Commissioner of Inland Revenue v Jackson Property Group Ltd
[2017] NZHC 1014
•17 May 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-3122 [2017] NZHC 1014
UNDER the Companies Act 1993 BETWEEN
COMMISSIONER OF INLAND REVENUE
Plaintiff
AND
JACKSON PROPERTY GROUP LIMITED
Defendant
Hearing: 26 October 2016 with extra submissions received
9 December 2016
Appearances:
Mr J Angelson for Commissioner of Inland Revenue
Mr G D Wiles for DefendantJudgment:
17 May 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
17.05.17 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
COMMISSIONER OF INLAND REVENUE v JACKSON PROPERTY GROUP LIMITED [2017] NZHC 1014 [17 May 2017]
[1] The plaintiff, the Commissioner of Inland Revenue (“Commissioner”), seeks the liquidation of the defendant, Jackson Property Group Limited (“Jackson Group”), under s 241(4) of the Companies Act 1993 (“the Act”). It relies on a number of grounds, namely that the defendant is insolvent,1 it has seriously failed to comply with the Act,2 that there have been serious and sustained breaches of the Act3 and that it is just and equitable that the company be liquidated.4
[2] The company is associated with Mr Stuart Jackson, whose part in the affairs of the company is examined subsequently in this judgment in detail. The other principal shareholder in the company was a Ms Surridge and reference will be made to her as well subsequently. These two persons established the company. Ms Surridge was a person of some financial substance and credibility. Mr Jackson had experience in the property development area but had a rather chequered history, as will become apparent.
[3] The parties apparently considered that by joining forces, they could make successful property investments.
Background
[4] The application involves questions about whether the defendant is indebted to the plaintiff. One of the grounds put forward for liquidation requires consideration of whether the defendant company is insolvent.5 The plaintiff in this case did not take the step of serving a statutory demand on the defendant and there is therefore no presumption of insolvency arising. It is thus necessary for the plaintiff to prove on the balance of probabilities that, based on the evidence before the Court, it can be
concluded that the defendant is insolvent.
[5] It is accepted for the plaintiff that, pursuant to s 241(2)(c)(iv) of the Act, she needs to establish that she is a creditor of the defendant or a prospective creditor. If
1 Section 241(4)(a).
2 Section 241(4)(b).
3 Section 241(4)(bb).
4 Section 241(4)(d).
5 Section 241(4)(b).
she is not able to establish this element of its claim, the plaintiff will not be able to succeed in obtaining a liquidation order on any of the pleaded bases, including the insolvency cause of action. If the plaintiff can establish that she is a creditor (including a contingent or prospective creditor) she will have standing to bring the liquidation proceeding. I therefore first turn to the question of the alleged indebtedness of the defendant.
Indebtedness of defendant to plaintiff
[6] In the statement of claim, the plaintiff claimed that she was a creditor of the defendant for $1,150.09 and a contingent creditor for a further $495,719.52. She further alleges that, on 14 July 2016, she issued a Notice of Proposed Adjustment (“NOPA”) in respect of goods and services tax (“GST”) returns filed by the defendant for the GST periods ending 31 March 2013 to 31 December 2014 inclusive.
[7] It is further pleaded that, subsequent to the date of the NOPA, the defendant on 20 July 2016 filed its GST returns for the periods ending 28 February 2015 to 31
May 2016 inclusive. In those returns, the defendant claimed approximately
$217,173.46 of GST refunds. Because the Commissioner was investigating those returns, she withheld payment of the claimed refunds under s 46 of the Goods and Services Tax Act 1985 (“GST Act”). She alleged further in the statement of claim:
(c) Even if the GST refunds claimed by the defendant were credited in full against the defendant’s tax arrears, the defendant would have a GST shortfall of approximately $91,207.95 owing to the plaintiff.
[8] The position of the plaintiff has since changed. The defendant company has over a period of years filed large claims for GST refunds. As at 26 October 2016, total claims came to $809,498.36. However, the plaintiff asserts that many of the claims are unjustified. Its current position is that after making required corrections to the various claims by the defendant, the defendant owes her $166,101.45, as will be explained shortly.
Exchanges between the parties concerning the level of indebtedness since the issue of the proceedings
[9] As the evidence was being compiled and filed with the Court for the current proceeding, a parallel process was being undertaken that involved discussions between the plaintiff and the defendant to reduce the areas of dispute. Primarily, the plaintiff’s position was put forward by Ms Torrie, a senior tax officer with the plaintiff, and Mr Bish the accountant for the defendant, whose primary role was to give expert evidence in this proceeding. As Mr Bish’s involvement progressed, he obtained additional financial material which impacted upon the actual taxation liability of the defendant to the plaintiff.
[10] The summary of the account which was put forward by the plaintiff was as follows:
Total GST refund claims as at 26 October 2016 -$809,498.36 GST already paid by the defendant -$16,039.09 Less GST refunds already paid by the IRD $174,415.67 NOPA amounts agreed $308,381.41 Elimination of Station Road $236,086.95 Amounts conceded to be incorrect $19,285.00 Further amounts CIR says are incorrect $4946.00 Change of use 15 St Johns Road $163,043.00 Reversal of input credit received - Massey Road $63,652.17 August and September 2016 refunds $21,828.70 TOTAL $166,101.45
[11] This net amount owing, it will be appreciated, is somewhat different from the figures stated in the statement of claim. However, this point was not taken by Mr G. Wiles for the defendant. He was prepared to deal with the question of indebtedness substantively without relying on any pleading point.
[12] The table above represented a substantial advance in attempting to reduce the areas of dispute between the parties as to the actual statement of account between them. However, substantial disputes in fact still exist to which I will now briefly make reference.
“NOPA amounts agreed”
[13] The figure of $308,381.41 is, I understand, the figure that represents a compromise on the amount of the claims which the plaintiff makes in the NOPA it issued on 14 July 2015.
[14] Mr Bish apparently accepted the first four lines of the calculation figure of
$308,381.41.
15 St John’s road property
[15] Mr Bish did not accept that there should be an adjustment of $163,043 in regard to the 15 St John’s road property which the plaintiff claimed. Ms Torrie had taken the view that the transaction ought not to have been zero rated and that the defendant ought to have accounted for GST on the sale of the property.
[16] Mr Bish records a number of matters that give rise to a dispute as to the accuracy of what Ms Torrie said. These include the fact that no GST was paid when the property was purchased, the original vendor not being GST registered, together with other grounds such as that the property was purchased for rental purposes and was tenanted throughout the ownership period. In his view, the correction which the plaintiff sought was not justified and the additional liability of $163,043 should be removed from the corrections to the account which are stated in the table.
Massey road, Hamilton Property
[17] Ms Torrie had also proposed that an input credit, which had been claimed by the defendant for the purchase of the Massey road property in Hamilton, should be reversed. This involved an increase to the overall liability of the defendant in the sum of $63,652.17.
[18] Mr Bish states that, in his opinion, zero rating of this transaction cannot apply and that the GST claim which the defendant submitted for the GST component of the purchase price when it acquired the property was correct.
Mr Bish’s statement of the position in summary
[19] The result of the calculations which Mr Bish carried out appears to be as follows:
Balance as per the plaintiff’s calculations at 14
June 2016
$308,381.41 GST refund due returns filed February 15 July
2016
-$479,605.21 Corrections as advised to IRD $19,285.00 Elimination of Station Road development
expenditure
$236,086.95 August and September 2016 refunds -$21,828.70 Input tax credit claim on Massey road purchase -$63,652.17 Net refund due $1332.71
[20] The above calculations represent the view of Mr Bish that if, what he regards as the correct figures¸ are factored into the calculation, there should be a net GST balance due to the defendant by way of refund of $1332.71.
[21] It will be observed that the method underlying the calculations is to treat the liabilities of the plaintiff on a running account basis. That is to say items of credit and debit can be set off against one another.
[22] The way in which the plaintiff presented her case was that, even if it were possible to offset in this way (which it denied), there was still a substantial amount of tax owing to the plaintiff. The plaintiff then set out to establish that there are several different reasons why the defendant could not avoid meeting a liability that it owed to the plaintiff on the basis that it expected in due course to be entitled to a
credit payable from the plaintiff. The basis for these contentions will be examined next.
