Classic Flights Limited (in liquidation) v Li
[2025] NZHC 1063
•6 May 2025
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2023-425-65
[2025] NZHC 1063
UNDER the Companies Act 1993 BETWEEN
CLASSIC FLIGHTS LIMITED
(in Liquidation) First Plaintiff
AND
TREVOR EDWIN LAING and EMMA MARGARET LAING
Second Plaintiff
AND
JUNJIE LI
Defendant
Hearing: 7 – 9 April 2025 Appearances:
J C D Guest for Plaintiff
B B Gresson and E M A Downey for Defendant
Judgment:
6 May 2025
JUDGMENT OF CHURCHMAN J
Table of Contents
Paragraph
Background 1
The facts 4
Submissions 17
Plaintiff ’s submissions 17
Defendant’s submissions 19
The law on breaches of duty by company directors 23
Analysis 31
The examination 65
Was the lease on normal commercial terms? 72
Conclusions on the evidence 102
What was the true value of the aircraft when returned to Apex Aviation 107
LAING and LAING v LI [2025] NZHC 1063 [6 May 2025]
Relief 115
Relevant law 115
Plaintiffs’ submissions 120
Defendant’s submissions 125
Analysis 126
Interest 127
Conclusion 129
Costs 130
Background
[1] The liquidators of Classic Flight Limited (in liquidation) (Classic Flights). Trevor Edwin Laing and Emma Margaret Laing, have commenced proceedings against Junjie Li (also known as Fox Li and as Fox Lee) alleging breaches of s 301 of the Companies Act 1993 (the Act).
[2] The breaches of duty are particularised in the amended statement of claim as being:
(a)That the defendant breached his statutory and fiduciary duties to the plaintiff by not acting in good faith and in the best interests of the plaintiff (s 131 of the Act), by causing the company to enter into a lease of a Cessna 172 aircraft (the aircraft), then registered ZK-DXP, on terms that were favourable to the defendant and disadvantageous to the plaintiff, thereby causing financial loss to the plaintiff.
(b)The defendant breached his statutory and fiduciary duties to the plaintiff by breaching the duty to exercise his powers as director for proper purposes (s 133 of the Act), by causing the company to enter into the lease of the above mentioned aircraft resulting in financial loss to the plaintiff.
(c)In particular, the defendant caused Classic Flights to pay for upgrading the aircraft to the benefit of the defendant’s wife, Lin Shi, U-Fly New Zealand Ltd and Southern Horizon Ltd.
(d)The defendant breached his statutory and fiduciary duties to the plaintiff by acting in conflict of interest between the plaintiff and U-Fly New Zealand Ltd, in particular:
(i)he was a director of both companies from 1 June 2019 to 15 September 2019;
(ii)he was effectively a director of both companies from 15 September 2019 until at least 5 February 2020;
(iii)the two companies were operating similar aviation businesses, from premises adjacent to each other, at Wānaka Airport and were in competition with each other; and
(iv)the defendant breached his statutory duty not to act in a manner that contravened s 134 of the Companies Act 1993 in that by resigning as a director the plaintiff had no directors resident in New Zealand contrary to s 10(d) of the Companies Act 1993.
[3]The compensation sought by the plaintiff is a payment of the sum of
$126,607.28 plus interest and costs. The defendant denies all of the alleged breaches of duty.
The facts
[4] From 2017 to 2021, Classic Flights operated an aviation business which undertook flight training and charters at Wānaka Airport. The company was duly incorporated under the Act. The defendant was the managing director of Classic Flights from 30 June 2017 until he resigned as director as of 15 September 2019. Until 5 March 2019, he was the companies’ sole director. On 15 March 2019, he had filed a notice recording that as of 5 March 2019, Hong Cheng and Yan Wang were appointed additional directors. The notice falsely described their residential address as being the aircraft hanger at 6 Spitfire Lane at Wānka Airport. They were actually resident in China.
[5] On 21 October 2021, Classic Flights was placed into liquidation by order of the High Court and the second plaintiffs were appointed as liquidators. The business assets had been sold and there were no identifiable assets of any sort. At the time of the liquidation, the directors were Hong Cheng and Yan Wang. Both of those directors each owned 45 per cent of the shareholding. The defendant was a minority shareholder, owning a 10 per cent share. The company owed an outstanding
$188,916.73 to creditors.
[6] During December 2017 and January 2018, the defendant negotiated the purchase of the aircraft, from a private owner. At the time of the purchase, the aircraft was registered as ZK-DXP. After having personally negotiated with the vendor of the aircraft for its purchase and having prepared and sent the vendor an initial draft agreement for sale and purchase showing himself as the purchaser, at the last minute, the defendant arranged for the aircraft to be purchased and registered under “Apex Aviation”.
[7] Apex Aviation was, in fact, the alter ego of the defendant’s wife, Ms Lin Shi. Under cross-examination, Lin Shi confirmed that, prior to the purchase of ZK-DXP Apex Aviation had not existed and that ZK-DXP was its only asset. Lin Shi had no prior qualifications or experience in aviation. For the reasons I discuss below, I have come to the conclusion that “Apex Aviation” was an invention of the defendant and created purely for the purpose of concealing from the other two shareholders in the company, both of whom were resident in China, that he had purchased the aircraft and entered into a lease arrangement highly advantageous to himself and disadvantageous to Classic Flights.
[8] The bill of sale, dated 29 January 2018, recorded a payment of $57,500 by Apex Aviation to the vendor. Those funds had come from borrowing against the house owned by the defendant and Lin Shi. That price reflected the fact that, before being used for commercial purposes, the aircraft would require major and expensive capital maintenance. All aircraft, and, in particular aircraft used for commercial purposes, are subject to strict time limits (measured by hours of operation). Detailed records are required to be kept of all operating hours. An inspection of the records reveals exactly
how many more hours an aircraft can operate before a complete overhaul takes place. At the time of its purchase, this aircraft had almost no hours left.
[9] On 5 February 2018, the defendant signed what was described as a “licence” but was, in reality, a lease, on behalf of Classic Flights, to lease the aircraft (the lease) from Apex Aviation (effectively himself and his wife). The lease provided for Classic Flights to pay all maintenance of any sort.
[10] On 2 February 2018, the defendant had obtained an inspection report in respect of ZK-DXP. At the time of signing the lease, the defendant was, therefore, aware of the state of the aircraft. The rent was $145 plus GST per flight hour, which was within the usual industry range. For the reasons I explain in detail below, the obligation on Classic Flights to pay the substantial maintenance costs including a full engine overhaul, an upgrade of the engine from 150 hp to 180 hp, an avionics upgrade and a new propeller, was not usual.
[11] Classic Flights took possession of the aircraft in February 2018. Its engine had done 1780 hours1 since its last overhaul and therefore had few remaining hours left before it was mandatorily required to have its major overhaul at 1,800 hours. It was effectively unusable by Classic Flights until the work was done. The defendant sent the aircraft engine to a maintenance facility in Australia to overhaul and upgrade the nearly expired engine. The avionics were also upgraded. The defendant also arranged with a New Zealand based company, Air Plains, for the purchase and installation of a new propeller.
