Combined Industrial Services Limited (in liquidation) v Dewar
[2014] NZHC 2316
•23 September 2014
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2014-454-49 [2014] NZHC 2316
BETWEEN COMBINED INDUSTRIAL SERVICES
LIMITED (IN LIQUIDATION) Plaintiff
AND
DAVID PAUL DEWAR First Defendant
AND
KIERON MAURICE CLARKE Second Defendant
Hearing: 21 August 2014 Counsel:
D Vincent for Plaintiff
J Maasen and N Jessen for DefendantsJudgment:
23 September 2014
JUDGMENT OF ASSOCIATE JUDGE SMITH
Introduction
[1] In 2006, the defendants Mr Dewar and Mr Clarke were directors of a company called Combined Industrial Services Ltd (CIS).
[2] By late 2006, it was apparent to Mr Dewar and Mr Clarke that CIS was not trading profitably. Mr Clarke suggested that he and Mr Dewar wind up their business relationship. Discussions between Mr Clarke and Mr Dewar continued into
2007, and a broad agreement was reached under which the branch operations of CIS would be divided between the two directors, effective 30 June 2007. Mr Dewar would take over CIS’ branches in Hastings, Palmerston North, and Wairarapa, and Mr Clarke would take over Auckland, Whanganui, and Wellington. CIS would not
trade after 30 June 2007.
COMBINED INDUSTRIAL SERVICES LIMITED (IN LIQUIDATION) v DAVID PAUL DEWAR [2014] NZHC 2316 [23 September 2014]
[3] There was a lot to be done to give effect to the winding up of CIS and the distribution of the net assets to the shareholders: plant and equipment registers had to be completed and updated, vehicles had to be valued, and rentals or leases of property and equipment had to be assigned to the new entities which Mr Dewar and Mr Clarke would create. They called in the company accountant, Mr Hull, to assist.
[4] Before Mr Dewar and Mr Clarke could bring their plans to break up CIS to fruition, a company called Henry Services Limited (HSL) wrote notifying a claim against CIS. The claim related to work which CIS had carried out on a truck owned by HSL in late 2005/early 2006. HSL contended that the work carried out by CIS was defective in a number of respects, and it sought a refund of all monies it had paid CIS. It indicated that it would seek further recompense for commercial costs said to be related to the alleged poor workmanship.
[5] Mr Dewar and Mr Clarke proceeded with the closing down of CIS and distribution of its net assets to its shareholders, without addressing the claim notified by HSL. All of CIS’ known creditors were paid (but not HSL), and distributions were made to the shareholders of CIS. CIS was later placed in liquidation.
[6] It is the failure to settle HSL’s claim which has led to this litigation.
Background
[7] To implement the agreed break-up of CIS, Mr Clarke and Mr Dewar established two new companies. Mr Clarke established Dynaflow NZ Ltd (Dynaflow) to purchase CIS’ stock, plant, and vehicles at Wellington, Whanganui, and Auckland. Mr Dewar established Dewtec Ltd (Dewtec) to purchase CIS’ stock, plant and vehicles in Palmerston North, Hawkes Bay, and the Wairarapa. CIS’ debtors were to remain in the company to cover accounts payable, tax and GST, and to be applied in reduction of CIS’ indebtedness to the National Bank.
[8] As at 30 June 2007, the shares in CIS were held as follows:
Mr Clarke 100 shares
K M Clarke Family Trust 37,450 shares
Kienan Trust 37,450 shares
(associated with Mr Clarke)
Mr Dewar 100 shares
Dewlot Family Trust 74,900 shares
(associated with Mr Dewar)
[9] The purchase of CIS’ assets by Dynaflow was funded by contributions made to Dynaflow by Mr Clarke, the K M Clarke Family Trust, and the Kienan Trust. Those advances or capital contributions were funded by distributions made to those parties (in their capacities as shareholders of CIS) by CIS, which were assigned to Dynaflow. The same process was followed with Dewtec: its purchase of CIS assets was funded by Mr Dewar and the Dewlot Family Trust, and they were in turn funded by distributions made to them (in their capacities as CIS shareholders) by CIS which were assigned to Dewtec.
[10] Mr Hull says that the distributions made by CIS to its shareholders were intended to be treated as dividends, and were so treated.
[11] Accounts were created in CIS’ general ledger to record the transfer of CIS’ assets to Dynaflow and Dewtec, and the funding of the sales to those companies. Dynaflow’s account with CIS was debited with figures totalling $668,245 for the transfer of motor vehicles, and plant and stock purchased by it from CIS. On the other side of the ledger, Dynaflow was credited with dividends said to have been transferred from Mr Clarke and the shareholders with interests associated with him. Various other sums were shown as having been credited to Dynaflow, including such items as accrued holiday pay, and the costs of staff redundancies which were picked up by Dynaflow. All of these ledger entries were dated 30 June 2007.
[12] CIS’ general ledger for Dewtec was in similar form. Dewtec’s ledger account was debited with the total sum of $566,582.99 for the acquisition of motor vehicles,
plant and stock purchased from CIS. On the credit side of the ledger there were shown dividends paid to Mr Dewar ($365) and to the Dewlot Trust ($273,683) which were shown as having been transferred to Dewtec’s account. As with the Dynaflow general ledger account, Dewtec’s account was also credited with certain other sums, including accrued holiday pay. Amounts standing to the credit of the shareholders were also shown as having been transferred to Dynaflow or Dewtec.