Section 109 of the Tax Administration Act (“TAA”)
[23] I have referred to the fact that the plaintiff put forward evidence in the form of calculations of what the net amount which the defendant owed was. In the course of those calculations, the plaintiff adopted for the purpose of the arithmetic the entire amount of the GST refund claims for the periods ending 31 March 2013 to 31
December 2014. Notwithstanding that fact, the formal position which the plaintiff took in the submissions made to me was that it was able to rely upon the contents of its NOPA issued on 14 July 2015 as a basis for contending that the defendant was indebted to it in the sum of $451,241.54.
[24] This brought into focus the question of what effect the issue of the NOPA
had in the context of the present dispute.
[25] Lengthy submissions were put forward concerning the effect of the NOPA. The position which the plaintiff took was that the decision to issue the NOPA was a “disputable decision” in terms of s 109 of the TAA. The effect of the NOPA was stated to be that it could not be disputed in a court.
[26] The issuing of a NOPA is a statement from one of the parties to a taxation dispute, in this case the Commissioner, that he or she has formed the view that certain “proposed” adjustments are required. The party receiving the NOPA is entitled to file a Notice of Response indicating whether he or she accepts the contentions in the NOPA. An assessment only results subsequent to that stage, there being no dispute that an assessment is a disputable decision which cannot be challenged under s 109.
Conclusivity of section 109
[27] The central element of legislation which needs to be considered in conjunction with this argument is s 109 of the TAA, which provides as follows:
109 Disputable decisions deemed correct except in proceedings
Except in objection proceedings under Part 8 or challenge under Part
8A, -
(a) no disputable decision may be disputed in a court or in any proceedings on any ground whatsoever; and
(b) every disputable decision and, where relevant, all of its particulars are deemed to be, and are to be taken as being, correct in all respects.
[28] Section 3 of the TAA provides as follows:
disputable decision means–
(a) an assessment:
(b) a decision of the Commissioner under a tax law, except for a decision -
(i) to decline to issue a binding ruling under Part 5A; or
(ii) that cannot be the subject of an objection under Part 8; or
(iii) that cannot be challenged under Part 8A; or
(iv) to issue a Commissioner’s notice of proposed adjustment under section 89B, a Commissioner’s disclosure notice or statement of position under section 89M, or a challenge notice[.]
[29] As I understand it, the argument which the plaintiff puts forward is to the following effect. During the period from 11 March 2013 to 31 December 2014, 13
GST returns were filed of which 10 asserted that the defendant was entitled to a refund of GST. The NOPA which the plaintiff then served disputed the entitlement to refunds in all cases. In addition, two of the returns represented self-assessments by the defendant that it owed GST for those periods and those amounts have been paid. Therefore, it is only the 10 refund returns which are the subject of the NOPA. As it was entitled to do, the defendant filed a Notice of Response which essentially set out its disagreement to the propositions contained in the NOPA. The defendant was required to file such a Notice of Response because if it did not, it would be deemed to have accepted the propositions set out in the NOPA. Had the defendant not filed a Notice of Response, it would have been open to the plaintiff to issue assessments.
[30] The argument that the plaintiff puts forward is that the defendant cannot contest the correctness of the matters set out in the NOPA in proceedings of the present kind because the NOPA is a “disputable decision” and the Court is not permitted to ‘go behind’” disputable decisions in this type of proceeding.
[31] Accordingly, the plaintiff submits that the NOPA disallowing the claims for refunds must be given effect to. Therefore, in the present proceedings, the Court is obliged to dismiss the defendant’s claim that it is entitled to GST refunds.
[32] The alternative approach would be that the defendant’s self-assessed GST returns which (if correct) entitle it to refunds must stand until a final determination or assessment has been made.
[33] The defendant says that in these proceedings the plaintiff is unable to impeach the amounts which it has claimed in its self assessments. It says that s 109 of the TAA dictates that outcome.
[34] In brief, the submission for the defendant is that it has lodged with the Commissioner a number of self assessments of GST, according to which it is owed GST refunds by the plaintiff. It says that these assessments are no different from assessments which the Commissioner carries out. Just as those assessments are unimpeachable in a proceeding of this kind because of s 109, equally, the Commissioner cannot dispute the defendant’s entitlement to a GST refund.
[35] The plaintiff, on the other hand, says that the claims which the defendant has brought do not give rise to a debt owed by the plaintiff to it. The plaintiff says that there are three grounds for that contention. The first ground is that the plaintiff has served a NOPA on the plaintiff on 14 July 2016 which disputes the self assessments. The plaintiff says that it is entitled to invoke s 109 of the TAA because the service of the NOPA amounted to a “disputable decision” which engages s 109 and is deemed to be, and must be taken as being, correct in all respects.
[36] Secondly, the plaintiff says that, in regard to the credits claimed that fall outside the time period to which the NOPA relates, the plaintiff has given notice
under s 46(5) of the GST Act declining to give effect to the credit the defendant has claimed while it, the plaintiff, investigates the claims further.
[37] The third point which the plaintiff raises, which again seems to relate to the period outside that covered by the NOPA, is that the defendant has, in making claims for refunds, misapplied the law. These considerations are related to a contention of the defendant that when an account is drawn up reflecting what is owing by the defendant and what is owing to the defendant, it is found that the overall balance lies in favour of the defendant. Therefore, the plaintiff says that the defendant is its creditor.
[38] The contention that was put forward by Mr Wiles for the defendant was that such a construction would be inconsistent with the rights of a taxpayer, in the position of the defendant in this case, to invoke the disputes resolution procedures under Part 4A of the TAA in order to have the question of its liability or otherwise to pay tax determined. There would be no point in providing a procedure to review decisions of the Commissioner if, before those proceedings had been completed, the Commissioner could rely upon a NOPA issued as being conclusive of the tax position and thereafter take steps to seek judgment in a court which reflected that position.
[39] It is necessary to undertake some additional analysis of the effect of the provisions of the TAA in order to resolve this issue.
Purpose and function of NOPA’s
[40] The function of a NOPA is to both provide the plaintiff’s formal response to claims which a taxpayer makes and communicate the decision of the plaintiff as to why she does not accept the contentions of the taxpayer which underlie matters such as tax returns the taxpayer has filed. The NOPA should also provide the taxpayer with an intelligible explanation as to why the Commissioner takes a different view concerning the issue in question. A party served with the NOPA has the right to issue a “response notice” under s 89G of the TAA.
[41] It would not appear, however, that the NOPA itself actually affects any assessment that has taken place, such as the self assessments that the defendant has filed in this case and which result, if effective, in the defendant receiving a refund of GST.
[42] Section 89C of the TAA makes it clear that the process of issuing NOPA’s is a prelude to making an assessment which reflects corrections to the taxpayers’ position.
[43] Once a NOPA has been delivered to the taxpayer, the final result on the question in dispute will depend upon what course matters take from that point. I understand that if the taxpayer does not effectively respond to the NOPA then, by default, the views of the Commissioner will prevail. There will then be a fresh assessment which replaces the earlier assessment. In the context of this case, that could result in an erasing of the claimed GST credits and could even result in the taxpayer, the defendant, having a liability imposed on it in place of the credit that it claimed for itself. It would not however appear that the issuing of a NOPA in itself settles the final tax position of the taxpayer, here the defendant. In addition to the possibility I have set out above of the Commissioner imposing a fresh assessment, there is the possibility that the dispute might be dealt with by the disputes resolution provisions in the TAA. This latter process could result in the original assessment being upheld or the Commissioner prevailing so that a different assessment is made cancelling the effect of the original assessment.
[44] I turn now to the point which the plaintiff makes to the effect that the NOPA represents a disputable decision. I am not persuaded that the submission is correct because, when viewed against the context of the process of the parties reaching the point where assessments are issued, the function of the NOPA is to give notice to the opposite party of, as the name suggests, “proposed adjustment”. There is a difficulty in viewing such a notice as itself amounting to a “disputable decision”.
