Clarke v Registrar of Companies
[2018] NZHC 1608
•2 July 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2017-404-2303
[2018] NZHC 1608
UNDER THE Companies Act 1993 IN THE MATTER OF
An appeal under s370 against a decision of the Deputy Registrar of Companies
BETWEEN
HAMISH JAMES CLARKE
Appellant
AND
REGISTRAR OF COMPANIES
Respondent
Hearing: 22 March 2018 Appearances:
P F Dalkie for Appellant
J K Gorman for Respondent
Judgment:
2 July 2018
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 02 July 2018 at 2pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors:
Dyer Whitechurch, Auckland Crown Law, Wellington
CLARKE v REGISTRAR OF COMPANIES [2018] NZHC 1608 [2 July 2018]
Introduction
[1]The two principal issues in this appeal are:
(a)Was the decision of the Deputy Registrar of Companies to prohibit the appellant, Hamish Clarke, from being a director, promoter or taking part in the management of any company correct in terms of s 385(3) of the Companies Act 1993 (the Act)?
(b)If that decision was correct, was the seven-year period of the prohibition set by the Registrar disproportionately severe as alleged by Mr Clarke?
[2] In the course of argument, Mr Dalkie, counsel for Mr Clarke, conceded the first issue and focused his submissions on the second – the period of the prohibition which he said was disproportionately severe. Even so, I examine the first issue to show why I consider the concession was appropriate.
Nature of the appeal
[3] Mr Clarke’s appeal was brought under s 370 of the Act. Under that section, a person aggrieved by a decision of the Registrar under the Act may bring an appeal to the High Court. In such an appeal, the Court must consider the merits of the case afresh but the appellant bears the onus of persuading the Court to depart from the decision appealed against and the Court should interfere with the decision only if it considers there was an error of law or principle, a relevant consideration was overlooked or an irrelevant consideration taken onto account, or the decision was plainly wrong.1
Was the prohibition properly imposed?
[4] By notice dated 8 December 2016 under 385(3) of the Act (which was not served on Mr Clarke until 5 May 2017), the Ministry of Business, Innovation and
1 Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]; Mani v Registrar of Companies [2016] NZHC 3002 at [5]; Brand v Registrar of Companies [2016] NZHC 2983 at [37].
Employment informed Mr Clarke he had been identified as a potential candidate for prohibition under s 385 of the Act. An accompanying letter of the same date set out the reasons the Ministry had come to that view, identified and enclosed copies of documents that would be considered, and invited Mr Clarke to make submissions on the proposed action and to provide any relevant information.
[5] The Ministry’s notice identified five companies of which Mr Clarke had been a director and which had been put into liquidation in the five years before the notice. These were Mr Clarke’s principal operating company, Valiant Homes Ltd, and four special purpose companies set up for specific residential developments that Mr Clarke had proposed to undertake. Mr Clarke was one of two directors of Valiant Homes Ltd and the sole director of the special purpose companies. The accompanying letter recorded that, in total, the five companies owed the Inland Revenue Department
$1,109,094, including preferential debts of $904,200.92, largely for unpaid Goods and Services Tax.
[6] Because the companies had been put into liquidation in the preceding five years, the Registrar or his Deputy had the power under s 385(4)(b) of the Act to prohibit Mr Clarke from being a company director unless Mr Clarke could satisfy the Registrar or Deputy Registrar either that he was not responsible for the manner in which the companies had been managed or that it would not be just or equitable to prohibit him from being a company director.
[7]By submission dated 23 May 2017, Mr Dalkie for Mr Clarke:
(a)Explained how Mr Clarke had established and operated his business which was to undertake residential developments on in-fill sites;
(b)Noted the advice Mr Clarke had received from a business associate, Mr Weise about the payment of GST, noted the role played by Mr Weise in the management of Mr Clarke’s companies, and recorded Mr Clarke’s expectations regarding a loan which did not materialise;
(c)Raised questions about the nature of the evidence to be relied on by a Registrar when making a decision under s 385 and said the burden of proof lay with the Registrar.
[8] Mr Clarke’s submission did not deny that each of the five companies identified in the Registrar’s notice had failed to pay significant sums of GST the companies had collected on transactions they had undertaken but explained why GST had either been paid late or withheld. The main explanations were a lack of cash flow, Mr Clarke’s decision to pay other creditors ahead of the IRD because interest on late payments of GST was cheaper than the interest payable to other creditors, and Mr Clarke’s expectation of receiving from Arrow International a loan of $2,000,000 which did not eventuate. The submission asserted that in paying other creditors and deferring or not paying GST, Mr Clarke had been acting on the advice of Mr Weise who had told him that paying off trade creditors ahead of making GST payments was a common business practice.
