Global Cover Insurances Limited (in liquidation) v Mario

[2020] NZHC 1556

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-2219

[2020] NZHC 1556

UNDER

Part 18 of the High Court Rules 2016 and sections 135, 136 and 137 of the Companies

Act 1993

BETWEEN

GLOBAL COVER INSURANCES LIMITED (IN LIQUIDATION)

First Plaintiff

VIVIAN JUDITH FATUPAITO
Second Plaintiff

AND

JIURIA RAIJELI MARIO

Defendant

Hearing:

2 July 2020

Appearances:

S L Hawksworth for the Plaintiffs

No appearance by or on behalf of the Defendant

Judgment:

3 July 2020

JUDGMENT OF GORDON J

This judgment was delivered by me on 3 July 2020 at 3 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors:           Simpson Grierson, Auckland

GLOBAL COVER INSURANCES LTD (IN LIQ) v MARIO [2020] NZHC 1556 [3 July 2020]

Introduction

[1]    The first plaintiff, Global Cover Insurances Ltd (in liquidation) (the company) was placed in liquidation on the application of the Commissioner of Inland Revenue (Inland Revenue) on 13 July 2018. The second plaintiff, Vivian Fatupaito, is the liquidator of the company. The plaintiffs seek to recover certain monies from the defendant, Jiuria Mario, the former sole director at all relevant times.

[2]    The plaintiffs filed this proceeding against Ms Mario on 17 October 2019. The statement of claim and notice of proceeding were served on Ms Mario on 20 December 2019 by way of substituted service as ordered by the Court on 19 December 2019. Ms Mario’s statement of defence was due on 18 February 2020. She has not filed or served a statement of defence, nor has she taken any steps in the proceeding. Accordingly the hearing before me proceeded by way of formal proof.1 Ms Faitupaito provided a detailed affidavit in support of the application.

[3]    The statement of claim contains three causes of action: alleging breaches of Director’s duties under ss 135, 136 and 137 of the Companies Act 1993.

Summary of relevant background

[4]    The company was incorporated on 27 January 2015. At all material times it was engaged in the business of providing insurance brokering services. Ms Mario was the sole director and a shareholder of the company from the date of incorporation to 20 August 2017. Ms Fatupaito says that there are no accounting records or financial statements available for the company. She had to reconstruct the company’s affairs using its bank account statements.

[5]    I  draw  the  following  further  brief  summary  from  the  submissions  of  Ms Hawksworth for the plaintiffs which I accept accurately summarise Ms Fatupaito’s evidence. The company’s financial position began to deteriorate shortly after its incorporation. The company began dishonouring payments to creditors and its bank account was overdrawn from as early as April 2015. By 30 June 2015, the company

1      High Court Rules 2016, r 15.9.

was balance sheet insolvent with its liability to the Inland Revenue exceeding its only asset (funds available in its bank accounts) at the end of each financial year.

[6]    The company was also cashflow insolvent from at least 20 July 2015 (and likely earlier) with no apparent means of paying its tax liabilities of $2,067.29 to Inland Revenue. Ms Mario nevertheless continued to trade the company for a further two years until she resigned as a director on 20 August 2017.

[7]    From 30 June 2015, the company’s position continued to deteriorate. But it continued to operate and accrue liabilities to Inland Revenue when it had no ability to pay those amounts. From 20 May 2016, the company failed to pay fortnightly wages to its sole employee, with Ms Mario telling the employee that the company had insufficient funds to meet its costs. Throughout Ms Mario’s directorship, the company began dishonouring payments to at least one other creditor, Fleet Partners.

[8]The liquidator has received creditors’ claims in the liquidation totalling

$48,238.63. Ms Fatupaito’s evidence is that of that sum, $30,266.53 became due and owing to Inland Revenue while Ms Mario was the sole director of the company.