[45] The real issue for resolution in the context of these proceedings is what effect, if any, the NOPA has upon the interim position.
[46] In my view, the effect of the disputes provisions in the context of this case is that, because the Commissioner’s view regarding the taxation position of the taxpayer is different from that contained in its self-assessment, an amendment or reassessment has to take place. It is noteworthy that the rights of objection under Part 8, which may apply if the dispute resolution procedures under Part 4A are not successful, are predicated upon the issue of an assessment. It cannot be the case in my view that the Commissioner, by making statements in the body of a NOPA, can in substance bring about a state of affairs equivalent to a substitution or reassessment of the taxpayer’s position without actually issuing an assessment that could be challenged under Part 8.
[47] However, for reasons that I express later in this judgment, the position which the defendant takes concerning the NOPA does not assist it. That is to say, even if it is the case that the NOPA does not deprive the GST refund claims which the defendant has filed of any effect, the defendant is no further ahead because it cannot set-off those claims.
Set-off
[48] The key submissions which the plaintiff made concerning set off were as follows:
2.1 The Commissioner is a present creditor of the Defendant in the amount of
$11,052.91. This amount is the self-assessed GST liability of the Defendant for the GST periods ending 30 September 2014 and 30 November 2015.
2.2At the time these GST returns were filed, the Defendant did not pay the GST it owed. Rather, the Defendant appears to have anticipated its GST liability would be offset by the large GST refunds it claims for other GST periods.
2.27A further argument applies to deny the Defendant from relying on its claimed GST refunds to prove solvency.
[49] It was the further contention of the plaintiff that, because of the provisions of s 15(B)(c) of the TAA, tax must be paid on the date that it becomes due.
[50] I consider that these contentions are correct.
[51] Even if the defendant’s self assessments, which assessed that it was owed a refund are correct, the real issue is whether the defendant is able to set those off against liabilities which the plaintiff has claimed from it. Therefore, even assuming that the NOPA which the Commissioner issued does not raise the entitlement of the defendant to refunds, the question remains whether the defendant is able to set its self assessed entitlement to refunds off against the amounts which the Commissioner claims is owing to her. In my view, the defendant cannot do that. The Commissioner is able to take advantage of r 5.61(1) of the High Court Rules, which forbids a taxpayer from raising a set off. The Commissioner is not under any corresponding disability.
[52] In his decision in Commissioner of Inland Revenue v The Fishing Company Ltd, Bell AJ considered the question of set-off in dealings between the taxpayer in that case and the Commissioner.6 While the Judge concluded that after liquidation, the rules of set-off would apply, he did not say anything which would suggest that up until the point of liquidation the position is otherwise.
[53] The plaintiff also has the assistance of s 46 of the GST Act:
2.24Section 46 of the Goods and Services Tax Act 1985 (GST Act) gives the Commissioner the right to withhold payment of claimed GST refunds. For the Commissioner to invoke s 46 and withhold the claimed GST refund, she must issue the required statutory notice within 15 days of receiving the GST return. The Commissioner has filed evidence of the statutory notices issued under s 46 to the Defendant in this case.
[54] As at the date when the Court heard this matter, there was no evidence that the plaintiff had completed investigation of the GST refund claims which the defendant had made. The notice under s 46 therefore continues to have effect. Because the refunds which were the subject of that notice are not repayable, they could not in any event give rise to a right of set off.
Was the Commissioner a creditor?
[55] What is not so clear, however, is how these considerations translate into actual figures of what is owing to the plaintiff. The notice under s 46 of the GST Act
6 Commissioner of Inland Revenue v The Fishing Company Ltd [2012] NZCCLR 5 (HC).
covers the periods 28 February 2015 to 31 May 2016. For that period, the defendant claimed GST refunds of $479,605.21. The effect of the notice is that none of that amount is payable at the present time. There is, however, no present liability for the defendant to make any payment arising out of that period. That is because the assessment, which was a self-assessment, resulted in a net balance owing to the defendant.
[56] It is not clear what the state of the assessments prior to 28 February 2015 was. Did they result in a liability being owed to the Commissioner which has not been paid?
[57] Certainly, it is the view of the Commissioner that the entire account of the defendant should be amended in terms of the NOPA, which would result in a very large shortfall being owed. But the NOPA is not an assessment. Even though it applies in the period from 31 March 2013 to 31 December 2014 the contentions which the plaintiff advances in the NOPA have yet to be accepted as part of the review of assessment process which the parties are engaged in.
[58] It is difficult therefore to conclude on the balance of probabilities that the plaintiff is a creditor of the defendant.
Is the Commissioner a prospective creditor of the defendant instead?
[59] The plaintiff claims that, alternatively, it is a prospective creditor within the meaning of s 241 of the Act and as the meaning of that term was interpreted in the decision of Re Austral Group Investment Management Ltd.7 I accept the submission of the plaintiff that the Re Austral Group case determined the following point:
3.7Holland J considered it was unnecessary to attach any connotation of certainty to the contingent liability (for “contingent creditors”), and similarly saw no need to attach any notion of certainty to the definition of “prospective creditor” either. His Honour continued [at
698–699]:
Clearly the word "prospective" requires the future to be considered. The word can be used in many contexts and I have not found dictionary definitions to be helpful. When the classes of contingent creditor and prospective creditor
7 Re Austral Group Investment Management Ltd [1993] 2 NZLR 692 (HC).
were added to the general class of creditor I do not accept that the intention was merely to include persons to whom a debt was certainly payable but payment was not due until the future. I am of the opinion and I hold that the addition of prospective creditors was intended to include persons in respect of whom there is a real prospect of their becoming creditors.
[60] In his judgment in Re Austral Group, Holland J said:8
Obviously the plaintiff in proceedings for winding up must establish in the winding-up proceedings that it is a prospective creditor. The mere fact that the plaintiff had made a claim would be insufficient. It should not, however, be necessary for the plaintiff to prove in those proceedings that such a claim will be successful if it can prove that there is a real prospect of it becoming so. … In the present case, there has been no attempt to demonstrate that the plaintiffs’ claim against the company is meritless or could not reasonably succeed. I am accordingly satisfied that for the purposes of s 219 of the Companies Act 1955 the plaintiffs are prospective creditors.
[61] In Re Austral Group, Holland J was dealing with a case where there was a claim for unliquidated damages which the defendant company had taken no steps to enforce.9 The position is somewhat different in the present case. In this case, the position of the plaintiff must be that even if there is no present statutory basis for recovery of the taxation items, including the NOPA amounts and GST in respect of the disputed items in the NOPA, there is a real prospect of the plaintiff becoming a creditor in regard to such amounts in the future. Notwithstanding those differences, I consider that the reasoning contained in Re Austral Group is applicable to the circumstances of this case.
[62] The plaintiff raised, as part of its argument, contentions about the merits of the various GST transactions that it was seeking to correct. In my view, it is quite unrealistic for the plaintiff to expect that, in the context of a liquidation application, the Court can embark upon a detailed consideration of GST legislation, principles relating to GST administration and examine the various documents that are relied upon by the parties.
[63] However, it may be possible to come to a view on the question of whether the plaintiff is a prospective creditor of the defendant by other means.
8 At 699.
9 At 698.
[64] A considerable amount of evidence was placed before the Court about the negotiations between the plaintiff and the representative of the defendant, Mr Bish. One of the central points of contention is whether a GST credit claimed in respect of
15 St Johns Road was legitimate. As I understand his evidence, Mr Bish was not prepared to concede that a correction ought to be made to the balances of GST owing. He did not agree with the position that the plaintiff took in respect of the 15
St Johns road property.
[65] However, as I have noted previously, even with the elimination of that item, there would seem to still be a liability of $3,000 owing to the plaintiff.
[66] As well, the plaintiff’s wider claim which asserts a liability of approximately
$166,000 cannot be regarded as entirely meritless. A reasoned position in support of the claim has been set out in the evidence of Ms Torrie, to whom reference has been made earlier in this judgment. On the totality of the evidence, I therefore conclude that the Court cannot exclude the possibility that there is a real prospect that the views of the plaintiff will prevail in the review procedure which the parties were going to embark upon and that the defendant will be found to be indebted to the plaintiff for at least $1,000.
