Independent Carpets Limited (in liquidation) v Carpet Call 2000 NZ Limited
[2020] NZHC 2757
•20 October 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-560
[2020] NZHC 2757
BETWEEN INDEPENDENT CARPETS LIMITED (IN LIQUIDATION)
First PlaintiffAND
VIVIAN JUDITH MADSEN-RIES AND DAVID SEAN WEBB (AS LIQUIDATORS OF INDEPENDENT CARPETS LIMITED)
Second Plaintiffs
AND
CARPET CALL 2000 NZ LIMITED
First Defendant
AND
DAVID WAUGH
Second Defendant
Hearing: 5 August 2020 Appearances:
P Shackleton and A Tumahai for the First and Second Plantiffs
Judgment:
20 October 2020
JUDGMENT OF HINTON J
[By Way of Formal Proof]
This judgment was delivered by me on 20 October 2020 at 4:30 pm pursuant to Rule 11.5 of the High Court Rules
…………………………………………………………………… Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland
INDEPENDENT CARPETS LIMITED (IN LIQUIDATION) v CARPET CALL 2000 NZ LIMITED) [2020] NZHC 2757
[1] Independent Carpets Ltd (ICL) was put into liquidation on 15 November 2019, owing a significant amount in unpaid tax to the Inland Revenue Department (IRD).
[2] ICL and its liquidators say the tax liability arose as a result of a second company, the first defendant Carpet Call 2000 NZ Ltd, defaulting on its obligations under a contract with ICL. They claim damages from Carpet Call for breach of contract in the same sum as the tax liability.
[3] They also claim compensation for breaches of duty under the Companies Act 1993 (the Act) from Mr Waugh, the sole director and shareholder of ICL, on the basis that:
(a)in entering into and pursuing the alleged contract with Carpet Call on behalf of ICL he breached duties owed to ICL; and
(b)he failed to ensure adequate financial records were prepared in respect of ICL’s business, and this increased the liquidator’s costs.
Manner of Proceeding
[4] The plaintiffs’ statement of claim was filed on 7 April 2020. The defendants were served on 20 May 2020.
[5] No statement of defence has been filed and the matter has been set down for formal proof.
[6] Pursuant to r 15.9(4) of the High Court Rules, the plaintiffs must establish to my satisfaction the causes of action relied on, and so far as damages are sought, provide sufficient information to enable me to calculate and fix those damages.
[7] Although the written submissions gave the impression the claim in contract was straightforward, it became apparent at the hearing on 5 August 2020 that it was not. In addition there were issues over hearsay evidence and other questions that needed clarifying. I therefore allowed the plaintiffs time to file further written submissions clarifying these points. These were filed on 18 August. Also, for the
reasons set out at [16] below, it was necessary for me on 29 September 2020 to invite further submissions on the plaintiffs’ claim under s 136 of the Act. These were filed on 2 October 2020.
Background
[8] The following is taken from the affidavit of Ms Masden-Ries, one of ICL’s liquidators, filed in support of the plaintiffs’ claim. Ms Masden-Ries deposes to the liquidators’ investigation of ICL’s affairs, and annexes relevant documents. The plaintiffs rely exclusively on her affidavit and annexures in seeking to discharge their evidentiary obligations under r 15.9(4).
[9] ICL was incorporated in 1998. It traded first, as its name suggests, as a carpet retailer.
[10] The plaintiffs contend that at some point between 2002 and 2004, Mr Waugh for ICL and Mr Neate as a director of Carpet Call entered into a verbal contract, the material terms of which were:
(a)ICL would cease trading as a carpet retailer and start operating solely as a supplier of labour;
(b)ICL would employ individuals previously contracted by it as carpet installers and act as the ‘employer of record’ with the IRD;
(c)those employees would work exclusively for Carpet Call and report directly to Mr Neate;
(d)as ‘employer of record’, ICL would calculate any required payments to be made to the employees and in respect of PAYE;
(e)instead of ICL making the actual employee/PAYE payments Carpet Call would make these payments. This would be achieved by Mr Neate (of Carpet Call) authorising Mr Waugh (of ICL) to make direct debits from Carpet Call’s bank account.
[11] No written documents recording the terms of the pleaded contract have been produced in evidence.
