Grant v Gifford
[2018] NZHC 26
•30 January 2018
IN THE HIGH COURT OF NEW ZEALAND GISBORNE REGISTRY
I TE KŌTI MATUA O AOTEAROA TŪRANGANUI-A-KIWA ROHE
CIV 2015-416-34 [2018] NZHC 26
BETWEEN DAMIEN GRANT AND STEVEN KHOV
AS LIQUIDATORS OF K-PACK INTERNATIONAL LIMITED (IN LIQUIDATION)
Plaintiffs
AND
KENNETH JOHN GIFFORD Defendant
Hearing: 30 October 2017 Counsel:
S M T Chambers for Plaintiffs
A M Simperingham for DefendantJudgment:
30 January 2018
JUDGMENT OF ELLIS J
[1] The liquidators of K-Pack International Limited (KPI) seek declarations under s 300(1) of the Companies Act 1993 (the CA) that the sole director of KPI, Mr Gifford, is personally liable for debts incurred by the company as a result of poor record-keeping during the period prior to liquidation. These debts amount to approximately $87,000. They also seek declarations that Mr Gifford is liable for the net (GST exclusive) costs of the liquidation (approximately 68,000 as well as interest
and costs.
GRANT AND KHOV AS LIQUIDATORS OF K-PACK INTERNATIONAL LTD (IN LIQUIDATION) v
GIFFORD [2018] NZHC 26 [30 January 2018]
[2] Although Mr Gifford instructed counsel and filed a statement of defence, shortly before the hearing his lawyer, advised that he would no longer be defending the claim. The matter therefore proceeded by way of formal proof.1 I therefore merely record that, from my reading of the statement of defence, his position was that KPI had (from 2008 onwards) “ceased trading”.
Relevant law
[3] I summarise the relevant statutory provisions below.
[4] Section 300 of the Companies Act 1993 (the CA) applies if a company is in liquidation and is unable to pay all its debts. Only a liquidator can bring an application under s 300. If it is found that a company in liquidation which cannot pay its debts has failed to keep its accounting records in accordance with the requirements of s 194 or prepare financial statements pursuant to any enactment, the Court may, if it considers that such failure has contributed to the company’s failure insolvency, or has adversely affected the course of liquidation, order that any of the company’s directors are personally responsible for all or part of the company’s debts and liabilities.2
[5] Here, the liquidators claim breaches of the record keeping requirements contained in both s 194 and ss 10 and 12 of the Financial Reporting Act 1993 (the FRA).3
[6] Section 194(1) (at the time) required that the board of a company must ensure that there are kept at all times accounting records that:4
(a) correctly record and explain the transactions of the company; and
1 Although Mr Taylor and Mr Simperingham appeared at the beginning of the hearing their attendance for the duration was excused.
2 Section 300(2) effectively provides that a director will have a defence to a claim under s 300(1)
if the Court considers that the person took all reasonable steps to secure compliance by the company with the relevant statutory provisions or had reasonable grounds to believe and did believe that a competent and reliable person was charged with the duty of seeing that that provision was complied with and was in a position to discharge that duty.
3 The FRA was repealed on 1 April 2014 but applies because it was in force at the relevant time.
4 Section 194 was replaced on 31 March 2014.
(b) will at any time enable the financial position of the company to be determined with reasonable accuracy; and
(c) will enable the directors to ensure that the financial statements of the company comply with section 10 of the Financial Reporting Act
1993 and any group financial statements comply with section 13 of that Act; and
(d) will enable the financial statements of the company to be readily and properly audited.
[7] The wording of para (b) makes it clear that the obligations upon company directors are ongoing and not static. The section also specifies certain transactions the records must contain, and requires the records to be kept in written form.
[8] Section 10 of the FRA provided that the directors of every reporting company and every “exempt company” must ensure that, within specified timeframes, financial statements are completed, dated and signed. Section 12 provides that exempt company financial statements must also comply with the Financial Reporting Order 1994.
