Fatupaito v Bates HC Auckland M521-Sd00
[2001] NZHC 401
•23 May 2001
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY M521-SD00
BETWEEN VIVIENNE J FATUPAITO & ANOR
Plaintiffs
AND WILLIAM J BATES
Defendant
Date of hearing : 9-11 April 2001
Judgment: 23 May 2001
Counsel: M Sullivan for plaintiffs
G Everard and N Smith for defendant
JUDGMENT OF O’REGAN J
| Table of contents | f |
| PARA | |
| Background | [2] |
| The nature of the claim | [13] |
| Issues | [18] |
| Deemed director - s 126 | [19] |
| Analysis | [19] |
| Does the professional capacity exception apply: | [50] |
| Conclusion - s 126 | [54] |
| When did Mr Bates’ directorship end? | [55] |
| Liability under s 135 and/or s 136 | [60] |
| Background | [60] |
| Did Mr Bates breach s 135? | [70] |
| Did Mr Bates breach s 136? | [80] |
| Section 301 - assessing liability | [90] |
| Is $59,517.59 the appropriate starting point? | [94] |
| Debtors over-valued | [97] |
| Mazda vehicle | [98] |
| Matters beyond Mr Bates’ control | [102] |
| Credit for creditors paid | [103] |
| Position of other directors | [104] |
| Matters after 31 July 1998 | [105] |
| Amount owing to Mr Moon | [108] |
| Mr Bates’ fees | [109] |
| Amount to be contributed under s 301 | [111] |
| Costs | [114] |
[1] This is an action by the liquidators of Metalsmiths Ltd (“the company”), Ms Fatupaito and Mr McCloy, against Mr Bates, who had acted in a position which he believed was that of a receiver of the company.
Background
[2] The company was incorporated on 26 September 1997 with 100 shares, all of which were held by Robert John Moon. Mr Moon was the sole director. The company took over certain elements of the business of Aleete Wrought Iron, although the evidence as to the precise arrangements between Aleete and the company are unclear. Paul Olsen, who had been involved in the Aleete business, was employed by the company and had responsibility for the production of the wrought iron products which the company sold and installed. The precise nature of Mr Olsen’s role in the company’s affairs will be discussed in more detail later.
[3] At some time during November 1997, the defendant, William John Bates, called on the company and offered his services as an accountant and business adviser. Mr Moon decided to engage Mr Bates’ services on behalf of the company. Mr Moon said this happened in early November 1997, whereas Mr Bates says it was in late November 1997. The only significance of this is the extent of Mr Bates’ knowledge about the affairs of the company when the purported receivership began.
[4] Initially Mr Bates administered the company’s payroll and helped the company with tax compliance (GST, PAYE and the like). He also prepared cash flow projections and budgets in December and a balance sheet with forward projections which indicated that the company’s financial position would improve significantly in December 1997 and January 1998. I will come back to that later.
[5] The position of the company continued to deteriorate in December 1997 and January 1998 and there was a falling out between Mr Moon and Mr Olsen in January 1998. Mr Moon gave evidence that there was a meeting in January 1998 which he, Mr Olsen and Mr Bates attended to discuss the financial predicament of the company. Mr Moon says that Mr Bates suggested putting the company into receivership. He apparently produced a copy of the Receiverships Act 1993 and pointed to the provisions which he said would allow Mr Moon to appoint a receiver. By a letter dated 11 February 1998 Mr Moon invited Mr Bates to take on the role of receiver. By a letter of 12 February 1998, Mr Bates accepted the invitation.
[6] The defendant’s statement of defence admits that Mr Bates was not in fact a receiver in terms of the Receiverships Act 1993. This was not the normal situation where a debenture holder appoints a receiver as a method of enforcing performance of the company’s obligation to the debenture holder, which is secured by the debenture. Rather, it was an action by a director to pass over responsibility to someone who Mr Moon said he thought would bring about an orderly termination of the company’s business activities. It seems both Mr Moon and Mr Bates were acting under a misapprehension of the nature of a receivership. While both of them genuinely appeared to believe a receivership had been created and Mr Bates had been validly appointed as a receiver, the position now taken by both parties is that no valid appointment of a receiver occurred. Where I use the terms ‘receivership’ and ‘receiver’ in this judgment, I am referring to the purported receivership situation described above.
[7] Immediately after the appointment of Mr Bates as receiver, Mr Bates and Mr Moon went to the company’s banker, Bank of New Zealand, and arranged for the signing authority for the company’s bank account to be transferred from Mr Moon as sole signatory to Mr Bates as sole signatory. The Bank of New Zealand authority form signed by Mr Bates for this purpose refers to him as “director solely”, but I do not think that any significance should be read into this as it is clear from the bank employee’s file note that he thought Mr Bates was a receiver not a director.
[8] Although Mr Moon said he thought Mr Bates would arrange for the termination of the company’s business, Mr Bates decided that it was appropriate to continue trading. His reasons for doing so were as follows:
[a] some customers of the company had paid large deposits (30%) and would have been disadvantaged by the company ceasing trading;
[b] he believed that the company was in a position where, upon completion of a small amount of work to finish some outstanding contracts, it would be entitled to a significant payment, being the outstanding balance of the contract price.
[9] In his capacity as purported receiver, Mr Bates prepared a profit and loss statement on 27 February 1998 which showed that, as at the date of the commencement of the receivership, the company had assets of $32,233 and liabilities of $47,172. That left a deficit of $14,941, with an unauthorised overdraft of $4329. At that stage, therefore, the company had liabilities significantly exceeding its assets, and the liquidators allege it was clearly insolvent.
[10] The company continued trading until July 1998, when it ceased trading. However, the liquidators allege Mr Bates retained his position as purported receiver and continued to undertake certain activities on the company’s behalf after the date on which the company ceased trading. The company was finally put into liquidation by order of this Court, on the application of the Inland Revenue Department on 4 February 1999.
[11] I was referred to the “Agenda for meeting about the receivership”. This is a document which appears to have been written by Mr Bates about a meeting to be held on 16 February 1998 (a few days after his appointment as receiver). That agenda refers to his appointment as receiver. It states the purpose of appointing a receiver is to take control of the company’s assets and liabilities and undertake a detailed review of its financial position and other relevant issues. This review was to lead to a decision about the company’s future: that is, whether to continue to trade or to liquidate. It concludes with the statement:
In effect, the receiver becomes the company’s manager for the duration of the receivership.
[12] It is clear from the evidence that Mr Bates was aware of the need to consider liquidating the company in view of its financial predicament, but ultimately he decided to continue trading for the reasons described above. Mr Bates says this decision was made in conjunction with Mr Olsen and, to a lesser extent, Mr Moon.
The liquidators allege this decision was irresponsible and that the proper course would have been to place the company into liquidation. If this had occurred, they allege the shortfall of assets to liabilities of the company would have been $59,517.59 lower than it was at the time of the liquidation on 4 February 1999.
The nature of the claim
[13] The liquidators allege that Mr Bates’ activities, in what he thought was the capacity of a receiver, were such that they meant he occupied a position of director of the company under s 126 of the Companies Act 1993 (“the Act”).
[14] The liquidators allege that, in that capacity, he breached s 135 of the Act, because he agreed to the business of the company being carried on, or caused or allowed the business to be carried on, in a manner likely to cause a substantial risk of serious loss to the company’s creditors.
[15] The liquidators also allege a breach of s 136 by Mr Bates, on the basis that he agreed to the company incurring obligations which it could not perform.
