DREW BOADEN AND TIMOTHY MAHONEY

[2024] NZHC 2783

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2022-404 000413

[2024] NZHC 2783

BETWEEN

DREW BOADEN

Plaintiff

AND

TIMOTHY MAHONEY

Defendant

Hearing:

1 August 2024

Appearances:

N Lawrence for the Plaintiff

No appearance for the Defendant

Judgment:

26 September 2024

Reissued:

7 October 2024

JUDGMENT OF TAHANA J

This judgment was delivered by me on 26 September 2024 at 3.00pm pursuant to Rule 11.5 of the High Court Rules and re-delivered by me on 7 October 2024 in accordance with

High Court Rules 2016, r 11.10

…………………………

Registrar/Deputy Registrar

Solicitors:

Holland Beckett, Tauranga Neilsons Lawyers, Auckland Bankside Chambers, Auckland

BOADEN v MAHONEY [2024] NZHC 2783 [26 September 2024]

Introduction

[1]    Mr Boaden claims $89,400 from Mr Mahoney for breach of director duties under the Companies Act 1993 (the Act) and for breach of s 9 of the Fair Trading Act 1986 (the FTA). Mr Mahoney’s defence was struck out1 and the claims proceed by way of formal proof.

[2]    Mr Mahoney was a director and shareholder of Civil Underground Ltd (in liquidation)  (Civil  Underground).  Civil  Underground  leased  a  property  from  Mr Boaden. Civil Underground failed to pay rent and did not remove soil and other materials from the property when the lease came to an end. Mr Boaden has incurred costs in clearing the property.

[3]    Civil Underground was put into liquidation in 2020. Mr Boaden has been unable to recover any monies in the liquidation. Mr Boaden claims that Mr Mahoney breached his duties as a director of Civil Underground and that those breaches have caused his losses. Mr Boaden also claims that Mr Mahoney misled him as to the financial position of Civil Underground in breach of s 9 of the FTA.

[4]The issues I need to determine are:

(a)Has Mr Mahoney breached his duties as a director of Civil Underground by allowing it to trade while insolvent?

(b)If yes, is Mr Boaden entitled to recover from Mr Mahoney and if so, what quantum of damages should be awarded to Mr Boaden?

(c)Did Mr Mahoney engage in misleading or deceptive conduct under s 9 of the FTA by failing to inform Mr Boaden of Civil Underground’s financial difficulties?

(d)If yes, what quantum of damages should be awarded to Mr Boaden?

1      Boaden v Mahoney [2023] NZHC 2878.

[5]Before considering the above issues, I set out the relevant background.

Background

Original lease

[6]    On 24 June 2004, Civil Underground (then called M Keoghan Contractors Ltd) entered into an agreement to lease with UKANZ Properties Partnership (the Lease) for the lease of part of a property (approximately 5,500m2) at Glen Eden (the Property). The total area of the Property was 13,700m.2

[7]    UKANZ Properties Partnership was the name  of the partnership  between  Mr Boaden and his brothers. The Lease included a one-year term with one right of renewal (total two-year term) and rental of $12,000 per annum (plus GST). The Property was authorised to be used for the “storage of heavy earth moving equipment and also Workshop/Supply yard”.

[8]    Mr Mahoney continued to lease the Property with the parties agreeing variations to the rental, which became payable on a monthly rolling basis.

[9]    Mr Boaden took over as owner/lessor under the Lease in May 2013. Mr Boaden owned a half share and his now ex-wife owned the other half share in the Property.

Variation to terms of Lease

[10]   In February 2017, Mr Mahoney approached Mr Boaden about purchasing the Property. No agreement was reached about a purchase, but discussions continued about the terms of the Lease.

[11]   The parties agreed updated terms for the Lease via email. On 19 July 2019 Mr Boaden sent an invoice for the updated rental and summarised the agreed terms as follows:

(a)The rent would be fixed for 18 months to January 2021.

(b)Either party could terminate the Lease upon providing six months’ notice.

(c)If notice is served, the Property is to be returned “as close as possible to its original state (the main concern here is the ‘fill pile’ and assorted items of no apparent commercial value) prior to being vacated”.

[12]   Mr Boaden divorced his wife and final orders were made by consent on 27 May 2019. Those orders required that Ms Boaden transfer her interest in the Property to Mr Boaden.

