GL Investment and Development Ltd (in liq) v Gao

[2018] NZHC 868

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2015-404-2060

[2018] NZHC 868

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of GL Investment and Development Limited

BETWEEN

GL INVESTMENT AND DEVELOPMENT LIMITED (IN LIQUIDATION)

First Plaintiff

VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN AS

LIQUIDATORS OF GL INVESTMENT AND DEVELOPMENT LIMITED (IN LIQUIDATION)

Second Plaintiffs

AND

MING GAO

Defendant

Hearing:	15 - 17 August 2017
Appearances:	P C Murray and G A Campbell for Plaintiffs H Zhang for Defendant
Judgment:	30 April 2018

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on 30 April 2018 at 4.55 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date: ...................................

Solicitors:Meredith Connell, Crown Solicitor, Auckland Richard Zhao Lawyers Limited

GL INVESTMENT AND DEVELOPMENT LIMITED (IN LIQ) v GAO [2018] NZHC 868 [30 April 2018]

Introduction

[1]                  GL Investment and Development Limited (in liquidation) and its liquidators, Ms Madsen-Ries and Mr Levin (“GL” and “liquidators”), seek relief against the defendant, Mr Ming Gao.

[2]                  GL was incorporated on 19 March 2007. From then until 2011, GL carried on business as a cleaning company, as a franchisee of “Jani King”. Mr Gao was the sole director of GL throughout, a shareholder from incorporation and has been GL’s sole shareholder since 6 October 2011.

[3]                  The High Court made an order for GL’s winding up on 8 November 2013, following an application by the Commissioner of Inland Revenue (“IRD”), the sole creditor in the liquidation. Aside from approximately $8,000 in cash, the company’s sole asset is such claims as it has against Mr Gao.

Pleadings

[4]The plaintiffs make three principal allegations against Mr Gao.

[5]The first is that between 29 March 2007 and 18 August 2011, Mr Gao applied

$149,230 of GL’s funds to or for his benefit (“$149,230”).

[6]                  Secondly, the plaintiffs allege that Mr Gao breached various duties he owed to GL, in part by paying himself the $149,230 but principally by failing to ensure that GL complied with its obligations to the IRD as regards GST and income tax. Ultimately,  this  resulted  in  the   IRD   assessing   GL’s   liabilities   under   the   Tax Administration Act 1994 (“TAA”), and imposing penalties for late filing, and charging interest. The liquidators have admitted the IRD’s claim of $161,649, including $4,294.11 costs due on winding up (“IRD’s claim”) and they seek to recover an equivalent sum from Mr Gao.

[7]                  Thirdly, the plaintiffs allege that Mr Gao failed to ensure that GL kept proper financial records.1 I do not propose to address this cause of action as the only relief

1      Companies Act 1993, s 194; and Financial Reporting Act 1993, s 10.

sought is an award of both the $149,230 and the  amount of the IRD’s  claim.  As   Mr Zhang, counsel for Mr Gao, submitted GL’s losses were not caused by Mr Gao’s clear non-compliance with his obligations, although that non-compliance undoubtedly impeded the orderly conduct of the liquidation.

Affirmative defence

[8]                  Mr Gao denies the matters alleged against him. He also pleads a limitation defence in respect of any act or omission that preceded 1 September 2009, being six years before this proceeding was issued on 1 September 2015.

Decision

[9]                  I am satisfied that Mr Gao is indebted to GL in the sum claimed. None of the explanations Mr Gao gave for the payments stand scrutiny.

[10]              I am also satisfied that GL’s income was more than sufficient to pay the GST and income tax that was due. The sums were not paid because Mr Gao ignored GL’s obligations in this regard. GL would have had sufficient funds to pay the IRD had Mr Gao not drawn the sums he did.

[11]              The plaintiffs seek judgment for the amount of the debt as well as an order that he compensate GL in the full amount of the IRD’s claim.2 For reasons set out below, I consider that the claim in respect of some of Mr Gao’s breaches of duty is time barred. Quite aside from that, however, I believe I would be “double counting” if I ordered Mr Gao to pay both the debt and compensation in the amount of the IRD’s claim. The reason the plaintiffs seek both is to enable them to pay the IRD in full and to pay their costs and those of their legal advisers. I am not persuaded that would be proper in this case and I decline to make the orders sought.

Debt – $149,230

[12]              In the absence of financial statements or a general ledger, the liquidators have compiled from GL’s bank statements a list of payments totalling $149,230

2      Companies Act 1993, s 301.

(“schedule”), and which they contend represent a debt due from Mr Gao, as they were for his benefit. Although Mr Gao does not dispute the accuracy of the schedule, that is the amounts shown and the payees, his evidence is that the payments were for company expenses and that he is not indebted to GL.

