “a procedural shortcut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against, inter alia, its former directors”.7 As already referred to, the plaintiffs claim multiple breaches of statutory duties. It is only necessary to establish one of them to hold the first defendant liable.
[33] The first breach claimed is a breach of s 131(1) of the Companies Act which provides that a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company. Furthermore, once the company is of doubtful solvency, the duty is also
owed to creditors.8
[34] While the duty imposed by s 131(1) is a subjective one, I accept, as the plaintiffs have submitted, that there will be circumstances where the conduct is so clearly dishonest and detrimental to the interests of the company and its creditors, that one can discount the possibility that the directors held a subjective belief that it was in the best interests of the company.
[35] In the present case, the first defendant caused or allowed the company to make the payments described above to the first and second defendants’ personal benefit, totalling $228,795, while its debts to Inland Revenue were increasing. This was a case, as in Sojourner and Robb, where the director should have recognised that
“the best interests of the company include the obligation to discharge [obligations to
6 Sojourner v Robb [2008] 1 NZLR 751 (CA).
7 Sojourner v Robb, above n 6, at [53].
8 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA).
creditors] before rewarding the shareholders”.9 Equally, the first defendant breached his duties by preferring the interests of the trust, and the fact these payments began three days after Inland Revenue served its statutory demand on the company, contradicts any suggestion that the first defendant subjectively believed this was in the best interests of the company.
[36] I accept, therefore, that the first defendant acted in his own interests, and in the interests of the second and third defendants, by causing the company to make dispositions and company payments to them and that, but for the dispositions to the Trust and the payments to the shareholders the company would have had
$294,970.84 available to the company and to pay its creditor Inland Revenue.
[37] Given my findings on s 131(1), I do not need to go on and consider each of the claims under s 135 of the Act (trading recklessly), s 136 of the Act (causing obligations to be incurred without reasonably believing the company could perform them) and s 137 of the Act (failing to exercise the care, diligence and skill expected of a reasonable director in the same circumstances). Furthermore, as was the expressed concern of Ellis J in a similar claim, there appears to be a degree of “over-egging” in the pleading in relation to what is, in reality, a relatively
straightforward claim.10
Quantum of relief under s 301 of the Act
[38] Under the third cause of action for breach of director’s duties, the plaintiffs seek the following sums from the first defendant:
(a) $55,810.48, concurrently with judgment under the first cause of action
(together with interest from the date of liquidation);
(b)$110,529.75, concurrently with judgment under the first cause of action, and on a joint and several basis with the second defendant
(together with interest from the date of liquidation); and
9 Sojourner v Robb [2006] 3 NZLR 808 at [102].
(c) $62,454.77, concurrently with judgment under the first cause of action, and on a joint and several basis with the second defendant (together with interest from the date of liquidation);
(d)$66,175.84, concurrently with judgment under the second cause of action, on a joint and several basis with the third defendant (together with interest from the date of liquidation);
(e) $104,122.45, being the loss to the creditor (together with interest from the date of liquidation).
[39] At the hearing I queried the claim for judgment for the amount owed to the creditor in addition to the amounts which had been transferred or paid to other entities in breach of Mr de Ruyter’s director’s duties. While the argument was academic, given Mr de Ruyter’s adjudication, I was concerned that it was inappropriate to give judgment ordering both repayment of the amounts in [38](a)-d) above, which would clearly exceed the amounts owed to the creditor and the costs of the liquidation, as well as judgment for the amount owed to the creditor. If it were possible to recover all those sums from the first defendant, it would then place the company in a better position than it would have been had the duties not been breached. My view expressed to counsel, was that the relief sought should be seen as alternatives.