[13] It appears that there was no movement of cash at all on 30 June 2007: the various ledger entries appear to have been substantially circular, in the sense that the purchase prices said to have been paid by each of Dynaflow and Dewtec which funded the dividends paid to the shareholders, were themselves substantially funded by transfers of those same dividends from the shareholders to Dynaflow and Dewtec. The transactions were not completely circular, however: after the assignments of dividends, current account balances and the various other sums, Dynaflow still owed CIS $168,880. Dewtec owed CIS $139,980.
[14] By August 2007 the claim by HSL had still not been resolved. HSL’s solicitors wrote to the directors of CIS in August 2007, repeating HSL’s allegations of substandard workmanship by CIS and the need for remedial work. The letter also referred to consequential losses of some $300,000 to $400,000 alleged to have been suffered by HSL. The letter threatened the issue of proceedings in the absence of a response within seven days.
[15] Mr Clarke responded to HSL’s solicitors on 14 August 2007, saying that he was not fully conversant with the details of the assertions made in the letter, but would get back to the solicitors before the end of August.
[16] It is not clear that Mr Clarke or Mr Dewar, or anyone else representing CIS,
ever did get back to HSL’s solicitors.
[17] CIS paid tax on the dividends to the shareholders, and imputation credits were applied to the dividend payments. These were accounted for in CIS’ income tax return for the financial year ended 30 June 2007, filed on 30 October 2007.
[18] Although Mr Hull stated in his first affidavit that he “prepared the necessary resolutions” relating to the dividends, no resolution was signed by Mr Dewar and Mr Clarke on or before 30 June 2007, the date on which they contend the dividend distributions were made. A directors’ resolution in respect of the dividend payments was not executed until 22 April 2008.
[19] That resolution, signed by Mr Dewar and Mr Clarke, reads as follows:
RESOLVED by the directors this 30th day of June 2007
That fully imputed dividends of $818,056 be authorized for payment
forthwith, for the period ended 30 June 2007, to [CIS’ shareholders]
That the Board is satisfied that the company will immediately after the distribution of such dividend satisfy the solvency test.
[20] Mr Dewar says that 22 April 2008 is the date on which Mr Clarke signed the document. Mr Dewar says that he signed it some time earlier, possibly in late 2007.
[21] Also on 22 April 2008, Mr Clarke signed a directors’ solvency certificate, certifying that immediately after the payment of the dividend referred to in the directors’ resolution, CIS would satisfy the solvency test as defined in s 4(1) of the Companies Act 1993 (the Act). The certificate set out the grounds for that opinion, and concluded that CIS would be able to pay its debts as they became due in the normal course of business, and that the value of CIS’ assets was greater than the value of its liabilities, including contingent liabilities. The document was signed by Mr Clarke and dated 22 April 2008. It was not signed by Mr Dewar.
[22] In early June 2008 solicitors retained by CIS and/or Messrs Dewar and Clarke were still working on documenting the sale of assets from CIS to Dynaflow and Dewtec. On 3 June 2008 the solicitors forwarded draft forms of agreement for sale and purchase for the Dynaflow and Dewtec purchases to Mr Hull, with a number of queries. One of the issues was over the correct figure to be used for motor vehicle finance costs which Dewtec would pick up, and in particular whether further payments made by CIS in June of 2007 had been allowed for. The solicitors said that the hire purchase debt which Dewtec would assume had been shown in spreadsheets they had been given at $56,062, but a figure of $52,273 had been
adopted in later figures provided to them. Mr Hull confirmed that the lower figure was the correct one.
[23] While these forms of agreement were being drafted in June 2008, they were drafted on the basis that the sales had taken place on 30 June 2007. For example, the possession date in the two forms of agreement was shown as 1 July 2007.
[24] HSL issued a court proceeding against CIS on 4 June 2008, claiming damages of $408,270 plus costs. CIS instructed solicitors to defend the claim.
[25] CIS’ registration as a company was allowed to lapse. It was restored to the
Companies Register on 22 October 2010 on the application of HSL.
[26] The solicitors instructed by CIS withdrew in December 2010. Thereafter, HSL’s claim against CIS proceeded on an undefended basis. HSL obtained a judgment against CIS for $113,541.43 on 27 September 2011.
[27] HSL subsequently commenced a liquidation proceeding against CIS, and CIS was placed into liquidation on 9 July 2013. Keith Bowen was appointed liquidator of CIS on that date.
[28] The judgment debt of $113,541.43 owing to HSL, plus further costs and interest, remains owing to HSL.