Mr Boaden sells the Property

[13]   On 20 January 2020, Mr Boaden entered into an agreement to sell the Property with a settlement date of 20 July 2020.

[14]   On 22 January 2020, Mr Boaden gave six months’ notice to Civil Underground that he was terminating the Lease because of the sale. On 23 January 2020, Mr Boaden asked Mr Mahoney to confirm receipt of his email and to confirm that the Property would be vacant “including removal of soil pile and rubbish”.

[15]   Mr Mahoney acknowledged Mr Boaden’s email on 23 January 2020 responding that it was “[s]een and underway.”

[16]   Mr Boaden continued to remind Mr Mahoney of the requirement to clean up the Property before the end of the Lease.

Mr Boaden agrees to defer rental

[17]   On 14 April 2020, during the COVID-19 lockdown Mr Boaden agreed that Civil Underground could defer the April rental payment until June 2020. Mr Boaden also reminded Mr Mahoney of the further rental payments due in May and June 2020 and of the obligation to remove the soil from the Property.

[18]   On 23 April 2020, Mr Mahoney informed Mr Boaden that he was taking action to remediate the site and dispose of surplus plant and equipment.

[19]   On 11 June 2020, Mr Boaden requested weekly updates from Civil Underground on the progress of the removal of soil. He also requested an update on when Civil Underground might have funds to pay the rental.

[20]   Mr Boaden obtained a two-week extension for the settlement of the sale of the Property to 11 August 2020.

Mr Boaden takes possession of the Property

[21]   On 21 July 2020, Mr Boaden emailed Mr Mahoney reminding him that the Lease ended on 22 July 2020 and that everything needed to be removed. Mr Boaden then took possession of the Property on 23 July 2020.

[22]After taking possession, Mr Boaden:

(a)hired a property manager to assist with arranging for the Property to be cleared;

(b)engaged contractors to remove the soil; and

(c)agreed with the purchaser to reduce the purchase price by $3,000 to account for further rubbish that had to be removed from the Property.

Statutory demand and liquidation

[23]   Separately, on 9 July 2020, Mr Boaden issued a statutory demand for payment of outstanding rent. Civil Underground applied to the Court to have the statutory demand set aside.

[24]   On 5 October 2020, Civil Underground was put into liquidation by its shareholders, Mr and Mrs Mahoney. Mr Boaden submitted claims in the liquidation.

[25]   The liquidators report to creditors dated 1 November 2023 indicates that as at that date, there was a shortfall of $1,341,553 to outstanding creditors.

[26]   Having set out the above background, I now consider the approach to claims by way of formal proof before considering each of Mr Boaden’s claims.

Formal proof

[27]   Rule 15.9 of the High Court Rules 2016 (HCR) provides for judgment by way of formal proof. I must be satisfied that Mr Boaden’s evidence establishes each cause of action on which he relies.2

[28]   Duffy J has held that “the level at which a Judge is required to satisfy herself regarding the plaintiff’s evidence is much the same as it would be if the proceeding had gone to trial.”3 I therefore consider whether the evidence filed proves each of the causes of action.

Did Mr Mahoney breach his director duties under the Act?

Scope of claims

[29]   While Mr Boaden pleaded that Mr Mahoney had breached ss 131, 133, 135, 136 and 137 of the Act, his counsel focused on breaches of ss 135 and 136. I therefore first consider whether there is any breach of those two provisions before considering whether it is necessary to consider the claims under ss 131, 133 or 137.

Alleged breach of s 135 of the Act

[30]Section 135 prescribes a director’s duties in relation to reckless trading:4

135     Reckless trading

A director of a company must not—

(a)agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or

(b)cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

2      High Court Rules 2016, r 15.9(4).

3      Ferreira v Stockinger [2015] NZHC 2916, at [35].

4      Companies Act 1993.

[31]The Court of Appeal has set out the “essential pillars” of s 135:5

·the duty which is imposed by s 135 is one owed by directors to the company (rather than to any particular creditors);

·the test is an objective one;

·it focuses not on a director’s belief, but rather on the manner in which a company’s business is carried on, and whether that modus operandi creates a substantial risk of serious loss; and

·what is required when the company enters troubled financial waters is what Ross … accurately described as a “sober assessment” by the directors, we would add of an ongoing character, as to the company’s likely future income and prospects.