[67] It is necessary for the plaintiff to have leave in order to proceed as a prospective creditor (which I find her to be). I was not addressed on the matters that the Court might take into account when considering that leave should be granted. It would appear to me that the broader interests of justice and the question of whether any injustice would result to the defendant from granting such leave are some of the elements that might be considered.
[68] In determining this question, the Court is not making a substantive adverse finding against the alleged debtor. The enquiry is more concerned with ensuring that the applicant for leave has a legitimate interest in bringing liquidation proceedings against the defendant. Plainly in this case, it would be in the interest of the plaintiff, as a prospective creditor, to proceed to a liquidation of the defendant if it was established that the circumstances of the company would deteriorate if the Court did not make a liquidation order. The implicit position which the plaintiff takes in this
case is that the affairs of the company are being misconducted and that it is in the public interest, and in the interest of the creditors, that the company be put under the control of a liquidator. I will make further comment on these contentions below.
[69] To negotiate around these difficulties, counsel for the plaintiff sought to place before the Court information in the form of submissions which updated the evidence. I do not, however, consider that the Court should come to any conclusion as to the actual indebtedness of the defendant, other than on the basis of findings made by the Court, or the actual evidence before the Court, concerning the $308,381.41 or indeed other aspects of the debt claimed.
[70] A further uncertainty arises from the fact that, in the submissions which he filed in December, counsel for the defendant apparently asserted that there should be deducted from the $308,381.41, the NOPA figure, the sum of $63,652.17. This would appear to be, in essence, a contention that the figure of $63,652.17 has been counted twice by the plaintiff. That is to say, the contention would appear to be that the plaintiff has included this amount in the claim for $308,381.41 and then separately added again a separate item in the table which I have set out above. I am unable to resolve these contentions on the state of the evidence before me. The effect of the adjustment which the defendant has proposed would be that, instead of an amount of $166,101.45 (the amounts set out in the table above which the plaintiff says is owing) being owed, the defendant would in fact not owe anything, after allowance is made for another adjustment which I shall refer to shortly, which relates to the change of use at the 15 St John’s road property, another item which is included in the above table.
[71] The plaintiff, however, claims that the effect of s 109 of the TAA is that the NOPA must be deemed to be correct. This is an argument that will be discussed next.
[72] The plaintiff issued a NOPA to the defendant dated 14 July 2016. The
NOPA related to the GST returns which the defendant filed between the periods of
31 March 2013 and 31 December 2014. The essential contentions appear to have been that the defendant was not entitled to certain GST refunds which it claimed had
been paid to it. The total amount of additional tax after adjustments had been made which the defendant, according to the NOPA, was required to pay was $451,241.54.
[73] As appears from the table which I have earlier set out in this judgment, that figure was greater than the $308,381.41 which, in the table the plaintiff provided, was stated to be the “NOPA amounts agreed”.
[74] The question of whether the contentions in the NOPA, which the plaintiff served, are correct or not has never been resolved. The defendant filed a Notice of Response, which apparently put many of these items in dispute. The evidence which was placed before me therefore was restricted to the fact that the plaintiff had served a NOPA and the defendant had responded to it. There is no evidence of what happened thereafter. It was common ground between the parties at the hearing before me that the parties were scheduled to undertake a disputes process in the near future but, of course, the outcome of that process was not a matter which I can speculate about, it not having been covered in the evidence.
[75] The NOPA dealt with GST self assessments by the defendant prior to 14 July
2016.10 The GST refunds which the defendant claims to be able to bring to account are not restricted to those periods. However, the GST refunds claimed after the date of the NOPA are being withheld pursuant to s 46 of the GST Act. It would appear that the amount of the pre-NOPA GST refunds, which the defendant claimed entitlement to, was $224,233.25. If the NOPA was conclusive in its effect of disallowing those GST refunds, it would be clear that the defendant owed significant GST debts to the Commissioner, which would be sufficient to support a claim for liquidation of the company.
Grounds for liquidation order – s 241(4)(a)
[76] As I have concluded that the plaintiff was a prospective creditor, she has standing under s 241(2)(c)(iv) of the Act to apply for a liquidation order.
[77] The plaintiff first applies for a liquidation order under s 241(4)(a) of the Act on the basis that the defendant company is unable to pay its debts.
10 The date of the NOPA.
[78] As I have established in the above discussion, I cannot be certain that the defendant company is currently indebted to the plaintiff. Given the fact that I have not been presented with any other basis from which to infer insolvency, I cannot say that the defendant is unable to pay its debts.
[79] If it had been the case that the plaintiff was a current creditor of the defendant and had been for some time it might have been possible to draw the inference that because the defendant had not paid off the liability, that was because it was unable to pay. That, in turn, would provide evidence of insolvency. I have not however been able to reach that position.
Grounds for liquidation order - s 241(4)(b)
[80] An alternative ground for a liquidation order is contained in s 241(4)(b) of the Act, namely that the defendant company has persistently or seriously failed to comply with the Act.
[81] The plaintiff claims that the defendant has seriously failed to comply with the requirements of the Act, in that it has failed to maintain records of minutes and/or resolutions of the shareholders, an interests register, minutes and resolutions of directors, copies of financial statements and the minimum required accounting records. These failures constitute a breach of s 189(1), as well as s 194(1), of the Act.
[82] The allegation to that effect is set out in the statement of claim which the plaintiff has filed in this proceeding. The defendant does not properly address this allegation, simply saying:
It denies the allegations and paragraph 36 of the statement of claim.
[83] The defendant does not in its statement of defence provide particulars (as it is required to do by virtue of the High Court Rules)11 of records which the company
actually created or maintained in satisfaction of the statutory obligation.
11 Rule 5.48(2).
[84] The interim liquidators of the company, who were appointed in January 2015, were obliged to engage a firm of chartered accountants to prepare an updated set of accounts for the company in an endeavour to ascertain its true position. They commented in their second report to the court:
This process has been extremely difficult, due to the lack of prime records to support many transactions. We have been forced to issue Section 261 notices on two legal firms in an endeavour to identify the true cash flows in relation to a number of property transactions. The company has at various times owned 19 properties.
The accounting work undertaken by [the accountants] has been complicated and expensive. We have incurred a potential liability for that work to date in excess of $18,000 excluding GST[.]
Mr. Jackson and Ms. Surridge have both assisted us in our enquiries, however there are still a number of key transactions for which the supporting documents have not been located.
[85] It would seem that Mr Stuart Jackson accepts that there have been such shortcomings, but he explained them as being due to the inadequacies of Ms Surridge, the former director.
[86] In my assessment, it does not matter whether one particular director has sole responsibility for the state of affairs or whether more than one director was responsible.
[87] As I determine in the following sections of this judgment, Mr Stuart Jackson was a de facto director of the company. On the assumption that that assessment is correct, it is necessary to briefly revert to the point that Mr Jackson made that the failings of the company to keep proper records were the responsibility of the de jure director of the company. Quite apart from anything else, it is not possible for one director to resist liquidation of a company, which has not maintained proper records, by blaming the failure of the other director. Directors have a joint responsibility.
[88] Mr Jackson, as a director of the company (albeit de facto), had such a responsibility.
[89] To this day, it is not clear whether the deficiency of primary records has been remedied. The fact that Mr Bish, in his affidavit in October 2016, was referring to
the fact that steps were now being taken to prepare tax returns for the years ended
2014, 2015 and 2016 suggests that there are still difficulties in this regard. In any case, s 241(4)(bb) is retroactive in its effect, in the sense that the present ground for liquidating a company may arise as a result of past inadequacies in keeping the proper records required of the company.
[90] It is possible to imagine a case where a company, although guilty of past infractions of ss 189(1)(i) and 194 of the Companies Act, had evinced an intention and ability to remedy past problems and had made substantial progress towards doing so. It might be that in a case of that kind, the Court would decide that ordering liquidation on the basis of non-compliance with s 194 was not a proportionate and balanced exercise of the discretion vested in the Court. In the present case, however, there is no evidence that suggests the type of situation that I have referred to above has in fact materialised with regard to the defendant. As I have remarked upon elsewhere, Mr Jackson has arranged for his son, who has not long since left school, to take over as a director of the company. I will not comment further on the adequacy of these governance arrangements, but it has to be said that they do not inspire confidence that the problems about keeping records now belong only to the past. In summary, I consider that this is an appropriate case in which the company should be put into liquidation because of failures to keep adequate records.