[12] Ms Masden-Ries examined on oath1 both Mr Waugh and a Mr Hampton, who was Carpet Call’s external accountant when ICL went into liquidation. There are some indications Mr Hampton may also have provided accounting services to ICL, but he sought to minimise any involvement on his part in ICL’s business. Based on these examinations, and the liquidators’ other investigations, Ms Masden-Ries deposes that:
(a)ICL received no benefit from the pleaded contract, nor did Mr Waugh receive a salary despite apparently working full-time for ICL performing administrative tasks in respect of the company’s staff. Carpet Call appears to have made some modest contributions towards Mr Waugh’s obligations under his personal mortgage. The frequency and amount of these payments is not the subject of evidence.
(b)From the time the pleaded contract was entered into until ICL was placed into liquidation, ICL was a shell, entirely dependent on Carpet Call to meet payments to the “employees” and any obligations to the IRD. There is no evidence ICL ‘traded’ in any conventional sense during this period. Nor did it, at least from 2007, operate any bank accounts.
(c)From about 31 December 2015, ICL started to default in making payments to the IRD, which Ms Masden-Ries says appears to be the result of Carpet Call’s not having enough cash on hand to allow Mr Waugh to make the payments.
(d)ICL’s tax arrears continued to accrue until the company was placed into liquidation on 15 November 2019 on the application of the IRD.
(e)As of 15 November 2019, ICL had no assets but had a debt to the IRD of $191,259.54, being the sole proof filed in the ICL liquidation.
1 See Companies Act 1993, ss 261 and 265.
Causes of Action
[13]The plaintiffs’ claim can be sensibly broken into three parts.
[14] First, ICL claims that from about 31 December 2015 Carpet Call was in breach of the pleaded oral contract. The essence of the allegation is that Carpet Call failed to make available to ICL sufficient funds to allow the payments to be made to Inland Revenue in respect of ICL’s employees, producing the tax arrears noted above.
[15] Second, both plaintiffs claim that Mr Waugh breached his duties owed to the company as a director under ss 131, 135, and 137 of the Companies Act 1993 (the Act). The allegation under this heading, in summary, is that Mr Waugh entered into the contract with Carpet Call on ICL’s behalf for his own benefit, or at least not that of the company, and then allowed the contract to continue even when it became clear the tax liability would continue to increase, to the prejudice of the IRD.
[16] The plaintiffs also advance a claim against Mr Waugh under s 136 of the Act. At the hearing on 5 August 2020, they sought that consideration of that claim be adjourned pending delivery of the Supreme Court’s decision in Debut Homes Ltd (in liq) v Cooper.2 Mr Shackleton responsibly accepted that a two-part formal proof was an undesirable manner of proceeding and that either the formal proof hearing as a whole should be adjourned, or the s 136 claim abandoned. As a result, Mr Shackleton obtained instructions to abandon the plaintiffs’ claim under s 136 at the outset of the hearing. Subsequently, on 24 September 2020, the Supreme Court delivered its decision in Debut Homes. As a result, by Minute dated 29 September 2020, I invited the plaintiffs to consider whether they wished to reinstate their claim under s 136. I directed that, if so, counsel was to file further submissions with regard to the application of Debut Homes to the s 136 claim, and otherwise if relevant. By memorandum dated 2 October 2020, Mr Shackleton advised that the plaintiffs were reinstating their claim under s 136 and filed further submissions.
2 Debut Homes Ltd (in liq) v Cooper [2018] NZHC 453, (2018) 12 NZCLC 98-059; reversed in part [2019] NZCA 39, [2019] 3 NZLR 57; leave granted [2019] NZSC 39; appeal allowed [2020] NZSC 100.
[17] Third, both plaintiffs say that, contrary to s 194 of the Act, Mr Waugh failed to ensure that adequate accounting records were kept and also, contrary to s 201, failed to ensure that compliant financial statements were prepared. They say this impeded the orderly liquidation of the company and Mr Waugh should be made to contribute to the additional costs of the liquidation caused by these failures.
[18] In their statement of claim, the plaintiffs also alleged Mr Waugh’s claimed failures with respect to accounting records and financial statements contributed to the company’s inability to pay its debts and asked that he be held personally liable for part of the debts of the company on that basis. I would not have considered the plaintiffs demonstrated any of Mr Waugh’s alleged accounting failings actually caused the company’s losses and at the formal proof hearing, counsel for the plaintiffs argued only for the claimed contribution towards the costs of the liquidation. I therefore approach the third cause of action in its narrower form. This makes no difference to the end result.