[32]   In Mainzeal Property and Construction Ltd (in liq) v Yan, Cooke J considered a significant aspect of s 135 was the risk if the company fails and there is a deficiency on liquidation.6 That risk must be substantial such as to cause or give rise to serious loss. “This contemplates a serious deficiency in a liquidation. A minor or modest loss is not relevant.”7 The conduct in issue is the manner in which the business is being carried on.8

[33]   The Supreme Court set out the approach to be adopted when considering s 135 as follows:9

[211]    We conclude as follows:

(a)An objective approach is to be taken in determining whether the business of the company was carried on in the prohibited manner (so that subjective awareness of the likelihood of substantial risk or serious loss is not necessary).

(b)However, when assessing whether the actions of the directors in agreeing to, or causing or allowing that trading were in breach of s 135, the courts will proceed on the basis of those facts and circumstances of which the directors were aware, or should have been aware, if exercising appropriate care, skill and diligence. The reference to “business judgment” in the long title of the 1993 Act is consistent with a focus on the reasonableness of the directors’ actions on the basis of the material they had, or should have had, if exercising the required standard of skill, care and diligence.

5      Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].

6      Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255 at [161] [Mainzeal HC].

7 At [161].

8 At [161].

9      Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113, [2023] 1 NZLR 296 at

[221] [Yan v Mainzeal].

(c)As to the levels of care, skill and diligence required, the more complex the company the higher the level of skill and diligence expected of a director. This point was made by Clarke and Sheller JJ in Daniels v Anderson in the context of the common law duty of care:

A person who accepts the office of director of a particular company undertakes the responsibility of ensuring that he or she understands the nature of the duty a director is called upon to perform. That duty will vary according to the size and business of the particular company and the experience or skills that the director held himself or herself out to have in support of appointment to the office. None of this is novel. It turns upon the natural expectations and reliance placed by shareholders on the experience and skill of a particular director.

(footnote omitted)

[34]   The Supreme Court also considered the implications of their approach to liability under ss 135 and 136, as follows:10

[273] As we have explained, we consider that the courts must apply a standard of reasonableness when assessing the decisions of directors. In doing so, the courts will recognise that such decisions are likely to involve the exercise of business judgment. So, in applying ss 135 and 136:

(a)In relation to decisions to trade on, the courts will accept that business judgment is involved, as liability under s 135 turns on not just an objective assessment by the court of the likelihood of substantial risk of serious loss to creditors but also whether, in their decision-making as to whether to allow continued trading, the directors applied reasonable care, skill and diligence.

(b)Judges will allow a reasonable time for directors to assess risk, review the options to meet that risk and decide what course to take, including time to take advice.

(c)Where advice has been taken, this must be factored into the assessment of the reasonableness of the directors’ actions, both generally and under s 138.

(d)Judges will recognise and adjust for the danger of hindsight bias. This means that they will identify the danger of treating a bad outcome as having been more predictable before the event than it actually was. And, it follows, judges will acknowledge that decisions that were reasonable when made may nonetheless turn out badly and that in difficult situations there will often be scope for more than one reasonable course of action.

10 At [273].

(e)The reality that directors are often required to make complex decisions under pressure of time and events and sometimes with knowledge that remains incomplete despite their best efforts will also be acknowledged.

(f)Although directors will not normally be liable for continuing to trade during the taking stock period, that may not be the case if substantial new obligations are taken on without measures in place to allow for them to be met.

(footnotes omitted)

[35]   Applying the above approach, I consider whether Mr Mahoney has breached his duty under s 135.

Did Mr Mahoney breach his duty under s 135?

Financial position of Civil Underground

[36]   Mr Boaden relies on the expert evidence of Mr Kieran Jones, a chartered accountant and licensed insolvency practitioner. Mr Jones’ evidence is that Civil Underground was insolvent from at least September 2018. At that time, it had a balance sheet net asset deficit of $87,709 and had unpaid creditor debts beginning to accrue. A creditor claim submitted to the liquidation records 19 June 2018 as the earliest unpaid creditor debt. Mr Jones’ evidence is that unsecured creditor debts began to consistently accrue from October 2018 onwards.

[37]   Mr Jones opines that a reasonable director would have undertaken a period of review of the company’s financial position and operations with that review been reasonably completed by no later than 31 March 2019. From 31 March 2019, the company’s net asset deficit had increased to $601,433 and it had accrued further unpaid creditor debts.