[16] The liquidators seek an order that the defendant contribute $59,517.59 to the company, which is the amount they calculate as being the net deterioration of the company’s net asset position during the period from the date of the appointment of Mr Bates as receiver of the company and the date of the order to liquidate the company. The application is made under s 301 of the Act.
[17] The amount claimed by the liquidators is based on a comparison of the financial position of the company at the date of liquidation against the financial position of the company as shown in the balance sheet prepared by Mr Bates in late February, showing the financial position of the company as at the commencement of the receivership. Mr Bates argued this was unfair in a number of respects and that I should use my discretion to excuse him from some or all of such liability.
Issues
[18] The key issues, therefore, are:
[a] Was Mr Bates a director in terms of s 126?
[b] If so, was there a breach of s 135 or s 136?
[c] If so, what is the appropriate assessment of liability for breach of ss 135 and/or 136 applying the criteria set out in s 301, and taking into account the matters which Mr Bates raises as reasons for excusing him from liability?
Deemed director - s 126
Analysis
[19] Section 126 says:
“126 Meaning of “director”
(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, and 301 of this Act,-
(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
(c) For the purposes of sections 131 to 149, 298, 299, and 301 of this Act, a person to whom a power or duty of the board has been directly delegated by the board with that person’s consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board; and
(d) For the purposes of sections 145 to 149 of this Act, a person in accordance with whose directions or instructions a person referred to in paragraphs (a) to (c) of this subsection may be required or is accustomed to act in respect of his or her duties and powers as a director.
(lA) In this Act, “director”, in relation to a company, does not include a receiver.
(2) . . .
(3) . . .
(4) Paragraphs (b) to (d) of subsection (1) of this section do not include a person to the extent that the person acts only in a professional capacity.”
[20] The liquidators claim Mr Bates occupied the position of director of the company under s 126(1)(b)(iii) and s 126(1)(c). Mr Sullivan for the liquidators pointed out that as Mr Moon was the only director of the company, he constituted the board for the purposes of s 127. Mr Moon’s evidence was that he looked after the management and financial side of the business, while Mr Olsen was responsible for the operations and manufacturing activities. Mr Moon described Mr Olsen as “the operations manager”.
[21] There was evidence that Mr Moon had engaged Mr Bates in November 1997 to undertake accounting work for the company, particularly administering the payroll and helping with tax compliance. Mr Bates was also asked to prepare cash flow projections and budgets, and did prepare a balance sheet with projections for December 1997, although Mr Bates’ evidence was that those projections were based entirely on what he was told by Mr Olsen and Mr Moon and did not involve any qualitative assessment by himself. Mr Moon said he relied on this balance sheet and Mr Bates’ advice when considering whether the company was still viable and could continue to trade beyond Christmas 1997, but I accept that, given the short time Mr Bates had been involved, it was not reasonable for him to be responsible for the correctness of those projections.
[22] The falling-out between Mr Olsen and Mr Moon occurred in January 1998, partly because Mr Moon had taken some cheques and money due to the company and appropriated them to himself. It was also clear at this time that the business of the company was foundering. The meeting between Mr Olsen, Mr Moon and Mr Bates at which the possibility of receivership was discussed, took place in late January 1998.
[23] Mr Moon said that at this stage he was concerned the company would incur more debt to complete the uncompleted projects. He was not confident it would benefit from continued trading, because the unfinished projects were being undertaken on very thin margins and any delay could cause a loss. Mr Moon said he therefore accepted Mr Bates’ advice and invited him to become a receiver, which occurred on 12 February. Mr Moon’s evidence was that he believed “that this would allow me to opt out and leave the company in Bill’s hands”.
[24] Mr Bates’ evidence on events leading up to his appointment does not differ from that of Mr Moon in any way which is material to the legal analysis that follows.
[25] In the absence of any New Zealand authority on the issues before the Court in relation to s 126, Mr Sullivan, counsel for the liquidators, relied on two overseas authorities. The first was a decision of the Supreme Court of New South Wales in 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371. That case involved a section in the Companies (NSW) Code which imposed liability on “any person who was a director of the company, or took part in the management of the company” for debts incurred by the company when there were reasonable grounds to expect the company would not be able to pay all its debts. In that case, the company had commenced business without any working capital and made substantial trading losses almost immediately. Mr Kemish was an accountant who initially prepared accounts and gave business advice, but gradually became more and more involved in the management of the company. To begin with, this meant working 21/2 days a week at the company’s business and eventually working full time. The Judge found that he was, for practical purposes, adopting the role of Managing Director. There are some similarities with the current case, but the different statutory context makes it of only limited assistance.
[26] The second case referred to by Mr Sullivan is the decision of the English Court of Appeal in Re Tasbian Ltd (No.3) [1992] BCC 358. That case concerned an accountant who was introduced to Tasbian Ltd by its major financier, to which Tasbian owed a considerable debt. He was to report to the financier and was also appointed as a consultant to Tasbian. The Court had to determine whether there was an arguable case that the accountant was either a director or shadow director as those terms are defined in the Company Directors Disqualification Act 1986. The definition of director in that Act was “director includes any person occupying the position of director, by whatever name called, and in s 629 includes a shadow director.” Specifically, the Act provided that a “shadow director in relation to a company means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (so that a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity)”.
[27] The factors said to indicate that the accountant was a de facto director or shadow director of Tasbian were that he:
[a] was appointed and paid by Tasbian;
[b] negotiated an informal moratorium with creditors;
[c] monitored trading and assisted the board;
[d] negotiated with the Department of Trade and Industry and the Inland Revenue and introduced Tasbian to new factors;
[e] became a signatory on Tasbian’s bank account [but, perhaps significantly in the context of this case, was not the only signatory];
[f] advised on the transfer of the labour force to a subsidiary of Tasbian;
[g] for the most part, the de jure directors regarded Mr Nixon as a shadow director, or even the Managing Director.
[28] The Court of Appeal found that some of these factors had little weight (eg negotiating a moratorium), but that others were more significant, particularly monitoring Tasbian’s trading and controlling its bank account through the bank mandate (which required that cheques would not be honoured unless they were signed by two of three named directors and counter-signed by Mr Nixon or one of his associates). The Court concluded that taking all the factors together, particularly the control over the bank account, there was an arguable case that the accountant was a shadow or de facto director.
[29] Tasbian is relevant in relation to its finding that there was an arguable case that the accountant was a de facto director. However, the references to a shadow director are not relevant here, because the definition of shadow director being considered by the Court in that case is similar to s 126(1)(b)(ii) of the Act, and the liquidators do not rely on that provision in this case. Tasbian would assist only in determining whether s 126(1)(a) could apply, but the liquidators do not rely on that provision either. Where it does assist is in giving some guidance on the parameters for determining what powers in relation to a company would be exercisable by a board, which if exercised by another person would indicate that person fell within s 126(1)(b)(iii) or 126(1)(c).
[30] Mr Sullivan argued the present case involved stronger factors than those present in Tasbian, because Mr Bates had assumed the role not just of accountant, but of receiver. It is clear that the Receiverships Act (which Mr Bates confirmed he had read and thought he was operating under) gives very broad powers to a receiver. Mr Sullivan referred particularly to s 14 and the list of powers set out in s 14(2). Mr Sullivan also pointed out that the letter under which Mr Moon appointed Mr Bates as receiver referred to an appointment of a receiver “to manage the affairs of a company until its future can be determined”. There was also a reference to the broad role of the receiver in the agenda prepared by Mr Bates for the meeting on 16 February 1998, immediately after the appointment.