[40] In response, and pursuant to leave granted to file further submissions, the plaintiffs cited cases to confirm that cumulative awards could be made which exceeded the creditors’ claims, saying this was expressly considered in:
(a) Mizeen Painters Ltd (in liq) and Ors v Tapusoa and Anor;11
(b) Shannon Agricultural Consulting Ltd (in liq) and Ors v Shannon;12
and
(c) Barring Horticulture NZ Limited and Ors v Barring and Anor.13
11 Mizeen Painters Ltd (in liq) and Ors v Tapusoa and Anor [2015] NZHC 826, [2016] NZAR 423.
[41] These cases confirm, and I accept, that where there are conceptually different claims against different parties, they are appropriately the subject of separate awards. Furthermore, I accept that the fact that the total of the claims made will significantly exceed the amount owed to creditors is not a barrier to entering judgment for that amount. As identified in Morgenstern v Jeffreys, the excess will be returned to the
first and second defendants as shareholders in any event.14
[42] However, my concern is a more discrete issue than this. It is whether, by awarding both the sums set out at [38] (a)-(d) above and the sum at (e) in the same paragraph, the award would fall outside the terms of s 301(1)(b). That section provides that where a breach of duties is found, the Court may:
…
(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; …
[43] As was explained in Soujourner v Robb, the provision allows relief to be calculated on a restitutionary or compensationary basis, but not both.15 In Sparta 13
Contractors, involving a similar suite of claims, Ellis J confronted the same issue saying:
[28] …Here, however, the company necessarily argues that there is such a distinction [between restitution and compensation] and that the defendants should both repay the amount they have gained but also compensate for creditors and liquidation losses.
[29] I am unable wholly to agree with that position. That is because the core part of the creditors’ losses, namely the money owed to [creditors] is not a loss to Sparta, but a debt properly incurred in the course of business. Moreover, if the monies taken by the defendants are repaid, as ordered, those debts can be met.
13 Barring Horticulture NZ Limited and Ors v Barring and Anor [2016] NZHC 304, [2016] NZCCLR 17.
14 Morgenstern v Jeffreys [2014] NZCA 449.
15 Soujourner v Robb, above n 6, at [53].
[44] As a consequence, Ellis J simply made compensation orders against the directors for interest and penalties on the debts and for the reasonable cost of the liquidation.
[45] In this case, I consider it is appropriate to make orders under s 301(1)(b) on a restitutionary basis and as an alternative to the claims under the first and second causes of action, and require the first defendant to repay or restore the money or property wrongly transferred from the company, along with interest. If restitution is ordered, this would put the company in the position it would have been, had the director not breached his duties by facilitating or effecting those transfers. The total of those sums exceeds the amount owed to the creditor by a large margin, so would, if paid, meet both that obligation and the costs of the liquidation. There is therefore no need to, nor is there jurisdiction to, also make a compensatory order as sought
under s 302(1)(b) for $104,122.45.16
[46] Accordingly, and as an alternative to the other claims, I grant judgment to the company against the first director for the sums listed at [38] (a)-(d) above, totalling
$294,970.84, but not for the additional amount claimed of $104,122.45.
Outcome
[47] On the first cause of action claiming repayment of the current account debt, judgment is entered for the following sums, each together with interest from the date of liquidation until the date of this judgment:
(a) judgment against the first defendant for $55,810.48;
(b) judgment against the second defendant for $110,529.75;
(c) judgment against the first and second defendants, jointly and severally, for $62,454.77.
16 Furthermore, for the same reasons as Ellis J, I do not consider it appropriate to treat this entire sum as properly the subject of a compensatory award, as it is in part a debt properly incurred in the course of the business. It would have been more appropriate to award that part of the sum which represents interest and penalties and court costs, along with the costs of liquidation.
[48] On the second cause of action seeking to set aside dispositions which prejudice creditors, judgment is entered as follows:
(a) judgment against the third defendant jointly and severally for
$66,175.84, plus interest from the date of liquidation until the date of this judgment, but with the liability of the third named third defendant limited to the assets of the Trust available for distribution from time to time.
[49] On the third cause of action and as an alternative to recovery under the first and second causes of action, judgment is entered against the first defendant in the sum of $294,970.84 plus disbursements, together with interest from the date of liquidation to the date of this judgment.
Costs
[50] Scale costs were sought on a 2B basis plus disbursements from the defendants and I award costs as sought although, as agreed, the third-third named defendant’s liability for costs and disbursements is limited to the assets of the trust.
Solicitors:
Meredith Connell, Auckland
Saunders Robinson Brown, Christchurch
3