[9] Section 6A(1) of the FRA defined an “exempt company” as a company (other
than an overseas company or an issuer) if:
(a) at least 2 of the following subparagraphs apply:
(i) as at the balance date of the accounting period for which financial statements are required, the value of the total assets of the company (including intangible assets) reported in the statement of financial position did not exceed $1,000,000:
(ii) in the accounting period for which financial statements are required, the turnover of the company did not exceed
$2,000,000:
(iii) as at the balance date of the accounting period for which financial statements are required, the company has 5 or fewer full-time equivalent employees; and
(b) as at the balance date of the accounting period for which financial statements are required, the company—
(i) was not a subsidiary of another body corporate or association of persons; and
(ii) did not have any subsidiaries.
[10] In Maloc Construction Ltd (in liq) v Chadwick the High Court set out the standards to which accounting records were to be held under the Companies Act 1955.5 It remains a key authority under the CA. Tompkins J relevantly held that:
(a) records must be such that they will, at any time, enable the financial position to be determined with reasonable accuracy, without requiring explanation or reconstruction;6
(b)the records must “speak for themselves” and basic accounting records such as “cheque books, deposit books, bank statements, invoices and the like” will not comply with the statutory requirements;7 and
(c) the meaning of “kept” is not confined to the retention and storage of such records but imports an obligation to create records that comply with statute.8
Facts
[11] Mr Kieran Jones (an insolvency specialist who has been managing the liquidation on behalf of Messrs Grant and Khov) was the only witness called for the liquidators and the narrative which follows is based on his evidence, which I accept.
[12] KPI was incorporated on 22 September 2003. It operated as a manufacturer and trader of machinery making fibre drums.
[13] Mr Gifford was a director and shareholder of KPI from its inception and was primarily responsible for managing the Company from that time until liquidation. Initially, Mr Gifford’s ex-wife, Eva Millacari-Gifford was also a director and shareholder of the Company. Her directorship ended on 6 December 2007 and she ceased being a shareholder on 30 October 2009, it seems following the break-up of
her relationship with Mr Gifford.
5 Maloc Construction Ltd (in liq) v Chadwick (1986) 3 NZCLC 99,794 (HC).
6 At 23.
7 At 22-23.
8 At 22.
[14] Following the break-up Mr Gifford formed a new entity, K-Pack International (NZ) Limited (KPINZ), in around December 2008. It seems that he intended that KPINZ effectively take over the business formerly operated by KPI, but as what follows will show, that was an object he achieved only in an incomplete and disorganised way.
[15] On 7 February 2013, KPI was placed into liquidation by the High Court in Gisborne as a result of an application by Fliway International Ltd (Fliway) and SMC Pneumatics (NZ) Ltd (SMC). Messrs Grant and Khov were appointed as joint and several liquidators.
[16] The liquidators have subsequently determined that, as at 7 February 2013
KPI had no funds in its bank account and could not pay its debts.9 The relevant debts were owed to:10
(a) Fliway in relation to transactions between 18 July 2011 and
5 February 2013 to the tune of $23,426.09. This sum has not changed since these proceedings were filed; and
(b) SMC in relation to transactions between 27 May 2011 and 8 August
2011 to the tune of $54,112.40. Mr Jones’ evidence was that this has
since decreased to $53,792.57.
[17] There is a further debt to the Commissioner of Inland Revenue the discovery of which post-dates the commencement of proceedings. Mr Jones advised that the debt owing to her is $9,790.74.
[18] The total amount owing as at the hearing date was therefore $87,009.40.
[19] Self-evidently, all of the outstanding debts were incurred during the time of
Mr Gifford’s sole directorship.
9 Apart from the sum of $5,135.95 which was paid by Mr Gifford to NZ Farm Tools Limited after liquidation.
10 These figures are taken from the statement of claim (SoC) dated 6 October 2015 and the evidence of Mr Jones.
[20] In May 2015 KPINZ was also placed in liquidation. Different liquidators have been appointed and I was advised that that liquidation is at an earlier stage.