[13]              The plaintiffs bring three causes of action, alternative to each other, regarding this $149,230. The first, which I find proved, is that Mr Gao is indebted to GL in the sum due. This makes it unnecessary to address the other two causes of action which are that Mr Gao paid the funds away with an intention to defeat creditors and that  Mr Gao is, at the very least, liable to refund $45,078, being the sum he paid away within three years preceding the IRD’s application to wind up.3

[14]              I turn now to address Mr Gao’s evidence in relation to the various categories in issue.

Personal

[15]              The payments in this category total $1,376, and comprise numerous transactions at fast food outlets and for groceries. They also include $200 paid to the Chinese Consulate.

[16]              Mr Gao’s evidence is that this expenditure was properly incurred, particularly in purchasing meals for employees. I reject this explanation in the absence of, inter alia, any evidence that GL was bound to provide meals to employees and any satisfactory explanation as to why GL should be paying a fee to the Chinese Consulate.

ATM and cash withdrawals

[17]The items in this category total $47,663.

[18]              Mr Gao’s evidence was that part of this sum is accounted for by the fact that on occasion he paid GL’s employees their wages in cash. There is no evidence as to which employees or when.

3      Second Amended Statement of Claim dated 14 September 2016 at [54]; Companies Act 1993,    s 298; and Property Law Acts 1952 and 2007.

[19]              Mainly, however, Mr Gao’s evidence was that GL made these and other payments to repay a debt to him. Mr Gao’s evidence on this point was as follows.

[20]              In January 2007, Mr Gao’s father lent Mr Gao ¥260,000, being approximately NZ$52,945.58 at that time. Mr Gao was to repay the loan plus interest by the end of 2008.4

[21]              Mr Gao advanced the funds to GL so that it could acquire the Jani King franchise and meet legal costs.5

[22]              Subsequently, Mr Gao’s father agreed to treat his loan as repaid if Mr Gao paid an equivalent sum to the Ming Gao Family Trust (“trust”), of which Mr Gao’s parents were beneficiaries.

[23]              GL repaid Mr Gao’s loan, and he his father’s, by the payments in issue under this heading.6 $36,689 was repaid by online transfers from GL to the trust; $7,352.20 by deposits of cash withdrawn from GL and deposited to the trust; and $11,027.10 by transfers from GL to Mr Gao’s personal HSBC account and from there to the trust.

These three sums total $55,068.30.7

[24]              The $36,689 can be put to one side because it does not form part of the $47,663 in issue. Nor do I accept Mr Gao’s evidence as to the $7,352.50 and $11,027.10. Aside from anything else, there is no correlation in time or amount between the withdrawals from GL on the one hand, and deposits to the trust or Mr Gao’s personal account on the other.

[25]              It may be, of course, that Mr Gao would have a claim in the liquidation if he were able to establish that he advanced funds to GL but he has not made such a claim. For the reasons given, I accept the plaintiffs’ case on this $47,663.

4 Brief of Evidence of M Gao dated 21 June 2017 at [4].

5 At [5].

6 At [9].

7      Supplementary Brief of Evidence of M Gao dated 15 August 2017 at [3](a).

Transactions with Mr Gao

[26]              The items in this category total (net) $12,407.32. They comprise various payments to Mr Gao for which he has offered no explanation.

Credit card

[27]GL paid a net sum of $3,441 towards Mr Gao’s credit card account.

[28]              Mr Gao’s evidence is that he paid company expenses such as petrol, parking fees and miscellaneous items required in the business on his credit card and the net payments reflect reimbursement.

[29]              I do not accept this evidence. First, as counsel for the plaintiffs submitted, the transfers from GL’s account were not specific amounts which might be expected if they were to reimburse for supplies such as to those to which Mr Gao referred. They were round, lump sums. Secondly, Mr Gao did not produce his credit card statements to evidence the purchases. Statements would still be available from the bank, even if the originals were unavailable.

Kiwisaver

[30]              GL paid $1,800 towards a Kiwisaver fund in Mr Gao’s name and $2,700 in his wife’s name.

[31]              Mr Gao’s evidence was that he and his wife were employed in GL’s business (his wife part time). As they were not paid a salary, Mr Gao considered that, at the very least, they were entitled to these modest amounts.

[32]              Again, I do not accept this. Mr Levin’s evidence was that Kiwisaver contributions may be classified as drawings, or as part of an employee’s wages or salary. Mr Levin’s assumption is that the payments constitute drawings absent evidence of an employment agreement. There being no such evidence, I proceed on the basis that the payments were drawings.