[9] Following the Registrar’s receipt of Mr Clarke’s submission, there was correspondence between the Registrar and Mr Clarke, via Mr Dalkie, about where the burden of proof lay in decisions under s 385(4)(b) of the Act, with the Registrar making it clear the burden lay on Mr Clarke to satisfy the Registrar why the Registrar should not prohibit Mr Clarke from being a director. The Registrar offered Mr Clarke the opportunity to revise his submissions in the light of this clarification. Mr Clarke chose not to make any further submission.
[10] In a minute dated 28 August 2017, the Deputy Registrar found Mr Clarke had not satisfied him Mr Clarke was not at least partly responsible for the insolvency of at least one of the companies and that, in accordance with s 385(4)(b) of the Act, the Deputy Registrar had the power to prohibit Mr Clarke from being a director. The Deputy Registrar also found that Mr Clarke had not satisfied him that it would not be just and equitable for the Deputy Registrar to exercise that power. The Deputy Registrar further determined he should not exercise his general discretion not to prohibit Mr Clarke from being a director.
[11] The Deputy Registrar’s decision canvassed and found against Mr Clarke on a number of factual matters. The central question was whether Mr Clarke had mismanaged the companies given the large arrears of GST. The Deputy Registrar noted that Mr Clark’s submission did not deny that GST was payable, did not deny the GST had not been paid, and did not question the amounts but argued that the arrears should not be considered mismanagement. The Deputy Registrar said he had not been satisfied that there had not been reckless trading and that there had not been mismanagement. Indeed, he went on to find there was “very serious” mismanagement and a breach of the trust reposed in company directors regarding the filing of GST returns. The Deputy Registrar also commented that two of the special purpose companies incurred significant tax arrears within a year of commencing operations and continued to incur further GST liabilities as they continued to trade while insolvent.
[12] In the course of the hearing before me, Mr Dalkie conceded that the findings regarding the non-payment of GST were open to the Deputy Registrar and Mr Clarke no longer challenged the Deputy Registrar’s decision to prohibit Mr Clarke from being a company director having regard to the test in s 385(4)(b). Accordingly, the rest of the hearing, including the oral submissions on behalf of the Registrar, proceeded on the basis of that concession and focused on the length of the prohibition.
[13] Those concessions were properly made. It was clear from the information before the Deputy Registrar and the Court that there was no dispute over the amounts of unpaid GST, that Mr Clarke was responsible for the non-payment of GST, and the non-payment of GST was a key factor in the companies being put into liquidation. Mr Dalkie properly accepted that arguments based on ss 130 or 138 of the Act – that Mr Clarke should not be held responsible because he had relied on the advice of Mr Weise – could not succeed because the circumstances in which those sections apply had not been made out.
[14] I also accept the submission from Ms Gorman, counsel for the Registrar, that Mr Clarke’s failure to pay the considerable arrears in GST and that the use of funds collected on behalf of the Government to pay other creditors was a breach of Mr Clarke’s duties under s 135 of the Act, having regard to the observations made in
Syntax Holdings (Auckland) Ltd (in liq) v Bishop and in Richard Geewiz Gee Consultants Ltd v Gee concerning the quasi-trust character of funds payable to the Inland Revenue Department.2
[15] For these reasons, if Mr Dalkie had not made the concessions I would have upheld:
(a)The finding of the Deputy Registrar that the non-payment of GST amounted to serious mismanagement of the companies by Mr Clarke; and
(b)The decision of the Deputy Registrar to prohibit Mr Clarke from being a director of any company in the exercise of the Deputy Registrar’s powers under ss 385(3) and 385(4)(b) of the Act.
Was the period of prohibition disproportionate?
[16] Under s 385(3), the maximum period Mr Clarke can be prohibited from being a company director is 10 years. The maximum period was five years until the section was amended by the Financial Markets (Repeals and Amendments) Act 2013 with effect from 1 April 2014.
[17] The Act does not specify the test to be applied by the Deputy Registrar when setting the period of the prohibition. It can be inferred, however, that the period must be just and equitable given that s 385(4)(b) requires any director being considered for prohibition under that section to satisfy the Registrar that the proposed exercise of the power of prohibition would not be just and equitable.
