Clarke
[2021] NZHC 3017
•9 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-001716
[2021] NZHC 3017
IN THE MATTER of s 382 Companies Act 1993 AND
IN THE MATTER
of an application for leave to be a director of and to take part in the management of three companies
BY
PAUL LAMBERT CLARKE
Applicant
Hearing: 4 November 2021 Appearances:
T J Shiels QC for Applicant
Judgment:
9 November 2021
JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie On 9 November 2021 at 11.00 am
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
Solicitors/counsel:
Downie Stewart, Dunedin
RE PAUL CLARKE [2021] NZHC 3017 [9 November 2021]
Introduction
[1] The applicant, Paul Clarke, seeks leave to be a director and to take part in the management of three companies, P L Clarke Ltd, Clarke Machinery Ltd and Valley Mechanical Ltd.
[2] Earlier this year, Mr Clarke was convicted and sentenced to six months’ community detention and a fine of $30,0001 in relation to the following charges:
(a)using altered documents with intent to deceive (representative) (x 2);2 and
(b)producing false documents (representative).3
As a result, he is automatically prohibited from managing and being a director of any company for a term of five years under s 382(1) of the Companies Act 1993 unless he first obtains the leave of the Court.
[3] Mr Clarke accepts that conditions will be imposed on any grant of leave. His offending related to the underpayment of GST to New Zealand Customs (“Customs”) on the importation of heavy machinery into this country. He suggests that all information and documents P L Clarke Ltd sends to its customs broker in the future should also be copied to the company’s accountants to verify. The accountant will then be required to certify to Customs that the supplier invoices match the bank payments.
[4] Customs is an interested non-party in these proceedings. It has filed two memoranda setting out considerations it suggests are relevant to the Court’s determination. It comments on the conditions Mr Clarke proposes. It suggests that an additional condition that could be imposed which would reduce the risk to the public, namely that an independent director be appointed to act alongside Mr Clarke. It submits that this would provide additional oversight of the companies’ operations from
1 New Zealand Customs Service v Clarke [2021] NZDC 15258.
2 Crimes Act 1961, s 259(1)(a) – maximum penalty 10 years’ imprisonment.
3 Customs and Excise Act 2018, s 368(1)(b) – maximum penalty six months’ imprisonment or a fine not exceeding $10,000 or three times the value of the goods to which the offence relates.
within which, when combined with the external oversight of the companies’ accountant, would help to protect against the risk of further offending. Subject to these comments, it has confirmed that it neither supports nor opposes Mr Clarke’s application.
[5] The Registrar of Companies was given notice of the proceedings as required by s 382. The Registrar has also filed a memorandum. He does not oppose Mr Clarke’s application or the conditions he proposes and supports the further condition proposed by Customs requiring the appointment of an independent director.
[6] Both Customs and the Registrar of Companies were excused from further appearances.
Mr Clarke’s offending
[7] P L Clarke Ltd is involved in the importation of heavy earth moving machinery into New Zealand, mostly from Japan. Mr Clarke’s offending arose because he under- valued some of the machinery imported by P L Clarke Ltd over a period of some seven years. He altered invoices received from suppliers which he then provided to his customs broker. The invoices were then used by the broker to calculate the duty payable on the importations.
[8] Between 1 January 2013 and 9 September 2019, P L Clarke Ltd lodged 201 import entries; 74 of these were in respect of heavy machinery under-valued by Mr Clarke. Ultimately, P L Clarke Ltd was audited and Mr Clarke sought to conceal his offending by altering 23 proofs of payment from the Bank of New Zealand so that the payments matched the altered invoices.
[9] Customs subsequently filed 70 charges against Mr Clarke. These were consolidated during the course of the criminal prosecution to two representative charges of using altered documents with intent to deceive and one representative charge of producing false documents.
[10] The Crown Charge Notice was filed in February 2021. Mr Clarke then sought a sentence indication and he appeared before Judge K J Phillips in the District Court
at Dunedin for this purpose on 5 May 2021. Although the extent to which the goods were under-valued was significant, the Judge accepted that the financial advantage for P L Clarke Ltd was rather more modest. The company was required to pay good and services tax (“GST”) on a one month/invoice basis. The invoices which Mr Clarke had altered were used to calculate the GST payable to Customs on the importations. Customs issued GST invoices based on the calculations. P L Clarke Ltd paid the GST invoiced and then claimed a credit from the Inland Revenue Department (“IRD”) for the GST paid by it on the importations. The GST credits were reimbursed by the IRD between 20 and 50 days after payment of the GST by P L Clarke Ltd to Customs. The benefit to the company from the offending came because it avoided interest costs on the underpaid GST.