Mercedes Benz

[33]              The items in this category total $68,995.95. They comprise payments towards the acquisition of two Mercedes Benz vehicles, the first of which was second hand and the second of which was new. I accept the plaintiffs’ submissions that these vehicles were so unsuitable for use in a cleaning business that the only inference to be drawn is that they were for Mr and Mrs Gao’s personal use. This inference is bolstered by the fact the vehicles were registered in Mr and Mrs Gao’s names.

VW Polo

[34]              The payments in this category total $3,399.75. They comprise monthly payments to a finance company between November 2010 and July 2011 for the purchase of a Volkswagen vehicle, again not in GL’s name. Mr Gao’s evidence was that this was his wife’s vehicle, and that it was appropriate for GL to meet the payments as she used the vehicle to assist him in cleaning premises.

[35]              In principle, there would be no objection to GL making a contribution to the vehicle’s running costs in those circumstances. However, any such contribution would be vastly less than the entire monthly payment due under the finance agreement. I am satisfied that these sums too were for Mr Gao’s, not GL’s, benefit.

Other

[36]              The payments in this category comprise payments totalling $1,286 to Auckland Council and $7,961.83 to an unidentified credit card.

[37]              Mr Gao’s explanation for the payments to the Council was that they were rates and represented a portion of the expenses of his home office. Again, in principle, there is no reason why GL should not pay a properly calculated portion of the outgoings incurred as regards the home office. It is a different matter to expect GL to fund the payment of rates without some extrinsic evidence that $1,286 was a fair amount.

[38]              Mr Gao was not able to identify the beneficiary of the $7,961.83 applied to the credit card. Again, GL’s claim to these sums is proved.

Limitation defence – debt

[39]              The plaintiffs commenced proceedings on 1 September 2015. Mr Gao contends that the plaintiffs are not entitled to relief in respect of any act or omission prior to 1 September 2009. If Mr Gao is correct in this contention as regards his current account debt, the plaintiffs could recover no more than $72,760.85. Mr Gao’s drawings prior to 1 September 2009 were $76,469.50.

[40]In response, the plaintiffs submit that s 25(4) Limitation Act 1950 applies:8

25       Fresh accrual of action on acknowledgment or part payment

(4) Where any right of action has accrued to recover any debt ... and the person liable ... therefor ... makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of … the last payment:

Provided that a payment of a part of the rent or interest due at any time shall not extend the period for claiming the remainder then due, but any payment of interest shall be treated as a payment in respect of the principal debt.

[41]              The plaintiffs contend that Mr Gao made payments “in respect of” his debt to GL, the latest in time of which was on 5 May 2010.9

[42]              I accept this submission. There is no dispute that Mr Gao made such payments and, in my view, the only inference to be drawn is that Mr Gao made them “in respect of” his current account debt. There was no other reason for him to make the payments. Accordingly, the six-year limitation period on the debt began to run on 5 May 2010, and the proceedings were brought within time.

Conclusion on first cause of action

[43]              Given these findings, I am satisfied that between 22 March 2007 and 19 August 2011, the company paid a net sum of $149,230 to Mr Gao, or for his benefit, and that Mr Gao is indebted to GL in that sum. The plaintiffs made demand on 26 August 2015.10

8      Although now repealed, the Limitation Act 1950 continues to apply to claims based on acts or omissions before 1 January 2011.

9      Amended Statement of Claim, above n 3, at Appendix A.

10     Letter Meredith Connell to M Gao dated 26 August 2015 at ABD 395.

Breach of duties owed to GL – fourth and fifth causes of action

[44]              The liquidators allege that Mr Gao breached duties he owed to GL under     ss 131, 135, 136, 137 and 194 of the Companies Act 1993 (“Act”), for which, by their fourth cause of action, they seek relief under s 301 of the Act. The breach emphasised in closing submissions was Mr Gao’s failure to ensure GL complied with its obligations to the IRD, detailed below.

[45]              Alternatively, if any part of the fourth cause of action is time barred, the liquidators allege Mr Gao also breached his duties under ss 131, 135 and 137 by failing to cause GL to take action against him before the limitation period expired. The relief sought, again under s 301, is intended to be sufficient to make up any shortfall.

IRD’s claim

[46]              The IRD’s claim in the liquidation reflects its default assessments of GST due for every six-month period from 31 March 2008 to 30 September 2011 inclusive. The lengthy process of assessment was completed by the end of January 2013, at which time GL was deemed to have accepted all of the IRD’s default assessments of GST.