[18] As Mr Dalkie submitted, there has been judicial consideration of whether the power of prohibition is to be exercised for the purposes of protecting the public or for punishing the conduct of the person being considered for prohibition. The position is
2 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171 at [12]; Richard Geewiz Gee Consultants Ltd v Gee [2014] NZHC 1483 at [98].
made clear in Davidson v Registrar of Companies,3 the first decision to specifically consider s 385. In that decision, Miller J said:4
[91] I need not categorise prohibition under s 385 as [either protective or punitive]. … it is both. … the legislation initially examines mismanagement contributing to insolvency, without focusing on the conduct of any given director. Causation having been established, the registrar may prohibit anyone falling within the class of directors and managers. Prohibition is not aimed at remedying wrongs done to shareholders and creditors of the insolvent company but at protecting the public from unscrupulous or incompetent directors in the future, deterring others and setting appropriate standards of behaviour. At the same time, any given director or manager inevitably experiences prohibition as a punishment; it is an adverse consequence of an inquiry into his or her involvement in an insolvent company.
[19] Mr Dalkie suggested that in the above passage Miller J took a different approach to that taken by Asher J in Kelly v Structured Finance Ltd where it was held that the public interest in prohibitions of this kind is to be approached from the perspective of protecting the public rather than punishment.5 I do not consider Asher J to have said anything materially different from what Miller J said in Davidson. Asher J’s observations in Kelly were made after he had adopted the reasoning of Tompkins J in Re Trott that the protection of the public may require that a person be marked as a bankrupt and suffer the stigma that goes with bankruptcy.6 In other words, protection of the public and the fact that the recipient may see prohibition as a punishment go together, as stated in Davidson.
[20] The Deputy Registrar set the period for Mr Clark at seven years – to run from the date of the notice given under s 385, being 8 December 2016. In setting that period, the Deputy Registrar referred to the reasons for the decision to prohibit Mr Clarke from being a director. Principally, these related to Mr Clarke’s mismanagement of the company over the non-payment of GST but they also included Mr Clarke’s failure to keep proper accounts. The Deputy Registrar also found that Mr Clarke had failed to cooperate with the liquidators of the companies.
3 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC).
4 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [91].
5 Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at [63].
6 Re Trott [2009] 2 NZLR 800 (HC) at 810.
[21] The Deputy Registrar made the following observations in the decision regarding Mr Clarke’s mismanagement:
9.13 I consider the mismanagement to be very serious. The fact the IRD’s “shareholder” is the State is irrelevant. Directors are not required to treat the IRD as a special class of creditor per se. However, the IRD should not be given an inferior status either. The IRD should be paid on the same basis as any other unsecured creditor. …
10.8For a company to remain solvent it must be both cash flow positive and have assets that exceeded liabilities as per section 4 of the Act. Once [Mr Clarke’s] Companies did not pay the IRD, and particularly the lack of payments over a sustained period, the Companies could not be solvent. At that point in time under any sober assessment Mr Clarke should have ensured the Companies ceased to trade. …
10.9I consider the nature of the mismanagement as well as the extent of it is severe. I consider his mismanagement was either wilful or fundamentally ignorant of what is required of a company director. …
11.11 I do not regard the failure to keep proper accounts as some sort of technical breach. I regard it as serious and fundamental. Insolvency practitioners have stated that such failure is a prime reason for company failure. …
11.18I do not regard a breach of s 189 [requiring a company to keep records at its registered office] as a technical breach. It is a fundamental requirement of directors to ensure that proper governance is being observed. … The maintenance of records is a discipline which reminds the directors of the duties and processes they must follow. …
[22] I consider these conclusions were justified on the information before the Deputy Registrar. As already noted, I agree with the Deputy Registrar’s conclusions regarding the non-payment of GST. Regarding the company records, Mr Clarke was unable to provide any satisfactory explanation of why he was unable to produce the records of the five companies. The assertion that the document management of the companies had been taken over by Mr Weise does not explain why there were no records. It is understandable the Deputy Registrar viewed with suspicion the claim the offices used by the companies had been ransacked by employees and trade creditors once news of the liquidations became public, and the invitation to speculate that this must have led to the loss of the records, given there was no evidence of a complaint to the police about the alleged break in.
[23] Mr Dalkie asserted there was an element of predetermination in the decision to prohibit Mr Clarke from being a director for a period longer than his period of
bankruptcy and referred to an email of 22 July 2016 from an official at the Ministry to the liquidators. I do not agree. The email states that the Deputy Registrar “may” determine that the conduct of bankrupt individuals warrants a period of prohibition longer than the period of their bankruptcy and that Mr Clarke was being considered for a director prohibition because of the number of failed companies in which he had been involved. It does not say Mr Clarke was being considered for director prohibition just because he was a bankrupt.
[24] I accept Mr Dalkie’s related submission that a decision under s 385 is separate from the question of an individual’s bankruptcy, except, as noted by Ms Gorman, to the extent that the bankruptcy is one of Mr Clarke’s personal circumstances to which the Deputy Registrar could and did have regard when setting the period of the prohibition.