Statutory provisions

[9]Section 301 of the Act 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 person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—

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

(b)order that person—

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

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

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

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

…

[10]   When considering an application under s 301, the Court is required to make a two-stage evaluation.2 At the first stage, the Court must determine whether there has been a breach of a duty owed by the director to the company. If the Court is satisfied that there has been a breach, it must then consider the extent to which the director should contribute to the losses of the company.

[11]   The plaintiffs allege that Ms Mario breached the following duties owed to the Company:

(a)The duty not to cause or allow the business of the company to be carried on in a manner likely to cause serious loss to the company’s creditors, pursuant to s 135 of the Act;

(b)The duty not to allow the company to incur obligations (to Inland Revenue) unless she believed at the time on reasonable grounds that the company would be able to perform the obligations when it was required to do so, pursuant to s 136 of the Act;

(c)The duty to exercise the care, diligence and skill expected of a reasonable director in the same circumstances, pursuant to s 137 of the Act.

[12]   Also relevant is s 4 of the Act which sets out the solvency test for companies. Section 4(1) of the Act provides that a company will satisfy the solvency test if:

2      Mason v Lewis [2006] 3 NZLR 225 (CA) at [52].

(a)the company is able to pay its debts as they become due in the normal course of business; and

(b)the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.

[13]   A company is thus cashflow insolvent if it is unable to pay its debts as they become due in the normal course of business, and a company is balance sheet insolvent if the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.

Was the company insolvent from 30 June 2015?

Cashflow insolvency

[14]   Ms Fatupaito’s evidence establishes that from 20 July 2015 the company was unable to pay its tax liabilities accrued to Inland Revenue as they fell due. On 20 July 2015, the company had $513.28 in its bank account, which was insufficient to pay the

$2,067.29 owing to Inland Revenue.

[15]   Ms Faitupaito’s evidence contains a table setting out the company’s liability to Inland Revenue together with the available funds in the company’s bank account at various dates from 30 June 2015 through to 31 March 2017. The evidence shows that the company continued to accrue further liabilities to Inland Revenue over that two year period as it continued to trade while Ms Mario was the company’s director. It was unable to pay these debts as they fell due. At each of the dates in the table the accumulated debt due to Inland Revenue exceeds the company funds available as at those dates.

[16]   As at the date of liquidation, the company’s outstanding debt owed to Inland Revenue which fell due during Ms Mario’s directorship totalled $30,266.53.

Balance sheet insolvency

[17]   The evidence establishes that the value of the company’s liabilities was greater than the value of its assets from 30 June 2015 onwards. The company’s only assets were the funds available in its bank accounts.

[18]   As at 30 June 2015, the company’s liabilities to Inland Revenue exceeded its assets by $1,585.33. The amount of the company’s liabilities continued to exceed the value of its assets: as at the year ending 31 March 2016 (-$23,519.21) and as at the year ending 31 March 2017 (-$30,797.48).

Breach of director’s duties – legal principles

Section 135 – reckless trading

[19]   Section 135 of the Act provides that a director must not agree to, 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.

[20]   In Superior Blocklayers Ltd (in liq) v Bacon, Edwards J was similarly required to consider whether the directors of an insolvent company had breached their duties pursuant to s 135.3 She considered the scope of the duty, concluding:

[39] The duty is one owed by the directors to the company, as opposed to particular creditors. The test is an objective one and focuses not on the director’s belief but on the manner in which the company’s business is carried on and whether that creates a substantial risk of serious loss. What is required under the Act is a “sober assessment” by the directors of an on-going character as to the company’s likely future income and prospects.

[21]In Madsen-Ries v Petera, Lang J held:4

… The courts have recognised that directors are not required to ensure that a company ceases to trade the moment it becomes insolvent. There are limits, however, to the extent to which the directors can permit a company to continue trading in the hope that things will improve. The justification for such hope is also likely to be less where the company is indebted to the Commissioner for unpaid PAYE or GST, because such payments are only meant to be held for a short time before being paid to the Commissioner.