KPI’s accounting and financial records
[21] Prior to the financial year ending March 2008, a Mr Stevenson of Stevenson Financial was engaged by KPI as its accountant. Mr Stevenson provided the Liquidators with several electronic copies of KPI’s financial statements in an Excel format, and a separate GST spreadsheet.
[22] These financial statements are dated between 31 March 2004 and 31 March
2008 and do not appear to have been signed by the directors, as required by s 10(2)(b) of the FRA. The financial statements also do not accord with the structure set out in the Financial Reporting Order 1994. They are lacking in detail as to current, or non-current assets and liabilities. They do not show whether any dividends were paid to shareholders. They do not detail which accounting policies were used. They incorrectly record income tax owing. Nor have the liquidators seen the documentary evidence (such as invoices and receipts) upon which the accountant relied.
[23] From 2008 onwards, Mr Jones has noted the following further errors in the required accounting and recording keeping.
[24] First, no financial statements have been prepared for the financial years ending March 2009, 2010, 2011, 2012 and 2013. Mr Gifford told the liquidators that this was because he had delegated the task to another employee who was unable to maintain accurate information.
[25] Secondly, KPI was a party to transactions which were not documented after it ceased trading in 2008, including:
(a) a lease of its assets to KPINZ between December 2008 and March
2009;
(b) receiving advances from KPINZ in order to pay the Company’s
creditors (those advances totalling $60,000 by March 2009);
(c) using the Company’s assets (totalling $166,995 at March 2008) to
purportedly offset this loan to KPINZ;
(d) selling the Company-owned 2006 Chrysler 300 on or around 1 March
2012 to Mr Gifford’s then-partner, Ms Osbourne (who has said she purchased the car from the company); and
(e) incurring the debts to Inland Revenue (PAYE and income tax), Fliway and SMC to which reference has been made above.
The effect of the record-keeping deficiencies and failures
[26] Mr Jones’ evidence was that, as a result of the above omissions and
deficiencies, the liquidators:
(a) were forced to undertake various investigations to ascertain the Company’s financial position, including seeking information from Mr Gifford, his then partner, BNZ, the Company’s lawyers, and the liquidators of KPINZ;
(b) could not determine which transactions, if any, may be voidable;
(c) could not determine whether any assets were disposed of at value or below value (the assets of the Company at 31 March 2008 were recorded as being worth $850,000, whereas it had no realisable assets as at the date of liquidation);
(d) could not ascertain whether any of the Company’s current accounts
were overdrawn without significant forensic accounting; and
(e) could not ascertain whether the withdrawal of $26,000 by Mr Gifford from the Company account between 1 April 2010 and
5 September 2011 was for personal use or otherwise.
[27] As well, Mr Jones said that the fact that KPINZ began trading in around 2008 and had leased KPI’s assets would almost certainly have led to confusion amongst the creditors of the KPI and KPINZ. It also caused confusion as to what assets and liabilities existed as between the two companies.
The claim under s 300
[28] The principal issues for determination in relation to the claim under s 300 are:
(a) did Mr Gifford comply with s 194 of the CA and ss 10 and 12 of the
FRA?
(b) if not, did his failure to do so:
(i) contribute to KPI’s inability to pay its debts;
(ii)result in a substantial uncertainty as to the assets and liabilities of the company; or
(iii) substantially impede the orderly liquidation of the company? (c) if so, what is the amount of Mr Gifford’s liability?
[29] There is a further, ancillary, issue as to whether Mr Gifford can be properly held liable for some or all of the liquidator’s costs in the liquidation. This question will be considered separately from the core issues identified above.
Analysis
[30] The starting point is to note that KPI was an exempt entity under the FRA. This is because:
(a) material transactions prior to liquidation, including introduction of funds from a related entity, expenses being paid by the Company, as well as no declaration of non-activity to the companies Registrar means the entity does not qualify as “non-active” under s 10A(2) of the FRA 1993; and
(b)draft financial statements of the Company for the financial year ending 2008 indicate it held less than $1,000,000 worth of assets and had less than $2,000,000 of turnover for any given financial period. This means it qualifies under s 6A of the FRA 1993 as an “exempt company”.11
[31] As an exempt company, the Company’s obligation was to keep financial
statements in the form set out in the Financial Reporting Order 1994.