[25] Mr Dalkie said the email of 22 July 2016 also showed the Deputy Registrar was using the prohibition to punish Mr Clarke rather than to protect the public. I do not accept that. It is clear the Deputy Registrar’s focus was on protecting the public rather than punishing Mr Clarke. The Registrar made the following observations when deciding the period of prohibition:
15.3I must also take into account the personal circumstances of Mr Clarke but unless there are exceptional circumstances (and none have been advanced) I consider the risk to the public outweighs any possible hardship to Mr Clarke. …
15.4I consider Mr Clarke then and now has no concept at all as to the duties and responsibilities required of a company director. This is not a failing on a technical level. It goes to a more basic failing of a person who has a flawed understanding of his duties and responsibilities to the Companies and its creditors. I consider there is nothing to indicate any insight by Mr Clarke as to his mismanagement and the effect he had on others. … I consider Mr Clarke is a serious danger to the public and the public requires protection from Mr Clarke.
[26] Nor do I accept, as Mr Dalkie said, that these findings by the Deputy Registrar were emotive, value subjective comments, were not based in reason or a proper objective analysis of the facts, were tendentious statements that suggested a predilection against Mr Clarke from the outset, and that they were not conclusions
open to be made on an objective analysis of ascertained facts, especially where the process was a decision made on the papers.
[27] To the contrary, I am satisfied the Deputy Registrar’s decision followed a proper process that accorded with the requirements of s 385 and with the requirements of natural justice as discussed in Davidson:7
(a)The Ministry’s Notice and accompanying letter of 8 December 2016 informed Mr Clarke of the decision under consideration and the material being considered for that decision, and offered Mr Clarke the opportunity to comment. The fact there was a five-month delay between the writing of the notice and letter and their service on Mr Clarke did not affect their validity or cause prejudice to Mr Clarke. I consider below whether the delay is relevant to the calculation of the period of the prohibition.
(b)Mr Clarke responded in an 18-page submission from his counsel.
(c)Mr Clarke was given the opportunity to revise his submissions once the Ministry had clarified where the onus of proof lay and made it clear to Mr Clarke that the responsibility lay with him to satisfy the Registrar why the Registrar should not prohibit Mr Clarke from being a director but did not take that opportunity.
(d)Mr Clarke chose not to take that opportunity – although nothing turns on that fact alone.
[28] I consider the Deputy Registrar’s substantive findings of the risk Mr Clarke posed to the public were properly open to the Deputy Registrar given the large arrears that GST accrued over a short period of time, Mr Clarke’s evident lack of understanding of his obligation to account for GST, the various efforts to evade responsibility by claiming Mr Clarke had been acting on the advice of Mr Weise and others, the failure to produce the company accounts and the unsatisfactory explanation
7 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [104]-[107].
offered for the absence of records. The basis of the findings – the substantial arrears in GST and the absence of records – are based on facts that Mr Clarke could not dispute.
[29] Mr Dalkie’s contention that the period of prohibition was disproportionately severe was based on a comparison with the prohibitions imposed in Davidson and Brand v Registrar of Companies,8 and with the period of bankruptcy imposed in Bryers v Official Assignee.9 As the Deputy Registrar noted, the prohibitions imposed in Davidson and Brand – two and a half years and four years respectively – were imposed at the time the maximum penalty was five years and the decision in Bryers did not concern s 385. (Mr Bryers did not challenge the five-year prohibition imposed under s 385 – also imposed when the maximum period was five years).
[30] I accept that just because Parliament doubled the period of the permissible maximum prohibition does not mean the Registrar should automatically double the period when imposing a prohibition under the new maximum. I do not consider the Deputy Registrar did engage in such a doubling exercise, even though, when agreeing with Mr Dalkie that Davidson was a useful reference point, the Deputy Registrar had noted that on one analysis he could simply double the two and a half years imposed in Davidson to set a starting point for the prohibition because of the increase in the permitted maximum. Rather, I consider the Deputy Registrar properly looked at the circumstances of Mr Clarke’s case when setting the period. At the same time, the Deputy Registrar was correct to take into account the legislated increase in the maximum period of prohibition, reflecting an evident expectation on the part of Parliament that longer periods of prohibition should be imposed in appropriate cases.
[31] Mr Dalkie sought to contrast the arrears of just over $1 million in GST owed to the IRD caused by Mr Clarke’s actions with the many millions lost to investors in the collapses of Bridgecorp, Blue Chip and South Canterbury Finance that were the background to the decisions in Davidson, Brand and Bryers. However, while the scale of past losses is clearly relevant, as the Deputy Registrar acknowledged, it is not the
8 Brand v Registrar of Companies [2016] NZHC 2983.
9 Bryers v Registrar of Companies [2015] NZHC 384.
sole factor. In this case, the Deputy Registrar considered the protection of the public and setting of standards to be predominant factors.