3      Superior Blocklayers Ltd (in liq) v Bacon [2016] NZHC 2601 (footnote omitted).

4      Madsen Ries v Petera [2015] NZHC 538 at [97] (footnotes omitted).

Section 136 – Duty in relation to obligations

[22]   Section 136 of the Act provides that a director must not agree to the company incurring an obligation unless he or she believes on reasonable grounds that the company will be able to perform the obligation when required to do so.

[23]   The Court of Appeal in Peace and Glory Society Ltd (in liq) v Samsa accepted the following break-down of the elements of s 136:5

(a)That the defendant was a director of the company;

(b)That an obligation was incurred by the company; and

(c)That at the time of incurring the obligation, the defendant did not honestly believe on reasonable grounds that the company would be able to perform the obligation when it was required to do so.

[24]   As can be seen from the above Court of Appeal decision, the test for s 136 has both an objective and subjective element. The company must show that the director agreed to the company incurring an obligation at a time when the director did not believe (subjective test) on reasonable grounds (objective test) that the company would be able to perform that obligation when required to do so.6 It is not enough for the director to believe that the company had a “reasonable likelihood” of being able to perform the obligation. A director must believe that the company “will be able” to perform the obligation rather than “will be likely to be able to perform the obligation”.7

Section 137 – director’s duty of care

[25]   Section 137 of the Act provides that a director must exercise the care, diligence and skill of a reasonable director in the same circumstances. The test is an objective one.8

5      Peace and Glory Society Ltd (in liq) v Samsa [2009] NZCA 396, [2010] 2 NZLR 57 at [45].

6      See also Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [80]; Kiwibest Realty Ltd (in liq) v Kashkari [2016] NZHC 2378 at [25].

7      Hansa Ltd (In Liq) v Hibbs [2017] NZHC 2014 at [34].

8      Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [89].

[26]   An assessment of whether a director has breached these duties will generally involve a reconstruction of the choices made by a director in continuing to trade in difficult circumstances when the financial future of the company ought to have been appreciated as being precarious.9 A director is required to undertake a “sober assessment” as to the company’s likely future income and prospects.

Did Ms Mario breach her director’s duties from 30 June 2015?

[27]   It is convenient to deal with the three claims together as the allegations underpinning each claim are essentially the same. I take into account the following.

[28]   At no time from 30 June 2015 was the company balance sheet solvent, nor did it have sufficient funds available to pay the amounts owing to Inland Revenue. At least, as at 30 June 2015, Ms Mario was required to undertake a “sober assessment” of the company’s future prospects and act accordingly. There is nothing to suggest that she did so. The reverse is the case:

(a)No financial statements or other accounting records were prepared for the company at any time during Ms Mario’s directorship;

(b)Ms Mario did not attempt to engage with Inland Revenue in relation to the company’s tax liabilities to negotiate a settlement or repayment arrangement; and

(c)There is no evidence that Ms Mario took steps to improve the company’s prospects or provide it with an injection of funds so that it could continue to meet its liabilities.

[29]   The deterioration in the company’s financial position continued after 30 June 2015. A snapshot of the position, helpfully summarised by Ms Hawksworth, as at various dates is as follows:

9      H Investments Ltd (in liq) v Official Assignee [2018] NZCA 76 at [82].

(a)31 December 2015: the company owed Inland Revenue an accumulated debt of $16,102.35 (of which $13,943.11 was immediately due). The balance of the company’s bank accounts as at that date was -$1,037.91. Also by this date the company was dishonouring payments to at least one other creditor, Fleet Partners.

(b)31 March 2016: the company owed Inland Revenue an accumulated debt of $23,659.69 (of which $21,500.45 was immediately due). The balance of the company’s accounts as at that date was $140.48. The company continued to dishonour payments to its other creditors.