[91] Notwithstanding the above conclusion, I will go on to consider the alternative liquidation grounds that the plaintiff proposed.
Alternative grounds for liquidation order - s 241(4)(bb)
[92] The plaintiff also applies for a liquidation order under s 241(4)(bb) of the Act on the basis that the defendant company, or one or more of its directors or shareholders, has in a persistent or serious way failed to comply with the company’s duties under the Act.
[93] In this regard, the plaintiff alleges that Mr Stuart Jackson breached this section.
[94] Mr Jackson had not been appointed a director of the company. Nonetheless, the substance of the plaintiff’s case is that Mr Jackson was a shadow director of the defendant and as such, he owed the same duties to the company as those which were owed by the de jure director, Ms Surridge.
Defendant’s contentions about Mr Jackson’s role in the company
[95] Mr Wiles relied upon the account that Mr Jackson had given in his affidavit to the effect that he was employed as a consultant of the company. He told me that the structure of the consultancy was that a company that Mr Jackson owned, Catalyst
2 Properties Ltd (“Catalyst”), provided the consultancy services under a contract with the defendant. To carry out the contract, Catalyst employed Mr Jackson. Mr Wiles referred to the fact that it was because of the previous bankruptcy of Mr Jackson, coupled with the prohibition against his becoming a director of the defendant (from December 2003 to December 2008), that the parties agreed that he would not be a director and that Ms Surridge alone would be the company director.
[96] Mr Wiles referred to such matters as Mr Jackson’s limited authority to make payment of the defendant’s liabilities. He said that Mr Jackson was authorised only to meet invoices or charges up to a maximum of $5,000.
[97] Mr Wiles said that the role that Mr Jackson played in the defendant’s affairs was to use his alleged knowledge and experience in the property market to identify properties for development — noting that, in fact, because of dissension between Mr Jackson and Ms Surridge, no development projects ever got underway.
De facto director
[98] The plaintiff says Mr Jackson was at all material times a shadow director of the defendant in that he:
(a) was involved in the structuring of the Defendant;
(b) was left to deal with the day to day running of the Defendant;
(c) provided instructions to the Defendant's accountants and solicitors; (d) was responsible for sourcing and developing the Defendant's
properties and then on-selling them; and
(e) has largely driven the Defendant's activities.
[99] Section 126 of the Companies Act defines a “director” in the following
terms:
(1) In this Act, director, in relation to a company, includes—
(a) a person occupying the position of director of the company by whatever name called; and
(b) For the purposes of sections 131 to 141, 145 to 149, 298,
299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7,—
(i) a person in accordance with whose directions or instructions a person referred to in paragraph (a) of this subsection may be required or is accustomed to act; and
(ii) a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and
(iii) a person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and
[…]
[100] Mr Angelson in his submissions for the plaintiffs referred to the leading
English authorities:
6.5 A leading decision on the interpretation of the English equivalent to s
126(1) is Revenue and Customers Commissioner v Holland; In re Paycheck Services 3 Ltd.12 In that case Lord Hope noted the observations of Millet J as to the differences between de-facto and shadow directors.13
A de facto director is a person who […] is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such.
[…] A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company.
12 Revenue and Customers Commissioner v Holland [2010] UKSC 51, [2010] 1 WLR 2793.
13 Revenue and Customers Commissioner v Holland, above n 12, at 182–183 (emphasis added);
quoting Re Hydrodam (Corby) Limited [1994] 2 BCLC 108 (Ch) at [183].
[101] Mr Angelson also submitted:
6.6 The widely-accepted dicta of Millet J has been followed in New
Zealand in several cases.14 According to Millet J:15
To establish that a defendant is a shadow director of a company it is necessary to allege and prove:
1) who are the directors of the company, whether de facto or de jure;
2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so.
3) that those directors acted in accordance with such directors; and
4) that they were accustomed so to act.
What is needed is, first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.
[102] I accept the correctness of those submissions.
Discussion
[103] There is adequate evidence in this case that Mr Jackson was not just the consultant that he painted himself as being. This was not a case of a consultant providing advice and information to the directors for them to act on as they chose. The activities that Mr Jackson says that he was involved in would plainly involve decisions being made about matters that would typically be made by directors. He puts forward a scenario to the effect that he was giving advice to such a board, but there was no board in fact in existence in this case. Ms Surridge did not want to be involved in the day-to-day running of the company. Her role in the company was to lend her good name and make security for lending available to it. Mr Jackson’s position was that he was engaged to provide advice on matters such as management of the properties and identification and selection of the properties is not in my view believable. He actually made the decisions that in properly constituted company
would be made by the directors. At the beginning of the company’s operations,
14 See for example Vance v Lamb (2009) 10 NZCLC 264,498 (HC); Delegat v Norman [2012] NZHC 2358; and Vance v Jefferys [2014] NZHC 1932.
15 Re Hydrodam, above n 13, quoted in Vance v Jefferys, above n 14, at [58].
Ms Surridge, as the de jure director of the company, was prepared to allow effective direction of the company to be carried out by Mr Jackson. After Ms Surridge and Mr Jackson agreed to separate their interests in the company, Mr Jackson arranged for his son, Schuyler Jackson to be appointed a director.
[104] Mr Schuyler Jackson was, indeed appointed as a director of the company. There is no doubt that this event did not signal any change to the way in which the company was administered. Mr Jackson Sr remained in control. He not only had the ability to control the company, but he put his potential ability to control the company into effect throughout its trading history.
[105] The context in which these arrangements were made is also relevant. Mr Jackson Sr, who had through his family trusts a substantial financial interest in the defendant, was not excluded from being a director because of an unwillingness or a perceived inability on his part to be involved in decisions affecting the company’s future. The reason why he did not appear as a director is that because of his unfortunate past record, his association with the company would not be helpful. He did not want to avoid being involved in direction of the company, but only being seen to be so involved.
[106] The circumstances surrounding the sale of the properties were a significant example of Mr Jackson Sr carrying on the affairs of the company. He did so when he wrote out agreements for sale and purchase of the defendant’s properties, from the trustees who held them for the company, to the associated entities. There was no company resolution passed by a director(s) of the company to countenance the sale of the properties, in which the company had the beneficial interest via the trustee, Ms Surridge. Mr Jackson Sr himself took the initiative and assumed that he was able to act in this way.
[107] I consider that the true position is reflected in an email which Mr Jackson Sr sent to Ms Surridge on 26 October 2015. In that email, he made a number of allegations against Ms Surridge and said that he now could not believe that he had “let this go on as long as [he had]”. He said that he had been through the company’s
bank statements to check and had been concerned about irregularities. He referred to the wishes of his children in the matter and said:
Their wish is the original arrangement, (status quo) be put back in place forthwith. We did not create millions of dollars of development property by me sitting on my arse, it didn’t just happen. As you are perfectly aware an income commensurate to my skills and knowledge is worth in excess of
$250,000 per annum but you and I mutually agreed that I would work for
100,000 plus GST for 2 years until this company got established. I’ve
sacrificed a $500,000 to $1,000,000 dollar a year commercial real estate
career the last 3 years to build this company with you and [I] won’t be ripped
off by you any longer.
[108] It is possible that Mr Jackson Sr could have taken the position that he did on the matters covered in this email even in circumstances where he was not a director. However, it is clear that whatever Mr Jackson Sr’s position was, it went well beyond simply being a consultant engaged by the company.
[109] Mr Angelson submitted that:
6.24 Stuart Jackson’s control over the Defendant continued. Stuart
Jackson:
(a) criticised Ms Surridge for applying to the Court for the appointment of interim liquidators “without any consultation with me”;
(b) presented a proposal to ensure the Defendant could continue trading despite the dissention between the shareholders;
(c) worked with the Defendant’s accountants and interim liquidators to ”conduct a thorough examination of the Defendant’s financial affairs and financial position”;
(d) provided a “proper analysis” of the shareholder current
accounts with the Defendant;
(e) pointed out what he said were inaccuracies with these current accounts; and
(f) explained the status of the various creditors of the Defendant as supplied by the interim liquidators.