[11] The total amount of GST underpaid over the period of the offending was estimated to be $1,735,021.74. At an interest rate of 8.22 per cent, the benefit P L Clarke Ltd had obtained if it was reimbursed within 20 days was $7,840.73; if it was reimbursed at 50 days, it was $19,336.82. The advantage to P L Clarke Ltd from underpaying GST when the goods were imported meant that it had a cashflow advantage over its competitors and other businesses, which were paying the correct GST on time.
[12] In his sentence indication, the Judge indicated a sentence of two years’ imprisonment on the charges of using altered documents and a fine of $30,000 on the charge of producing false documents.4
[13] At about the time that the sentence indication was given, Mr Clarke arranged for the company to pay to Customs the GST that should have been paid – in total
$1,735,021.74. In addition, the company paid compensatory interest payable of
$61,032. However, P L Clarke Ltd was entitled to obtain an input credit for the additional GST paid and, in due course, it received credits from the IRD for GST matching the assessments issued by Customs and the amounts paid (but not for the compensatory interest).
4 New Zealand Customs Service v Clarke DC Dunedin CRI-2020-012-413, 5 May 2021.
[14] Following the sentence indication, Mr Clarke pleaded guilty on 18 May 2021 to three of the four charges laid against him. The Crown withdrew the fourth charge.
[15] Sentencing proceeded on 14 July 2021.5 The Judge imposed a sentence of six months’ community detention and a fine of $30,000, to be paid immediately. He stated as follows:
[6] We have discussed today the impact of that upon your business. The nature of your business is one where you are the sales manager and the difficulties that are seen is that as sales manager you need to travel to the worksites where the machinery is needed so you can properly advise and give advice in relation to the appropriate level of machine. We have discussed a different way of dealing with it rather than a full lockdown.
[7] I am going to step back from imprisoning you and put you in as a community-based sentencing option. To that I note your guilty pleas, you are clearly remorseful. You have paid the interest penalties to the IRD. You tell me you are going to pay the fine of $30,000 immediately and this young lady here will arrange for that to happen. A company without its leader (its leader being in prison) would mean it would not operate. The main point and made particularly by Mr Bates when this proposal was discussed, was that it is for the benefit of your employees not for your benefit, to keep the company open and running so that their jobs are maintained at this present time of uncertainty.
[8] So, having said all of that, on charges 1 and 2, you are sentenced to community detention rather than home detention. It is designed so as to allow you to carry on in your managerial role in the sales area, to enable you to be able to work four days a week and then be on your community detention sentence for the remainder of the time. …
The application for leave
Relevant law
[16]Section 382 of the Companies Act 1993 relevantly provides as follows:
382 Persons prohibited from managing companies
(1)Where—
(a)a person has been convicted of an offence in connection with the … management of a company (being an offence that is punishable by a term of imprisonment of not less than 3 months), including an offence under section 138A; or
5 New Zealand Customs Service v Clarke, above n 1.
(b)a person has been convicted … of any crime involving dishonesty as defined in section 2(1) of the Crimes Act 1961; or
…
that person shall not, during the period of 5 years after the conviction or the judgment, be a director … of, or in any way, whether directly or indirectly, be concerned or take part in the management of, a company, unless that person first obtains the leave of the court which may be given on such terms and conditions as the court thinks fit.
…
[17] This prohibition recognises that those dealing with companies are entitled to expect that those they are dealing with are persons of integrity. The Act does not prescribe criteria for granting leave; rather, the Court should consider many different interests “with an overarching eye to the prophylactic dimension” of the section – to protect the company’s creditors, consumers, shareholders, investors, employees, and the wider public.6
[18] Considerations likely to be relevant to the grant of leave were discussed in Ramsay v Sumich,7 in Re Minimix Industries Ltd8 and more recently in Re Weston.9 An applicant bears the “substantial onus” of demonstrating that leave should be granted.10 The section is not designed to be punitive; instead, the fundamental question is whether granting leave would place the public at risk.11 In reaching its decision, the Court should take into account whether the protection of the public can be achieved or assisted by imposing appropriate conditions.12 It may be appropriate to make provision for the withdrawal of permission if conditions are breached.13
[19] Previous cases have identified some of the factors the Court can consider. Broadly, these include:
6 Re Dheil [2021] NZHC 572 at [16]-[17].
7 Ramsay v Sumich [1989] 3 NZLR 628 (HC). See in particular the list of 14 considerations outlined by the Judge in that case at 631.