The discrepancy in CIS’ financial statements
[29] The total amount of dividends shown in CIS’ income tax return filed on 30
October 2007, as having been paid on 30 June 2007 and the figure shown in the 22
April 2008 directors’ resolution and in the copy of CIS’ financial statements at 30
June 2007 which was produced by Mr Dewar were different. The income tax return, prepared by Mr Hull, showed total dividends of $545,965 paid to the shareholders. With imputation credits of $269,958.22 added, the total dividend shown in the tax return was $815,923.22. But the total dividends (including imputation credits) recorded in the directors’ resolution completed on 22 April 2008, was $2,132.78 higher. The higher figure of $818,056 was also shown in the company dividend
statements which Mr Dewar produced with his first affidavit, and in the financial statements for CIS as at 30 June 2007 which he produced.
[30] It is not clear from the shareholder dividend statements when they were prepared (or used by the shareholders), and the financial statements which Mr Dewar produced appear, for reasons which were not explained, to have been produced in June 2014.
[31] Mr Dewar and Mr Clarke say that the variance in these figures is explained by the fact that the lower figure ($545,965 plus imputation credits of $269,958.22 – total $815,923.22) came from an earlier version of CIS’ financial statements for the year ended 30 June 2007. They say that the final version of the accounts was not printed out in the hard copy files which were provided to the liquidator following his appointment. They say that the variance does not alter the fact that the distribution was made on 30 June 2007.
[32] Mr Dewar and Mr Clarke have not explained why the lower dividend figure ($545,965) was included in the income tax return submitted to the Inland Revenue Department on 30 October 2007, or stated whether any correction was later made to the return.
The Court proceeding
[33] On 14 April 2013 CIS commenced this proceeding against Mr Dewar and Mr Clarke. In essence, CIS says that the dividends paid by CIS to its shareholders in the financial year ending 30 June 2007 were paid unlawfully, as Mr Clarke and Mr Dewar did not execute a resolution or solvency certificate at the time the distributions were made. Further, when a solvency certificate was signed by Mr Clarke on 22 April 2008, Mr Clarke and Mr Dewar had no reasonable grounds to believe that CIS could satisfy the solvency test set out in s 4(1) of the Act: by
22 April 2008, Mr Clarke and Mr Dewar knew, or ought to have known, that CIS had a contingent liability to HSL of at least $335,000.
[34] CIS seeks an order under s 56 of the Act that Mr Dewar and Mr Clarke return to CIS the total sum of $545,965, being the sum distributed to shareholders “on or
soon after 22 April 2008”. CIS also says that Mr Dewar and Mr Clarke breached their obligations under s 131 and 137 of the Act to act in good faith and in the best interest of CIS, and to exercise the care, diligence and skill that a reasonable director would exercise in the circumstances. On its causes of action under ss 131 and 137 of the Act, CIS asks for judgment in the sum of $113,541.43 (the amount of the HSL judgment against CIS), together with interest and costs.
[35] Mr Dewar and Mr Clarke now seek leave under r 12.4(3) of the High Court Rules to apply out of time for summary judgment on the claims brought against them by CIS. With the leave application, they filed a substantive application for summary judgment. The leave application and the substantive application for summary judgment were heard together on the basis that the merits or otherwise of the substantive summary judgment application would be relevant (and possibly decisive) on the question of whether leave should be granted to apply out of time.
[36] Mr Dewar and Mr Clarke say that the claims by CIS are out of time, under s
4 of the Limitation Act 1950: the alleged causes of action both accrued on or before
30 June 2007, and CIS’ claim was not filed until after the expiration of six years from that date. In the alternative, they say that CIS’ claim cannot succeed because s
56 of the Act requires CIS to pursue its shareholders for any recovery of the dividends, before it looks to the directors for repayment.
[37] In response, the liquidator says that time did not begin to run until
22 April 2008, when the directors’ resolution was completed, at the earliest. The claim was filed on 14 April 2014, and was therefore filed within the period of six years allowed for filing such claims under s 4(1)(d) of the Limitation Act.
Distributions to shareholders: legal principles
[38] Section 52 of the Act provides:
Board may authorise distributions
(1) The board of a company that is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test may, subject to section 53 and the constitution of the
company, authorise a distribution by the company at a time, and of an amount, and to any shareholders it thinks fit.
(2) The directors who vote in favour of a distribution must sign a certificate stating that, in their opinion, the company will, immediately after the distribution, satisfy the solvency test and the grounds for that opinion.
(3) If, after a distribution is authorised and before it is made, the board ceases to be satisfied on reasonable grounds that the company will, immediately after the distribution is made, satisfy the solvency test, any distribution made by the company is deemed not to have been authorised.
(4) In applying the solvency test for the purposes of this section and section 56,—
(a) debts includes fixed preferential returns on shares ranking ahead of those in respect of which a distribution is made (except where that fixed preferential return is expressed in the constitution as being subject to the power of the directors to make distributions), but does not include debts arising by reason of the authorisation; and
(b) liabilities includes the amount that would be required, if the company were to be removed from the New Zealand register after the distribution, to repay all fixed preferential amounts payable by the company to shareholders, at that time, or on earlier redemption (except where such fixed preferential amounts are expressed in the constitution as being subject to the power of directors to make distributions); but, subject to paragraph (a), does not include dividends payable in the future.
(5) Every director who fails to comply with subsection (2) commits an offence and is liable on conviction to the penalty set out in section
373(1).