[31] In response, Mr Everard argued that the true director of the company was Mr Olsen, even though he was never appointed as such. He points to:
[a] Mr Olsen’s evidence that he was responsible for running the business, that Mr Bates never gave him instructions, that Mr Bates never made any decisions about the operations of the company, and that after Mr Moon’s departure, Mr Olsen assumed responsibility for matters previously within the ambit of Mr Moon’s responsibilities and had ‘taken over the managerial roles and management of the company’;
[b] Mr Moon’s evidence that Mr Olsen was ‘the main driving force behind the business’;
[c] Mr Bates’ evidence that Mr Olsen remained the decision-maker and driving force behind the business, and that Mr Bates could not and did not exercise control over Mr Olsen.
[32] Mr Everard downplayed the significance of the reference in the bank mandate form to Mr Bates being ‘sole director’. I accept that this fact in itself has little significance, although the fact that Mr Bates became the sole signatory is significant. Mr Everard says that the only people who could give reliable evidence as to the control of the company were Mr Olsen, Mr Bates, and to a lesser extent Mr Moon, and they all thought Mr Olsen was in charge.
[33] Mr Everard cited a number of cases which he argued supported his client’s position. The first of these was Re PFTZM Ltd (in liquidation), Jourdain & Ors v Paul [1995] 2 BCLC 354. This was a decision of Judge Paul Baker QC of the Chancery Division (Companies Court). It concerned a situation where a secured creditor, which had advanced money to a company, established a regime of weekly management meetings and a system where all receipts of the company were paid into an account in the name of financier, with periodic transfers being made to the company. The issue which is relevant for present purposes is the allegation that certain officers of the financier were shadow directors of the debtor company under the relevant legislation. Again, the definition was similar to that in s 126(1)(b)(ii).
[34] The Court held that a person would be found to be a shadow director only if he or she were pulling the strings behind the appointed directors. In this case, the officers of the financier were simply trying to rescue what they could, by using the rights of the financier as a secured creditor. The Judge therefore found it was “far from obvious” that there was a prima facie case that they were shadow directors. This is of only limited assistance to me in this context, because the liquidators’ do not allege Mr Bates was a shadow director. However, Mr Everard said that the case demonstrated that in the present context Mr Olsen was the shadow director and Mr Moon was the nominee.
[35] The next case is Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180. Mr Everard particularly emphasised the passage, at p 183, where Millett J distinguished between de facto and shadow directors. Millett J defined a de facto director as one who is held out as a director by the company, and claims or purports to be a director, although never actually or validly appointed as such, who undertakes functions in relation to the company which could properly be discharged only by a director. Millett J found it was not sufficient to show that a person was involved in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level. He then defined a shadow director as one who lurks in the shadows, sheltering behind others, who he claims are the only directors of the company to the exclusion of himself.
[36] This is of very limited assistance here, because there is no allegation that Mr Bates was a shadow director. The liquidators do not rely on s 126(l)(b)(i). Accordingly, the submissions relating to shadow directors do not provide much assistance to me. The definition given by Millett J of a de facto director is broadly similar to the wording of s 126(1)(b)(iii), and therefore does not add a lot to the words set out in s 126.
[37] Mr Everard’s next case was Mistmorn Pty Ltd (in liquidation) & Anor v Michael Yasseen (1996) 14 ACLC 1,387, a decision of the Federal Court of Australia. The definition of director in that case was similar to s 126(1)(a) and s 126(1)(b)(i) and again, it is notable that neither of those provisions are relied upon by the liquidators in this case. However, the case is helpful in that it sets out a list of factors which weighed heavily in the finding that Mr Yasseen was a director, even though the only appointed director was his wife. In particular it was found that he:
• negotiated the company’s lease and conducted rent review discussions with the landlord;
• lodged development applications with the local Council;
• was instrumental in obtaining insurance;
• arranged for the shop fit out;
• arranged for printing of promotional material;
• applied for membership of the trade association relevant to the business;
• arranged for the opening of the shop by the local Mayor and spoke at the opening (even though the official director, his wife, was present;
[38] Davies J therefore found that he was a director for the purposes of provisions which are similar to those being considered in this case.
[39] Mr Everard distinguished the case, describing Mr Bates’ role as very much secondary to the operation of the company by Mr Olsen, in contrast to that of Mr Yasseen who appeared to have an instrumental role in the business.
[40] While the cases cited to me are interesting indications of the way Courts in other jurisdictions have approached issues such as the one which faces me, their assistance to me is limited because I have to interpret the particular statutory wording of the New Zealand legislation.
[41] Turning to the wording of s 126(l)(b)(iii), the question I need to answer is whether Mr Bates exercised, or was entitled to exercise, or controlled, or was entitled to control, the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board.
[42] In this case, it is possibly arguable that Mr Olsen was, prior to the receivership, a director (in addition to Mr Moon) in terms of s 126(1)(a). However, I find that his role at that time (even by his own evidence) was limited to operational matters and that the division of responsibilities between him and Mr Moon was such that only Mr Moon could be said at that stage to be a director, and therefore to be the board. Mr Bates’ major argument is that, once the receivership had started, he did not exercise powers of the board, because he operated in a way which involved consultation and discussion with Mr Olsen, and did not in fact exercise any particular degree of control over Mr Olsen, apart from some isolated instances, particularly that in relation to the Mazda vehicle (which will be referred to later).
[43] Mr Bates, Mr Moon and Mr Olsen all thought Mr Bates had been appointed a receiver and therefore had the broad powers of a receiver as set out in the Receiverships Act and in the agenda for the 16 February meeting. If he had been validly appointed as a receiver, I would have no doubt that he was exercising, or entitled to exercise, powers normally exercisable by the board. It is notable that s 126 contains an express exclusion for receivers in 126(lA), which appears to indicate that, but for that exception, receivers would otherwise be caught by the definition. However, the appointment as receiver was invalid and Mr Everard asks me to look at what actually happened between Mr Bates and Mr Olsen, rather than what legal powers Mr Bates thought he had under the Receiverships Act.
[44] I find that Mr Bates:
[a] thought he was a receiver and thought he had the powers set out in the Receiverships Act;
[b] acted throughout the receivership on that basis, as Mr Moon had before him. He gave a considerable degree of autonomy in operational and managerial matters to Mr Olsen;
[c] consulted frequently with Mr Olsen and did not assert the authority he thought he had as receiver in that he operated on a collegial and consultative basis and with some deference to Mr Olsen’s considerable knowledge of the operational issues facing the company;
[d] had sole cheque signing authority and held himself out to the bank as a receiver, which the bank would have understood put him in control to the exclusion of the board;
[e] exercised that cheque signing authority on the consultative basis referred to above, in that he did not sign cheques until he had reached agreement with Mr Olsen as to the appropriate course for the company to take in relation to particular payments;
[f] was not subject to the direction and control of Mr Olsen, but rather acted on a co-operative basis with Mr Olsen;
[g] undertook a number of actions which were consistent with the role of a receiver, including writing to creditors at the commencement of the receivership, asserting ownership of the Mazda vehicle when this became contentious, and endeavouring to recover money from Mr Moon which appeared to have been misappropriated.
[45] Mr Bates obviously also had an important role in the decision to continue trading at the outset of the receivership and to cease trading at the end of it. While the original decision involved discussions with Mr Olsen and Mr Moon (although Mr Olsen disputes that discussions with him could be said to have reached the consensus that trading would continue), Mr Bates thought he was a receiver, and having read the Receiverships Act must have thought that he ultimately had the right to determine whether the company continued trading or not. Mr Olsen did not have any authority to allow the company to continue trading and Mr Moon had effectively departed the scene. The only person who was entitled to make that decision was Mr Bates. The fact that in his own mind he thought it was a collegial decision does not alter that fact.
