FBB Holdings Limited (in liquidation) v McGrath
[2018] NZHC 1786
•24 July 2018
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2018-485-147
[2018] NZHC 1786
UNDER the Companies Act 1993 BETWEEN
FBB HOLDINGS LIMITED (in liquidation) First Plaintiff
RICHARD GRANT SIMPSON and DAVID IAN RUSCOE
Second Plaintiffs
AND
DAVID ROBERT DANIEL MCGRATH
First Defendant
LEONARD IAN BALDWIN
Second Defendant
Hearing: 16 July 2018 Appearances:
B R McKinnon for plaintiffs
D M Abricossow for first defendant P R W Chisnall for second defendant
Judgment:
24 July 2018
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] The plaintiffs, FBB Holdings Ltd (in liq) and its liquidators, Richard Grant Simpson and David Ian Ruscoe, sue FBB’s shareholders and directors, the defendants, David Robert Daniel McGrath and Leonard Ian Baldwin, in connection with the conduct of FBB’s business.
[2]Six causes of action are pleaded:
FBB HOLDINGS LIMITED (in liquidation) v MCGRATH [2018] NZHC 1786 [24 July 2018]
(a)claims for recovery of the alleged debit balances of Mr McGrath and Mr Baldwin’s shareholder current accounts as at the date of liquidation;
(b)claims for the recovery of $562,291 against Mr McGrath and $708,309 against Mr Baldwin said to have been paid contrary to ss 107 of the Companies Act 1993 which concerns unauthorised payment of dividends;
(c)claims for alleged breaches of s 161 of the Act which relates to unauthorised remuneration paid to directors for the same amounts of
$562,291 and $708,309;
(d)unquantified claims for alleged breaches of s 135 of the Act which concerns reckless trading;
(e)unquantified claims for alleged breaches of s 137 of the Act which concerns directors’ duties of care;
(f)unquantified claims for alleged breaches of s 194 of the Act which concerns directors’ duties in connection with company accounting records.
[3] By notice of application dated 23 February 2018 the plaintiffs seek summary judgment pursuant to pt 12 of the High Court Rules 2016 on their first causes of action against each of Mr McGrath and Mr Baldwin. As pleaded, $45,255.41 is sought against Mr McGrath and $37,217.96 is sought against Mr Baldwin, these being the alleged debit balances of their shareholder current accounts as at the date of liquidation.
[4] At the commencement of the hearing I was informed by Ms McKinnon and Mr Chisnall that all issues as between the plaintiffs and Mr Baldwin had been fully and finally resolved and that the plaintiffs proposed discontinuing their claim against him. I gave the plaintiffs leave to withdraw their application for summary judgment
against Mr Baldwin and asked Ms McKinnon to ensure that a notice of discontinuance was filed as soon as possible.
[5] Mr Abricossow told me that this development came as a surprise to him and he expressly reserved whatever rights Mr McGrath might have on the filing of a notice of discontinuance.
[6] Thus, this judgment deals only with the plaintiffs’ first cause of action against Mr McGrath and their application for summary judgment against him.
The factual background
[7] FBB was incorporated on 22 March 2006. From the outset Mr McGrath and Mr Baldwin were the shareholders and directors. As I understand it FBB’s business involved providing management services to a chain of fast food restaurants. This Court made an order winding the company up and appointing Mr Simpson and Mr Ruscoe as liquidators on 28 June 2016.
[8] The evidence is that Mr McGrath was responsible for the financial side of the business and Mr Baldwin was involved with operations and staff. However, ultimately, that is irrelevant. Both Mr McGrath and Mr Baldwin were directors of the company and responsible for its governance and management.
[9] It is common ground that FBB’s records, such as they were as at the date of liquidation, showed the shareholder current account held by the company for Mr McGrath as having a debit balance of $18,521.99.