[39] Section 56 of the Act provides:
Recovery of distributions
(1) A distribution made to a shareholder at a time when the company did not, immediately after the distribution, satisfy the solvency test may be recovered by the company from the shareholder unless—
(a) the shareholder received the distribution in good faith and without knowledge of the company's failure to satisfy the solvency test; and
(b) the shareholder has altered the shareholder's position in reliance on the validity of the distribution; and
(c) it would be unfair to require repayment in full or at all.
(2) If, in relation to a distribution made to shareholders,—
(a) the procedure set out in section 52 or section 70 or section
77, as the case may be, has not been followed; or
(b) reasonable grounds for believing that the company would satisfy the solvency test in accordance with section 52 or section 70 or section 77, as the case may be, did not exist at the time the certificate was signed,—
a director who—
(c) failed to take reasonable steps to ensure the procedure was followed; or
(d) signed the certificate, as the case may be,—
is personally liable to the company to repay to the company so much of the distribution as is not able to be recovered from shareholders.
(3) If, by virtue of section 52(3) or section 70(3) or section 77(3), as the case may be, a distribution is deemed not to have been authorised, a director who—
(a) ceased after authorisation but before the making of the distribution to be satisfied on reasonable grounds for believing that the company would satisfy the solvency test immediately after the distribution is made; and
(b) failed to take reasonable steps to prevent the distribution being made,—
is personally liable to the company to repay to the company so much of the distribution as is not able to be recovered from shareholders.
(4) If, by virtue of section 55(5), a distribution is deemed not to have been authorised, a director who failed to take reasonable steps to prevent the distribution being made is personally liable to the company to repay to the company so much of the distribution as is not able to be recovered from shareholders.
(5) If, in an action brought against a director or shareholder under this section, the court is satisfied that the company could, by making a distribution of a lesser amount, have satisfied the solvency test, the court may—
(a) permit the shareholder to retain; or
(b) relieve the director from liability in respect of—
an amount equal to the value of any distribution that could properly have been made.
[40] The expression “distribution” is defined in s 2 of the Act as follows:
“Distribution in relation to a distribution by a company to a shareholder means –
(1) The direct or indirect transfer of money or property, other than the
company’s own shares, to or for the benefit of the shareholder; or
(2) The incurring of a debt to or for the benefit of the shareholder – in relation to shares held by that shareholder, and whether by means of a purchase of property, the redemption or other acquisition of shares, a distribution of indebtedness, or by some other means.
[41] Under the Income Tax Act 2007, an amount will be treated as having been paid when it has been distributed or credited to a person, or dealt with in that person’s interest or on their behalf in some other way.1 The issue is when dividend income is to be regarded as having been derived for income tax purposes. The provisions in the Act relating to distributions, and the requirement that the company satisfy the solvency test before distributions are made, are directed at quite a
different purpose. That purpose is ensuring that creditors or preference shareholders are not prejudiced by distributions made to ordinary shareholders. Simply because the solvency test may have been satisfied at the time a dividend was declared and the amounts credited to the shareholders’ current accounts, that is not enough to protect creditors. In some cases there will be a considerable period between the time that the dividends were credited and the time when they were actually paid over to the shareholder. At that later point, if creditors are to be protected, the solvency test
must also be satisfied when actual payment out of the account is made.2
[42] In Re DML Resources Ltd Heath J held that the term “distribution” should not be construed in a narrow manner. The distribution provisions in the Act are concerned with a capital maintenance regime which is designed to protect creditors and others who may have preferential claims over ordinary shareholders to whom
dividend payments are made.3 There must be an outflow of wealth from the
company to the shareholders, and a link between that outflow of wealth and the benefit received by or on behalf of the shareholders.4
1 Income Tax Act 2007, pt Y, sub-pt YA, s YA 1. Compare Income Tax Acts 1994 and 2004 pt O, sub-pt OB, s OB 1.
2 Kitchener Nominees Ltd v James Products Ltd (2002) NZCLC 262, 882 (HC).
3 Re DML Resources Ltd (in liquidation) [2004] 3 NZLR 490 at [56].
4 At [64].
[43] The Judge in Re DML Resources Ltd also considered the distinction between a distribution being authorised, and the distribution being made. He held that s 52(3) of the Act does not retrospectively cancel the authority to distribute; it merely suspends the ability to distribute until the company is solvent.5
[44] In Case Z4, the Taxation Review Authority applied Kitchener Nominees and Re DML Resources in the situation where a company had credited the amount of a dividend to a shareholder’s current account.6 The Authority said:
[T]hat credit may not be able to be paid to the shareholder if at the time of proposed payment out of that current account the company is insolvent. That protects the other creditors in accordance with the underlying policy of the Companies legislation. It does not deny that crediting the current account creates a liability or debt, or that there is such a crediting.
Defendants’ applications for summary judgment – legal principles
[45] Under r 12.2(2) of the High Court Rules, the Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[46] The Court of Appeal considered the principles applicable on a defendant’s application for summary judgment in Westpac Banking Corporation v M M Kembla NZ Limited.7 That case is authority for the following propositions:
(1)A defendant applying for summary judgment has the onus of proving the plaintiff cannot succeed. Usually, summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim.
(2)The Court must be satisfied that none of the claims can succeed: it is not enough that they are shown to have weaknesses.