[47]              Mr Gao challenged aspects of the GST assessments at trial, but it was not open to him to do so. Any challenge needed to be made at the time, in accordance with the mandatory procedures specified in the TAA.

[48]              There is no contemporaneous evidence before me relating to the assessments of income tax but Mr Levin’s evidence was that such assessments were made for the years ended 31 March 2009 to 2012 inclusive and the IRD’s claim in the liquidation includes the amounts assessed for income tax also.

[49]              I accept the submission that Mr Gao’s failure to cause GL to meet its obligations as to GST and income tax constituted a breach of his duties as a director of GL under ss 131 and 137 of the Act:

131Duty of directors to act in good faith and in best interests of company

(1) Subject to this section, a director of a company,  when  exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.

137     Director’s duty of care

A director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—

(a)the nature of the company; and

(b)the nature of the decision; and

(c)the position of the director and the nature of the responsibilities undertaken by him or her.

[50]              Any director acting in good faith and in what he or she believed to be the best interests of the company would ensure the company met its obligations to the IRD, if financial circumstances allowed, as they did. Likewise, a director exercising the care, diligence and skill that a reasonable director would exercise in the same circumstances.

[51]              Whether Mr Gao also breached ss 135, 136 and 194 of the Act adds nothing to the case.

[52]              In respect of these breaches, the liquidators seek relief under s 301(1)(b)(ii) of the Act, which provides:

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 ... director ... has ... become liable ... for ... breach of duty ... in relation to the company, the court may, on the application of the liquidator ... —

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

(b)order that person—

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

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

...

[53]              There are two further matters to address, being the applicable limitation period and quantum, before considering whether I should make any order under s 301.

Limitation defence – breach of duty

[54]              Given the view I take of the relief to be ordered, the issue of whether the claim in respect of some breaches of director’s duties is now time barred is not determinative.

[55]              For the sake of completeness, however, the usual position under the Limitation Act 1950 was that time begins to run from the date of breach and expires six years later.11

[56]              In this case, that would mean that any claim for compensation in respect of a breach arising prior to 1 September 2009 would be time barred and the sum for which Mr Gao could be liable reduced to $75,637.35, that is if I were to exclude GST, income tax, penalties and interest accruing prior to 1 September 2009.

[57]              Mr Murray submitted that the limitation period in respect of a breach of s 131 at least is extended by s 28 Limitation Act 1950, which provides:

28       Postponement of limitation period in case of fraud or mistake

Where, in the case of any action for which a period of limitation is prescribed by this Act, either—

(a)The action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or

(b)The right of action is concealed by the fraud of any such person as aforesaid; or

…

the period of limitation shall not begin to run until the plaintiff has discovered the fraud ... or could with reasonable diligence have discovered it:

…

11     Arataki Properties Ltd v Craig [1986] 2 NZLR 294.

[58]              Counsel submitted that a breach of s 131 constitutes a breach of a fiduciary obligation, and thus constitutes equitable fraud. Counsel referred me to Victoria Street Apartments Ltd (In Liquidation) v Sharma, which I accept supports this submission.12

[59]              It is unnecessary for me to address this submission in detail because, at the very least, an extension of an otherwise prevailing limitation period on the ground of fraud must be clearly pleaded so as to put the defendant on notice that it is to be argued.13 The proposed extension by s 28 Limitation Act 1950 was not pleaded and, indeed, was not raised prior to closing submissions. For that reason, I would not have permitted reliance on s 28 Limitation Act 1950.

Quantum

[60]              As Mr Zhang submitted, the sole purpose of ordering Mr Gao to repay the debt and to compensate GL in the amount of the IRD’s claim is to give the plaintiffs a recovery that will enable the liquidators to pay their costs and expenses in full.

[61]As to those costs and expenses, the evidence I have is as follows.

[62]              First, in the letter to Mr Gao of 26 August 2015 referred to above, which was sent just five days before proceedings were commenced, the plaintiffs’ solicitors referred to a letter sent to Mr Gao on 9 December 2013. This letter apparently notified Mr Gao of a claim for loss caused to creditors (of which the IRD was and is the only one) from his failure to comply with his duties as a director.14

[63]              The solicitors went on to say in the August 2015 letter that the liquidators had since undertaken a further investigation into GL’s affairs and, in doing so, had identified a claim for amounts GL had paid to Mr Gao for his personal benefit.