[110] On one view of it, the matters that Mr Angelson referred to in his submissions exhibit characteristics of a person with a close interest in the affairs of the company and knowledge of those affairs. However, having regard to the fact that Mr Jackson Sr’s family trust owned an equal share in the company, it may be
regarded as natural that he would take such an interest in the company’s affairs and the fact that he did is not necessarily evidence that he became a de facto director. This was at least so during the period which Ms Surridge was legally a director of the company.
[111] It is possible to view matters differently from the point of Ms Surridge’s departure following the execution of the shareholders’ agreement in May 2016. There is no doubt that the appointment of Mr Schuyler Jackson as the replacement director for the company was contrived by his father, Mr Jackson Sr. Further, given the complete lack of experience of Mr Schuyler Jackson and given the likelihood that as a family member he would adhere to his father’s views, a strong inference arises that from the point where Mr Schuyler Jackson was appointed director, the steps that he took reflected the control and authority that Mr Jackson Sr assumed for himself in the wake of the departure of Ms Surridge. That is the true explanation of the relationship between Mr Jackson Sr and Mr Schuyler Jackson, rather than the competing explanation which Mr Jackson Sr has put forward. He claimed that he was initially engaged as a consultant by the company through the agency of Ms Surridge and then through the agency of Mr Schuyler Jackson when he became director. This alternative analysis seems to me to be unlikely. In my view, Mr Schuyler Jackson was a cypher who took his place at the instigation of his father.
[112] Coming to a judgment on this matter is not easy, particularly in light of the fact that the plaintiff did not require Mr Jackson Sr to be made available for cross- examination. However, on the balance of probabilities, it is open in my view to the Court to conclude that, at least for the period that I have stated above, Mr Jackson Sr was a shadow director of the company.
[113] Consistent with that explanation, once it became clear that the shareholders were going to go their own way, Mr Jackson Sr immediately assumed direct control of the affairs of the company. I consider that his actions of immediately moving to draw up agreements for sale and purchase, transferring the properties away from the bare trustee to entities under Jackson family control, were most conspicuous. Mr Jackson Sr did not make the effort of presenting these actions as being taken by the sole director of the company, Mr Schuyler Jackson. He intervened directly.
[114] The company was required by law to disclose who its directors were.16 No doubt the Jacksons did not want to disclose the fact that Mr Jackson Sr was a director because of his poor track record. At an earlier date, a group of companies that he had been the sole director of, including Budget Homes Ltd which was liquidated in May 2003, had managed to accumulate debts of $14,000,000.
[115] The result of the company not disclosing in its register that he was a director was misleading and designed to be so.
[116] The discussion in this part of the judgment is relevant to the ground for liquidating a company set out in section 241(4)(b) of the Act, namely that the company or board has persistently or seriously failed to comply with the Act.
[117] I also consider that the Court is justified in invoking the just and equitable ground of the Act in this regard17, on the grounds that there is a justifiable loss of confidence in the conduct and management of the company.18
[118] Mr Jackson Sr did not take any legal methods available to him to resolve the impasse — for example by his family trust as a 50 per cent owner of the company seeking liquidation. He did not see the need to, in my view, because there was a much more direct way of achieving the desired result and that was to continue his control of the company as a de facto director and achieve the breakup of the company and dispersal of its assets by that means.
[119] My overall conclusion is that Mr Stuart Jackson was at all material times a shadow director of the company.
Was there therefore a breach of s 241(4)(b)?
[120] As Mr Jackson was a director of the company, it is necessary to inquire whether he failed to comply with duties relating to the company under the Act in a
persistent or serious way.
16 Companies Act 1993, s 189(1)(f).
17 Section 241(4)(d).
18 Morgan Roche Ltd v Registrar of Companies (1987) 3 NZCLC 100, 189 (HC).
[121] It was submitted for the plaintiff that shadow or de facto directors are subject to the same directors’ duties imposed under the Companies Act as any de jure director.19 I accept that submission. I also accept the contention of Mr Angelson that Mr Schuyler Jackson and/or Mr Jackson Sr owed the defendant duties:
(a) to act in good faith and in what they believed to be the best interests of the Company (s 131 of the Act);
(b) not to cause or allow the business of the Company to be carried on in a manner likely to cause serious loss to the Company's creditors (s
135 of the Act);
(c) not to allow the Company to incur an obligation unless they believed at the time on reasonable grounds that the Company would be able to perform the obligation when it was required to do so (s 136 of the Act); and
(d) when exercising powers of performing duties as a director, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances (s 137 of the Act).
[122] The plaintiff made wide-ranging and detailed submissions on the various ways in regard to which Mr Jackson Sr and Mr Schuyler Jackson breached their obligations.
[123] In the interests of concision, I will deal with only one of those aspects.
Failure to act in good faith - s 131(1) of the Companies Act
[124] The contentions of the plaintiff were that only eight days after the plaintiff filed her appearance which noted the large contingent debt owed by the defendant, Stuart and Schuyler Jackson caused the defendant to enter into sale and purchase agreements to transfer away or dissipate all of its properties on 31 May 2016 – whilst this matter was still before the Court (and the defendant was still in interim liquidation). The result of the subsequent transfer of these properties on 16 June
2016 was that the defendant was made bereft of assets.
19 Companies Act, s 126(1)(b); Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (HC) at
90.
[125] The plaintiff submitted that, further, one of the properties transferred from the defendant was the St Johns road property – the residence of Stuart and Schuyler Jackson. This was said to be a clear instance of Stuart and Schuyler Jackson:
a) disregarding the interests of creditors by transferring away the
Defendant’s assets; and
b)preferring their own interests by transferring ownership of the Defendant’s property at 15 St Johns Rd, St Johns to Alana Jackson as trustee of the JPT.
[126] It was the further assertion of the plaintiff that, by transferring the property where they live from the defendant to a trust controlled by their daughter/sister at a time they knew the defendant had significant liabilities, their actions cannot be said to have been in good faith. The plaintiff says this is a breach of s 131(1) of the Act, which states that a director, when exercising or performing duties, must act in good faith.
Discussion of breach of duty in relation to sale of the company’s properties by Mr
Stuart Jackson
[127] I consider that there is substance to the case which the plaintiff has made in this regard. However, I consider that some further aspects of the arrangement, which are not apparent from the submission which the plaintiff made, need to be emphasised.
[128] In the first place, it would appear that the contentions that Mr Wiles made on behalf of the defendant that consideration was received for the sale of the properties, which was in turn used to pay off debt to the security holders over those properties, is in fact correct. It was not therefore simply a matter of the directors presiding over a process which “stripped” the company of its assets. However, that is not the end of the matter because the way in which the properties were disposed of and the timing of that sale raises concerns. In the first place, no acceptable justification has been put forward by Mr Jackson Sr to justify the sale of these properties other than on the open market and in circumstances where a conscientious and sufficient attempt was made to establish what the current market value was. The only attempted justification which can be found in the evidence which Mr Jackson Sr has filed is to the effect that the prices which his family paid to acquire the properties was
nominally greater than the price at which the company acquired them in the first place. That is quite insufficient in my view.
[129] There are other aspects of the transactions which are notable.
[130] Mr Angelson submitted:
5.22 The recent transfer or dissipation of the Defendant’s properties was particularly brazen as it occurred whilst the Defendant was still in interim liquidation, and whilst this proceeding was before the Court. In this respect the Commissioner notes the Minute of Associate Judge Bell dated 16 June 2016:
While I appreciate the Commissioner's concerns, that the people behind the company do have bad form in terms of tax compliance and solvency, I do not see a continuing need for the interim liquidators to stay in office. That is because the liquidation application is before the court and the people behind the company cannot help but be aware that any transactions they might enter into are likely to come under scrutiny, both by the Commissioner and by the Court. If they were to play fast and loose with company assets in the meantime, they would be acting exceedingly foolishly. I consider that the prospect of further scrutiny should be enough to dissuade them from any reckless actions.