Hearsay Issue
[19] As noted, the plaintiffs rely exclusively on Ms Masden-Ries’ affidavit and the documents annexed thereto in seeking to discharge their evidentiary obligations. These annexures include, materially, transcripts of Ms Masden-Ries’ examinations on oath of Mr Waugh and Mr Hampton and copies of two emails sent by Mr Neate to the liquidators in response to questions about the alleged contract.
[20] The plaintiffs seek to rely on statements made by Mr Waugh and Mr Hampton during the examinations as recorded in the transcripts and Mr Neate’s statements in his emails in order to evidence the existence, terms, and operation of the pleaded oral contract between ICL and Carpet Call.
[21] These are all hearsay statements.3 The statements are therefore inadmissible unless one of the exceptions found in the Evidence Act 2006 apply.4
3 Evidence Act 2006, s 4 definitions of “hearsay statement” and “witness”.
4 Section 17.
[22] In his post-hearing submissions addressing the hearsay issue, Mr Shackleton seeks to rely on the general exception found in s 18(1) of the Evidence Act 2006.5 The effect of that exception is that the statements on which the plaintiffs seek to rely are admissible if the circumstances relating to the making of the statements provide reasonable assurance that the statements are reliable6 and that undue expense or delay would be required if the makers of the statements were required to be witnesses.
[23] So far as Mr Waugh and Mr Hampton’s statements are concerned, I note they were made during examinations conducted under oath that were recorded and transcribed and convened after they had engaged in initial conversations with the liquidators. I agree with Mr Shackleton this means the statements have very likely been accurately reported. Furthermore, it is likely the statements were deliberate, considered, and made with the benefit of preparation. This speaks to the reliability of the statements. The veracity of the statements is further reinforced by the fact Mr Waugh and Mr Hampton were subject to the pain and penalty of perjury in making them.7 The statements are also consistent with Ms Masden-Ries’ evidence as to the company’s operation as gleaned from the liquidators’ investigation. Moreover, in Mr Waugh’s case, the statements made by him are clearly contrary to Mr Waugh’s own interests.
[24] Having regard to the circumstances in which Mr Waugh and Mr Hampton’s statements were made, I am reasonably assured as to the reliability of these statements. This, I note, was the same conclusion arrived at by Courtney J in respect of statements made in similar circumstances in Capital Hospital Holdings Ltd (in liq, ex parte Grant) v Pandey,8 to which Mr Shackleton referred me.
[25] I am not so assured however as to the reliability of Mr Neate’s statements in his emails to the liquidators. His statements are consistent with Ms Madsen-Ries’ evidence as to the affairs of ICL, and also appear to have been carefully considered.
5 The exception in s 18(1) is subject to the provisions of ss 20 and 22: s 18(2). Neither of those provisions is relevant here.
6 An inclusive definition of the meaning of “the circumstances” related to the making of a hearsay statement is given in s 16(1).
7 See generally, as to the meaning of “the veracity of the person” for the purposes of s 16(2) of the Evidence Act 2006, R v Shortland [2007] NZCA 37 at [43] and [44].
8 Capital Hospital Holdings Ltd (in liq, ex parte Grant) v Pandey [2013] NZHC 3330 at [9]-[13].
They were not however given by him under oath. For that reason I am less assured of their veracity. I therefore do not take into account Mr Neate’s statements. I note they do not appear to be particularly material in any case.
[26] As to whether undue expense or delay would be caused if Mr Waugh and Mr Hampton were to be required as witnesses, I note that Courtney J in Capital Hospital Holdings was satisfied that was the case in respect of the former director whose statements were in issue there. The Judge considered that the liquidators had been “put to considerable unnecessary expense already” as a consequence of the other party’s unmeritorious opposition to the liquidators’ applications,9 and that requiring evidence from the former director would only cause further delay.