[10] The liquidators were not prepared to accept the accuracy of these records. They questioned certain credits lodged to the account. In particular they questioned, and have reversed, the following credits:
(a)a credit posted as at 31 March 2015 of $20,280 described as “To offset leave liabil…”;
(b)three credits posted as at 5, 13 and 19 January 2016, all being for
$2,151.14, and therefore totalling $6,453.42 described as “Salary”.
[11] Following these adjustments the liquidators concluded that the account stood in debit in the amount of $45,255.41.
[12] It is that amount — together with interest and costs — that they seek in their summary judgment application against Mr McGrath.
Summary judgment principles
[13] In Krukziener v Hanover Finance Ltd1 the Court of Appeal described the principles that govern summary judgment applications in these terms:
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1; (1986) 1 PRNZ 183 (CA), at p 3; p 185. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNX 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR 373 (PC), at p 341; p 381. In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
[14] Both Ms McKinnon and Mr Abricossow referred me to other cases in relation to these principles but in my view none of them deviate materially from Krukziener.
The plaintiffs’ case
[15] The plaintiffs’ case as advanced by Ms McKinnon on their behalves could not be more straightforward.
1 Krukziener v Hanover Finance Ltd (2008) 19 PRNZ 162 at [26].
[16]Her essential submission was that:
(a)an overdrawn shareholder current account is a debt repayable on demand;2
(b)as one of FBB’s directors, by reason of s 194 of the Companies Act, Mr McGrath was and remains responsible for the accuracy of the company’s financial records.3 Accordingly, it is not open to Mr McGrath to oppose the plaintiffs’ application for summary judgment on a basis that involves questioning their accuracy;
(c)to the extent that the plaintiffs have made adjustments to those records in determining the balance of the shareholder current account and formulating their claim those adjustments are justified.
[17]As to the last of these points:
(a)the credit of $20,280 posted as at 31 March 2015 was apparently recorded in Mr McGrath’s shareholder current account the day before the Order made in this Court appointing the liquidators. This was done by Mr Mathew Tong of Pocock Tong Trass, a Wellington accounting firm engaged by FBB to prepare its annual financial statements and tax returns. He was not responsible for or involved in the company’s day- to-day bookkeeping which was done by an employee, Ms Anita Sarginson. In the course of the liquidation the liquidators interviewed Mr Tong. A transcript of the interview was in evidence. It is hearsay of course, but admissible evidence nonetheless. This interview was conducted pursuant to s 261 of the Companies Act. Mr Tong told the liquidators that off his own bat, and not on the instructions of the directors, he had been playing around with figures and wishing to see how the directors’ shareholder current accounts would look if he
2 Re Samarang Developments Ltd (in liq) (unreported), HC, Christchurch, 30 September 2004.
3 Tom Contractors Ltd (in liq) v Tom (unreported), HC, Auckland, 28 April 2009; Chesterton Holdings v Durney (unreported) HC, Napier, 19 May 2011 and New Zealand Meat Export Ltd (in liq) v Yat Fan Lau (unreported) HC, Whangarei, 19 March 2018.
credited their outstanding holiday entitlements to them. He added that he knew he should have reversed this entry but did not do so. On the basis of what Mr Tong told them the liquidators reversed this credit;
(b)as to the three $2,151.14 payments between 5 and 19 January 2016 the liquidators say that their decision to reverse these is justified because there is no evidence of FBB (or Mr McGrath) filing tax returns on the basis that these payments were salary.
[18]This then is the basis upon which the plaintiffs seek summary judgment.
An arguable defence
[19] On Mr McGrath’s behalf Mr Abricossow emphasised that the primary burden in any summary judgment application by a plaintiff rests on the plaintiff to establish that there is no arguable defence. He accepted that a defendant opposing such an application on the grounds that there is an arguable defence must be able to point to a proper foundation for such a defence. He accepted also the broad sweep of the submissions made on behalf of the plaintiffs by Ms McKinnon to the effect that the liquidators of a company are entitled to recover the debit balance of a shareholder’s current account as a debt and that the Court is entitled to rely on the company’s financial records. But he submitted that it remains open to a director to point to particular inaccuracies or raise particular questions about the accuracy of the company’s records in the context of advancing a viable defence.