[46] The liquidators argue Mr Bates was a director in terms of s 126(1)(b)(iii) because he exercised powers which would normally fall to be exercised by the board (Mr Moon). While I accept that Mr Bates did exercise powers which would normally be exercised by the board (or was entitled to do so), I do not accept that is sufficient to bring him within s 126(1)(b)(iii), because that sub-paragraph refers to powers which ‘apart from the constitution of the company, would fall to be exercised by the board’. The precise meaning of those words is unclear. There was no equivalent of s 126(1)(b)(iii) in the Law Commission’s draft Companies Bill (see clause 96 in NZLC Report 9). The learned authors of Anderson’s Company and Securities Law say that s 126(1)(b)(iii) refers to ‘the exercise of powers which would be exercised by the board were it not for the constitution of the company providing otherwise’. That seems to imply a requirement that, in order for a person to be caught by s 126(1)(b)(iii), there needs to be a provision in the constitution giving that person powers which would otherwise have been exercised by directors. The learned authors of Morrisons Company and Securities Law refer to ‘the exercise of the powers which would normally be exercised by the board’, without referring to the constitution of the company.
[47] The interpretation of s 126(1)(b)(iii) suggested in Anderson appears to me to be the correct one and it is clear that Mr Bates did not have any authority in terms of the constitution of the company in this case. I find that s 126(1)(b)(iii) does not apply to him.
[48] Turning to s 126(1)(c), the issue which concerns me is whether a power or duty of the board (in this case Mr Moon) has been directly delegated by the board (Mr Moon) to Mr Bates, with Mr Bates’ consent or acquiescence, or whether Mr Bates exercised the power or duty with the consent or acquiescence of Mr Moon. In view of the correspondence between Mr Moon and Mr Bates and the apparent acceptance by both of them that Mr Moon’s role was supplanted by that of Mr Bates as receiver, I find that Mr Bates does fall within s 126(1)(c). The appointment of a receiver by Mr Moon was clearly intended by him to hand over the powers which he had as the board of the company to Mr Bates. Mr Bates appeared to accept this. It is clear that he had no expectations of any continuing involvement from Mr Moon and thought that he had sufficient control to, for example, make claims on the company’s behalf against Mr Moon himself, notwithstanding that Mr Moon remained as the only registered director.
[49] I therefore find that the liquidators succeed in their case that Mr Bates was a director of the company under s 126(1)(c) of the Act, but not under s 126(l)(b)(iii).
Does the professional capacity exception apply?
[50] Mr Bates relies on the exception in s 126(4) which says that s 126(1)(b), (c) and (d) do not include a person to the extent that person acts only in a professional capacity.
[51] Mr Sullivan acknowledged that in the period from the time he was first asked to undertake work for the company until the date of the receivership, Mr Bates was acting only in a professional capacity, but argues that once he took on the receivership that changed. Mr Everard argued that while there was a change of role at the time of the receivership, Mr Bates’ roles was throughout that of an accountant and he therefore falls within this exception. He downplays the significance of Mr Bates being the sole signatory on the bank account because that was the only practical option available to the company and because Mr Bates’ and Mr Olsen’s evidence was that decisions as to who should be paid were made in conjunction with Mr Olsen.
[52] I do not accept that argument. The appointment as receiver clearly changed dramatically the position which Mr Bates occupied. He became much more involved with the affairs of the company as his time records (reflected in his invoices), showed. He controlled the company’s bank account even though he chose to exercise that control on a collegial basis with Mr Olsen. The reality is that if there had been a disagreement between Mr Olsen and Mr Bates as to the appropriateness of any cheque being written, Mr Bates held the ace card because his signature was required. Mr Bates thought he was acting as a receiver. His lack of experience perhaps led him to operate in a way which was not in accordance with normal receivership practice, but nevertheless he believed he had the powers of control given to a receiver under the Receiverships Act and there were times when he exercised them.
[53] I find that the exception in s 126(4) does not apply in this case.
Conclusion - section 126
[54] I therefore find that, with effect from 12 February 1998, Mr Bates was a director of the company in terms of s 126.
When did Mr Bates’ directorship end?
[55] That then leads to a consideration of the period for which Mr Bates was a director. The evidence shows that the company ceased trading at the end of July 1998 but Mr Bates did not bring the receivership to an end as the Receiverships Act requires. For example, he did not give a notice to the Registrar of Companies of the end of the receivership or prepare a report as at the end of the receivership as would have been required by s 24 of the Receiverships Act. However, he did notify some suppliers to the company (notably Power New Zealand, the local electricity utility), and he also paid off all of the staff and discontinued their employment.
[56] Mr Everard argues that the actions which Mr Bates took after 31 July 1998 were consistent with an arms length relationship of a professional adviser. For example, he points out that the letters which Mr Bates wrote after 31 July 1998 (and there were very few of them), were written on his own letterhead and signed in his personal capacity, not on the company’s letterhead signed as receiver. Mr Everard therefore argued that if Mr Bates were to be found to be a director, then there should also be a finding that he ceased to be a director as at 31 July 1998, and that any liability that he has under s 301 should relate only to the period between 12 February 1998 when he was appointed as receiver and 31 July 1998 when the company ceased trading.
[57] Mr Sullivan points to the fact that Mr Bates took no action to notify the end of the receivership and continued to do at least some (admittedly minor), work for the company in circumstances where there was clearly no person who had any legal authority to instruct him to do it. He argues that this indicates that Mr Bates must have thought that he continued to be receiver, even though the fact the company had ceased trading meant his role was now substantially reduced. He points out that a receiver who wanted to bring the receivership to an end would have advertised that he had ceased to act, notified the Inland Revenue Department and other utilities such as Telecom, and taken steps to ensure that further obligations were not incurred by the company (as happened in this case with the continued used of the mobile phone by Mr Olsen which ran up considerable extra charges to Telecom Mobile).
[58] While Mr Bates may have thought that the receivership had come to an end at the time of the company ceasing to trade, there is nothing which indicates that he handed control of the company back to Mr Moon who was the board of the company, and who would have become responsible again for the company once the receivership ended (and who could have put the company into liquidation immediately). It seems this was essentially an oversight on the part of Mr Bates perhaps resulting from his inexperience of receivership situations. I acknowledge that he did take some steps which were consistent with the termination of the receivership and did have only a limited role from then on, as the company’s trading activities had ceased.
[59] However, I do not believe the actions which he took at the end of July can be said to have severed his status as a director on the basis of my earlier findings, I therefore find that he continued to be a director until the date of liquidation. The significance of this is that he could be liable for debts incurred after 31 July 1998. I accept there is some substance in Mr Everard’s submission that this would be unfair to him, but I do not believe that the way to deal with that issue is to make an artificial finding that his directorship ceased at 31 July. Rather, this seems to be an issue for the exercise of discretion under s 301, and I will deal with it in that context.
Liability under s 135 and/or s 136
Background
[60] The allegations against Mr Bates are that he is liable for breaches of the duties set out in ss 135 and 136 of the Companies Act 1993. Those sections say:
“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.
136. Duty in relation to obligations-
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.”
[61] The history leading up to the enactment of these provisions is summarised by Tompkins J in his article “Directing the Directors: The duties of directors under the Companies Act 1993” (Waikato Law Review (2) 1994, 13-39). He said at 26:
“These sections are broadly akin to s 320 of the 1955 Act, although that section applies only where a company is being wound up. In its present form the section is the product of the unsatisfactory course that was adopted for this reform. The [Law] Commission’s version proposed that directors be liable for ‘an unreasonable risk of causing the company to fail to satisfy the solvency test’. Thus reasonable risks could be taken. That was deleted by the Justice Department, and a ‘reckless’ test substituted. That in turn was axed by the Justice and Law Reform Select Committee, from which [s 135] in its present form emerged. It is not surprising that such a piecemeal method of law reform has produced a rather uncertain result.”