5 At [58].
6 Case Z4 (2009) 24 NZTC 14,051. This case was governed by the Income Tax Act 1994.
7 Westpac Banking Corporation v M M Kembla NZ Limited [2001] 2 NZLR 298(CA).
(3)Summary judgment will only be suitable where all the material facts are not in dispute and can be put before the Court efficiently in affidavit form.
(4)The procedure may be inappropriate if the case is likely to turn on a judgment which can only be reached properly after hearing all the evidence at trial.
(5)Developing points of law may require the added context and perspective provided by a full trial.
The issues for determination in this case
[47] The following issues fall to be determined:
(1) Is it arguable for CIS that the distributions were made after
14 April 2008?
(2)If the distributions were made before 14 April 2008, is it arguable for CIS that the completion of the directors’ resolution on 22 April 2008 and/or the completion by Mr Clarke of the solvency certificate (in respect of the same distributions) provided separate grounds for a claim by CIS against Mr Dewar and Mr Clarke under s 56(2) of the Act, which would not be time-barred?
(3) Can Mr Dewar and Mr Clarke be liable under s 56(3) of the Act when
CIS has not yet sued the shareholders?
(4) Is it arguable for CIS that Mr Dewar and Mr Clarke, as directors of
CIS, owed duties to CIS under ss 131 and/or 137 of the Act after
14 April 2008?
(5)If so, is it arguable for CIS that Mr Dewar and/or Mr Clarke breached their duties under one of both of ss 131 and 137 of the Act after
14 April 2008?
Issue 1: Is it arguable for CIS that the distributions were made after
14 April 2008?
The relevant limitation provision
[48] I note first that it is common ground that a six year time limitation period applies to both of CIS’ causes of action. The relevant provision is s 4(1)(d) of the Limitation Act 1950 which relevantly provides:
(1) Except as otherwise provided in this Act…, the following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued, that is to say, -
…
(d) Actions to recover any sum recoverable by virtue of any enactment, other than a penalty or forfeiture or some by way of penalty or forfeiture.
[49] A cause of action “accrues” only when the material facts necessary to
establish all of its elements are present.8
The parties’ submissions
[50] CIS says that the following are material elements of the liability of Messrs
Dewar and Clarke:
(1) Mr Dewar’s failure to take reasonable steps to follow the procedure in
s 52 of the Act;
(2) Mr Clarke’s signing the solvency certificate on 22 April 2008.
[51] CIS says that no distribution was made to the shareholders until the resolution was completed on 22 April 2008. That is the only evidence of a board decision approving the resolution. A solvency certificate must be signed at the time of the resolution, and Mr Dewar has never signed any such certificate. Accordingly, CIS says that Mr Dewar’s liability under s 56(2)(a) and (c) crystallised on 22 April
2008 when the resolution was completed by Mr Clarke.
8 Westland District Council v York [2014] NZCA 59, at [11].
[52] CIS submits that Mr Clarke’s liability crystallised when he signed the resolution and solvency certificate on 22 April 2008. It says that the relevant date for assessing the solvency of CIS was the date on which the solvency certificate was signed, and that occurred in time for the purposes of CIS’ claim.
[53] CIS relies on Re Samarang Developments Ltd.9 In that case, the defendant directors sold the company’s business and paid out the proceeds to themselves in their capacities as shareholders. Some months later they passed backdated resolutions confirming the payments as dividends. In the intervening time, the directors became aware of significant liabilities to the Customs Department. John Hansen J held that when the defendants received the physical payments they did not specifically turn their minds to either the company’s solvency or the purposes of the payments. In the absence of an explanation for these drawings, the judge held that they were to be treated as advances from the company to the shareholders which were repayable on demand. On the evidence, they remained advances to shareholders until such time as the resolution classified them as distributions. In those circumstances, the relevant date for the solvency test was the date of the actual
resolution, and not the date of the earlier transfer of funds.10
[54] Mr Vincent for CIS submits that there is no evidence that Messrs Dewar and Clarke turned their minds to the nature of the “dividends”, or carried out any solvency test, prior to 22 April 2008. Moreover, it is unclear when the claimed distributions were made. He relies on Samarang in support of the proposition that the date on which the solvency test should have been applied, and from which liability accrues, is the date of the April 2008 Board resolution and solvency certificate.
[55] Mr Maasen for Messrs Dewar and Clarke submits that Samarang should not be read as authority for any broad proposition of that kind.
9 Re Samarang Developments Ltd (in liquidation) HC Christchurch CIV-2003-409-2094, 30
September 2004.
10 At [55].
Discussion
[56] I accept Mr Maassen’s submission on the effect of Samarang. The decision was very much dependent on the fact that there was insufficient evidence to show that the physical payments made to the shareholders were intended to be dividends rather than advances. The Court held that a relevant “distribution” was made when the directors subsequently completed the board resolution: until the resolution was passed, the advances made to the shareholders were, on the evidence in the case, repayable to the company, and thus remained assets in the company’s hands. Those assets were effectively distributed to the shareholders when the resolution was passed deeming the payments to have been dividends.