[12]Classic Flights incurred costs in relation to this capital maintenance of some
$126,607.28. It was just under four months after purchase that the aircraft was available to be used by Classic Flights. Before returning the aircraft to Wānaka, the defendant arranged with the Civil Aviation Authority for the registration of the aircraft to be changed to ZK-LIT.
1 Under cross-examination the defendant mentioned both 1,780 hours and 1,792 hours.
[13] The lease effectively ended in early January 2019, less than a year after it commenced with the last recorded flight for Classic Flights being 10 January 2019. The defendant then took the aircraft to Auckland.
[14] On 4 June 2019 the defendant became a director of U-Fly,2 which was then conducting an identical business to Classic Flights at Wānaka Airport. The sole shareholder of U-Fly is now Southern Horizon Ltd (Southern Horizon). I set out below the relevance of the defendant’s connection to both U-Fly and Southern Horizon and the extent he has gone to, to disguise that connection.
[15] A few months prior to the liquidation of Classic Flights, U-Fly purchased the business premises which Classic Flights had previously leased, namely, a hangar at 6 Spitfire Lane at Wānaka Airfield. It operates from those premises.
[16] The aircraft ZK-LIT (formerly ZK-DXP) is now operated by U-Fly and has been since at least 4 June 2019. The defendant works full-time as a Senior Flying Instructor and Commercial Pilot at U-Fly. Through family nominees, he is also effectively the managing director and owner of that company.
Submissions
Plaintiff ’s submissions
[17] In addition to the particular breaches set out at [2] above, the plaintiffs specifically claim that the terms of the lease of ZK-DXP were unusual and onerous to Classic Flights while being commercially beneficial to the defendant’s wife, namely:
(a)the lease agreement was, unusually, framed as a licence, with no right to exclusive use nor certainty of duration;
(b)the terms the defendant agreed to on behalf of the first plaintiff were detrimental to the first plaintiff because the combination of the hourly
2 At that time, the company was called U-Fly (2014) Ltd. The name was later changed to U-Fly New Zealand Ltd.
rate and the obligation to pay for all of the maintenance meant that the first plaintiff could never profit from it;
(c)The aircraft was significantly improved through the maintenance and refurbishment paid for by the first plaintiff at the direction of the defendant; and
(d)The defendant’s actions constituted a significant planned transfer of wealth from the first plaintiff to the defendant’s wife or both of the defendant and his wife jointly.
[18] The plaintiffs argue the unusual terms of the lease were exacerbated by the fact that the aircraft was in poor condition when it was purchased from a private operator with a time-limited engine and propeller.
Defendant’s submissions
[19] The defendant submits he did not breach his duties under s 301 as the company received fair value from the leasing transaction. He asserts the aircraft flew for
506.4 hours and made income for the company of $307,935, producing what the defendant claims as $38,881.56 in profit. The defendant acknowledges that whilst he had an interest in the lease of the aircraft and payment of the maintenance and repair costs, this was not a breach of his fiduciary duties as those transactions were entered into in the best interests of Classic Flights. His counsel acknowledges that the onus of proving that the lease provided fair value to the company is on him.
[20] The defendant argues the lease enabled Classic Flights to secure an aircraft, without committing to any immediate obligations or costs. The company did not have any repair or maintenance obligations other than those arising from its use. The defendant claims the rent was payable at or below normal rates of rent.
[21] The defendant argues the maintenance and repair costs were necessary and based on a reasonable estimate to make the aircraft airworthy. The estimate was based on the use and financial performance of the company’s existing aircraft at the time and of the likely revenue the company would receive if the aircraft was repaired.
[22] In relation to the terms of the lease, the defendant submits the terms of the lease were substantively fair and justifiable in the particular circumstances. The defendant claims the term requiring Classic Flights to pay for maintenance obligations arising out of its use of the aircraft was not uncommon. The defendant says he relied on lease guidance material to include the clause in the lease.
The law on breaches of duty by company directors
[23] Section 301 of the Act gives the Court the power to require persons to repay money or return property in the course of the liquidation of a company:
301 Power of court to require persons to repay money or return property
(1)If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—
(a)inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b)order that person—
(i)to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(c)where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
(2)This section has effect even though the conduct may constitute an offence.
(3)An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.
(4)In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.
[24] In Mason v Lewis, the Court of Appeal set out a two-step test in relation to a claim for breach of directors’ duties brought pursuant to s 301.3 The first step is to ask whether there has been a breach of duty owed by a director to the company. If there was a breach, the next step is to consider the extent to which the director should contribute to the losses of the company.
[25] Section 131 requires directors to act in good faith and in the best interests of the company:
131 Duty of directors to act in good faith and in best interests of company
(1)Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
(2)A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.
…
(5) To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters).
[26] Section 131 involves a fiduciary duty.4 Good faith requires a director to act honestly and with a proper motive. The test for whether a director acted in good faith is a subjective test.5 However, directors cannot subjectively believe they are acting in the best interests of the company if they have failed to consider the interests of the company or, where required, the interests of all of the creditors, including prospective creditors.6 The interests of creditors have to be considered where the company is
3 Mason v Lewis [2006] 3 NZLR 225 (CA) at [52].
4 Morgenstern v Jeffreys [2014] NZCA 449 at [99].
5 Madsen-Ries v Cooper [Debut Homes] [2020] NZSC 100, [2021] 1 NZLR 43, at [112].
6 At [114].
insolvent or nearly insolvent.7 A director must not put his or her own interests, or those of a third party, ahead of the company's interests.8
[27] Acts which cause the company to become insolvent are not in the best interests of the company, given that the company would cease to exist, and shareholders would lose possible future income.9 In an insolvency situation where the interests of all creditors have not been considered, a conflict of interest may well exacerbate the breach.10 The fact that an allegedly unreasonable belief was held may provide evidence that the belief was not honestly held.11
[28] Section 133 provides a director must exercise a power for a proper purpose. The duties set out in ss 131 and 133 are owed to the company and not to shareholders.12 The purpose of s 133 is to prohibit a director’s abuse of power by acting for an improper reason, even if the act itself is within the scope of his or her powers.13 Circumstances where the Courts have ruled that directors have breached s 133 include where a director acted for personal purposes rather than corporate purposes,14 or withdrew company funds to the detriment of the company and Inland Revenue,15 or operated a Ponzi scheme.16
[29] Section 134(1) requires a director to comply with the Act and constitution of the company: “a director of a company must not act, or agree to the company acting, in a manner that contravenes this Act or the constitution of the company”.
[30] If a director is involved in a transaction where there is a likely conflict of interest between the director’s personal interests and the separate interests of the
7 At [31] citing Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 250 per Cooke J and 255 per Somers J.
8 Independent Carpets Ltd (in liq) v Carpet Call 2000 NZ Ltd [2020] NZHC 2757 at [43] citing
Debut Homes, above n 5, at [177].