[62] Tompkins J referred to criticisms that had been made of s 135, especially its apparent failure to recognise that business decisions involve an assessment of risk as well as an assessment of the prospective gain, and that higher risks can bring higher rewards. On its face, the section does not seem to provide for such a balance. Tompkins J believed that a risk of loss that is reasonably balanced by a prospect of gain could not be characterised as substantial, but added:
“If, as I consider to be the case, a judgment on whether there has been created a substantial risk of serious loss can properly have regard to the size of a prospective gain, that is, if it is legitimate to balance the risk with the return, it would have been preferable for the section to say so.”
[63] Although it is not directly relevant to the issues before me, I would hesitate to interpret s 135 as allowing the kind of balancing of risk and reward referred to by Tompkins J - it refers only to risk and does not qualify the reference to risk by wording such as “except where the potential for substantial gain justifies the taking of such risk”.
[64] In Nippon Express (NZ) Ltd v Woodward (1998) 8 NZCLC 261,765, Anderson J considered the application of s 189 of the Companies Act 1955 which was, at that time, identical in all material respects to the wording of s 135 of the 1993 Act. At p 261,777 Anderson J said:
“Of course, if a company operates at a loss for an extended period and has few, if any, realisable assets, there must be some risk to creditors. Section 189[s 135], is concerned, however, with not mere risk but substantial risk of serious loss.”
Having found that the directors were not in breach of the section during an initial period, Anderson J then considered a period after certain previously undisclosed debts had come to light and found that after that period the directors were in breach. In assessing how to apply the section Anderson J commented at p.261,777:
“However, precedent legislation as examined by the Courts, was concerned with punitive sanctions for compliance with directors’ obligations rather than seeking to undermine the principle of limited liability. Judicial discretion was concerned with culpability which required a consideration of both the causative impact and the blameworthiness of the directors’ conduct in relation to the company’s debt. All the circumstances of the case will have to be considered in the light of those criteria, with the exercise ultimately remaining discretionary and often requiring a broad global approach. A number of frequently cited authorities are conveniently collated and reviewed in Re Bennett Keane & White Ltd (in liquidation)(No.2) (1988) 4 NZCLC 64,317 (HC) per Eichelbaum J (as he then was).
Anderson J found that the debts of the company had increased significantly during the period in which trading occurred in breach of s 189 of the 1955 Act. One major creditor was repaid while debts to others were created. Anderson J said at p.261,778:
“In my opinion the fact that the cause of the delinquent manner of the business after January 1995 resulted in a major debt to one creditor being repaid whilst major debts to another creditor were created, does not increase or diminish the directors’ culpability for carrying on business in a manner which wrongly increased the level of debt from $500,000 to $1.1million.”
In determining liability in that case, the Judge considered the discretion given to him by s 275 of the 1955 Act (equivalent to s 301 of the 1993 Act), and concluded at p.261,778:
“Bearing in mind the essentially penal nature and purpose of s 275(1)(b)(ii), I am of the opinion that justice requires that each defendant’s liability to contribute to the assets of the company should be neither more nor less than the defendant’s just deserts.”
Anderson J pointed out that the duty owed under s 135 is a duty to the company, rather than one which is owed directly to any particular creditor. For this reason, he did not accept that the imprudent conduct of a particular creditor mitigated the defendant’s liability. He said:
“At the heart of a director’s liability pursuant to s 275(1)(b)(ii) is the concept of compensation to the company for a director’s breach of duty to the company. The damage to the object of the duty, naively the company, is the debt which the company has been plunged into. Although such damage to the company has led to loss by the plaintiff [a creditor], no duty was owed by it to the company itself. It is not the plaintiff but the directors whom the law expects to be the company’s keeper.”
[65] I respectfully agree with those comments.
[66] In a more recent case on s 189 of the 1955 Act Re Hilltop Group Ltd (in liq); Lawrence v Jacobson (2001) NZCLC 262,477, Potter J commented that s 189 imposes an objective test - how would an ordinary, prudent director be expected to act in the circumstances? Wild J used a similar formulation in Re B M & C B Jackson Ltd (in liq); Benchmark Building Supplies v Jackson, (High Court, Palmerston North, CP 26/99 29 March 2001).
[67] Having considered them, I think that the position in relation to s 135, when read together with s 301 is as follows:
• Section 135 imposes a duty which is owed by a director to the company rather than to any particular creditor;
• The test is an objective one;
• Although the law reform process makes it difficult to elicit any legislative intent in relation to the wording of s 135, it appears to impose a stringent duty on directors to avoid substantial risks of serious loss to creditors and does not appear to allow for such risks to be incurred, even in circumstances where the potential for great rewards exists;
• In situations where a company has little or no equity (as is the case here), directors will need to consider very carefully whether continuing to trade has realistic prospects of generating cash which will allow for the servicing of pre-existing debt and the meeting of commitments which such trading will inevitably attract. As Anderson J said, the reference to “substantial risk”‘ and “serious loss” does appear to set a higher standard than simply any risk at all to creditors which must be inevitable where a company is operating at a loss and has few, if any, realisable assets;
• Where a breach of the duty is found, the assessment of the amount to be paid by a director under s 301 should be “neither more nor less than that [director’s] just deserts”.
[68] It is also notable that s 135 does not apply only in a liquidation situation, although this is the situation now before me. On the face of it, it appears to allow actions for breach of the section to be brought against a company which continues to trade.
[69] Anderson J commented in Nippon Express that the legislation which was replaced by s 135 did not seek to undermine the principle of limited liability (p.261,777). It is hard to say with absolute confidence that s 135 does not undermine the principle to some extent. Certainly the omission of the reference to “unreasonable risk”, which appeared in the Law Commission’s report, seems to remove from the Court a discretion to consider whether the risks which have been taken are reasonable in the circumstances (eg where a substantial profit was a potential outcome). If the risk is substantial and it involves potentially serious loss, then, on the face of it, a breach of s 135 occurs.
Did Mr Bates breach s 135?
[70] The liquidators allege Mr Bates was in breach of s 135 and s 136. That allegation is based on the fact that he allowed the company to continue to trade and to incur debts after his appointment as receiver. The evidence of Mrs Fatupaito was that the company was insolvent at the date of Mr Bates appointment. She pointed to the following
“[a] A balance sheet prepared by Mr Bates at the end of February 1998 showing the position of the company as at February 1998 which indicated that the company had assets of $32,233 and liabilities of $47,172;
[b] the fact that the company’s bank account was overdrawn by $4,329 at 12 February 1998 even though there was no authorised overdraft facility;
[c] the fact that Mr Bates had been involved in preparing accounts in early December 1997 which had shown that the company had negative equity of $20,293 at the end of November 1997 and that its operating costs had exceeded its income in the months of October and November 1997, which she said indicated that the company had been insolvent from as early as November 1997;
[d] the fact that Mr Bates had also prepared projections for December 1997 and January 1998. after he had prepared the balance sheet as at the end of November 1997 which showed very optimistic prospects for those months. I accept Mr Bates’ evidence that these projections were reflections of what he had been told by Mr Olsen and Mr Moon rather than exercises of his own judgment. Nevertheless, at the time of his appointment as receiver he was in a position to know that these projections had been unduly optimistic to say the least;
[e] the fact that Mr Bates, in a letter to creditors (I was referred to a letter to Carters, but the evidence was that this was a standard letter written to a number of other creditors), states that the receiver intends to keep the company trading “because, in spite of the circumstances, it is considered there is sufficient backlog of projects and new work to make it a practicable approach to a situation.” Mrs Fatupaito points out that Mr Bates did not make any inquiries as to the individual profitability of the projects and that his knowledge of the company at that time would have indicated that there were a number of significant problems with the company as had been demonstrated by its failure to perform in any way close to the projections prepared in November 1997.