[27] The position here is obviously somewhat different. There has been no opposition, unmeritorious or otherwise. Nonetheless, I agree with Mr Shackleton that little benefit would be gained in “all the particular circumstances”10 of this proceeding from requiring Mr Waugh or Mr Hampton to give evidence. They would either co- operate, in which case they would presumably volunteer the same evidence already given on oath, or alternatively the liquidators would need to rely on r 9.75 to compel them to make affidavits and then, if necessary, obtain directions for oral evidence pursuant to r 15.9(5). That would obviously significantly delay the resolution of the proceeding. It would also involve considerable additional expense, which would be disproportionate to the meagre advantages likely to be obtained in terms of the quality of the evidence.11 Also both Mr Waugh and Carpet Call have been served with the proceedings, are on notice that the liquidators rely on the statements made, and have taken no steps in opposition.
[28] For these reasons, I determine that Mr Waugh and Mr Hampton’s hearsay statements in their examinations under oath, as recorded in the transcripts annexed to Ms Madsen-Ries’ affidavit, are admissible.
9 At [12].
10 See Harte v Wood [2004] 1 NZLR 526 (CA) at [33].
11 See R v Horncastle [2009] UKSC 14, [2010] 2 WLR 47 at [21].
Breach of Contract
[29] As noted, the contract as pleaded is not in writing, nor are there relevant admissible documents. The primary evidence relied upon is the hearsay statements of Mr Waugh and Mr Hampton, the key parts of which I set out below, taken from the transcript of the examinations under oath by Ms Masden-Ries and Ms Choun of Mr Waugh and Mr Hampton (described as “Vivian”, “Kathleen”, “David”, and “Gerald” respectively in the transcript).
[30]As to the nature of the alleged contract, Mr Waugh said:
Vivien:When did [Independent Carpets] cease trading as a retailer of carpet?
David: Probably about 15 years ago. It traded for a couple of years. […]
Vivien: Then you’re saying things changed, you got closer? David: Yeah.
Vivien: There was a decision made that …
David: At some point, I can’t remember when, but made that we’d take [Carpet Call’s employees] on as official PAYE workers under the umbrella Independent Carpets Limited.
[…]
Vivien: Why did it cease? Did it sell its business or did it just close its doors?
David:No, everything gets difficult after a while but, at that stage, there was another company that I became associated with which is Carpet Call. Because I was doing the wage thing for Independent Carpets and they were contractors, basically at that point, because it was just a general meeting between us. I had the premises, they had layers, that it took onboard as a contract type situation, it was only verbal and I looked after it obviously for quite a few years. It’s only the last few years that things have got really difficult, really difficult.
[…]
David: It was just a general agreement between Carpet Call and Independent Carpets at the time, when they came onboard. We agreed between us, that’s the way we’ll do it.
Vivien: There’s actually two companies that have got very similar names, there’s Carpet Call 2000 NZ Limited and Carpet Call NZ 2000 Limited, which one are we talking about? Peter Neate is the director of both of them.
David: Yes I think it’s Carpet Call 2000 NZ Limited. […]
Vivien: You said it was just a verbal arrangement? David: That’s correct.
Vivien: Nothing in writing? David: No.
[…]
David: It was between Peter Neate and myself.
Vivien: You were the two people that came to the arrangement?
David: Yes, he’s the principal of Carpet Call and I was the principal of Independent Carpets.
[…]
Kathleen: Had you known Peter [Neate] for some time before entering to this agreement?
David:I’d known him for quite a while, yes. But I didn’t have much to do with him prior to that. I knew him probably the past 30 years but we became closer as far as the business side of things about 2000, somewhere round the time that Independent Carpets was formed.
[31] When asked as to why he and Mr Neate concluded this arrangement, Mr Waugh’s answers were vague:
Kathleen: What about your remuneration? Were you getting a salary through Independent Carpets or Carpet Call?
David: No I don’t have a salary from either of them and as a Director I probably should’ve have drawing or something at some stage but haven’t had any of those for probably more than 10 years.
Kathleen: How were you getting any money for your living? David: I’m on the pension.
Kathleen: You didn’t get paid through Carpet Court or Independent Carpets either by way of salary or drawings?
David: No.
Kathleen: What was the benefit in your agreeing to this arrangement[…]?
David:But I did have a mortgage to service and the company is paying the mortgage. Not Independent Carpets, Carpet Call. It’s not much but that’s what it was doing.
[32]As to the operation of the agreement, Mr Waugh said:
David: When we decided to get a bit closer and I pulled Independent Carpets direct one-to-one selling with the public, and Peter [Neate] did it through Carpet Call, he did everything through Carpet Call, decided at that point in time we’d continue on with the way that we had been paying the PAYE which was streamed in principally as a trades account. But then a bit later on it was changed to a direct payment system. I looked after all the PAYE as far as working out what was due and arranging for payments to be made.