9 At [32].
10 At [115].
11 At [109].
12 Companies Act 1993, s 169(3)(d) and (e).
13 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 at [15] per Lord Sumption citing
Hindle v John Cotton Ltd (1919) 56 SLR 625 at 630.
14 See Singh v K & M K Singh Farms Ltd HC Hamilton CIV-2007-419-911, 20 July 2007; and see
Willburn Furniture and Restorations Ltd (in liq) v Gledhill [2016] NZHC 331.
15 See Sion Consultants Ltd (in liq) v Bason [2015] NZHC 645.
16 See Hansa Ltd (in liq) v Hibbs [2017] NZHC 2014.
company, the director must satisfy to the Court that the transaction was for fair value to avoid breaching the director's duties to the company.17 While there is no obligation for the breaching director to obtain a contemporaneous independent valuation, a director who does not do so may find it difficult later to establish that the transaction did occur at fair value and was generally a proper one for the company to enter into.18
Analysis
[31] Liability for breach of any one of the duties identified by the plaintiffs would be sufficient for the Court to award relief under s 301.
[32] The credibility of the defendant is a factor that weighs significantly in my assessment of his evidence and his claim to have been acting in good faith. Actions done openly and communicated clearly to the other shareholders and directors would support a finding of good faith. Conversely, secretiveness and attempts to conceal the true nature of a transaction would support the opposite conclusion.
[33] I start with some general observations about the defendant’s credibility. The defendant’s prepared brief of evidence, the contents of which were confirmed by him under oath, contained a claim that was untrue. He claimed to have held “several senior positions in the Civil Aviation authority”. He was obliged to admit under cross-examination that he had never actually worked for the Civil Aviation Authority in any capacity.
[34] The defendant had also falsely denied that the aircraft registered as ZK-LIT was the same aircraft as ZK-DXP. A witness for the plaintiffs, Callum Smith, had given evidence that the defendant had denied to him that ZK-LIT was the old ZK-DXP and insisted it was a different aircraft. Mr Smith was not cross-examined on that aspect of his evidence, and I accept it as reliable. It is also consistent with the record of an application by the defendant of 12 March 2019 to change the registration of ZK-DXP to ZK-LIT.
17 Morgenstern v Jeffreys, above n 4, at [57] affirmed by Morgenstern v Jeffreys [2014] NZSC 176 at [8].
18 Morgenstern v Jeffreys, above n 17, at [8].
[35] In addition to the matters just outlined, the defendant’s evidence on other topics raises grave concerns about the extent to which reliance could be placed on any of his evidence. I will now discuss some of that evidence in some detail.
[36] Section 10(d) of the Companies Act requires that a company registered in New Zealand has a least one director resident in New Zealand. On 28 May 2019 the defendant filed the annual return for Classic Flights for the financial year 2019. In addition to himself, it listed two other directors: Hong Cheng and Yan Wang. It gave the residential address for both these directors as being 6 Spitfire Lane, RD 2 Wānaka. This is not a residential address but the address of the hanger at Wānaka Airport from which Classic Flights conducted its business. Hong Cheng and Yan Wang were also the two major shareholders in Classic Flights. In the same annual return, where the addresses of shareholders are required to be listed, the defendant listed the correct residential addresses of Hong Cheng and Yan Wang which were in Harbin City and Beijing China respectively.
[37] The defendant claims that Hong Chen and Yan Wang held visas allowing them to work in New Zealand at the time of his resignation as a director of Classic Flights but did not plead or assert in his evidence that they were resident in New Zealand at that time or any other time. Indeed, he refers to having visited them both in China in January 2019.
[38] There was no evidence that either were ever resident in New Zealand. On the defendant’s resignation as a director, the company was in breach of s 10(d). I infer that the defendant’s reference in the 2019 annual return to these directors residing at 6 Spitfire Lane was a deliberate attempt to conceal the fact that neither were New Zealand residents and that his resignation as a director would put the company in breach of s 10(d).
[39] Another aspect of the evidence that reflects poorly on the defendant’s attitude to his obligations as a director of Classic Flights is the sequence of events that started on 8 February 2019 when the defendant’s father-in-law, Yan Shi, incorporated a company called Southern Horizon Ltd. Yan Shi was shown as the sole director and shareholder. On 1 April 2019, Yan Shi filed a document with the Companies Office
transferring all of his shares to the defendant’s wife Lin Shi who then became the sole shareholder.
[40] On 17 May 2019, Yan Shi filed a document recording the appointment of the defendant as a director of Southern Horizon Ltd.
[41] On 30 May 2019, Yan Shi filed a further document which showed a transfer of half of Lin Shi’s shares to the defendant. The defendant thereby became an equal shareholder with his wife.
[42] On 4 June 2019, the defendant filed a series of documents with the Companies Office in relation to the company then called U-Fly (2014) Ltd. These documents recorded that he had become a director of that company on 1 June 2019, that, on the same date, the prior director Kylie Krippner had resigned; that the new 100 per cent shareholder of U-Fly (2014) Ltd was Southern Horizon Ltd.
[43] The significance of this is that, on 4 June 2019, the defendant was still a director of Classic Flights, and he became the director of a company that operated a business which directly competed with Classic Flights from adjacent premises.
[44] The same day that the defendant became the director of U-Fly, he had advised the Civil Aviation Authority that possession of the aircraft ZK-LIT was transferred from Apex Aviation to U-Fly. Thereafter, it was used in U-Fly’s business in direct competition with Classic Flights and continues to be so used.
[45] After assuming control of U-Fly, the defendant engaged in a complicated series of transactions relating to both U-Fly and Southern Horizons that are only explicable as being an attempt to conceal from the shareholders in Classic Flights and later, the liquidators, his link to those companies.
[46] I now set out the details relating to these transactions. On 21 August 2019, the defendant advised the Companies Office that Lin Shi (his wife) had become a director of U-Fly. On 5 February 2020, he advised the Companies Office that he had ceased to be a director of U-Fly. On 13 November 2020, he advised the Companies Office
that his father-in-law Yan Shi, (whose residential address he gave as 6 Spitfire Lane, RD 2 Wānaka) had become a director of U-Fly. On 10 March 2021 he advised the Companies Office that Lin Shi had ceased to be a director. On 2 September 2021 he advised the Companies Office that his father-in-law, Yan Shi had ceased to be a director.
[47] The particulars of the directors and shareholders of Southern Horizon were also regularly changed. On 5 February 2020, the defendant’s wife filed a document recording that nine months earlier, on 17 May 2019, the defendant ceased to be a director of Southern Horizon. He was replaced by his father-in-law Yan Shi as a director of Southern Horizon on 11 November 2020. Later the same day, Yan Shi filed a document recording the cessation of Lin Shi as a director. On 1 December 2021, Yan Shi filed a document recording his cessation as a director and replacement by Lilin Xiong. Under cross-examination, the defendant’s wife acknowledged that Lilin Xiong was, in fact, her mother (and therefore, Yan Shi’s wife).