[71] In addition, it was contended on behalf of the liquidators that Mr Bates failed to have sufficient regard to the following:
[a] the company had lost a number of employees around Christmas 1997. which impacted on its ability to complete projects;
[b] the company had not traded profitability since its incorporation.
[c] the company had taken over a business from Aleete Wrought Iron which had itself been in financial difficulties indicating that little reliance could be placed on Mr Olsen’s judgment in relation to trading;
[d] the company had a poor record of timeliness, workmanship and under-pricing projects, and trouble collecting its debts as a result.
[72] The liquidators argue that there were a number of other warning signs which were apparent at the time and became apparent later. In particular, they point to the fact that Knobs and Knockers, one of the major creditors, had instructed a solicitor to write to the company in April 1998 asking whether the company was solvent, and the fact that Mr Bates had received advice from the company’s solicitors that there was no way he could deny that the company was insolvent. Similarly, Mr Bates himself confirmed in a letter to the solicitor for Mr Moon in June 1998 that the company had been “hopelessly insolvent for some time”.
[73] Mr Bates’ submission was that continuing to trade after his appointment as a receiver was a reasonable step in the circumstances principally because of the “equity” in the uncompleted projects which the company had on its books. The evidence showed that the way in which the company worked was that customers paid a deposit of 30% when they engaged the company to undertake a project with the balance being payable when the project was complete. Mr Bates pointed out in evidence that much of the work for some of these projects had been commenced, and in some cases was quite advanced. He thought, by completing the projects, the company could then obtain payment which would be to its financial benefit.
[74] Mr Everard submitted that Mr Bates made a reasonable assessment of the equity in these projects and that he proceeded on a responsible basis. He also submitted that Mr Bates did not “allow” or “cause” the company to continue trading because what was involved was the continuation of projects to which the company had already committed itself.
[75] To deal with that second argument first, I cannot accept Mr Everard’s submission that the company had a pre-existing commitment which Mr Bates could not have interrupted. It is always open to the directors of a company to cease trading even though the company has entered into pre-existing commitments and in some cases this will be the wise cause to take. Of course that would hurt those who have paid a 30% deposit and have not had their work done, but s 135 requires an assessment of the position of creditors as a body rather than individual creditors. I find that Mr Bates, in his capacity as a director, was in a position where he could have made a decision to cease trading at the time of his appointment or after a reasonable period during which he could have evaluated the financial position of the company. By not doing so, he allowed the company to continue to carry on business.
[76] As to the other point raised by Mr Everard, I do not accept that the decision to keep trading was a responsible one in the circumstances. I accept that Mr Bates was entitled to continue trading for a reasonable period while he evaluated the company’s prospects and I accept the evidence that the original intention was to continue trading only until the end of March. However, once Mr Bates had created his balance sheet on 27 February showing that the company had a negative equity of over $14,000 as at the date of his appointment, and once he had evaluated the company’s previous record of poor performance, he ought to have known that the prospects of continued trading were such that there was a substantial risk of serious loss to creditors by continuing to trade. This was exacerbated by his allowing the company to undertake the new projects which Mr Olsen committed it to, notwithstanding that he had previously reached agreement with Mr Olsen that this would not occur.
[77] The important point is that when a company has negative shareholders’ funds, the decision to keep trading is a decision which necessarily involves risk for creditors (both existing creditors and those which will arise from the future trading). While there may be circumstances where continued trading is justified by the prospect of collecting pre-existing debts or generating significant income from a reasonably minor expenditure (as in situations where projects are nearly completed and a small amount of work to complete them will justify payment of a full contract price), directors must be very cautious before embarking on that course.
[78] In this case, Mr Bates did not make any assessment of the likelihood that existing debts would be collected (which Mrs Fatupaito said would be standard practice in this situation) and he appeared to unquestionably accept Mr Olsen’s optimistic forecast for the derivation of income from uncompleted projects even though Mr Olsen’s poor past record showed that such faith was not justified.
[79] I therefore find that the position was such that Mr Bates was in breach of s 135 by allowing the company to keep trading because this involved a serious risk of substantial loss for creditors of the company. I accept that Mr Bates was entitled to take a reasonable time to evaluate the company’s prospects. It appears that that was his original intention, but he did not carry it out. Such a period of evaluation should have been only a fortnight or so. Therefore, from early March, trading was in breach of s 135.
Did Mr Bates breach s 136?
[80] In order to establish a breach of s 136, the liquidators must show that Mr Bates agreed to the company incurring an obligation at a time when he did not believe (the subjective test) on reasonable grounds (an objective test) that the company would be able to perform that obligation when required to do so.
[81] Again, the liquidators rely on the balance sheet as at the date of the commencement of the receivership which shows that the liabilities of the company exceed its assets by over $14,000. The liquidators argue that, in those circumstances, any belief that Mr Bates had that creditors would be paid as the obligations to them arose could not be based on reasonable grounds. Thus, the liquidators submit this section is also breached. Indeed, Mr Bates himself acknowledged in evidence that the company was insolvent.
[82] On behalf of Mr Bates, it is argued that the approach suggested by the liquidators takes too simplistic a view of the situation. In particular, Mr Everard argued strongly that the basis of Mr Bates’ decision to continue trading was the likely income from uncompleted projects which had been calculated by Mr Bates after discussion with Mr Olsen and which showed likely receipts of over $30,000 in both February and March, and over $18,000 in April for relatively limited expenditure. It was these projects which formed the basis of the decision to trade on, notwithstanding that the company was, in an accounting sense, insolvent. The evidence shows a reasonably careful approach by Mr Bates to the calculation of the contractual sums due to the company in relation to these projects, but no similar evaluation of the likely costs to be incurred to derive that income or the potential contingencies which could arise.
[83] Mr Everard suggests that if the value of the uncompleted projects (work in progress) had been included in the balance sheet of the company the deficit of assets to liabilities would have been more than cancelled out. I accept that would be the case if the contractual sums due in relation to work in progress was the value of that work in progress. But that is obviously not the case when the company needs to incur expenditure in order to complete the projects and there was no evidence before me as to what those costs would be, and no evidence that Mr Bates had made any evaluation of them. More importantly, Mr Bates appeared to make no inquiries about the possibility that there would be problems in completing the projects on time and thereby deriving the income, or in even collecting the contract sums at all, because of poor workmanship and so on. In view of the fact that the company’s records show this was a common occurrence, it was at best unwise of Mr Bates to assume that no such problems would arise in the future. He had already seen that the very optimistic predictions for December and January had been proven wrong, yet he seemed to be prepared to make similarly optimistic predictions for the period immediately after the start of the receivership without dispassionate inquiry.
[84] Mr Everard also argued that the principal obligation which arose after Mr Bates’ appointment was the payment of wages, and that Mr Bates had made sure that all staff were paid up-to-date before the company ceased trading on 31 July. Thus, to the extent that obligations for wages were incurred, Mr Bates not only had reasonable grounds for believing that these wages would be paid, but, in fact, made sure that they were. I accept that he did so.
[85] However, in order to meet the liability for wages, Mr Bates had to make an assessment not to pay some other sums and there was evidence that he had deferred payment of amounts due to the Inland Revenue Department for PAYE and/or GST on that basis.