8 Re Minimix Industries (1982) 1 NZCLC 98,381.
9 Re Weston HC Auckland CIV-2006-404-773, 18 August 2006. See also Re Henderson [2017] NZHC 474 for a comprehensive summary of the applicable principles in the context of s 299 of the Insolvency Act 2006, an analogous provision to s 382.
10 Re Minimix Industries, above n 8, at 98,382.
11 At 98,382.12 Weston, above n 9, at [10].
13 At [10].
(a)the interests of creditors, shareholders, company employees, investors and others who have dealings with the company;14
(b)the personal position of the applicant and any hardship to him/her and to third parties, balanced against the core objective of protecting the public;15
(c)the nature of the offending and the applicant’s involvement, recognising that deliberate acts of dishonesty might indicate a propensity towards offending. This might be less significant if the misconduct was at a lower level of culpability;16
(d)the general character of the applicant and, specifically, his or her remorse, the likelihood of further offending and whether the offending was an aberration or part of a pattern of sustained behaviour;17
(e)the nature of the company the applicant seeks leave to direct or manage, including its structure, its business model and its financial performance;18
(f)the nature of the applicant’s intended role in the company and the risk posed to the public as a result;19
(g)the business history of the applicant, in particular, whether fraud or losses to the public feature in that business history;20
(h)the recent conduct of the applicant. This can also inform the Court as to the likelihood of reoffending.21
14 Ramsay, above n 7, at 631.
15 Weston, above n 9, at [9].
16 Re Weston, above n 9, at [8].
17 Re Henderson, above n 8, at [52]; Re Dheil, above n 6 at [19].
18 At [57]-[64].
19 At [65]-[71].
20 Re Weston, above n 9, at [9].
21 At [9].
[20] The Courts have frequently considered the impact on the company should it decline leave to an applicant seeking to act as a director. By way of example:
(a)in Re Focas,22 Jaine J recorded that the companies in question had no shareholders other than the applicants and that there was a risk the companies would not survive if the application was not granted, causing prejudice to third parties (employees). It was noted that the applicants had special skill and knowledge of the particular industry, which required the building of long-term relationships between company directors and suppliers; thus, the applicants were effectively irreplaceable; and
(b)in Re Minimix Industries Ltd,23 Cook J considered the small size of the business concerned and the reliance that others had on the applicant continuing to work in the company. The applicant had been convicted of procuring goods valued at over $7,000.00 by using a false name and address and issuing valueless cheques. The Court granted leave with the condition that the applicant was to have no cheque signing authority.
[21]The appointment of independent directors has been considered on occasion:
(a)In Hattie v Registrar of Companies,24 the applicant pleaded guilty to 232 charges of using a document with intent to defraud. The offending occurred as a result of an arrangement he had had as director of a customs agency and freight forwarding company with a person employed by principal customers which resulted in unlawful increases in amounts invoiced. The Registrar proposed a condition requiring the company to appoint a chartered accountant as a director for five years. Williams J noted the company’s accountants’ assertion that chartered accountants are generally disinclined to accept directorships of closely- held companies because of the risk of personal liability under statute.
22 Re Focas (1993) 6 NZCLC 68,417 (HC).
23 Re Minimix Industries Ltd, above n 8.
24 Hattie v Registrar of Companies (2000) 8 NZCLC 262,152.
Given that disinclination, “the Court consider[ed] it impractical to endeavour to impose that requirement as a condition of granting leave.”25 Instead, the company was ordered to appoint an auditor, with the auditor providing to the Registrar of Companies twice yearly an audit certificate confirming the company is being properly run in accordance with the company’s obligations and that the proper books of account are being kept.
(b)In Re Turner,26 the applicant had forged guarantees while acting as director for a company under financial pressure. Woolford J accepted that, following conviction, he was unable to find another person to appoint as director of his two companies “despite his best endeavours”.27 He was allowed to remain as a sole director as other conditions were considered sufficient to protect against further offending. These were that an auditor’s report of the companies’ accounts was to be provided to IRD and the Companies Office every six months, the companies’ accountant was to attend to all tax reporting obligations to the IRD, and the accountant was to witness the applicant’s signature on any formal company documents.