[57] The questions in this case are whether Messrs Dewar and Clarke have sufficiently shown that payments were in fact made by CIS to the shareholders on
30 June 2007 (or at least before 14 April 2014), and if so that the payments were dividend distributions, and not advances.
[58] The fact that a backdated resolution authorising the transactions as dividends was not completed until 22 April 2008 will be one item of evidence relevant to those questions, but I do not think it could be enough on its own for the Court to conclude that no distributions were made until the board resolution was signed.
[59] So s 56(2) of the Act expressly contemplates the scenario in which a company makes a distribution to shareholders without the directors having attended to the formalities required by the Act. In such a case, I do not believe that the subsequent signing and backdating of a solvency certificate could somehow deem a distribution which had in fact been made, not to have been made until the solvency certificate was signed. That follows from the wording of s 52(2) of the Act, which contemplates that the solvency certificate will be signed at or before the date the
distribution is made.11 In my view the statutory intention was that the situation
where directors effect a distribution to shareholders without attending to the
11 The subsection requires that the certificate must state the company will, immediately after the distribution, satisfy the solvency test: there is no requirement in s 52 for the signing of a solvency certificate at some time after a distribution has been made. Any such certificate would clearly be pointless, as the money would have already gone.
formalities required by s 52 is to be dealt with under s 56(2)(a) and (c) of the Act –
failure to take reasonable steps to ensure that the s 52 procedure was followed.
[60] The question is whether the various book entries apparently made on 30 June
2007 had the effect of transferring wealth to the shareholders, in relation to the shares held by them.12 If the transfer of wealth to or for the benefit of the shareholders was not wholly or partly completed by 14 April 2008, then (to that extent) the “distribution” will not have been made, and the claim brought by CIS will be in time.
[61] CIS contends that the transfer of wealth to the shareholders was not completed until the transactions were formally documented, which could not have been before June of 2008.
[62] For Mr Dewar and Mr Clarke, Mr Hull expressed the view in his evidence that the finalisation of the documentation required to record the transactions between CIS and Dynaflow and Dewtec merely gave effect to an already determined course of action by the directors to make distributions. In his opinion the documentation, including shareholder dividend statements, plainly shows that the dividends were paid at 30 June 2007.
[63] Mr Hull relied on the following to support his view that the distributions were in fact made on 30 June 2007:
(1)The date the distribution was declared was 30 June 2007, and to the extent that any dividend was not then paid, an accounting record was made in the general ledger creating a liability to the shareholder. He stated that the creation of that liability as part of a single transaction, was the point at which the distribution was made. (Mr Hull did not explain the manner in which the distribution was said to have been “declared” on 30 June 2007. The only evidence of a “declaration” is
the resolution completed by the directors and dated 22 April 2008.)
12 Re DML Resources Ltd (in liquidation), above n 4 at [23].
(2)The financial statements for CIS, which were finalised in October 2007, recorded the transactions as Mr Dewar and Mr Clarke say they took place.
(3)Satisfying the liabilities in the current accounts, whether by future payment or transfer of assets, is a means of settlement of the liabilities only. It does not establish the dates on which the dividends were paid. In Mr Hull’s opinion, the date the dividend was “made” was the date the liabilities to the shareholders were created.
(4)CIS effectively ceased trading on 1 July 2007. From that date, the shareholders controlled assets previously owned by CIS as their own, and (through Dynaflow and Dewtec) traded independently. The legal documentation was later created to reflect and confirm that existing reality.
(5)That picture is confirmed by the financial records of Dynaflow and Dewtec. Copies of Dewtec’s 2008 year-end financial statements and the fixed asset register for Dynaflow which Mr Clarke produced, confirm that, from and after 1 July 2007, the assets formerly owned by CIS were shown as assets in the accounts of either Dynaflow or Dewtec.
[64] I think the passage from Case Z4 quoted at para [44] above is against the approach adopted by Mr Hull in his evidence. Even if crediting the shareholders’ current accounts created liabilities owed by CIS to them, the satisfaction of those liabilities by actual transfer of wealth could not validly be effected if CIS was insolvent.
[65] At the end of the day, the question must be when the last of the stock, plant and vehicles (i.e. the “wealth”) moved out of CIS and (via its shareholders) into Dynaflow and Dewtec. For actual wealth to have moved out of CIS to the shareholders, a corresponding amount of wealth had to come into CIS from Dewtec and Dynaflow. That is how the dividends were to be funded.
[66] The evidence does not justify a finding that any wealth moved from Dynaflow or Dewtec into CIS before those companies received assets of corresponding value from CIS. The draft agreements for sale prepared in June 2008 show that payment by Dynaflow and Dewtec to CIS was due on the “possession” date on which the stock, plant and vehicles were to be handed over to the purchasers. In those circumstances the critical question is whether Mr Dewar and Mr Clarke have shown, to a standard sufficient to justify the entry of summary judgment in their favour, that all of the relevant wealth which flowed out of CIS to Dynaflow and Dewtec had flowed out before 14 April 2008. It was not until that point that the “circle” would be complete, and Dewtec and Dynaflow could be treated as having funded the payment of the dividend distributions to the shareholders.