[32] The next point is that there can be no doubt that, as sole director of KPI, Mr Gifford:
(a) was responsible for operating the business, correctly recording the transactions of the company and ensuring the accounting records complied with generally accepted accounting practice and were able to be audited under the Companies Act 1993.
(b)was obliged to ensure financial statements were completed within five months of the balance date of the Company under the Financial Reporting Act 1993, and obliged to sign and date said financial statements.
[33] Nor can it be disputed that the relevant accounting records were required to contain:12
11 Although KPI was not trading during the post 2008 period, it did not qualify as a non-active entity and did not declare itself to be one. Its accounting and record-keeping obligations therefore continued.
12 Companies Act 1993, s 194(2) (prior to April 2014 amendment).
(a) entries of money received and spent each day, and what each transaction relates to;
(b) a record of the assets and liabilities of the Company;
(c) a record of goods bought and sold, identified by relevant invoices; (d) a record of stock held at the end of the financial year;
(e) a record of services provided and the relevant invoices.
[34] On the basis of the evidence before me I am satisfied that Mr Gifford failed to comply with the requirement to keep correct financial records under s 194(1)(a) of the Companies Act and ss 10 and 12 of the FRA 1993. In particular:
(a) the Company’s financial statements for the financial years ending
2004, 2005, 2006 and 2008 do not comply with generally accepted accounting practice and are unready for audit (in that they are not signed);
(b) there were no measures or systems between the financial year ending
2004 and the liquidation date tracking the Company’s financial position and performance, including the keeping of an asset register, inventory, invoices or any sale and purchase agreements;
(c) Mr Gifford failed to provide sufficient information to KPI’s accountant between the financial year ending 2009 and the liquidation date for the purpose of compiling financial statements; as a consequence, no financial statements were prepared from the financial year ending 2009 to the date of the liquidation in 2013;
(d)no audit was possible for the financial years ending 2009 through to the date of liquidation;
(e) there is no asset list or inventory for KPI as at the date of liquidation;
(f) as at the date of liquidation, the liquidators were unable to ascertain with reasonable accuracy (or complete an audit as to):
(i) KPI’s asset position;
(ii) whether any of its assets had been sold; or
(iii) if KPI had received valuable consideration for its assets. (g) Mr Gifford also:
(i) failed to record Fliway and SMC as creditors to the Company;
and
(ii)sold some of the Company’s assets to related parties by way of set-off without keeping records as to the dispositions and of the value obtained.
[35] Mr Jones said that the liquidation was impeded by the above acts or omissions in the following ways:
(a) the liquidators could not assess the director’s and shareholder’s
current account on a cost-effective and timely basis.
(b)they could not assess whether any transactions of the company were undervalue or voidable;
(c) they could not ascertain whether the company had any assets to realise, other than a $550.42 GST refund, which was put towards the liquidation costs.
Conclusions
[36] Based on Mr Jones’ evidence there can be little doubt that Mr Gifford’s
failure to comply with his obligations has:
(a) contributed to KPI’s inability to pay its due debts (in the sense that had the KPI’s financial position been clearer it would not have entered the transactions giving rise to the outstanding debts);
(b) resulted in substantial uncertainty as to KPI’s assets and liabilities;
and
(c) substantially impeded KPI’s orderly liquidation.
[37] In terms of possible defences under s 300(2), there is nothing before me to suggest that Mr Gifford took reasonable steps towards achieving compliance with the relevant record keeping requirements. Nor did he have any reasonable grounds to believe that a competent and reliable person was charged with the duty of seeing that proper accounting records were kept by the Company.
[38] Once that point is reached, there remains a question as to the extent of Mr Gifford’s liability. Section 300 provides the Court with a broad discretion to make a declaration that he is personally responsible for all or any part of the debts and other liabilities of the company.