Should leave be granted?
[22]Against this background, I turn to consider Mr Clarke’s application.
[23] Mr Clarke seeks consent to be a director of and to manage three specific companies. He is the sole director and shareholder of each of them.
(a)P L Clarke Ltd was incorporated in May 2002. Its business is the importation of second-hand earth moving machinery and its subsequent hiring out and/or re-sale.
25 At [5].
26 Re Turner [2013] NZHC 2098.
27 At [4].
(b)Clarke Machinery Hire Ltd does not trade. It is kept on the Register to protect its trading name.
(c)Valley Mechanical Ltd is involved in the servicing of the earth moving machinery owned by P L Clarke Ltd. Its only client is P L Clarke Ltd and it has no outside clients. Mr Clarke has deposed that the company will be shortly wound up.
There is no risk to the public from allowing Mr Clarke to remain a director of and to manage Clarke Machinery Hire and Valley Mechanical Ltd. P L Clarke Ltd is the only company with any trading activities.
[24] The offending involved P L Clarke Ltd only. There is force in Mr Shiels QC’s submission that the offending related to Mr Clarke’s interactions through P L Clarke Ltd with Customs, and not with the general public as such. The company obtained a cashflow advantage over its competitors, but there is no suggestion that the public was directly impacted by the offending. The general public is indirectly affected because such offending constitutes a fraud on the revenue and the public purse but individual members of the public were not at risk. Nor can I see that there is any future risk to the public if leave is granted.
[25] The interests of the company’s shareholders are relevant. Mr Clarke is the sole shareholder of all companies. P L Clarke Ltd’s financial accounts have been produced. They show significant equity but also substantial debt. I note Mr Shiels’s submission that it is unclear what equity would remain if P L Clarke Ltd was forced to cease its business activities.
[26] Mr Clarke’s livelihood and that of his family depends on P L Clarke Ltd continuing to trade. Further, P L Clarke Ltd has 33 employees and four dependent sub-contractors. If the company cannot continue to trade, it appears likely that the employees will lose their jobs and thus livelihoods and that the dependent sub- contractors will suffer significantly. This is clearly a factor which weighed significantly with Judge Phillips in sentencing Mr Clarke. He contemplated that Mr Clarke should be allowed to continue in business.
[27] A factor which tells against the grant of leave in this case is the nature of the offending. While the advantage ultimately obtained by Mr Clarke and P L Clarke Ltd was modest, it was deliberate offending. Mr Clarke was the only person involved but he offended against Customs deliberately and then sought to hide this offending by offending further. The offending was not an aberration. It was premeditated and over a prolonged period. Further, Mr Clarke does not have a trouble-free past. He has been convicted of a number of other offences, although only one involved dishonesty and it was of a very different character, committed over 11 years ago.
[28] Apart from the offending, Mr Clarke’s business history indicates a hardworking man who has enjoyed considerable success in recent years. He commenced the business of P L Clarke Ltd from scratch and developed it into a successful enterprise now employing 33 people. The company’s wage bill alone each year is in excess of $1.3 million. There is nothing to suggest that the company or Mr Clarke has been involved in any other inappropriate business practices in trade and there has been no criticism of Mr Clarke’s conduct since the convictions. He paid the unpaid GST promptly, as well as the penalty interest and then the fine. It appears from the pre-sentence report and from his affidavits that he is genuinely remorseful. He accepts the offending and does not seek to excuse it.
[29] Mr Clarke is clearly critical to the success of the companies. They are classic “one man bands”. This reduces the prospect for internal checks and balances. However, I accept that the conditions which Mr Clarke has volunteered create a check against any repeat offending. Almost all of the machinery which P L Clarke Ltd hires and/or sells is purchased from overseas and Mr Clarke is the person who has traditionally travelled to inspect the machinery overseas and to arrange its purchase and then importation. He has deposed that nobody else in the business has had personal dealings with the overseas contacts and that noone else has the experience to purchase the machinery and arrange for its importation. I accept this evidence. Mr Clarke is also in charge of sales by P L Clarke Ltd, although it does have one salesperson employed in Christchurch and another in Tauranga. However, both report to Mr Clarke and he makes all final decisions on sales transactions. He has two service managers but both report directly to him. I accept that Mr Clarke is the principal person involved in all aspects of the business and that it would be artificial to decline
leave with the result that somebody else would have to stand in in his stead. Any replacement would be unlikely to have sufficient knowledge and expertise to run the business.