[67] In the end, the evidence is not sufficiently clear for me to find that Mr Dewar and Mr Clarke have a complete defence under the Limitation Act on the basis that the relevant distributions were all made before 14 April 2008. I reach that conclusion having regard, in particular, to the following matters:
(1)Mr Hull says that he prepared a directors’ resolution, apparently at or about the time the various book entries were made.13 That means that the need for a directors’ resolution was not completely ignored. But none of Messrs Dewar, Clarke and Hull have offered any explanation as to why the directors’ resolution was not then signed. In the absence of any explanation, the court is left to wonder if the omission may have been deliberate. That in turn raises a question mark over the intentions of CIS and its shareholders at the time. If they deliberately
chose not to go through the requisite statutory procedures for declaring and paying a dividend, might they have intended the transactions to be treated as advances rather than as dividends, pending completion of the formal documentation of the transactions?
(2) Why did the directors bother at all with the signing of a directors’
resolution (and in Mr Clarke’s case a solvency certificate) on
22 April 2008, if the distributions had already been made? Again, no
13 Hull first affidavit, para [4].
explanation has been offered by Mr Dewar or Mr Clarke. Although both documents purport to speak as at 30 June 2007, it seems clear that the directors were not trying to retrospectively put right their omissions from the previous year – presumably they would not have written the date 22 April 2008 on the resolution if that had been their intention. The completion of these documents in April 2008 raises a question as to whether the transfer of assets from CIS to Dynaflow and Dewtec was regarded as having been completed by then, or whether further steps remained to be taken.
(3)The evidence shows that the formal agreements for sale and purchase under which CIS transferred its assets to Dewtec and Dynaflow, were still in draft form, being worked on by the lawyers and by Mr Hull, in June of 2008. Again, Mr Dewar and Mr Clarke have not explained why it was necessary for formal documentation to be produced at this late stage if all of the relevant assets had already been distributed. Also, the solicitors’ letter to Mr Hull dated 3 June 2008 which accompanied the draft agreements, referred to the assets “being transferred” from CIS to Dynaflow and Dewtec. It may be a small point, but the use of the present tense “being” again raises a question mark as to whether all of the “wealth” formerly owned by CIS (which was the subject of the dividends) had by then already moved to Dynaflow or Dewtec.
(4)The discrepancy between the total dividends figure returned to the Inland Revenue Department on 30 October 2007 ($815,923.22 including imputation credits) and the figure of $818,056 referred to in the directors’ resolution dated 22 April 2008, has not been satisfactorily explained. There was no material change in the figure for the imputation credits so, on the face of it, the shareholders appear to have been credited with a further sum of approximately $2,133 at some point between 30 October 2007 and 22 April 2008. There is nothing in the evidence to show when that adjustment, or correction or whatever it was (Mr Hull did not explain it), was made. In
particular, there is nothing to say that the correction or adjustment may not have been made in the period between 14 April 2008 and 22
April 2008. If an additional small dividend of $2,133 was either credited or paid to the shareholders in that period, the claim would not (to that extent) be out of time.
(5)I do not think I can place much weight on the shareholder dividend statements produced by Mr Dewar with his first affidavit. It is not clear from the documents themselves when they were prepared. In the absence of any further explanation I assume that they would have been used by the shareholders in filing their individual tax returns for the year ended 31 March 2008, but the evidence does not show when those returns were filed. Presumably, it would have been after
14 April 2008. Similarly, the financial statements for CIS which Mr Dewar produced do not provide much assistance on when all of the wealth comprised in the dividends had moved from CIS to Dynaflow and Dewtec. The fact that the final version of the June 2007 financial statements for CIS was apparently not produced until June 2014 raises a question which has not been answered. The financial statements must have been required for the completion of CIS’ tax return for the year ended 30 June 2007, and they were presumably regarded as being in final form at that stage.
(6) Finally, I note that the accounts for CIS for the year ended
30 June 2007 which Mr Dewar produced have not been signed by either Mr Clarke or Mr Dewar. Nor does either director appear to have signed the tax return filed in October 2007. Again, the point is a small one, but it provides an additional reason for the court to view the defendants’ claims with some caution.
[68] Having regard to those factors, I am not prepared to enter summary judgment for Mr Dewar and Mr Clarke on the basis that the distributions in issue were all made more than six years before CIS commenced this proceeding. As the Court of Appeal noted in Westpac Banking Corp v M M Kembla NZ Ltd, the summary
judgment procedure is appropriate in clear cases, such as claims based on simple debts where it is reasonable to expect proof to be immediately available. But in more complex cases (and I judge this to be one) the summary judgment procedure may not be appropriate. That is particularly so where the sufficiency of the plaintiff’s proof is in issue. As the Court of Appeal noted in Kembla, a defendant, perhaps more in possession of the facts than the plaintiff, should not be permitted to force on the plaintiff’s case prematurely, before completion of discovery or other interlocutory steps, and before the plaintiff’s evidence can be reasonably
assembled.14
[69] A final point I should mention is that Mr Dewar and Mr Clarke say that they need do no more than rely on CIS’ pleading in its statement of claim, which states that “in the financial year ending 30 June 2007 the defendants made distributions totalling $245,965…to the plaintiff’s shareholders).15 I do not accept that CIS’ pleadings can, on their own, provide a basis for summary judgment as Mr Dewar and Mr Clarke contend. It is clear on the face of the statement of claim that CIS is challenging the validity of steps allegedly taken (or omitted) by Mr Dewar and Mr Clarke in April 2008, and if and to the extent that the wealth of CIS comprised
within the dividends had not been fully distributed by then, I think the allegations relating to the April 2008 acts or omissions can form the basis of a valid claim (or at least it is not clear that they cannot). I note too that in its prayer for relief on its first cause of action CIS refers to the $545,965 as having been “distributed to shareholders on or soon after 22 April 2008”.