[38]   In March 2019, the shareholders capitalised $482,636 of their shareholder account into share capital. During March 2019, two asset accounts were also written either down materially or completely to nil. Mr Jones opines that this demonstrates that Civil Underground was carrying asset values that were overstated by $590,281 for some time prior to March 2019. Capitalising the shareholder loan improved the equity position, but an asset deficit remained.

[39]   Further, Mr Jones deposes that from at least November 2019, Civil Underground was not meeting its GST tax obligations and by January 2020 its PAYE obligations. The Inland Revenue Department (IRD) debt was under a payment arrangement from at least June 2019.

[40]   Mr Jones’ evidence is that Civil Underground’s total loss incurred during the 18-month period from April 2019 to September 2020 was $164,335.

[41]   Mr Jones infers that around March 2020 a property was sold and BNZ provided a new overdraft and loan to Civil Underground. The lending documents include a director’s certificate setting out under the heading “Solvency” that the value of Civil Underground’s assets is greater than its liabilities including contingent liabilities and that it is able to pay its debts as they fall due. It is unsigned but Mr Jones infers that  it must have been signed because BNZ made the new loan facilities available.

[42]   The refinancing indicates that $450,000 was applied to reduce Civil Underground’s overdraft facility, which was replaced with a new $150,000 facility and an additional $30,000 loan facility. Both facilities were in Civil Underground’s name with the Mahoney Family Trust and Mr Mahoney as guarantors. Mr Jones’ evidence is that from March 2020, three loans were continually serviced by Civil Underground until prior to its liquidation. Those loans were described as the “Mahoney Fam Loan Paymt Housing Loan” (with three separate accounts). The loan payments were for

$3,200, $385 and a third payment of $2,800 per month.

[43]By August 2020, Civil Underground had reached its overdraft limit of

$150,000 and then exceeded it in September 2020 ending at $150,812.

[44]   Mr Mahoney filed an affidavit dated 21 July 2020 deposing that Civil Underground was experiencing some trading difficulties towards the beginning of 2019. This is consistent with the evidence of Mr Jones.

[45]   Mr Mahoney filed another affidavit dated 11 August 2023 explaining that he had obtained external financial advice in mid-2020. That affidavit attaches a memorandum dated 10 June 2020 from Cameron Smith of Discrimen Ltd to the Bank

of New Zealand (BNZ). Mr Smith’s memorandum notes that a property would be sold by the end of November 2020 and that historic creditors ($371,087) would be paid. The cash flow forecast assumes that April and May creditors will be paid in June. The memorandum refers to two creditors who had issued statutory demands against Civil Underground. The memorandum records that:

5.It is clear from the above summary that, in the absence of:

(a)Further capital being introduced into the company (above the

$370,000 anticipated from the sale of the Rotorua property); and

(b)        Increased profitability (not anticipated prior to FY2023); Then the increasing debt burden is not sustainable.

6.Other Issues.

…

(b)The company will need some form of creditor protection if it is to continue to trade. If formal creditor protection (business debt hibernation or creditor’s compromise) is unavailable, and based on the paragraph 6 (a) above and the FY2021/22 budget and cashflow forecasts, this appears unlikely, then an informal arrangement is the only option available. This will also not be possible without further support from the BNZ and/or the shareholders.

[46]   Mr Smith considered that the company did not meet the solvency test as at 31 December 2019. Nor was it in a position to pay its debts as they fell due as at 31 December 2019. It was not therefore, eligible for the COVID-19 business debt hibernation scheme.

[47]   Mr Mahoney also obtained a report from BDO dated June 2020 (the BDO Report). The purpose of the BDO Report records that it is to assist the directors to ascertain the forecasted cashflow needs of Civil Underground and to assist in raising additional funds to support the business. The BDO Report records that:

The Projected Statements of Profit or Loss, Cashflow, Funds flow and Balance Sheets have been prepared on the basis of future events that the Directors of [Civil Underground] reasonably expect to occur, associated with the actions that they [reasonably] expect to take. However, the Statements are forecasts based on certain assumptions that may or may not be achieved. As the actual results for the period of these Statements are likely to vary from the

information provided, we express no opinion on the achievability of those forecasts.