[86] While I accept that Mr Bates honestly believed that continuing to trade would generate income in excess of the expenditure to be incurred, I do not believe that the circumstances were such that this belief was a reasonable one taking into account:
• The company’s trading history, which showed continued losses and failures to meet projected income targets;
• The problems the company had had with Mr Moon involving funds being taken by Mr Moon on an apparently unauthorised basis;
• The fact that, on Mr Bates own assessment, the employees were “stressed people” and the fact that there had been a number of employees departing the company around Christmas 1997:
• By the end of February Mr Bates knew or ought to have known, that there was significant difficulty in collecting the $16,050 debt owed by Mr P Collins which ended up being part of a transaction involving the transfer to the company of a Mazda vehicle which was the subject of an ownership dispute (about which I will say more later).
[87] It also appeared that Mr Bates’ decision was based on a likelihood that debts incurred after the date of the receivership by the company would be outweighed by income, but Mr Bates knew at the time of the commencement of the receivership that the company already had an excess of liabilities over assets of over $14,000. It should have been clear to him that creditors in existence at the time of the receivership would also need to be paid, and in view of the fact that many accounts from those creditors were already overdue, the pressure would come on for them to be paid first. The “aged payables” list which Mr Bates prepared at the commencement of the receivership showed that 56.8% of creditors’ accounts were 31-60 days old, and a further 9.3% were older than 60 days. There was no basis on which Mr Bates could reasonably assume that existing creditors would continue to permit late payment - to do so would not be reasonable - see Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACLC 768, cited by Wild J in B M & C B Jackson Ltd.
[88] In the circumstances, I find that Mr Bates was in breach of s 136 from the beginning of March 1998 because he was, at that time, aware that the company was in an insolvent position and it was not reasonable for him to believe that from then on obligations incurred by the company would be able to be met as they fell due.
[89] Looking at the position with hindsight, it is clear that the fnancial position of the company deteriorated significantly for a number of reasons which meant that the company did not in fact meet a number of obligations incurred during the receivership. The question I need to answer is whether Mr Bates could reasonably have believed that such obligations would be met. I find that he could not.
Section 301- assessing liability
[90] The liquidator’s claim against Mr Bates is made under s 301 of the Act. That section says:
“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, 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, 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 19(d) of the Insolvency Act 1967.
[91] The basis of the claim in this case is that Mr Bates is a past or present director (given my earlier findings in relation to s 126), that he has been liable for a breach of duty in relation to the company (being the duties under s 135 and 136 of the Act), and that he ought therefore to be ordered to contribute such sum to the assets of the company by way of compensation as the Court thinks just.
[92] The liquidators claim $59,517.59, which is what they characterise as the “erosion of capital” of the company, during the period between the date on which the receivership commenced and the date of liquidation of the company. Thus is calculated by reference to a statement of assets and liabilities of the company as at the date of the commencement of the receivership (12 February 1998) and a similar statement as at the date of liquidation. This shows that there was, between those two dates, a reduction in the assets of the company of $21,581.01 and an increase in the total liabilities of the company of $37,937.58, making a total “erosion of capital” of $59,517.59.
[93] Section 301 requires that the Court assess the contribution to be made by the director by reference to what the Court thinks is just. I have already referred to the comments made be Anderson J in Nippon Express on the appropriate method of assessing the amount of liability,which he summarised as being no more and no less than the directors’ “just deserts”.
Is $59,517.59 the appropriate starting point?
[94] I believe that the methodology proposed by the liquidators is appropriate, because it yields a net figure which properly excludes the deficit which already existed before Mr Bates became involved with the company and it is a useful way of assessing the deterioration in the position of the company during the period between the receivership and the liquidation. The liquidators argue the actual losses during the period were about $65,000, but an amount owed by Mr Olsen to the company was not included out of fairness. This approach appears to be similar to that taken by Anderson J in Nippon Express, where he looked at the amount of losses that arose after the date on which the directors became in breach of their duty to the company.
[95] The figure suggested by the liquidators is based on the change in the company’s position from the date on which the receivership commenced until the date of the liquidation. As I have found that the breaches of ss 135 and 136 commenced on 1 March, that is the appropriate starting date for the calculation. In practical terms, I do not think that would make any material difference to the amount claimed, and in view of the approach I will take to the application of s 301, I do not think any adjustment to reflect any change in position between the receivership date and 1 March is required.
[96] Mr Everard argued strongly that there were a number of matters which were incorrectly calculated in coming to the $59,517.59 figure or which should not be the subject of an order under s 301. I deal with each of these in turn.
Debtors over-valued
[97] Mr Everard argued that the debtors shown in the balance sheet as at the commencement of the receivership, were over-valued; he said it was unfair to assess them at their full value in coming to an assessment of Mr Bates’ liability. The evidence showed that Mr Bates himself had assessed their value in his first receiver’s report, which was prepared after he had had a greater chance to gauge their value, at $27,700. This is approximately $4000 lower than the figure shown in the balance sheet. Of course, that argument has the potential to be a two-edged sword because, if it is correct, it shows that the company’s financial position was worse at the date of the receivership than the balance sheet disclosed, and that the level of deficit in shareholders’ funds was higher. However, putting that to one side, I accept that there is a degree of unfairness in accepting a valuation of debtors at their face value when the reality is that, if Mr Bates had decided to liquidate the company immediately, a realisation of the full face value was unlikely.
Mazda vehicle
[98] There was considerable evidence and debate about events surrounding the Mazda vehicle which the company purchased. The list of debtors at the start of the receivership prepared by Mr Bates showed a debt due to the company by a Mr P Collyns of $16,050 (at some point reference is made to “Majestic” which was apparently the business operated by Mr Collyns). It seems that an arrangement was entered into whereby Collyns/Majestic would pay the contract price for the work previously done by the company, and once that payment had been received the company would then purchase from Collyns/Majestic the Mazda vehicle for $12,750. The fact that this arrangement (or one similar to it) was in contemplation was clear from the agenda for the meeting about the receivership prepared by Mr Bates on 16 February 1998, so it was a matter about which he had at least some understanding.
[99] However, the ownership of the Mazda vehicle then became a matter of dispute. Mr Olsen’s father-in-law, Mr Simpson, apparently had security over certain assets of Aleete and these assets were still being used by Mr Olsen in relation to the company’s business. Mr Simpson decided to take possession of the Mazda to protect his position, which frustrated Mr Bates’ efforts to sell the car as an asset of the company. As it turned out the Mazda was in Mr Simpson’s possession at the date of the liquidation and the liquidators eventually entered into a settlement with him, under which he paid $4500 to the company.
[100] Mr Bates says these events were outside his control because he was not aware of Mr Simpson’s involvement in the previous business and his security over assets still used by Mr Olsen in connection with the company’s business. While I accept that Mr Bates could not be expected to know this background, there was at least some evidence that a letter written by Mr Olsen, evidencing the arrangement with Mr Simpson and dated February 1998, was shown to Mr Bates. Mr Olsen’s evidence was vague on this point but the fact the Mazda vehicle was one of the issues to be discussed at the February meeting about the receivership makes it at least possible that the background details would have been known to Mr Bates.