[48] On 6 December 2021, Yan Shi filed a document removing himself as a shareholder and naming Lilin Xiong as the new sole shareholder. Lin Shi alleged in cross-examination that her mother, Lilin Xiong, at the time of the hearing, remained the sole shareholder of Southern Horizon. However, that was inconsistent with the documentary evidence.
[49] That evidence disclosed that on 14 December 2024 Yan Shi filed a document which removed Lilin Xiong as a shareholder and described the new shareholder as Sujuan Xia, whose residential address was given as 6 Spitfire Lane, RD 2 Wānaka as a replacement shareholder in Southern Horizon Ltd. On 16 December 2024 Yan Shi filed a further document recording that Sujuan Xia of 6 Spitfire Lane, RD 2 Wānaka was the new director. Under cross-examination Lin Shi admitted that Sujuan Xia is, in fact, the defendant’s mother.
[50] The merry-go-round of shareholders and directors that occurred in relation to Southern Horizon also occurred in relation to U-Fly. On 21 August 2019 the defendant filed a document which listed his address as being 28a Riversdale Rd, Avondale and recorded the new director of U-Fly as being Lin Shi but listed her
address as 2 Paramu Ave, Birkdale. Given that the defendant and Lin Shi remain married, it is not obvious why the defendant would deliberately record he and his wife as having different residential addresses in Auckland unless he was intending to conceal the fact that she was his wife. On 5 February 2020, the defendant resigned as a director and Yan Shi was appointed a director. On 4 November 2020, the defendant filed the annual return for U-Fly showing Southern Horizon as the sole shareholder in U-Fly and Lin Shi as the sole director.
[51] On 13 November 2020, the defendant filed a document recording that Yan Shi became a director of U-Fly on 11 November 2020. On 10 March 2021, he filed a document recording that Lin Shi ceased to be a director on 28 February 2020. On 27 December 2024, the defendant filed a document recording that Yan Shi and Lilin Xiong ceased as directors of U-Fly that day and Sujuan Xia became the sole director.
[52] The defendant had no rational explanation for the complicated manoeuvring in respect of the shareholding and directors of Southern Horizon and U-Fly. When asked in cross-examination what his understanding of the purpose of formation of Southern Horizon was, he said he “couldn’t recall”. He also could not recall being involved in the filing of a notice with the Companies Office by Yan Shi shortly after the company was formed. That notice had transferred Yan Shi’s shareholding entirely to Lin Shi.
[53] He “could not recall” details of his wife receiving the 100 per cent shareholding and could not recall whether the formation of that company was linked to his impending departure from Classic Flights. He could not give a reason why he became a director of Southern Horizon on 16 May 2019. He accepted that as at 30 May 2019 when he acquired half the shares in Southern Horizon it was with the intention of acquiring the shares in U-Fly. In cross-examination, the defendant claimed that the money to purchase U-Fly came from his father-in-law Yan Shi.
[54] When asked why he transferred his shares in Southern Horizon to his wife so that she became a 100 per cent shareholder, his explanation was “for family reasons”.
When asked to explain what those reasons were he initially refused and then said that he didn’t “actually recall” the reason. He confirmed the transaction was not a sale.
[55] The relevance of all of this is that the defendant did not disclose to the two Chinese based majority shareholders (and also by that time, directors) of Classic Flights that, whilst still a director of Classic Flights he had, through family nominees, acquired control of a direct competitor to Classic Flights.
[56] This is confirmed by a letter from the legal firm Loo and Koo to the defendant dated 27 August 2019. The letter records that the solicitors had been instructed by Hong Cheng and Yan Wang, then directors of Classic Flights, to act on behalf of the company. It notes that the defendant had sent an undated resignation letter on 29 July 2019 recording his resignation as both company director and CFO of Classic Flights effective of 15 September 2019. The letter then records:
We understand that, without prior authorisation by [Classic Flights] you were appointed as a director of U-Fly New Zealand Ltd (“UFNZ”) on 1 June 2019, which company operates a competing business adjacent to CFL. There is a clear conflict between your duties as a director of CFL and your duties as a director of [U-Fly].
[57] The letter concluded by expressly reserving Classic Flights’ rights against the defendant. The defendant was therefore aware on 27 August 2019 his relationship with U-Fly and its owner Southern Horizon may well come under legal scrutiny.
[58] The risks to the defendant only increased when the second plaintiffs were appointed as liquidators of Classic Flights on 21 October 2021. The extent of lack of cooperation between the defendant and the liquidators is detailed in the evidence of Trevor Laing. He notes that the business premises of Classic Flights at 6 Spitfire Lane Wānaka had been “entirely cleaned out” before the new owner of the premises (U-Fly) assumed occupation a few months prior to the liquidation.
[59] Mr Laing discovered that there were no records for Classic Flights other than those in public documents. His evidence was that the defendant told him that there was nothing in the hanger left by Classic Flights when he had taken possession of the premises. The defendant was vague when asked about who the accountants were for Classic Flights mentioning “accountants in Auckland” and subsequently the name,
Findex. He did not tell Mr Laing that there had been other accountants involved as well. Given that the defendant held the role of CFO for Classic Flights, his lack of frankness as to who the company’s accountants were is concerning.
[60] As well as being uncooperative, Mr Laing’s evidence records that the defendant actively mislead him about a number of matters particularly around the lease of ZK-DXP (later ZK-LIT) to Classic Flights.
[61] Mr Laing’s evidence was that he spoke to the defendant several times and became increasingly concerned about his account of what had happened in the company. He recounts the defendant as having explained to him in interviews that there was significant tension between the directors about the operation of the company as well as issues about drawings taken by the two non-resident Chinese directors and what the defendant felt was their lack of support from them for his “on the ground” decisions.
[62] The topics on which the defendant actively mislead Mr Laing included his description of the aircraft ZK-DXP being owned by “one of the people [the defendant] knew of in Auckland”; his repeated reference to Lin Shi of Apex Aviation as being a male; the claim that the aircraft was leased on a “standard aircraft lease agreement” that the defendant did not have a copy of; the claim that the aircraft was leased “temporarily” and the claim that the engine sent to Sun Coast Aero Engines Pty Ltd in Australia for extensive maintenance was not for ZK-DXP but another aircraft.
[63] On this last point, Mr Laing refers to the various invoices referring to the aircraft serial number L-24756-36A which was the serial number of ZK-DXP. These invoices clearly establish that it was the engine from ZK-DXP, not any other aircraft, that was sent to Australia.
[64] Mr Laing also notes that the lease agreement between Apex Aviation and Classic Flights executed on 5 February 2018 recorded the agreed value of the aircraft as being $145,000. I infer that this figure, which was nearly three times the purchase price of $57,500, could have only referred to the value of the aircraft once the anticipated work to the engine, avionics and new propeller had been factored in.
The examination
[65] Because of concerns about the defendant’s evasiveness, the liquidators determined to formally examine him under oath pursuant to s 261 of the Companies Act. The transcript of that interview was included in the common bundle. It supports Mr Laing’s evidence about the extent to which the defendant actively misled him. In the transcript of the interview, Mr Laing is recorded as asking the defendant:
… So Lin Shi — is he in aviation business? Does he lease other aircraft or is there another aircraft that he leases from someone else?