[48]   Any  assumptions  as  to  forecast  revenue  would  have  been  based   on   Mr Mahoney’s projections. The evidence of Mr Jones is that the accounts of Civil Underground were not accurate:

[Civil Underground’s] profit and loss statement from the MYOB account was not providing an accurate monthly profit / loss value due to containing basic omissions of certain accounting treatments. Following making the three adjustments referred to, it is apparent that [Civil Underground] was making a consistent monthly loss almost every month. This was not a company that was generating a consistent profit that would enable it to trade its way out of the financial deficit it faced.

[49]   The memorandum of Mr Smith and the BDO Report do not contain advice to continue trading but appear to have been prepared for the purposes of Civil Underground obtaining further lending from BNZ or further capital. Mr Smith’s view was that creditor protection would be required if the company continued to trade.

[50]   I accept that the evidence indicates that Civil Underground was insolvent from at least September 2018, that allowing for a time to assess the company, the directors would have had until March 2019 to determine whether to continue trading. Against that backdrop I assess whether Mr Mahoney’s conduct amounts to a breach of s 135.

Assessment of Mr Mahoney’s conduct

[51]   I must apply a standard of reasonableness when assessing Mr Mahoney’s conduct and decisions. Those decisions will likely have involved the exercise of business judgment.

[52]   I accept that the actions in March 2019 to capitalise shareholder lending and write off debts were reasonable, but they were not enough to return Civil Underground to solvency. Mr Mahoney allowed the company to continue to trade after March 2019.

[53]   A sober assessment was required. Civil Underground’s overdraft increased from $124,380 in June 2018 to $422,968 in December 2019. The increase in the overdraft balance continued after March 2019, by which time Mr Mahoney should

have taken stock. The increasing balance should have put Mr Mahoney on notice that the financial situation was not improving.

[54]   During 2019, Civil Underground also entered into the payment arrangement with IRD also indicating to Mr Mahoney that continuing to trade may be problematic especially when the overdraft balance was increasing and the company continued to have a net asset deficit.

[55]   While     Mr     Mahoney     acted     in     March     2020     to     reduce    Civil Underground’s debt by refinancing, that action was taken too late. Mr Smith’s memorandum confirmed that Civil Underground was insolvent as at the end of 2019. That is before refinancing. The refinancing was also not enough, and the overdraft balance continued to increase. Civil Underground was also servicing the lending for loans described as the “Mahoney Fam Loan Paymt Housing Loan”.

[56]   I do not consider that the advice Mr Mahoney obtained in June 2020 from  Mr Smith and Deloitte (as set out in the BDO Report) provides a defence. Mr Smith’s memorandum confirms Civil Underground’s insolvency as at the end of December 2019 and notes that protection will be required if Civil Underground continues to trade.

[57]   The BDO Report provided forecasts, but those forecasts were projections of future revenue based on assumptions provided by Mr Mahoney. Neither Mr Smith’s memorandum nor the BDO Report opine on the validity of the forecasts or recommend that Civil Underground keep trading despite its net asset deficit. The advice was too late and was only as good as the assumptions underlying the forecasts. Those assumptions would have been provided by Mr Mahoney.

[58]   It is appropriate that the Court also take account of the effect of COVID-19, which Mr Mahoney would not have foreseen. While I accept that COVID-19 would have contributed to the worsening of Civil Underground’s financial position, it was insolvent before COVID-19 affected New Zealand. Civil Underground’s inability to access the COVID-19 business debt hibernation scheme was because its own adviser (Mr Smith) considered it was insolvent by end of December 2019 (prior to COVID-

19). Mr Jones’ evidence was that it was insolvent by September 2018 and trading should have stopped by March 2019. I therefore do not consider that the effect of COVID-19 was the cause of Civil Underground’s insolvency such that it provides a defence.