[39] The matters relevant to the making of such an award were discussed in Mason v Lewis.13 There, the Court of Appeal highlighted three factors: causation, culpability and the duration of trading.14 These have been summarised in commentary as entailing:15
(a) Causation: Whether the action or inaction of a director or a former director has contributed to a failure to comply and to the financial position of the company.
13 Mason v Lewis [2006] 3 NZLR 225 (CA).
14 At [110].
15 Company Law (online looseleaf ed, Thompson Reuters) at [CA300.03].
(b) Culpability: The extent to which the failure to comply results from the actions or inactions of a director or former director. A punitive element is involved so as to deter laxity on the part of directors in the keeping of proper accounting records.
(c) Duration: The period over which the director or former director was responsible for the keeping of proper accounting records especially over the periods in which the debts were incurred which directly or indirectly led to the company’s insolvency.
[40] It follows from what I have already said that I consider that Mr Gifford essentially bears sole responsibility for the record-keeping failures in this case and for the impact of those failures on the state of the company and on the liquidation. While his statement of defence suggests that he believed that KPI had “ceased trading” in 2008, his own actions are not consistent with that view. Rather, the evidence suggests that he took little if any care in terms of the relationship between KPI and KPINZ and, it seems, regarded them as interchangeable, from 2008 up until the date of liquidation. When he did choose to treat them as discrete entities (for example in relation to the lease of KPI’s assets to KPINZ) he failed properly to record or account for that transaction. There is no evidence to suggest that he sought or obtained appropriate accounting or legal advice.
[41] Accordingly it is my view Mr Gifford should be liable for the entirety of the debts owed to Fliway, SMC and the Commissioner accordingly.
The liquidators’ fees
[42] In seeking an order that Mr Gifford is also liable to meet their net fees and disbursements in the liquidation of $68,415.50 (which sum excludes legal fees) the plaintiffs principally rely on three decisions: Richard Geewiz Gee Consultants Ltd (in liq) v Gee;16 Madsen-Ries v Petera;17 and Grant v Guo. 18
[43] In Richard Geewiz Gee Consultants Ltd (in liq) v Gee (which was not a s 300 case) Brown J held that a director breaching his duties should pay compensation for the amount of the costs and disbursements incurred in the liquidation, but not costs
related to the litigation.
16 Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [122]–[126].
17 Madsen-Ries v Petera [2015] NZHC 538 at [112].
18 Grant v Guo [2015] NZHC 2480, [2015] NZAR 1585 at [54].
[44] In Madsen-Ries v Petera Lang J did not consider that a director should be liable to meet the general costs of the liquidation “unless there is a link between the incurring of those costs and the director’s conduct.”19 That case concerned directors whose poor record keeping had required the liquidators to incur expense in reconstructing books of account. In the course of his reasoning Lang J quoted from Madsen-Ries v Twine, in which Gilbert J had said:20
[10] The question of whether compensation should also be ordered in relation to the liquidators’ costs in undertaking the liquidation is less straight-forward. Such costs may well be recoverable in a case where, for example, liquidators have been required to incur expense in reconstructing books of account because the directors failed to keep proper records in breach of their duty to do so. However, that is not the situation here. In this case, the directors ought to have ceased trading by early 2008, if not earlier. But it is not clear from the evidence that the costs incurred by the liquidators in carrying out the liquidation would have been any less if they had been appointed earlier. The liquidators would still have had to realise the company's assets for the benefit of creditors and take all other steps required in any liquidation. It appears that a significant part of the liquidators' costs were incurred in preparing the present proceeding. Such costs are not normally recoverable. For these reasons, I am not persuaded that an order requiring the directors to meet the costs of the liquidation is appropriate in this case.