[70] I conclude that the summary judgment application cannot be sustained under Issue 1. It is arguable for CIS that the distributions (or at least some part of them) were made after 14 April 2008.
[71] That finding makes it unnecessary for me to consider Issue 2.
14 Westpac Banking Corporation v M M Kembla NZ Ltd above n 7, at [63].
15 Statement of claim, para [5].
Issue 3: Can Mr Dewar and Mr Clarke be liable under s 56(3) when CIS has not yet sued the shareholders?
[72] Mr Dewar and Mr Clarke rely on s 56(2) of the Act, and in particular the words “…[a director] is personally liable to the company to repay to the company so much of the distribution as is not able to be recovered from shareholders” (my emphasis). In other words, inability to recover distributions from the shareholders to whom they have been made is a prerequisite to any liability of the directors for making those distributions.
[73] Messrs Dewar and Clarke accept that claims against shareholders and directors need not be sequential. All parties could be defendants in the same proceeding, with any orders against the directors limited to that which is not able to be recovered from the shareholders. They say, however, that if the shareholders’ liability is not tested under s 56 of the Act, and now cannot be tested by means of proceedings for recovery under that section, the condition precedent for the directors’ liability can never be established. If the claim is out of time against the directors, it must also be out of time against the shareholders.
[74] I accept Mr Maasen’s submission on this point as far as it goes, but there is insufficient evidence for me to conclude that CIS will not be able to show at trial that some or all of the dividends paid to particular shareholders cannot be recovered. I do not read the relevant part of s 56(2) as requiring that court proceedings must be issued against the shareholders either before or concurrently with the issue of proceedings against the directors. For example, CIS may be able to show that one of the trust shareholders received the distribution made to it in good faith and without knowledge of CIS’ failure to satisfy the solvency test, and altered its position in reliance on the validity of the distribution in circumstances where it would be unfair to require repayment in full or at all (s 56(1)(a) to (c) of the Act). In those circumstances, the distribution to that shareholder would not be able to be recovered. Or it may simply be that one or more of CIS’ shareholders who received the distributions is now unable to make repayment. There is simply no evidence on those matters, and the court is accordingly unable to conclude that Mr Dewar and Mr Clarke have a complete answer to the claims made against them on the basis that the
shareholders are able to repay in full the distributions received by them, and cannot or will not invoke the grounds for resisting payment set out in s 56(1)(a) to (c).
[75] While it may be the case that any claims under s 56 against the shareholders would now be out of time (a point on which I make no finding), it will be apparent that I do not think that could assist Mr Dewar and Mr Clarke. It may be open to CIS to prove, by means other than the issue of fruitless court proceedings, that no recovery can be made from at least one of the shareholders who received a distribution. There is simply insufficient evidence for the Court to find these applications that CIS will be unable to do so.
[76] Finally on this argument, I note that two of the CIS shareholders who received distributions have been sued. Mr Dewar and Mr Clarke were both shareholders in CIS, and their receipt of the dividends paid to them is pleaded at para [6] of CIS’ statement of claim. The claim for relief in CIS’ first cause of action includes a claim for judgment in the sum of $545,965, “being the sum distributed to shareholders on or soon after 22 April 2008”. The first cause of action in the statement of claim is simply headed “Section 56 Companies Act 1993”. In those circumstances, it may be that it is still open to CIS to amend its claim to plead specifically that relief is also sought against Mr Dewar and Mr Clarke in their capacities as shareholders in CIS. The point was not argued and I make my finding on it, but the existence of the possibility reinforces my view that it would be inappropriate to enter summary judgment for Mr Dewar and Mr Clarke on their defence under s 56(2).
[77] For the reasons set out above, I find that Mr Dewar and Mr Clarke are not entitled to summary judgment on the basis of the defence under s 56(2) of the Act.
[78] Rule 12.2 of the High Court Rules requires that Mr Dewar and Mr Clarke must satisfy the Court that none of the causes of action in CIS’ statement of claim can succeed, even in part. In my assessment they have failed to do that. It follows that the summary judgment application as a whole must fail.
[79] In those circumstances there is no need for me to go on to consider Issues 4
and 5, relating to CIS’ second cause of action.
Orders
[80] The application by Mr Dewar and Mr Clarke for leave to apply for summary judgment is refused. Consequentially, the substantive application for summary judgment is dismissed.
[81] The costs of the applications are reserved.
Associate Judge Smith
Solicitors:
Thomas Dewar Sziranyi Letts, Wellington for Plaintiff
Cooper Rapley, Palmerston North for Defendant