5.23 Unfortunately, by the time this Minute was given (at the hearing on 16 June 2016 at 10:45am), the transfer or dissipation of the Defendant’s properties was already complete. The Defendant’s properties were transferred away or dissipated between 9:53am and 10:24am on 16 June 2016. For some reason, Stuart Jackson (who handwrote each sale and purchase agreement), saw an urgent need to get the Defendant’s properties beyond the reach of creditors and supervision of the Courts.
[131] Mr Wiles added:
1.5. On 25 May 2016 the parties entered into a Deed of Settlement agreement. In terms of the agreement SWJ Trustee Company purchased the shares held by Ms Surridge's Ajay Trust for $1.00, a sum ($3,445,220) equivalent to the agreed market value of the properties then owned by the company and additional sums to meet the cost of the interim liquidators and to achieve settlement. These payments allowed Ms Surridge to clear the mortgages on those properties, the titles to which were transferred to SWJ Trustee Company acting as the replacement bare trustee for the Defendant company.
1.6. The properties were then sold to BA Scott Trustee Co Ltd (as trustee of the Williams Family Trust) for the same price ($3,445,220). A full explanation of this transfer and the subsequent transfers of the properties to St Johns Property Group Ltd (in respect of 6 titles) and Alana Jackson (in respect of 15 St
John Road) is provided by Mr Bish. He points out that the transfers were for a fair market value and that the initial transfer of the properties to BA Scott Trustee Ltd allowed St Johns Property Group Ltd to raise the necessary mortgage finance. Finance would not have been approved to St Johns Property Group Ltd if it was purchasing the properties from a company in interim liquidation with possible tax debts .
[132] Unfortunately, the transactions that involved the sale of the various properties are complex. Again, the process of finding the facts was not assisted by an absence of cross-examination. Nor was expert evidence put forward concerning the value of the properties.
[133] Notwithstanding these drawbacks, I consider that it is possible to come to a view of the legitimacy of these transactions. That is, based upon the documentary evidence which has been filed, and following through one of the transactions, some understanding can be gained of the process by which the company’s properties were disposed of.
[134] Mr Jackson Sr had apparently carried out a calculation of the value of these properties, which was provided to the lawyers acting for Ms Surridge sometime in October 2015. In his calculations, he took into account a number of valuers’ reports20 and the price obtained on another property which he regarded as a comparable sale. The market value arrived at was $1,281,000. From this, he deducted GST and real estate commission to come up with what he described as a “zero rated” value of $1,070,000. Subsequently, an agreement for sale and purchase was entered into for these properties at the latter figure. Mr Jackson Sr has written
on the agreement for sale and purchase the remarks “zero rated”. The purchaser
under this agreement was a company called Catalyst.
[135] A further point needs to be noted, namely that the sales were acquiesced in by Ms Surridge. I do not accept, though, the apparent contention of Mr Jackson Sr that this provided an assurance that what was paid was proper market value for the
properties.
20 These were not disclosed to the Court.
[136] There is ample evidence to establish that the affairs of the company had become blighted by mutual recriminations between Ms Surridge and Mr Jackson Sr, including threats and abuse on the part of Mr Jackson Sr that Ms Surridge was not functioning acceptably because of excessive drinking. Mr Jackson wrote particularly unpleasant emails to Ms Surridge.
[137] While it is correct that these two parties were in some respects at arm’s length, the essential function of their termination agreement was to divide the property of the company between themselves. In such a circumstance, the nominal consideration for transfer of properties was not of preponderant importance. What was important was to ensure that, broadly speaking, the division of property reflected an acceptable basis upon which the parties could part ways. Further, a contract which is designed to regulate the disentangling of the affairs of two parties can reflect extraneous issues, in that it probably reflected a process of give-and-take, with the parties factoring in advantages and disadvantages and not just proceeding on the simple basis of whether a given asset was available for acquisition at a fair market price. The parties could not extricate themselves from the arrangement without coming to some agreement as to the division of the property. How anxious they were to bring about a termination of the arrangement could well affect what minimum price they might accept for various assets. The prices paid were not therefore necessarily what an informed, willing but not anxious vendor or purchaser might have agreed to pay or receive on a sale.
[138] The overall effect of the matters I have been discussing would seem to be this. In the first place, on the basis of the information which the plaintiff has put before the Court and which the defendant has not meaningfully contested, there is real concern that the sale of the company’s properties came at a cost to the company and its creditors. An inference arises that, because proper attempts were not made to ascertain the market value of the properties, for example by marketing them in an orderly way and soliciting bids from the public for them, a fair price from the company’s perspective was not obtained.
[139] In other circumstances where the parties appear to have been acting responsibly in general terms in the way that the company was carried on, the Court
might have fewer concerns about the propriety of this transaction. Unfortunately, the Court cannot have confidence that Mr Jackson was capable of such conduct. Further, the only identifiable basis upon which the price was arrived at was, as mentioned previously, their historical purchase price. I agree with Mr Angelson that it is common knowledge that these transactions occurred at a time when there were substantial rises in property values. In that context, linking the sale prices to their historical value, fixed by having regard to the price that the company paid for them in other words, was not defensible.
Lack of adequate records
[140] The next particular breach of s 241(4)(b) upon which a liquidation order is sought is that there has been a breach of the company’s obligations to keep accounting records.
[141] Section 194 of the Act relevantly provides:
(1) The board of a company must ensure that there are kept at all times accounting records that -
(a) correctly record the transactions of the company; and
(b) will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
(c) will enable the financial statements or group financial
statements of the company to be readily and properly audited (if those statements are required to be audited).
…
(2) The board of a company must establish and maintain a satisfactory system of control of its accounting records.
(3) The accounting records must be kept –
(a) in written form in English; or
(b) in a form or manner in which they are easily accessible and convertible into written form in English.
…
[142] The background to the matter coming before the Court needs to be supplemented by having regard to the following matters.
[143] An order was made placing the company into interim liquidation on 29
January 2016. The liquidators appointed were partners in a chartered accountancy firm. As at the date when they were appointed, there were no annual accounts available for the 2013, 2014 and 2015 financial years. There is no dispute that annual accounts ought to have been available for those years by the time that the interim liquidators were appointed.
[144] Counsel for the plaintiff made the following submissions:
5.5The Defendant’s previous accountant noted that Stuart Jackson had largely driven the Defendant’s activities, and as such, it was difficult to appreciate the Defendant’s early transactions.
5.6The position with the ability to understand the Defendant’s transactions has not improved. In their first report the Interim Liquidators’ preliminary view was that there had been noncompliance with tax and accounting obligations by the Defendant; and that there appeared to be no minute books or financial statements kept for the Defendant.
5.7 In their second report, the Interim Liquidators noted:
The interim liquidators have engaged Bendall & Cant Chartered Accountants, to prepare an updated set of accounts for the company to the present date, in an endeavour to ascertain its true position and to identify the use of the mortgage funding raised for it by Ms. Surridge. This process has been extremely difficult, due to the lack of prime records to support many transactions[.] We have been forced to issue Section 261 notices on two legal firms in an endeavour to identify the true cash flows in relation to a number of property transactions. The company has at various times owned
19 properties.
5.8Stuart Jackson adopts the interim liquidators’ criticisms of the state of the Defendant’s “accounts, its tax compliance practices and record-keeping”, and says this “reflect[s] on Ms Surridge herself”.
5.9The Interim Liquidators’ final report suggested that they were required to prepare financial statements for the Defendant for the period since April 2013 to indicate the trading and balance sheet
position of the Defendant. However, no such financial statements were provided by the Interim Liquidators. Beyond draft balance sheets, the Defendant has also not put into evidence any financial statements or records which would satisfy s 194 of the Act.
Discussion of lack of adequate records
[145] I approach the question of whether a liquidation order ought to be made in the circumstances of this case on the basis that it would not seem to be correct that every breach of a requirement to retain proper records of a company will result in an order for liquidation. The decision to liquidate the company should only be made if it is proportional to the extent of the breach of the section.