The defendant answered
“No, its just a friend I know and looking for some…actually I asked just if he was interested to invest to get some financial reward kind of thing, yeh.”
[66] The transcript then records that, when asked who wrote the lease agreement, the defendant responded: “Oh, um maybe one of the lawyers I’m not sure.”
[67] When it was put to the defendant that the lease did not look like an agreement that was produced by a law firm and the defendant was asked where it came from he said: “I think yeah I’m not sure that is Apex Aviation prepared.”
[68]When asked when he first saw the lease document, the defendant said:
It’s the first I have seen of it when we talk about leasing the aircraft and talking about and ask Lin Shi at that stage to invest….I think he just emailed to me I had a read of it.
[69] All of these statements are false. Lin Shi was not a male, nor “just a friend” and no lawyers were involved in the preparation of the lease which was prepared by the defendant and his wife. These facts support my conclusion that, at the time of entering into the lease, the defendant was well aware that he had a major conflict of interest and that he was prepared to lie on oath to conceal from the companies’ liquidators the true nature of the transactions.
[70] During the examination, when asked specifically whether he and Lin Shi were related, the defendant acknowledged they were but would not answer the question as to the nature of how they were related saying: “Yeah, again I am wanting to discuss
my role in the relationship with Classic Flight and sorry couldn’t disclose any more info that’s how I’m not related”.
[71] This refusal to disclose the true nature of the relationship between him and Lin Shi when given the opportunity to do so provides further support for the conclusion that the defendant was well aware of his breach of his duties to Classic Flights and was attempting to conceal the conflict of interest.
Was the lease on normal commercial terms?
[72] An important issue requiring determination is whether or not the defendant has established that the lease of ZK-DXP was on standard terms. The plaintiff’s evidence was that there were four principal areas in which the lease was non-standard and provided an unusually favourable benefit to Lin Shi and a corresponding detriment to Classic Flights. First, the lease obliged Classic Flights to meet the capital maintenance costs that should normally be met by the lessor. Second, the lease was terminable by the lessor on one months’ notice. Third, the lease did not give Classic Flights exclusive use of the aircraft with the lessor being able to give 24 hours’ notice to Classic Flights of any period during which the lessor required exclusive use of the aircraft and during which the aircraft would, therefore, not be available for use by Classic Flights. Fourth, the nature of the obligations imposed on Classic Flights to repair the aircraft irrespective of a successful insurance claim.
[73] Three witnesses for the plaintiff gave relevant evidence. As to the obligation on Classic Flights to pay for the capital maintenance Trevor Laing’s evidence was:
A commercially oriented business would never do it and the only conceivable reason that the Defendant did this was to benefit his wife. This is further evidence by the return of the aircraft back to the owner in March 2019 with only 494 of the available 1,800 hours on the engine having been used by Classic Flights, leaving three quarters of the engine life left for the owner’s benefit at Classic Flights’ cost. There was no recognition of component amortization, that is, dividing out the used and un-used hours and apportioning between owners and lessees. If there is an obligation to perform all maintenance, which of itself is unusual, there should be a calculation of betterment/detriment on the aircraft’s return to the owner (paragraph references omitted).
[74] Mr Jonathan Chambers, a commercial pilot with 8,000 hours of flight experience who was also a committee member of the NZ Agricultural Aviation Association and whose work experience included work as an Airwork Sales and Leasing executive, gave evidence as someone who was entirely familiar with aircraft leasing in New Zealand. His relevant evidence was:
The provisions regarding maintenance are most unusual in that the licensee is required to maintain the aircraft and is responsible for time expired or worn out components due [to] what would be considered as “normal wear and tear”. This means that the licensee pays a substantial rate per flight hour and in addition pays for all the maintenance. In practical terms, this greatly increases the actual cost per flight hour (paragraph references omitted).
[75] In addition to the obligation on the lessee to pay for capital maintenance, Mr Chambers was critical of other terms in the lease. He found it very unusual that the document was described as a “licence” as opposed to a lease; that it was unusual to have such limited details in regard to the parties, no full names of individuals, business numbers, addresses or witnesses to the signatures and that there was no identification of who was behind Apex Aviation which he regarded as unacceptable.
[76] He also noted that the provisions relating to insurance were unusual and onerous on Classic Flights. The relevant part of his evidence stated:
… Financial exposure to the licensee is significant because of the requirement to repair irrespective of a successful claim. The document is very light on details around values and limits.
Any underwriter would certainly want more details on the potential “invitees” that they may be providing cover to under this agreement and/or would impose limits on pilots’ experience requirements [which] would also be noted in the lease agreement (sometimes called “open pilot warranty”).
As a business owner and operator, this agreement would not be acceptable if it was presented to me in relation to a proposed aircraft lease. It is fundamentally unfair to the licensee, and fundamentally beneficial to the licensor (paragraph references omitted).
[77] Mr Chambers also referred to another lease that had been entered into by the defendant on behalf of Classic Flights in relation to a similar aircraft (ZK-JMG). His evidence was:
This lease of aircraft ZK-JMG appears to me to be a conventional document with the usual lease terms that I would expect to see in these arrangements.
… The unusual features that I have noted in respect of the licence granted by Apex are absent, and Classic Flights is properly protected with the right to exclusively use the aircraft with the lessor paying all maintenance costs.
[78] Mr Michael Hall, an aviation leasing manager who was the principal of AV Lease Ltd (an aircraft leasing company) gave evidence that the lease of the aircraft from Apex Aviation differs significantly from the lease that he negotiated with Classic Flights in respect of the Cessna 172 owned by his company. That lease was dated 25 November 2019 and negotiated on behalf of Classic Flights by the then Chief Executive Officer, Sue Telford. Mr Hall gave evidence that:
In comparing my company’s lease to the lease of the similar aircraft from Apex Aviation, I note the maintenance requirements are totally different. The Apex lease (which is also referred to as licence) requires Classic Flights to pay for all the maintenance. I would have loved such a clause in the lease from my company to Classic Flights. I did not draft a requirement into my company’s lease to Classic Flights because it would not be an acceptable requirement in the aviation industry. This is because it would cause the effective hourly rate to then be higher than what the lessee could ever recover. Expecting the leasing/operating entity to pay the going market rate for a Cessna 172 plus pay all the maintenance required, even to the extent of engine overhaul, would result in a financial loss to the operator, and in this case Classic Flights.
Classic Flights should have been able to make money out of the aircraft leased by my company at $165 per flight hour with all maintenance included, when it was able to charge the use of the aircraft at between $300 and $600 per hour. However, Classic Flights could not have made any money out of the Apex aircraft at the stipulated $145 per flight hour if it had to additionally pay for all the maintenance. Apex was also able to use the aircraft and therefore put hours onto the time limited components. Moreover, Apex could terminate the lease or licence on a month’s notice, and that could occur immediately after an expensive engine overhaul. If I had been able to get the same terms with Classic Flights, a financial windfall, highly beneficial for my company and loss-making for Classic Flights (paragraph references omitted).