[101] Mr Everard argues that credit should be given for the value of the Mazda ($16,750), because Mr Bates could reasonably have expected it to have been an asset available to the company. I do not accept that would be appropriate. The fact is, if a liquidation had occurred at a date soon after the commencement of the receivership, the full value of the debt owing by Mr Collyns/Majestic would have been able to be claimed and any arrangement involving the Mazda could have been undertaken in circumstances where the risk of its loss to Mr Simpson could have been avoided. Having said that, it is clear that the problems relating to the Mazda were caused by Mr Olsen where he appeared to have been less than frank with Mr Bates. The difference between the value of the Mazda at that time ($16,750) and the value eventually obtained, $4,500, is significant (approximately $12,000). I accept fairness suggests the amount Mr Bates is required to contribute to the company should include some allowance for this difference.
Matters beyond Mr Bates’ control
[102] Mr Bates also pointed out a number of matters outside his control in respect of which he should not have responsibility. In particular, he argued that the failure of a number of debtors to pay was outside his control for various reasons. I do not accept this argument. The failure of debtors to pay is precisely one of the risks of carrying on a business which would have been avoided by ceasing trading at the outset. Mr Olsen gave evidence that it was common practice in the industry in which the company operated for debtors to use contractors as a bank and simply refuse to pay. If that is so, then there was no logical basis on which Mr Bates could have assumed that all debtors would pay in full without dispute, particularly given the company’s history of problems. Particular reference was made to the debt owed by Knobs and Knockers, an important debtor, but I do not see any grounds for treating that differently.
Credit for creditors paid
[103] Mr Everard asks that I give credit to Mr Bates for the value of creditors reduced or paid after the receivership. The assessment made by the liquidators, which provides a net position, taking into account all credits and debits relating to the period of the receivership, already gives that credit, albeit on a global basis.
Position of other directors
[104] Another matter raised by Mr Bates was that Mr Olsen may have been a shadow director and Mr Moon was the statutory director; and that it is unfair that all liability should fall on him. I do not accept that submission. Mr Moon recognised the dangers of the company trading and responded by appointing Mr Bates as a receiver, although this appointment turned out to be ineffective in law. He relied on Mr Bates’ advice when appointing him as receiver, and was entitled to believe that the appointment was effective and had supplanted him as a director until the receivership was terminated. In my view there is no basis to change the calculation of any claim against Mr Bates, simply because Mr Moon remained a statutory director of the company. The issue is more problematic in the case of Mr Olsen but I accept it is arguable that he may have been a deemed director and that he was more involved in the day to day running of the company. Nevertheless it was Mr Bates who was the party who had the apparent authority to cease trading and did not do so. While I accept Mr Olsen’s involvement may have affected the way Mr Bates acted, it is not such that it should absolve Mr Bates of liability.
Matters after 31 July
[105] The next category is amounts which accrued after 31 July, the date on which the company ceased trading. I have already found that Mr Bates continued to be a director during this period, but I signalled that there may be a case for some allowance being made for the fact that the company had ceased trading at that time and had made at least some efforts to discontinue the company’s business. There are two particular categories in respect of which Mr Everard argues credit should be given. He argues that the debt which accrued to Telecom Mobile through Mr Olsen’s continued use of the company’s mobile phone should be the $576.06 which was owing at the end of July, rather than the $980.05 claimed by the liquidator. I do not accept that submission. Mr Bates appeared to realise that utilities needed to be notified that the company had ceased trading and ought to have done this with Telecom Mobile. His failure to do so led to this debt accruing.
[106] The other major category is the penalties which continued to accrue to the Inland Revenue Department. The amount owed is shown in the schedule of creditors provided by the liquidators as $59,300.36. Mr Bates argues that the amount for which he should be responsible is only $23,180.66 although, after some discussion, his counsel acknowledged that in addition to this there is a further $14,740, being the amount of unpaid PAYE. This gives a total of approximately $38.000. While Mr Bates took issue with a number of minor matters, the essential issue relates to the amounts owing to the Inland Revenue in respect of penalties relating to the period after 31 July 1998. These amounts were approximately $11,000 in relation to PAYE and $7500 in relation to GST.
[107] Mr Bates said he had correspondence from the Inland Revenue that prosecution/penal action would not be taken against the company, but on further analysis this did not appear to be a forgiveness of the penalties referred to in the proof of debt of the Inland Revenue Department. In broad terms, the assessment I must make is whether solve credit should be given to Mr Bates in respect of those amounts because they arose after he had taken what he thought were reasonable steps to stop the company trading and pay off its employees, while omitting to notify the Inland Revenue Department or hand back control of the company to Mr Moon so that it could be liquidated immediately. I accept that justice requires some allowance should be made, but not to the full extent claimed by Mr Bates.
Amount owing to Mr Moon
[108] Mr Bates also asked that I exclude from the calculations any amounts owing to Mr Moon or his business Magazine Art, because Mr Moon also owed money to the company. In the absence of evidence as to the applicability of a set-off in relation to Mr Moon’s Magazine Art, I do not think I can make a finding that this be excluded. Essentially, I am being asked to find that there is an error in the calculation and I do not believe I have the evidence that allows me to do that.
Mr Bates’ fees
[109] Mr Bates contended that I should exclude the amount owing to himself in unpaid fees, because he is unlikely to receive this given the preferential position occupied by the Inland Revenue Department.
[110] I find that the fees charged by Mr Bates were reasonable (the liquidator herself acknowledged that they were very modest), and I do not consider that he acted in any way improperly in arranging for payments to himself of outstanding fees. Mr Olsen’s evidence was that Mr Bates needed to be pressed to accept payment to himself and the considerable amount unpaid to Mr Bates appeared to confirm that he did not unfairly prefer his own position over that of other creditors. This is not a case where a director has abused his position to improve his personal finances at the expense of the company and its creditors. However, I am being asked to reduce his liability to the company, because it owes him money. I do not consider that is an appropriate factor to take into account in assessing what is basically a liability for a breach of duty to the company, which exists independently to the position of any creditor, including Mr Bates himself. If he were entitled to a set-off in relation to any amount I order him to contribute under s 301, no doubt he would exercise it. I hasten to add that I am not making such a finding, and indeed was not asked to do so.
Amount to be contributed under s 301
[111] Mr Everard referred me to the Maloc Construction Ltd v Chadwick & Ors (1986) 2 BCR 217, which was a decision of Tompkins J under similar provisions in the Companies Act 1955. In that case, Tompkins J suggested that the three factors relevant to the exercise of the discretion in assessing liability were causation, culpability and duration. Mr Everard suggested that I also apply those factors in this case, and I accept that suggestion. I note that this was also the approach taken in the B M & C B Jackson Ltd case.
[112] I find that, applying the criteria from Maloc, looking at the degree to which Mr Bates’ activities caused loss, the culpability he exhibited (and noting Anderson J’s comment in Nippon Express that the section was at least partly punitive in nature) and duration (given the efforts he made to discontinue trading at 31 July 1998), it would not be just to require Mr Bates to contribute the full $59,517.59 claimed by the liquidators. I have already referred to Anderson J’s comment in Nippon Express (p.26,177) that all the circumstances need to be considered and often a broad global approach will be required. This is such a case.
[113] Taking into account all the circumstances I have referred to above and giving credit to Mr Bates where it is warranted. I calculate the “just deserts” (to use the words of Anderson J) of Mr Bates in this case at $30,000. That reflects my findings that the original debtors were over-valued and that Mr Bates should not be responsible for all of the $12,000 lost in relation to the Mazda, and makes an allowance for some of the penalties accruing to the Inland Revenue Department after 31 July, which I believe is fair in the circumstances. I find that it is just that he should make such a contribution to the assets of the company, and I therefore order him to pay $30,000 to the liquidators pursuant to s 301(1)(b)(ii) of the Act.
Costs
[114] I did not hear from counsel on the subject of costs, and therefore reserve the matter. Submissions should be made on that question within 21 days of the date of this judgment.
1
0