[146] The purpose of the statutory enactment is not made explicit. The Court of
Appeal in its judgment in R v Bennett stated:21
Section 151(1) does not stipulate the accounting records to be kept save by the purposes they are to serve and the information they are to provide. What is necessary will vary with the nature of the business and the urgency and state of its affairs. Further than this we do not at present go. On some future occasion it may be necessary to decide whether among the objects of s.151
is that of having the management of a company know its financial state at all times …
[147] That case was, of course, one involving a criminal prosecution of directors of the company for breaches of the requirements of the Companies Act as to the state of the company’s records. These were breaches which the directors denied. In the present case, the issue is a different one, there being no substantial argument that the company did not actually comply with the requirements of the legislation.
[148] Although this authority was decided under the predecessor section to the current form of the enactment,22 there is no reason to suppose that what the Court of Appeal said does not remain applicable.
[149] In more general terms, it would seem likely that one of the reasons for the role is that the ability to limit liability, by adopting an incorporated body as the
vehicle for a business, brings with it the responsibility to ensure that the acceptance
21 R v Bennett (1985) 2 NZCLC 99,279 (CA) at 99,282.
22 Companies Act 1955, s 151(1) and (2).
of the advantages must be conditional upon acceptance of the responsibilities that comes with that.
[150] The position which has been described by the interim liquidators would indicate that there had been a major failure to provide and keep accounting records that correctly record and explain the transactions of the company, as s 194 of the Act required, at least from April 2013.
[151] By the time the matter came on for hearing towards the end of 2016, there was no evidence that records which met the standard that s 194 required had ever been prepared.
[152] The omissions in this case were not trivial. The conduct of the interim liquidation was hampered by the fact that the interim liquidators, and presumably the independent chartered accountants that they retained to prepare comprehensible financial records, could not make sense of the company’s financial position.
[153] Mr Jackson, through his counsel, was driven to blaming the omission to keep proper records on Ms Surridge, the original director of the company.
[154] Mr Wiles for the defendant took the approach that, while the past position as to records may have been unsatisfactory, the company had now turned over a new leaf with the appointment of a new director, the son of Mr Stuart Jackson, Mr Schulyer Jackson. He and his sister, who had a business qualification, would be ensuring that in the future the company was properly run, with, presumably, proper records being kept. However, as the plaintiff observes, the shareholders’ agreement that was entered into between the parties in 9 June 2015 recorded that Mr Schulyer Jackson was appointed director from 25 May 2016.
[155] I will make further observations concerning the part that Mr Schulyer Jackson plays in respect of the company elsewhere. However, it is clear that he has no business experience. More critically, there is no indication that he has been able to obtain the financial resources to carry out reconstruction of the company’s financial records. This point is relevant because, as the interim liquidators have
made clear, they themselves had spent considerable amounts of money attempting to achieve this objective before their liquidation ended. As well, if Mr Schulyer Jackson had actually accomplished the objective of having the accounts brought into compliance with s 194, one would have expected evidence from him that that was the case or that, alternatively, he would have provided evidence demonstrating that substantial steps had been taken to get to this position.
[156] As well, I must disagree with the approach that the defendant now takes which is to blame the state of its records on a previous director. While the directors are of course separate from the company, the company cannot take the position that it disavows the actions of the director who created the situation that it finds itself in.
[157] Nor do I accept, as his side have stated elsewhere in this judgment, that Mr Stuart Jackson was simply a contractor providing services to the company as opposed to being someone involved in its direction and governance. He was in fact closely influential concerning the way that the company was being operated and his attempts to distance himself from the operation of the company, and its failures to comply with the relevant provisions of the Companies Act, are not only irrelevant but implausible.
[158] In the context of this case, the references in R v Bennett above to the nature of the business which the company was involved in, and the urgency and state of its affairs, would appear to be referenced to the issue of whether there was any excuse for the directors not actually keeping records. In this case, the issue is rather different, involving assessment of the seriousness of the breach and whether there is any aspect of the surrounding circumstances which mitigated the seriousness of the breach.
[159] As I have noted elsewhere, interim liquidators were appointed to the company on 29 January 2016. The fact that the interim liquidators, who themselves were apparently chartered accountants, and the chartered accountants to whom they delegated compilation of accounts, were not able to make significant progress notwithstanding incurring substantial professional fees, implies that the company’s financial records were seriously substandard.
[160] Further, even if it were true that the problems with the accounts properly rested with Ms Surridge, one would have thought that her departure from the company following the shareholders’ agreement entered into in May 2016 would have resulted in the new management taking prompt steps to rectify the problems. Yet, when this case was heard in November 2016, there is no evidence that any progress had been made with the accounts. Mr Schulyer Jackson did not prove to be the new broom that Mr Jackson Sr had hoped.
[161] The application to appoint interim liquidators was filed on 22 December
2015.
[162] Even if it is to be accepted that Mr Jackson Sr had been ignorant of the true position, he must have known from a reasonable time after the appointment of the interim liquidators in January 2016 that matters were seriously awry with the company. The fact that nothing has changed from what the interim liquidators described after all this time demonstrates that this company either cannot or will not take proper steps to put its accounts in order.
[163] The breach by the company of the requirements of s 194 is serious and prolonged. While the courts are required to consider whether alternative remedies ought to be considered, such as a prosecution, before they make a winding up order, I do not consider that the failure to prepare proper accounts can be fairly considered as an aberration on the part of what is otherwise a well-run company.
[164] Mr Wiles, in the lucid submissions which he filed, adopted a realistic approach to the allegations of breach of the requirements of s 194. The emphasis of his submissions was not directed to the question of whether there had been a breach, instead he submitted that with the change of directorship to Mr Schuyler Jackson, the company had turned over a new leaf.
[165] I agree that this point in the appropriate case could be influential. If for example, through ill health or otherwise, the director of a company had not been able to attend to proper compilation of records for a brief period but that the company was now back on track, it might not be appropriate to make a liquidation order.
[166] However, because of the role that Mr Schuyler Jackson actually fulfils in the company – as a representative of his father – and for other reasons, I do not accept that there is room for the optimism that Mr Wiles proposed. It has not been, for example, explained how the company under the direction of Mr Schuyler Jackson would propose to resource the proper administration of the company which must involve substantial expense. Mr Stuart Jackson appears to now have moved his business activities on to a separate corporate structure. Unless he was committed to the proper administration of the company in the future, it is unlikely that such is going to occur.
[167] In the end, Mr Wiles did not appear to submit that there had not been breaches of s 194 historically. Such a contention would not be a realistic one.
Conclusion on persistent or serious failure to comply with the Act
[168] There have been breaches of s 194 by the company which were substantial and serious. There have been similar breaches of the directors’ duties by Mr Stuart Jackson. In all the circumstances, it is my assessment that an order for liquidation is a reasonable and proportionate response to that state of affairs.
The just and equitable ground - section 241(4)(d)
[169] In my view, given that the Court has already concluded that there is a proper basis upon which to make a liquidation order, it is not desirable to extend this already lengthy judgment by reviewing the application under s 241(4)(d) of the Act.
The Leave issue
[170] I have earlier noted that leave was necessary for the plaintiff to proceed as a prospective creditor of the defendant. Brief consideration was given to some of the factors that the Court might take into account when considering whether or not to grant leave.
[171] I consider that the negative features of the governance of this company, which I have referred to in the course of my judgment, mean that it constitutes a real risk to its creditors. I consider that it is legitimate for the plaintiff as a prospective
creditor, who may eventually be placed in the position of attempting to enforce taxation liabilities against the company, to take steps to bring it under the control of a liquidator. The risks are otherwise that the company will lose whatever equity it has in the meantime if such a step is not taken. There is also the risk that Mr Jackson Sr will contrive to move assets out of the company if he and his son remain in control of it.
Result
[172] There will be an order placing the company into liquidation, with the time of that order being the time and date when this judgment is released to the parties by the Registrar. Henry David Levin and Vivien Judith Fatupaito are appointed liquidators. The defendant is to pay costs on a 2B basis together with disbursements
as approved by the Registrar.
J.P. Doogue
Associate Judge
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