[79] Against the evidence of the plaintiff’s witnesses on the issue of whether or not the lease was one on standard commercial terms is the evidence of Kaiwen Li and the defendant. Kaiwen Li said that he was a senior corporate jet pilot who had been based in Singapore since 2021. He had previously worked in New Zealand as a charter flight pilot for a small airline based at Ardmore Airport.
[80] He was a director of Autoaero Group Ltd which he said was formerly in the business of aircraft leasing.
[81] He said that in September 2017 (which would have been some three months after the defendant had become managing director of Classic Flights) Autoaero entered into a lease with Classic Flights for a Cessna 172 aircraft, registration ZK-CAA. He acknowledged that Autoaero retained responsibility under that lease for maintaining the aircraft to an air worthy condition. It appears that the lease lasted only for one month as he said it was terminated in October 2017 when maintenance work was required to make it air worthy.
[82] His evidence in chief indicated that Autoaero then entered into a lease with L3 Commercial Flight Training Ltd (L3) (a company that the defendant worked for between leaving Classic Flights and commencing with U-Fly). He did not have a copy of the lease. Under cross-examination, he initially claimed that the lease involved the lessee paying for maintenance, but he then acknowledged that what he was referring to was routine maintenance and admitted that the lessor paid for the overhaul of the engine.
[83] He agreed that an engine overhaul was considered a capital item because it added to the value of the aircraft. He also agreed that replacement of a time expired propeller would fall into the same category. He expressed the opinion that there was a limited availability of Cessna 172 aircraft for lease in late 2017.
[84] During the course of the hearing, it immerged that Mr Li had been a friend of the defendant and his wife for some time. In his prepared brief, he had acknowledged being a former director of Prestige Aviation Group Limited which was a company which the defendant was a current director and shareholder of. He said the company was founded in 2013 but never traded. Under cross-examination, he acknowledged that in addition to being a former director of Prestige Aviation, he had also been a shareholder. He had acknowledged that he did not resign as a director of that company until 2019. He could not recall whether he had transferred his shares in the company to the defendant. He claimed also not to know Yan Shi who had also been a shareholder in Prestige Aviation.
[85] He accepted that the lease of Autoaero’s Cessna 172 to L3 was not on any unusual terms because of any shortage of Cessna 172s for lease.
[86] He admitted that he had only recently seen a copy of the lease between Apex Aviation and Classic Flights and that his brief of evidence had been prepared without him ever have seen that lease.
[87] When asked whether it was normal for an owner to be able to get exclusive use of an aircraft on 24 hours’ notice his answer was:
It really depends. I have to say if its very difficult to get the aircraft sometimes [the] company they can, they have to, you know, approach to some private owners and give private owners some flexibility so then they can, you know, lease the aircraft from the private owners.
[88] When asked whether he thought it was unusual that Classic Flights would have to pay for capital maintenance such as an engine overhaul and new propeller his answer was: “I couldn’t comment on that just because I’m not familiar with their, you know their operate environment at Wānaka.”
[89] When asked whether he would ever buy an aircraft without knowing how soon the engine would have to be overhauled, he confirmed that the purchaser would need to know information about the time limited parts of the engine to make a purchase decision. He confirmed that aircraft value was highly related to the life of the time-limited parts such as an engine and propeller. He appeared not to know that the Cessna 172 aircraft at issue in these proceedings had been purchased by Lin Shi for a price in the order of $57,000. His response to that being put to him was:
Fifty-seven? Well that’s, I would say it’s a very good price for 2017 Cessna 172. That would be a very good price. Its not really market value. The market value is much higher than that.
[90] He agreed generally with a proposition that the only reason why a plane like a Cessna 172 would have been so cheap was because it would clearly have had significant maintenance costs coming up in the immediate future.
[91] The defendant’s evidence on the disadvantageous terms of the lease was that while the lease provided for the ability for both parties to terminate on one months’ notice, the “understanding” between Classic Flights and Lin Shi was that unless Classic Flights wanted to terminate the lease, then Lin Shi would continue to allow Classic Flights to use the aircraft. That was contrary to the evidence given by Lin Shi
under cross-examination. When she was asked why the clause giving her the right to terminate on one months’ notice was put in the agreement she said, “just to be protecting my rights, my right.”
[92] Lin Shi did not suggest at any stage that, notwithstanding the express wording in the agreement, there was some additional oral agreement that she would not enforce the right to terminate the lease on one months’ notice. I, therefore, reject the defendant’s claims to the contrary.
[93] The defendant also claims that, at the time the lease was entered into, “there were not understood to be substantial issues in terms of the condition and air worthiness of the aircraft”. He says that he ensured this by obtaining an inspection report from a company called Aeromotive prior to the lease being entered into. He claimed that Aeromotive’s report confirmed the aircraft condition was satisfactory.
[94] There are two problems with this, firstly the Aeromotive report is dated 2 February 2018, which is after the lease had already been entered into. Secondly, the report does not confirm that “the aircraft condition was satisfactory.” It sets out the maintenance history as recorded in the log book and concludes that:
THE MAINTENANCE RECORDED HAS BEEN CARRIED OUT IN ACCORDANCE WITH THE REQUIREMENTS OF NEW ZEALAND CIVIL AVIATION RULE PART 43 AND IN RESPECT OF THAT MAINTENANCE THE AIRCRAFT IS RELEASED TO SERVICE.
[95] In relation to the lessee being responsible for capital maintenance obligations, the defendant denied that this was highly unusual and said he was aware of other leases containing these obligations. He referenced, in support of that claim, only one document, which he produced. This was not a New Zealand document nor one involving a lease to a commercial operator. It was an American document designed specifically for the leasing of aircraft to flying clubs. In addition to the lease providing for a fee calculated on a per hour flight basis it also provided for an additional payment described as “base lease fee” representing five per cent of the aircraft’s value.
[96] The document does not assist the defendant at all in establishing the Apex lease was on standard terms applicable in New Zealand in 2018. Indeed, the fact that this
was the only example that the defendant could find tends to confirm the unusualness of such a term in New Zealand in 2018.
[97] The defendant’s prepared brief of evidence on the topic of maintenance costs was confusing. He said:
During the induction inspection, the engineer identified additional maintenance work required before the aircraft could be used for Part 115 and Part 135 operation. From my years of experience working with aircraft maintenance engineers, I am aware maintenance requirements can be very subjective.
It was expected the costs of the maintenance would be approximately $50,000. As noted above, Lin Shi did not agree to meet these costs herself. Nor did she or I have the financial means of doing so.
I then considered whether the best course was to terminate the lease with Lin Shi.
[98] None of this makes sense. By the time the defendant had received the report on the induction inspection, the lease had already been signed containing the obligation on the lessor to pay for capital maintenance. That obligation had been inserted before the defendant knew anything about the contents of the induction report.