[20] In this case, Mr Abricossow submitted, there is a genuine question about the reliability of the company’s records in general and this account in particular and issues concerning the legitimacy or otherwise of the adjustments made by the liquidators to the account. He contended that those matters constitute a basis upon which Mr McGrath is able to say that he has an arguable defence — or defences — and that this matter should be allowed to proceed to trial.
[21]He developed this submission on two broad bases:
(a)first, he submitted that the plaintiffs’ case depends upon them being able to establish that the balance of the shareholder’s current account as at the date of liquidation was the amount they allege and they have failed to do so. In relation to this he pointed to the fact that the last authenticated financial statements are those as at 31 March 2014; that all records from that date are at best unauthenticated; that after 31 March 2015 (when Ms Sarginson left its employment) the company engaged an organisation by the name of Aspire Solutions Ltd to provide bookkeeping services and transferred onto a different computer platform; that none of Aspire’s records, or records generated by the new computer system, are in evidence; that the evidence is that the plaintiffs have not accessed this material and that Mr McGrath has certainly not had opportunity to review it; and that as the plaintiffs did not provide initial disclosure pursuant to r 8.4 on the commencement of this proceeding and have not, of course, provided discovery, all relevant records are not before the Court. He submits that until such time as that material is available and both parties are able to analyse it, there can be no certainty as to the balance of the shareholder current account as at the date of liquidation;
(b)second, Mr Abricossow submitted that, even without that material, it is evident that there at least three serious areas of dispute:
(i)the financial records that are in evidence record that payments to AMP were debited to Mr McGrath’s shareholder current account. Mr McGrath’s evidence is that these can only have been premiums payable in respect of insurance taken out by the company and should not have been debited to his account;
(ii)notwithstanding the statements apparently made by Mr Tong during the course of his s 261 interview, Mr McGrath’s evidence is that he and Mr Baldwin both had substantial outstanding holiday entitlements as at 31 March 2015 and that the proposal that these — or a proportion of them — should be paid out was
a serious one. On that basis he does not accept that the liquidators’ decision to reverse the credit to his shareholder current account in respect of outstanding holiday entitlements was a legitimate one;
(iii)Mr McGrath’s evidence is that the three $2,151.14 payments made to him between 5 and 19 January 2016 were salary and he points to the regularity and uniformity of such payments before and after those dates as evidence of this. He accepts that there is no evidence that the company accounted for PAYE in relation to these payments, and that it may not have done so. He puts this down to error as I understand his evidence. Nevertheless he maintains that the payments were intended as salary and that the reversal of them by the liquidators was not legitimate.
[22] On those bases Mr Abricossow’s submission was that this is not a suitable case for summary judgment because the plaintiffs have not placed adequate evidence before the Court so that the Court can be satisfied that Mr McGrath has no defence.
Discussion
[23] As will be apparent from the introductory section of this judgment, the plaintiff’s application for summary judgment arises against the backdrop of a much more extensive claim in which the plaintiffs seek damages of well over $500k against Mr McGrath. The first cause of action in relation to which they seek summary judgment reflects a small proportion (no more than .08%) of their claim.
[24] That, in and of itself, is not a basis for dismissing the plaintiffs’ claim for summary judgment. But it provides important context. Especially in view of their failure to provide initial disclosure on commencement, in pursuing this claim, the plaintiffs will almost certainly be obliged to provide discovery in the usual way and that will enable a full assessment to be made of the company’s financial position including the shareholder current accounts as at the date of liquidation.
[25] The plaintiffs’ submissions that the debit balance of a shareholder’s current account is a debt which is recoverable on demand; and that the directors of a company have a responsibility for ensuring that the company’s records are accurate and prima facie must accept the accuracy of those records are elementary and unquestionably correct. But those principles are not absolute.