(c)20 May 2016: on that date the company’s employee discovered that Global had failed to pay his fortnightly wages for the period 9-20 May 2016. When the employee raised this with Ms Mario she told him the company had insufficient funds to meet its costs and asked him how the company could obtain more funds. On 30 May 2016, Ms Mario emailed the employee saying that the company’s financial situation was critical.

(d)31 May 2016: the company owed Inland Revenue an accumulated debt of $26,898.55 (of which $25,818.93 was immediately due). The balance of the company’s bank accounts as at that date was $29.81.

(e)31 March 2017: the company owed Inland Revenue an accumulated debt of $30,266.53. The balance of the company’s accounts as at that date was -$712.75.

[30]   I accept Ms Hawksworth’s submission that in light of the financial difficulties referred to above, Ms Mario should have undertaken a sober assessment of the company’s future at least as at 30 June 2015. I accept that a sober assessment would have led to the conclusion that the company should cease trading.

[31]   I also accept that any attempt to trade out of insolvency was not reasonable in the circumstances as Ms Mario did not take any action to stem the company’s

increasing liabilities. Further, it was not realistic for Ms Mario to think that the company would emerge from its start-up phase then trade profitably, as the company had no assets other than the limited funds in its bank account. Additionally there is no evidence that Ms Mario took any professional advice or arranged for financial statements to be prepared in order to assess the company’s prospects. Instead she continued to trade the company for a further two years until she resigned as a director.

[32]   I accept the submission of Ms Hawksworth that Ms Mario breached her duties as follows:

(a)Section 135: from 30 June 2015 Ms Mario caused the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors, principally Inland Revenue. Ms Mario’s decision to continue operating the business, and thus incur liabilities to Inland Revenue when there was no way that the company would be able to meet those liabilities, created a substantial risk that Inland Revenue (along with other creditors) would suffer loss;

(b)Section 136: from 30 June 2015, Ms Mario agreed to the company incurring obligations when she did not believe on reasonable grounds that the company would be able to perform the obligations when required to do so. Ms Mario would have been aware of the financial difficulties and she could not reasonably have believed that the company would be able to meet either its present or future obligations. But she nevertheless continued to cause the company to incur further obligations to Inland Revenue (along with other creditors);

(c)Section 137: I accept that from at least 30 June 2015, Ms Mario did not exercise the level of care, diligence and skill that a reasonable director would have exercised in the same circumstances. Applying an objective test I accept that no reasonable director in Ms Mario’s position would have elected to continue trading in the face of the company’s obvious financial difficulties when there was no way that the company would be able to meet its future obligations when they fell

due. No reasonable director would have elected to stop paying Inland Revenue and continue to trade in the face of mounting tax obligations.

[33]I find that breaches of ss 135, 136 and 137 are proved.

Quantum of relief under s 301

[34]   The Court of Appeal in Mason v Lewis set out a three-pronged approach to determining the quantum of relief under s 301:10

[109]     The standard approach has been to begin by looking to the deterioration in the company’s financial position between the date inadequate corporate governance became evident (really the ‘breach’ date) and the date of liquidation.

[110]     Once that figure has been ascertained, New Zealand courts have seen three factors – causation, culpability and the duration of the trading – as being distinctly relevant to the exercise of the Court’s discretion …

…

[118]   Finally, claims of this character necessarily have to be approached in a relatively broad-brush way. The jurisdiction to order recompense is of an ‘equitable’ character.

[35]   Justice Katz in Bay Metal Fabricators Ltd (in liq) v Steenson summarised the three elements of causation, culpability and duration as follows:11

(a)The element of causation is concerned with the link between the carrying on of the company’s business recklessly, to the knowledge of the impugned director, and the indebtedness of the company for which it is sought to impose personal liability.

(b)The element of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of the director’s conduct, bearing in mind that at one end of the range the nature of a director’s involvement will be blind faith or muddle- headedness, while at the other end there will be actions or instances of inaction which are plainly dishonest. The deterrent purpose of the section is served in cases involving a high degree of culpability by orders which are punitive as well as compensatory.