[99] The claim that total capital maintenance costs were only revealed once the job was completed also does not make sense. The defendant knew that the aircraft had run almost all of the 1,800 hours available to it before a major overhaul was required. I also note that part of the costs incurred by Classic Flights included not just the cost of the overhaul but the upgrade of the engine from 150 hp to 180 hp and the updating of the avionics. I reject the defendant’s claims that the need for a major overhaul and a new propellor before the aircraft could be used by Classic Flights was in any way a surprise to him.
[100] The defendant also claims that the lease terms proved beneficial for the company in that the aircraft made a profit for the company. However, as the defendant was obliged to admit under cross-examination, his calculation of the claimed contribution to the profitability of the company had omitted to have regard to the need for the aircraft to contribute to all of the overhead costs including hangar rental,
insurance, civil aviation fees, accounting fees, ACC levies, advertising, commissions, contract pilots and civil aviation authority charges.
[101] The defendant’s calculations were also based on unsubstantiated generalities including his suggestion that all pilot costs attributable to the aircraft could be calculated on a notional figure of $17 per hour on the basis that it was common for first flight instructor jobs to be paid at the minimum wage. The defendant’s own evidence was that this aircraft was not generally used for flight instruction but principally for scenic flights. The defendant also acknowledged that for the period of some four months after the lease commenced, the aircraft was not available to generate revenue because it was being overhauled and upgraded.
Conclusions on the evidence
[102] I accept the evidence of the plaintiff’s witnesses that the lease between Apex Aviation and Classic Flights contained a number of terms that were significantly adverse to Classic Flights and beneficial to Apex Aviation and which were clearly non-standard. I accept Mr Laing’s evidence that Classic Flights could not have made money on the lease and that the lease was fundamentally unfair to Classic Flights.
[103] The evidence of Lin Shi was that the full purchase price of the aircraft was recovered from the per flight hour lease payments within some seven to eight months of the lease commencing.
[104] I do not accept that there was any imperative that justified the defendant, on behalf of Classic Flights, entering into a lease that was so disadvantageous. The defendant accepted that the busy period for Classic Flights was the summer. The aircraft was never going to be available to assist in the busy summer season at the start of 2019 given that, because it had used up almost all of the 1,800 permitted hours, it was always going to be out of action for an extended period for a major overhaul. That proved to be exactly the case with the repairs taking nearly four months.
[105] It is also clear that the value of the aircraft was directly related to the length of time the aircraft could be used without a major overhaul.
[106] I accept the plaintiff’s contentions that the transaction involved a substantial transfer of wealth from Classic Flights to Lin Shi and the defendant. That is unconscionable and the defendant was in fundamental breach of his obligations both as a director and senior employee of Classic Flights.
The true value of the aircraft when returned to Apex Aviation
[107] The defendant agreed that the end result of the lease transaction was that Lin Shi owned an aircraft which was worth a great deal more than the $57,500 she paid for it. As a result of the terms of the lease, the value of the aircraft purchased with the joint funds of the defendant and his wife increased from $57,500 to something in the order of $145,000 immediately after the overhaul and to something in excess of
$95 to 100,000 exclusive of GST at the time the lease ended.
[108] According to the logbook produced by David Whalley for the plaintiffs, the aircraft engine had done 494 hours during the period it was operated by Classic Flights (effectively from late May 2018 when the overhaul was completed, until early January 2019). This was less than a quarter of its lifespan before a further major overhaul was required. There is no valuation evidence of its value at the end of the lease. The defendant advised the Civil Aviation Authority that possession of ZK-DXP had changed from Classic Flights to Apex Aviation on 15 March 2019. On 4 June 2019, he advised Civil Aviation that possession had changed from Apex Aviation to U-Fly.
[109] On 12 September 2019, some eight months after the aircraft was last used by Classic Flights, U-Fly got the aircraft valued by Mr D J McMillan of Airflite South Ltd. The valuation noted that the aircraft’s engine had done 575 hours since overhaul and that the propeller had done 575 hours since new. It also noted that the engine was a 180 hp upgrade from the original 150 hp and that the avionics had been updated. It valued the aircraft then, when it had done some 575 hours since the overhaul at $95,000 — $100,000 GST exclusive.
[110] Having regard to the hours the aircraft did after it left Classic Flights, it seems that, at the time Lin Shi resumed possession of the aircraft, its value had increased from the $57,500 she had paid for it, to something likely to have been in the order of
$125,000. All of that increase in value results from Classic Flights having paid for its capital maintenance costs.
[111] The defendant has failed completely in establishing that the lease from Apex provided fair value to Classic Flights. The defendant’s claim that there was a shortage of Cessna 172s for lease and this meant that lessees were prepared to meet the capital maintenance costs is directly contradicted by other evidence. First, the fact that Mr Smith and Mr Hall leased similar Cessna 172s on standard terms with the obligations on the lessor to pay capital maintenance. Second, the evidence of the defendant’s own witness Kaiwen Li who terminated his company’s lease of a Cessna 172 to L3 when some capital maintenance issues arose. That was because his company, as lessor, would have been obliged to meet those costs.
[112] The defendant’s counsel claimed that the inclusion of the term that the lessee was to pay capital maintenance resulted in the company having “the ability to operate the aircraft on a long-term basis” is the exact opposite of the actual effect of the lease. The non-standard terms allowing Apex to use the aircraft for its own purposes at any time simply giving 24 hours’ notice and being able to terminate the lease on one month’s notice ensured that Classic Flights had no certainty at all that they would have long term use of the aircraft.
[113] The defendant’s holding of a directorship in U-Fly while a director of Classic Flights was not disputed by the defendant as being a breach of his obligations as a director.
[114] I find breaches of s 131, s 133 and s 134 of the Act have been established. The next step I will consider is the relief sought under s 301.
Relief
Relevant law
[115] Relief can be provided in the form of restitution under s 301(1)(b)(i) or compensation under s 301(1)(b)(ii).19 The Court in Debut Homes makes the following assessment of s 301(1)(b)(i):20
Section 301(1)(b)(i) provides that an order can be made to “repay or restore” money or property. The word “repay” implies that the person has received company money or property and can be ordered to return it to the company. The word “restore” suggests rather that a person can be ordered to return the company to the position it would have been in absent the breach, including making good a company debt that should not have been incurred, even if the person has not received company money or property.
[116] In assessing whether a director should be required to pay compensation and the quantum of any compensation or restitution, the Court may take into account the nature of the breach or breaches, the level of culpability of the director (namely, the lack of culpability),21 causation, duration of the breach, holding the director to account and reversing the harm to the company.22
[117] The Supreme Court in Debut Homes noted relief under s 301 is not designed to be punitive but the relief granted can take into account factors tending to provide for more general deterrence:23
Relief ordered cannot be more than is required to compensate and/or to provide restitution. Within these limits, it can, however, take into account general deterrence….in the cases of multiple breaches of duty, any redress under s 301 must be tailored towards the combination of breaches found.
[118] In Yan v Mainzeal Property and Construction Ltd (in liq), the Supreme Court acknowledged the granting of relief was a complicated exercise.24 Against the background of a limitless range of counterfactuals and hypothetical assumptions, the Court said it would be unrealistic to expect precise calculations of loss.25 The Court
19 Debut Homes, above n 5, at [156].
20 At [157].
21 At [158].
22 At [182].
23 At [162].
24 Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113, [2023] 1 NZLR 296 at [309].