[26] As Mr Abricossow pointed out during the course of the hearing, in the case on which the plaintiffs rely for the first of those propositions, Re Samarang Developments,4 the relevant passage from the judgment begins with a critical qualification:
… in the absence of explanation for drawings they must be treated as advances from the company to shareholders; i.e. debts owed by the shareholders to the company repayable on demand. (Emphasis added)
[27] Two features of this case strike me as unusual. First, there is a degree of irony in the plaintiffs’ position. On the one hand they contend that Mr McGrath as a director of FBB cannot be heard to raise an issue as to the accuracy of the company’s accounting records. Yet they have adjusted those records and it is the adjusted records that they contend Mr McGrath must accept. Second, both parties accept that FBB’s records since 1 April 2015 are not authenticated and that such records as exist are at least open to question. Yet the plaintiffs, not having provided initial disclosure and having apparently also failed to access all available records, contend that the Court should, by summary process, enter judgment against Mr McGrath.
[28]Turning to the three areas of dispute which Mr Abricosso submits exist:
(a)it is difficult to say much about the AMP debits. Mr McGrath’s evidence is that he thinks they are company obligations. The plaintiffs say that, if the records are incorrect, Mr McGrath must live with that because he was responsible for them. Whilst there is some force in the liquidators’ position, as matters stand, they are the parties with access to the records and have not contradicted Mr McGrath’s evidence;
4 Re Samarang Developments Ltd (in liq), above n 2 at [55].
(b)the liquidators’ concern about a large credit shortly before their appointment is entirely understandable. It is one that the Court shares. That said Mr McGrath’s evidence that he had outstanding holiday entitlements stands uncontradicted so that some credit may have been justified pursuant to the Holidays Act 1981. Additionally, Mr Tong’s position as explained to the liquidators is not easy to follow. Mr Tong is a chartered accountant. He says that he was “just playing around” when he credited Mr McGrath’s account with $20,000 holiday pay. When interviewed he said that the entry in the accounts should have been reversed. If that was his view, it is surprising that he did not do just that;
(c)as to the three $2,151.14 payments between 5 and 19 January 2016, these certainly have the appearance of salary payments. Even if the company did not account to the Inland Revenue Department for PAYE in respect of them, whilst that may mean that it — and its directors and officers — failed in their statutory responsibilities, it does not necessary mean that the payments were not properly categorised as salary.
Conclusion
[29] Against that background, I am not satisfied that I can rely on the material before the Court as to FBB’s shareholder current account for Mr McGrath as at the date of liquidation. To use the terminology employed by the Court of Appeal in Krukziener,5 I am left with a “… real doubt or uncertainty …” as to whether the plaintiffs will be able to establish that as at the date of liquidation Mr McGrath’s shareholder current account had a debit balance of $45,255.41.
[30] In my view, that will only be capable of being determined following discovery of all relevant records including those which are not currently before the Court. That brings me back full circle to the point I have already made that this summary judgment application arises against the background of a much larger claim by the liquidators against Mr McGrath in which they will be obliged to provide comprehensive discovery
5 Krukziener v Hanover Finance Ltd, above n 1, at [26].
and such an exercise can take place. That, in my view, is the course that the proceeding should follow.
[31] I therefore dismiss the plaintiff’s application for summary judgment against the first defendant. I do so expressly on the basis that in my judgement the plaintiffs have not established that Mr McGrath has no defence. I want to be clear that in doing so I am not exercising the residual discretion referred to by the Court of Appeal in Krukziener.6
[32] Costs are reserved. My preliminary view is that they should be costs in the cause as is conventionally the case in unsuccessful applications for summary judgment. However, as I have not heard from counsel in relation to costs, if either party wishes to contend that costs ought not to be reserved at this stage counsel may file memoranda and I will deal with the question on the papers.
Associate Judge Johnston
Solicitors:
Buddle Findlay, Wellington and Christchurch for plaintiffs Johnston Lawrence, Wellington for first defendant
Macalister Mazengarb, Wellington for second defendant
6 Krukziener v Hanover Finance Ltd, above n 1.
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