[45] Lang J then went on to express his agreement with Gilbert J, that some causative link between the breach of s 300 (or s 301) and the relevant costs is required. He said that because he was not persuaded that Mr and Mrs Petera’s actions caused an otherwise healthy company to fail and so he was not prepared to require them to meet the general costs of the liquidation. He had noted earlier in his judgment that the liquidators had failed to adduce evidence regarding the costs specifically attributable to the reconstruction of the company’s affairs.21
[46] And in Grant, after referring both to Gee and Petera, Woolford J followed the approach of Lang and Gilbert JJ and (on the facts of that case) held that the director was not only liable for all the company’s debts under s 300 but should meet all of the liquidation costs, totalling over $76,000. In doing so he noted that not only were
substantial costs incurred by Ms Guo’s poor record-keeping and failure to co-operate
19 Madsen-Ries v Petera, above n 17, at [112].
20 Madsen-Ries v Twine [2015] NZHC 227.
21 Madsen-Ries v Petera, above n 17, at [107].
with the liquidators, but liquidation may not have occurred at all if Ms Guo knew of
the company’s actual financial position earlier.
Analysis
[47] It necessarily follows from my earlier conclusions that Mr Gifford’s actions and inactions have been causative of avoidable costs in the liquidation. The present falls within the type of case in which an order requiring him to meet those costs might be made. But the liquidators nonetheless face certain hurdles.
[48] In particular, although the liquidators have adduced into evidence their time records in relation to the liquidation, I am reluctant to hold that Mr Gifford should be liable for the costs of the liquidation in its entirety. Although I accept that, as at
2008, KPI seems to have been a profitable company with valuable assets I am not sure that it is fair simply to draw conclusions based on a comparison of its position then with its position now. KPI’s fate was (rightly or wrongly) inextricably linked to that of KPINZ and KPINZ, too, has since gone into liquidation. In the absence of information about the circumstances of that company and what has led to its effective demise, I am not prepared to conclude that responsibility for KPI’s liquidation is to be laid entirely at the door of Mr Gifford’s woeful record keeping.
[49] In light of that conclusion it then becomes necessary to ask what portion of the costs of the liquidation could fairly be said to have been caused by Mr Gifford’s s 300 defaults. It is not possible for me to ascertain from the records produced precisely which specific items are attributable to the work required as a result of them. But in light of my more general view of the matter I would be prepared to accept that over 50 per cent of those costs are properly so attributable.
[50] The other matter which, in my view, is supportive of the Court declining to permit full recovery of the liquidators’ costs from Mr Gifford is simply the point that adopting that approach provides no incentive to liquidators to ensure that they conduct liquidations such as the present in a cost-effective manner. Notwithstanding the challenges that were undoubtedly presented by Mr Gifford’s non-existent record-keeping, the liquidation is does not strike me as an overly complex. The two
principal creditors were identified right at the outset; only one other was identified. The evidence suggests that Mr Gifford was largely cooperative in the process.
[51] So for the reasons I have given, I am not prepared to make an order permitting the liquidators to recover all of the claimed costs of the liquidation from Mr Gifford. My approach is necessarily a broad brush one. In my view an order that he pay $45,000 is warranted.
Orders
[52] For the reasons I have given I make a declaration under s 300(1)(b) of the Companies Act that Mr Gifford is personally responsible without limitation of liability for all the debts of KPI. I therefore enter judgment in favour of the plaintiffs against Mr Gifford in the sum of $87,009.40. In addition, I order that Mr Gifford pay the plaintiffs a proportion of their net fees and disbursements in the liquidation, being $45,000.
[53] The plaintiffs sought interest on those sums pursuant to s 87 of the Judicature Act 1908. That section has been repealed as of 1 January 2018,22 but continues to apply to proceedings commenced before that date.23 Accordingly I make an order that interest shall run on the $87,009.40 at the prescribed former Judicature Act rate from the date upon which the company was placed in liquidation until the date of this judgment. I decline to make any order for interest in relation to the costs of the liquidation.
[54] The plaintiffs are also entitled to their costs on a 2B basis.
Rebecca Ellis J
22 Senior Courts Act 2016, ss 182(4) and 2(2)(b).
23 Pursuant to cl 1 of sch 1 of the Interest on Money Claims Act 2016.
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