25 At [309].
proceeded on the basis that it could enter judgment for the amount sought by liquidators if satisfied on the balance of probabilities that it was less than the losses actually suffered.26
[119] The Court of Appeal in Morgenstern v Jeffreys provided the following guidance as to the assessment of relief following a breach of s 131:27
… A breach of s 131 involves the breach of a fiduciary obligation, requiring a strict standard of causation and imposition of the fiduciary measure of damages, including on a “restitutionary” or notional account of profits basis. A company's loss, where “loss” is in any event the appropriate measure of compensation, is calculated based on the deterioration of its financial position between the date of the breach and the date of liquidation. The onus is on the delinquent director to prove that the loss, or part of it, would have been caused regardless of the breach.
Plaintiffs’ submissions
[120] The plaintiffs assert that the transfer of wealth from Classic Flights to the defendant's wife cannot be left unchallenged, particularly when there is an outstanding debt of $188,916.73 payable to creditors.
[121] The plaintiffs seek to recover compensation based on the cost of maintenance and refurbishment paid by Classic Flights on the aircraft. The plaintiffs argue the amount would put the company where it would have been if the lease had been on conventional terms and if the impact of the conflict of interest was reversed. The plaintiffs table of calculations is set out below:
Invoice
Date
Amount ($)
Performance Aviation Wanaka Invoice # 560 30/4/18 41,161.79 Performance Aviation Wanaka Invoice # 659 24/5/18 12,017.34
26 At [309].
27 Morgenstern v Jeffreys, above n 4, at [99].
Performance Aviation Wanaka Invoice # 680 31/5/18 12,417.43 Sub total 65,596.56 Plus Suncoast Aero Engines Pty Ltd
for engine overhaul
16/3/18 39,709.57 Plus Air Plains Services Corp Ltd for propeller 19/2/2018 21,301.15 Total $126,607.28
[122] In the alternative, the plaintiffs propose for compensation to be calculated based on the increase in value of the aircraft. When U-fly obtained possession of the aircraft, a valuation on 12 September 2019 estimated the value of the aircraft to be
$95,000–$100,000, inclusive of GST. The valuation indicates a minimum appreciation in value of nearly $50,000, taking into account the fact that the aircraft had run 575 hours on its new engine and propeller. The plaintiffs suggest a total of
$184,101 by adding the value of the purchase price of $57,500 with the refurbishment costs of $126,601.
[123] The plaintiffs also suggest that compensation is payable based on the value of the Apex Aviation investment. The plaintiffs argue the defendant’s wife received revenue for rent worth $73,370, comprising 506 hours for $145 per hour, along with being relieved of the need to pay for capital maintenance outgoings and improvement of the aircraft. The plaintiffs argue the defendant’s wife received a return of well over 100 per cent in less than a year based on the purchase price of $57,500. In addition, the plaintiffs submit the capital value of the aircraft increased at least $50,000 and over
$100,000, making the return to the defendant’s wife extraordinary and lacking any commercial reality. Moreover, the transaction was without any identifiable risk to Ms Shi.
[124] The plaintiffs also seek compensation in the form of interest for the time since the transfer of wealth occurred to the date of judgment.
Defendant’s submissions
[125] The defendant submits that if fair value was not received under the transaction, the pleaded compensation is not payable because Classic Flights did not suffer the alleged loss. The defendant submits neither the lease nor the payment of maintenance and repair costs worsened the financial position of Classic Flights. The defendant acknowledges the amount of $126,607.28 spent by the company could reasonably be seen as what the company is said to have lost but claims that it does not represent any profit received by the defendant. The defendant suggests the test for whether compensation ought to be given depends on a comparison of the consequence of the transaction with the situation if it had not been entered into. The defendant disagrees with the plaintiffs’ methodology that the liquidators can assess loss on the basis of comparing the transaction to one entered into under different (or better) terms.
Analysis
[126] In the present case, the following factors outlined in Debut Homes are relevant to my assessment as to the type of relief appropriate in the present circumstances:
(a)The nature of the breaches: the defendant did not take into account the best interests of the company when drafting the lease agreement between Apex Aviation and Classic Flights. The defendant used his power as a director to enter into transactions on behalf of Classic Flights and negotiate the lease of the aircraft from Apex Aviation. The loss to the company was exacerbated by the conflict of interest whereby Ms Shi greatly benefitted from the acquisition of the upgraded aircraft.
(b)The level of culpability: the defendant did not disclose his conflict of interest to the shareholders at the time of the entry into the lease and, in fact, went to great lengths to try and conceal the true nature of the transaction by using the fictitious entity of “Apex Aviation”. He
actively mislead the liquidators about the true nature of the transaction including going so far as to lie on oath during the examination.
(c)In terms of his conflict of interest in becoming a director of U-Fly while still a director of Classic Flights, he went through an elaborate charade of changing directors and shareholders of Southern Horizon and U-Fly. Those actions have no rational explanation other than the defendant’s attempt of trying to conceal from the liquidator his true involvement in those companies.
(d)The duration of breach: The defendant was in breach of his duties as a director from the date of the negotiation of the lease of the aircraft (in January 2019) to the date the defendant resigned as a director on 15 September 2019. In relation to his directorship of U-Fly, he was in breach from 4 June 2019 until 15 September 2019.
(e)The principles of accountability and deterrence: The defendant’s actions were deliberate and involved a high degree of deception sustained over a long period of time including after the company went into liquidation. There is a need for such behaviour to be denounced.
(f)Reversing the harm to company: If the company had not been obliged to pay the capital maintenance costs, it would have had those funds available to it for other uses including paying its creditors. That is the measure of its loss in relation to the lease. While the Court has a discretion and there are alternative ways of calculating appropriate restitution, payment of the $126,607.78 sought seems to be the simplest way of recompensing the first plaintiff for its loss. Under s 301(1)(b)(ii) of the Act, the Court is entitled to order a contribution to the assets to the company that it considers just.28 I find that a contribution of $126,607.78 is just.
28 See Kumar v Smart Pay Ltd [2023] NZCA 410.
Interest
[127] The plaintiffs claim interest under the Interest on Money Claims Act 2016. They claim interest of $32,784.15. The defendant’s closing submissions did not challenge that claim or refer to interest at all.
[128]I find the plaintiffs are entitled to the interest claimed.
Conclusion
[129] The defendant breached his duties as a director of Classic Flights under s 131, s133 and s 134 of the Act. The restitution required from the defendant is $126,607.78 plus interest of $32,784.
Costs
[130] I invite the parties to settle costs between themselves. If that is not possible within 14 days, the plaintiffs are to file a memorandum of no greater than five pages in length. The defendant will have 14 days to reply. I will then deal with the matter on the papers. Both parties are to specifically address the question of whether indemnity costs are appropriate.
Churchman J
Solicitors:
Solomons, Dunedin for Plaintiffs
Todd & Walker Law, Queenstown for Defendant
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