(c)As to the element of duration of the wrongful trading, the Court of Appeal found in that case that a duration of two years and 10 months was “lengthy”.

10     Mason v Lewis, above n 2.

11     Bay Metal Fabricators Ltd (in liq) v Steenson [2016] NZHC 1634 at [48], citing Löwer v Traveller

[2005] 3 NZLR 479 (CA).

[36]   The quantum of relief ordered by courts varies in accordance with these three factors. So, in Löwer v Traveller the Court of Appeal upheld the trial judge’s finding of 100 per cent liability for loss during the relevant period.12 The director was found to have been unreasonably optimistic and put his own interests ahead of other unsecured creditors over an extended period.

[37]   In contrast, and as noted by Katz J in Bay Metal Fabricators Ltd (in liq),13 the Court in Rowmata Holdings Ltd (In liq) v Hildred ordered the directors to pay 70 per cent of the company’s losses.14 However, in reaching this conclusion, the Court found that the global financial crisis (“GFC”) “was in part responsible for the [directors’] predicament, and the GFC was not their fault”.15

[38]   The plaintiffs submit that it would be just for Ms Mario to compensate the company in full for its losses incurred from 30 June 2015 until she resigned as a director of the company, those losses totalling $30,366.53.

[39]   I have referred to Ms Fatupaito’s evidence that by 30 June 2015 the company was clearly balance sheet insolvent. It was also cashflow insolvent from 20 July 2015. I accept that in assessing compensation for breaches of duties by permitting the company to trade when a director knew the company could not pay its debts, directors are not required to ensure that a company ceases to trade the moment it becomes insolvent. But there are limits to the extent to which a director can permit a company to continue trading in the hope that things will improve. In this case, the company’s financial difficulties were apparent from (at least) April 2015. It is apparent from the company’s bank account that it frequently dishonoured payments to other creditors and went into overdraft. It also relied on deposits from Ms Mario and made insufficient income from its business activities.

[40]   I therefore accept that the appropriate starting point of inadequate governance should be 30 June 2015.

12     Löwer v Traveller [2005] 3 NZLR 479 (CA).

13     Bay Metal Fabricators Ltd (in liq) v Steenson, above n 11 at [50].

14     Rowmata Holdings Ltd (in liq) v Hildred [2013] NZHC 2435, (2013) 26 NZTC 21-039 at [150]; upheld on appeal: Hildred v Rowmata Holdings Ltd (in liq) [2015] NZCA 106.

15 At [148].

[41]   As to causation, there is the necessary link in this case between Ms Mario’s carrying on of the company’s business in the manner that I have referred to above and the indebtedness of the company for which the plaintiffs seek to impose personal liability. She was directly responsible for the company suffering the losses.

[42]   As to culpability, while there is no evidence of dishonesty, for the various reasons I have already referred to, culpability is nevertheless high.

[43]   The wrongful trading continued from 30 June 2015 to 20 August 2017, a period just under two years and two months. That is appropriately characterised as a lengthy period.

[44]   I consider that the deterioration is represented by the amount owed to the Inland Revenue in liquidation being the sum of $30,263.53 and the appropriate relief is an award of 100 per cent of that sum.

Orders

[45]   I enter judgment in favour of the plaintiffs against Ms Mario on each of the three causes of action. I order relief in favour of the plaintiffs against Ms Mario as follows:

(a)Ms Mario is to pay the plaintiffs $30,266.53 for breaches of her director’s duties owed to the company under ss 135, 136 and 137 of the Act; and

(b)Ms Mario is to pay interest on the amount in (a) above pursuant to s 10 of the Interest on Money Claims Act 2016 from the date of liquidation to the date of this judgment.

Costs

[46]   I award costs to the plaintiffs against Ms Mario calculated on a 2B basis. The plaintiffs may file a memorandum itemising costs and disbursements.

Gordon J