[30] Both Mr Clarke and Mr Harvie (P L Clarke Ltd’s accountant) have deposed that there is pressure from the company’s bank to reduce its borrowings. If leave were to be declined, Mr Clarke would have little option but to close down the companies, with the result that both stock and plant would go to a “fire sale”. This would lead to a loss of employment for P L Clarke Ltd’s employees, a loss of business for its sub- contractors, a loss of capital and income for Mr Clarke (and thus his family) and probably a loss to the company’s major creditor, its bank. Mr Clarke has given personal guarantees and his family home would probably also need to be sold to meet the resulting likely indebtedness. Declining leave would precipitate this collapse and that does not seem to me to be in anyone’s interests.
[31] I am satisfied that it is appropriate to grant leave to Mr Clarke to act as a director of and to be involved in the management of P L Clarke Ltd, Clarke Machinery Ltd and Valley Mechanical Ltd. I turn to consider the appropriate conditions.
Conditions
[32]Mr Clarke proposes as follows:
(a)that all customs entries in respect of any goods imported by any of the companies – P L Clarke Ltd, Clarke Machinery Hire Ltd and Valley Mechanical Ltd – be filed by International Freight Logistics Ltd;
(b)that all information and documentation supplied by any of the companies to International Freight Logistics Ltd for the purposes of customs returns be copied to the chartered accountants preparing the annual accounts and the GST and tax returns for the companies;
(c)that bank advice of any and all payments to overseas suppliers be copied to the chartered accountants preparing the annual accounts and the GST and tax returns for the companies;
(d)that the chartered accountants preparing the annual accounts and the GST and tax return for the companies have direct access to the online banking records of the companies;
(e)that a chartered accountant holding a public practising certificate, and a member of the firm of chartered accountants preparing the annual accounts and the GST and tax returns for the companies, certify to New Zealand Customs Service within 15 working days of a supply invoice being received that he or she has checked the invoice and that the payment made from any one or more of the companies’ bank accounts to the overseas supplier matches the invoice the company received;
(f)that a copy of this order be served on International Freight Logistics Ltd, Harvie Green Wyatt (chartered accountants), New Zealand Customs Service and the Registrar of Companies.
[33] The conditions imposed by Mr Clarke offer a structured system for the checking of Customs returns. They will create a comprehensive paper trail, which will be able to be readily audited by Customs if it wishes to do so. I acknowledge that Customs, through one of its officers, has deposed that Customs will not be able to regularly monitor the returns filed because it does not have the resources to do so. Nevertheless, the conditions proposed will give Customs the opportunity to monitor at any stage if it chooses to do so. Responsibility for adopting proper procedures and accounting fully for all duty and GST payable rests on P L Clarke Ltd and on Mr Clarke personally. Nothing in the proposed conditions detracts from these responsibilities.
[34] In addition, I consider it appropriate to impose the following additional condition.
(g) in the event that there is any breach of these conditions by Mr Clarke, then leave for him to act as a director and to be involved in the management of P L Clarke Ltd, Clarke Machinery Hire Ltd and Valley Mechanical Ltd is rescinded.
This additional condition should serve to bring it home to Mr Clarke that any further departure from appropriate and honest business practice will not be tolerated.
[35] I have considered whether it is appropriate to require that an independent director be appointed. I accept the submissions of Customs that such an appointment would be desirable, but in the circumstances it seems that it would be extremely difficult for the companies to continue to operate if I were to impose such a condition. There is affidavit evidence before me that Mr Harvie and other members of his firm are not prepared to accept appointment. Although it is hearsay, Mr Clarke has deposed that his solicitor is not prepared to accept appointment either. The evidence suggests that it would be extremely difficult to find any other independent professional prepared to do so. While Mr Clarke could arrange for his wife or another employee to become an independent director, such persons would not be fully independent and would be unlikely to have the required business experience. I accept that it is impracticable to appoint an independent director in the circumstances of this case.
[36] Accordingly, I grant leave to Mr Clarke to act as a director of and to be involved in the management of the three companies, subject to the conditions I have set out in [32](a) to (f) and [34] above.
[37]There is no issue as to costs.
Wylie J