[59]   Mr Boaden also relies on Mr Mahoney’s conduct, which led to the striking out of the statement of claim. On 30 May 2023, Mr Mahoney was ordered to give access to  his  computers,  cell  phones,  email  messages  and  messaging   applications.11 Mr Mahoney had sworn an affidavit in which he said he had 22,578 emails in his inbox. Mr Mahoney then claimed that his desktop and laptop were stolen from his car. He then claimed his mobile phone had become inoperative and had been disposed. A joint expert opined that it was most likely that Mr Mahoney had deleted all his emails from his Gmail account. The Court noted that this “is the most flagrant and deliberate breach of a Court order that I have encountered.”12

[60]   Mr Boaden invites the Court to draw adverse inferences from Mr Mahoney’s conduct. I accept that Mr Mahoney’s conduct suggests that there was unlikely to be material contained within the emails that is helpful to him in defending the claims. I do not however, consider it is necessary to rely on any adverse inference to find that there has been a breach. The evidence of Mr Jones establishes the financial position of Civil Underground and supports a finding that Mr Mahoney created a substantial risk of substantial loss by allowing the company to trade for a considerable time (over 12 months) when it was insolvent.

[61]   In summary, Mr Mahoney allowed Civil Underground to continue to trade for over 12 months while it was insolvent. During this time, Civil Underground was unable to pay IRD and had to enter into a payment arrangement, its overdraft was increasing, and there was no provision for doubtful debts. Mr Jones’ evidence is that those issues exacerbated the net asset deficit of Civil Underground. In these circumstances, by allowing Civil Underground to continue to trade, Mr Mahoney’s conduct created a substantial risk of serious loss.

11     Boaden v Mahoney [2023] NZHC 1318.

12     Boaden v Mahoney [2023] NZHC 2878 at [12].

[62]   In these circumstances, I am satisfied that Mr Mahoney has breached his duty under s 135.

Did Mr Mahoney breach his duty under s 136?

[63]   A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.13

[64]   The purpose of s 136 — as compared to s 135 — is to deal with obligations on the capital account rather than on the revenue account. Section 136 focuses on particular transactions rather than the general conduct of the company’s business.

[65]Clifford J explained the Court’s approach to s 136 in Jordan v O’Sullivan:14

[55]      Section 136 therefore entails a mixed, objective-subjective approach. The director will breach the duty unless he or she subjectively believes, at the time the obligation was entered into, that the company will be able to meet the obligation incurred when it is required to do so. That subjective belief must, however, be based on objectively reasonable grounds (see, for example, PC Company Ltd v Sanderson HC HAM CP18/00 1 Nov 2001).

[56]      The need for the director’s belief to be based on objectively reasonable grounds means the director must have sufficient knowledge of the company’s position and ability to meet the obligation so as to give rise to reasonable grounds. It is implicit that the director must take sufficient steps to obtain this knowledge – claiming ignorance will not be a defence.

[66]   Mr Mahoney agreed to vary the Lease terms in June 2019. By that time, Civil Underground had a net deficit asset position. Its overdraft was increasing and was

$124,380 in June 2018 and $422,968 in December 2019. Creditor debts were also accruing at this time.

[67]   Had Mr Mahoney undertaken a sober assessment of the financial position of Civil Underground, he would have known that there was not a reasonable basis for assuming that Civil Underground would be able to pay its rental and the cost of clearing the Property when the Lease ended. The BDO Report indicates that $20,000 per month for two months should have been included as a contingency for clearing the

13     Companies Act, s 136.

14     Jordan v O’Sullivan HC Wellington CIV-2004-485-002611, 13 May 2008 at [55]-[56].

Property. That did not happen when Mr Mahoney was notified in January 2020 that the Lease would end.

[68]   In March 2019, Civil Underground wrote off work in progress and retentions of $590,281 indicating that they were likely not recoverable. For the previous financial year to 31 March 2019, Civil Underground have made a net loss of $805,570. Its net asset deficit had increased from $233,332 to $554,447.

[69]   With knowledge of the above,  there  is  no  reasonable  basis  upon  which Mr Mahoney could reasonably have believed that Civil Underground would be able to meet its obligations or trade its way out of debt. In these circumstances, I am satisfied Mr Mahoney breached his duty under s 136 of the Act.

What relief should be granted to Mr Boaden?

[70]   Mr Mahoney relies on s 301 of the Act in seeking to recover from Mr Mahoney. Section 301 confers jurisdiction on the Court to require persons to repay money or return property:

301 Power of court to require persons to repay money or return property

(1)If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—

(a)inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and

(b)order that person—

(i)to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or

(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or

(c)where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.

(2)This section has effect even though the conduct may constitute an offence.

(3)An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.

(4)In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.