[64]              The letter made formal demand for payment of what I have now held is the debt due on the current account; set out the claim for breach of director’s duties; advised Mr Gao that the claims in the liquidation totalled the amount of the IRD’s

12     Victoria Street Apartments Ltd (In Liquidation) v Sharma HC Auckland CIV-2009-404-8377,  21 September 2011.

13     FAF Holdings Ltd (in liq) v Bethune [2017] NZHC 2796 at [86].

14     Letter Meredith Connell to M Gao, above n 10.

claim; informed him that the liquidators’ costs to that date were approximately $38,100 excluding GST; and asked Mr Gao to make an offer in response to the letter, failing which further steps would be taken.

[65]Accordingly, at that point Mr Gao was on notice of a claim of approximately

$200,000.

[66]Mr Levin’s evidence at trial was that costs and expenses alone now exceed

$140,000 excluding GST, with approximately 50 per cent attributable to the liquidators’ own costs and 50 per cent to legal costs. Accordingly, if the IRD were paid in full as a result of an order under s 301 of the Act, the debt due from Mr Gao would be applied to meet the costs and expenses to which I have just referred. I add that the plaintiffs have also sought costs in the proceedings.

[67]              As Mr Murray submitted, the Court has previously ordered a defendant such as Mr Gao to pay a sum to the company that greatly exceeds the loss to creditors. For instance,  in  Morgenstern  v  Jeffreys,  the  Court  ordered  Mr  Morgenstern to pay

$3,499,999  even  though  the  claims  filed  in  the  liquidation  were  no  more  than

$1,315,807.80.15 A similar approach was adopted in Mizeen Painters Ltd (in liq) v Tapusoa.16

[68]              However, more recent authorities support a different approach. These authorities stand for the proposition that a director may only be required to pay the costs and expenses that arise from the breach itself.17 It is not to be assumed that costs incurred in the liquidation flow directly from a breach. The connection must be established. The liquidators, if successful, should also receive an award in respect of their legal costs and disbursements in the proceedings.

[69]              A recent illustration of this is Shaw v Owens.18  In that case, the appellants  Mr and Mrs Shaw, had been ordered to pay $125,884.59 to the liquidators of their

15     Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [93](d).

16     Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423.

17     Madsen-Ries v Twine [2015] NZHC 227 at [10], Madsen-Ries v Petera [2015] NZHC 538 at [110] to [124]; and Madsen-Ries v Petera [2016] NZCA 103, (2016) 11 NZCLC 98-043.

18     Shaw v Owens [2017] NZCA 315, [2017] NZCCLR 23.

company, “Aluminium Plus”. An unpaid creditor obtained an order that the company be wound up. That creditor was owed $88,814.54 and two other creditors together were owed “just over $10,000”. In the High Court, Mr and Mrs Shaw were ordered to pay compensation under s 301 of the Act of $125,884.59 comprising the company’s debts of $99,005.03 plus the costs and disbursements of the liquidation of

$26,879.56.19 The Court of Appeal reduced this award to $7,500, saying:

[22]   ... The purpose of an award of compensation under s 301 is to recoup or indemnify the company for its losses attributable to a director’s breaches. While it may be appropriate to incorporate an allowance for the liquidator’s costs where they are necessarily incurred as a consequence of the relevant breach, care is required to ensure that the award is truly proportionate to the company’s actual loss. It is telling that the final award in the High Court — inflated by credit consultant’s and liquidation costs — more than doubled Viridian’s actual debt. On any cost-benefit analysis, pursuit of this litigation was not a commercially rational exercise.

[70]              For myself, I am not persuaded that Mr Gao should bear the entire cost of the liquidation or, even if he should, that $140,000 excluding GST is a remotely reasonable sum. In fact, it seems extraordinary in the circumstances of this case.

Conclusion

[71]              Taking all of these matters into account, I enter judgment for the first plaintiff in the sum of Mr Gao’s current account debt, being $149,230.35, together with interest since the date the proceedings were served, such interest to be calculated at the Judicature Act rate prevailing from time to time. I accept that this gives the plaintiffs a recovery that exceeds the sum I would have ordered pursuant to s 301 of the Act. That, however, is a consequence of the manner in which Mr Gao conducted GL’s financial affairs.

[72]              In principle, as the successful party, the plaintiffs are also entitled to an award of costs (on a 2B basis) and disbursements in the proceedings.

[73]              The parties may be able to agree such costs and disbursements but may file submissions if they are not able to do so. The plaintiffs should note, however, that in any submissions they file I would expect an account of how the $149,230.35 plus

19     Owens v Shaw [2016] NZHC 1400, (2016) 4 NZTR 26-008.

interest is proposed to be applied and it may be that no further order for costs and disbursements would be forthcoming or that any order would be modest.

Peters J