[32] In Davidson, Miller J said there was no dishonesty or impropriety of any sort on Mr Davidson’s part. Mr Davidson’s responsibility lay in failing to take more assertive action in a situation of sustained mismanagement of the Bridgecorp group by others.10 Miller J also held that the public had nothing to fear from Mr Davidson who had learned a painful lesson and agreed that specific deterrence was not needed, although he did go on to note that standard-setting and general deterrence did matter and warranted a substantial period of prohibition. It is inherent in those findings that Miller J considered Mr Davidson knew and understood the need to avoid any repeat of the situation in which he had found himself. That contrasts starkly with the conclusions of the Deputy Registrar in this case that Mr Clarke had a flawed understanding of his responsibilities as a director and little insight of the impact of his actions on others.
[33] In terms of the protection of the public, therefore, Mr Clarke’s situation is different and more serious from that of Mr Davidson, notwithstanding the much more significant losses suffered in the Bridgecorp collapse and notwithstanding the fact that it was the IRD rather than private investors that suffered the loss in Mr Clarke’s case. Furthermore, to set the term of the prohibition principally by reference to the losses suffered risks making punishment the primary focus – which Mr Dalkie agreed it should not be. It is also relevant to recall the observations of Miller J in Davidson that the maximum period was not reserved for the worst possible cases and that there might be many cases where a substantial period of prohibition was needed.11
[34] Mr Dalkie said that the seven-year prohibition imposed on Mr Clarke was at the top end of the range and that this also showed it was disproportionately severe. However, Ms Gorman produced a list of prohibitions imposed over the period from January 2012 to February 2018 that shows that penalties have regularly been imposed at the upper end of the range – both when the maximum was five years and, since 1 April 2014, when it became 10 years.
10 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [140].
11 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [142].
[35] Mr Dalkie did not object to the list to which he referred in making the case that the seven-year prohibition imposed in Mr Clarke’s case was excessive. However, the list shows that 18 of the 91 prohibitions imposed since 1 April 2014, or just under 20 per cent, were for seven years or more, with some being for periods of eight, nine or 10 years. While the Court is no position to assess how Mr Clarke’s case compares with those other cases, it is apparent that the penalty imposed on Mr Clarke is within the range of penalties imposed in recent years and is not the outlier contended by Mr Dalkie.
[36] Accordingly, I see no basis for concluding that the prohibition imposed by the Deputy-Registrar was manifestly excessive or plainly wrong. Furthermore, as Ms Gorman observed, Mr Dalkie has not pointed to any error of law or principle by the Deputy Registrar in exercising his discretion to impose a seven-year prohibition. It follows that there is no proper basis for this Court to set aside the term imposed by the Deputy-Registrar and impose one of its own.
Should the period of prohibition take into account delays by the Ministry?
[37] Mr Dalkie submitted that Mr Clarke should get credit for an eight-month delay in the inquiry by the Ministry which he says means that the inquiry should have concluded earlier and the period of prohibition would have started and ended sooner. It appears from the submission Mr Clarke made to the Deputy Registrar that the delay referred to was between August 2015 and May 2016.
[38] However, it is not the investigation but the notice issued under s 385(3) that sets the starting point for the period of prohibition. The notice in this case was dated 8 December 2016, after the delay alleged by Mr Dalkie. There is no basis, therefore, for giving “credit” for actions that might have taken place before that date because the decisions to proceed with the notice may not have been taken until after the period of alleged delay.
[39] A consequence of the prohibition period running from the date of the notice is that Mr Clarke suffered no prejudice from the five-month delay between the issuing of the notice and its service on Mr Clarke or from the further time taken to clarify where the onus of proof lay in a situation covered by s 385(4)(b). Accordingly,
Mr Dalkie’s submission on these later delays and the argument there was double counting cannot succeed.
Conclusion
[40]It follows that:
(a)The decision of the Deputy Registrar of Companies to prohibit Mr Clarke from being a director, promoter or taking part in the management of any company under of s 385 of the Companies Act 1993 was correct;
(b)There is no basis for this Court to set aside the Deputy Registrar’s decision setting the period of prohibition at seven years;
(c)There is no reason to give Mr Clarke “credit” in calculating the period of prohibition for alleged delays by the Ministry of Business, Innovation and Employment.
Result
[41]The appeal is dismissed.
G J van Bohemen J
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