[71]   The  Supreme  Court  in  Yan  v  Mainzeal  considered  that  the  language  of  s 301(1)(c) did not preclude a creditor from recovering compensation from a director:15

[163] We think it clear that the language of s 301(1)(c) is the result of a drafting slip, with the words “or transfer the money or property” being erroneously used rather than a reference to compensation under s 301(1)(b)(ii). To give effect to the legislative purpose, either s 301(1)(c) should be construed as referring to “such sum” and thus to compensation under s 301(1)(b) or, alternatively, “transfer the money or property in s 301(1)(c) should be construed as encompassing money awarded by way of compensation. Either way, we are satisfied that s 301 allows for a direct claim by creditors for breaches of ss 135 and 136 for losses that they have suffered as a result of those breaches.

…

[168] As will be obvious, our conclusion that the creditors may recover directly in relation to claims under ss 135 and 136 provides some support for the availability of new debt-based assessments of quantum in proceedings for breach of those sections.

[72]   The Supreme Court considered how loss should be assessed for breach of ss 135 and 136 noting that both ss 135 and 136 are focused on loss suffered by creditors but differ in focus as to the manner or type of those creditors’ losses.16 Assessment of loss for breach of s 135 should usually proceed on the basis of net deterioration between breach date and liquidation as reflecting the loss to creditors as a whole, with the shortfall to creditors acting as a cap on recovery.17 Since the damage for which compensation should be available under s 136 is the incurring of obligations without belief on reasonable grounds that they will be honoured, the extent to which the

15     Above n 9, at [163] and [168].

16 At [366].

17 At [367].

creditors are out of pocket by reason of the failure to honour those obligations provides the most logical method of quantifying loss.18

[73]   Mr Boaden is out of pocket for unpaid rent and for costs incurred in clearing the Property. Mr Boaden seeks recovery of the following losses:

(a)$21,534 for unpaid rent from April to July 2020;

(b)Costs arising from clearing the Property:

(i)$36,285 for the costs incurred in removing the soil from the property. This amount takes into account $9,705, being the proceeds of sale Mr Boaden received from selling items left on the property;

(ii)$6,400 for the property manager Mr Boaden hired to project manage the clearing of the Property; and

(iii)$3,000 being the reduction in the sale price for the Property due to the state in which the Property was left.

[74]   Mr Boaden is a creditor of Civil Underground. Mr Mahoney agreed to Civil Underground’s decision to vary the Lease terms, which variation required that it pay rent when due and required that it clear the Property at the end of the Lease. At the time that Civil Underground agreed to the variation, it was insolvent. Accordingly, there was no reasonable basis upon which Mr Mahoney could have considered that Civil Underground would be able to meet its debts when they became due. It follows that the losses suffered by Mr Boaden arose by reason of Mr Mahoney’s breach of    s 136.

[75]   I accept that Mr Boaden had no basis to question Civil Underground’s ability to pay rental or clear the Property when he agreed to the Lease variation. Mr Mahoney did not provide Mr Boaden with any information as to the actual financial position of

18 At [369].

Civil Underground to put him on notice that there was a risk of non-payment. I do not consider that there is any contributory negligence on the part of Mr Boaden by agreeing to the Lease variation.

[76]   It follows that I find that Mr Mahoney is liable for the amounts claimed by Mr Boaden. It is not necessary for me to consider whether Mr Mahoney is also liable under the FTA.

Result

[77]   For the reasons set out above, I find that Mr Mahoney has breached ss 135 and 136 of the Act and that Mr Boaden is entitled to recover the amounts claimed.

[78]I order under s 301 of the Act that:

(a)Mr Mahoney pay Mr Boaden $89,400;

(b)on costs associated with removing the soil pile, Mr Mahoney pay interest at the interest rate set out in s 10 on the Interest on Money Claims Act 2016 from 1 August 2020 to 7 March 2024, amounting to

$3,795.24, plus interest from 8 March 2024 to the date of payment to Mr Boaden; and

(c)on the outstanding rent, Mr Mahoney pay interest at the interest rate set out in the Interest on Money Claims Act from 22 July 2020 to 7 March 2024, being $2,267.87 plus interest from 8 March 2024 to the date of payment to Mr Boaden.

[79]   Mr Boaden is also entitled to 2B costs. I order that Mr Mahoney pay 2B costs on Mr Boaden’s claims by way of formal proof.

Tahana J