[…]
Kathleen: In terms of the agreement that you entered into with Peter Neate, because it was all verbal, what assurance did you get that Carpet Call would keep paying all the employees, that Independent Carpets was hiring for its benefit?
David:They hired the people on the strength of Carpet Call […] When we agreed that somebody would come on board, then we would include them in the books of Independent Carpets and tell them that they were employed by Independent Carpets. Any of the literature that they got was always on Independent Carpets Limited letterhead.
Kathleen: The only assurance that Independent Carpets had that Carpet Call would fulfil its end of the bargain of paying these employees is that you want to retain good people?
David:Yep, generally it was just a verbal agreement between the two of us.
[…]
Vivien: Would you then tell Peter that there was X amount of dollars required in order to pay employees?
David:Either that or it was set up with an AP form for them through [Carpet Call].
Vivien: Did [ICL] invoice Peter’s company, Carpet Call for the gross wages?
David:No, all they did was it was recorded in all the records of what was taking place.
Vivien:The employees would receive their net amount of wages into their bank accounts or cash. Let’s talk about bank accounts first. Whose bank account would pay the employees wages?
David: Carpet Call would pay the wages for those which were on automatic payment.
Vivien: And those that were getting cash?
David:Peter would have to organise that and I would have to tell him what was due. […]
Vivien: You were calculating […] the PAYE that was due? David: That’s right.
[…]
Vivien:As I understand it, you were pretty reliable in completing the PAYE returns up until about May 2019.
David: Yeah […] […]
Vivien:What was the arrangement that caused Independent Carp to be filing or to have PAYE liabilities with Inland Revenue?
David: The contractors – the Carpet Call – I was doing the PAYE on their behalf but it was being paid from their account. If they didn’t have sufficient funds at the time, then I would note it and it was hoped that it would be caught up.
[…]
Vivien:[…] How would you communicate with Carpet Call about the amount required to pay the PAYE?
David:I’d just tell them that’s what it was and that it was going to be paid.
Vivien: What would normally happen?
David:Payment would be made, the same way we would pay any bill. You can go online, that part I understand, you can tick out the specific Inland Revenue thing that you’ve gotta pay to and just follow a process on it […]
[…]
Vivien:When PAYE was due to be paid, how did you assess whether or not to make the payment?
David:It was just a transaction online; you don’t have to have a signature to do it.
Vivien: You’ve got a password to get into Carpet Call’s internet banking? David: Yes, somewhere I have.
[33] The examination turned to the tax arrears that resulted in Independent Carpets being placed into liquidation:
Vivien: [The payment of PAYE obviously] didn’t happen every month though, did it, because the statement of account that we’ve been looking at […] shows that there is quite a few months when PAYE wasn’t paid. What would happen in those months? What went wrong?
David: You’d have to say that it was probably due to cash being tight. Vivien: Carpet Call not having enough cash to pay Independent Carpets? David: Carpet Call not having enough cash […]
[…]
Kathleen: Who was the one who said, “Let’s not pay the PAYE?” David: Probably my decision.
Kathleen: Your decision
David: Yeah, I made that.
Kathleen: Why did you decide to do that?
David:Because I probably thought the next week it would be resolved but it never got resolved in some cases.
Kathleen: You said to Peter, “Don’t worry about paying the PAYE, I’m happy for it not to be paid?
David:No, I didn’t discuss it with Peter, that was part of the problem. As I say, put my hand up and I say the problem arose because of the decisions I made, unfortunately.
[…]
Vivien:When a PAYE needs to be made, you could obviously log into the bank account and see how much money was there. How did you make a decision whether or not to pay or, more importantly, when not to pay? Were you aware of their cashflow situation or what their overdraft was? How did you know not to pay, that there wasn’t enough cash to pay?
David:I was aware of the amount of business that they were putting through and I was aware of forecasts of some of the money coming in. Whether it happened or not was another situation but
I tried to make judgements based on that: if it wasn’t available then and there, could it be done the following week sort of thing.
Vivien: You didn’t talk to Peter?
David:Not all the time cos he’s out and about, he’s selling, he’s laying, he’s everywhere. But at the same time we’re still trying to keep the place turning over.
[34] Mr Waugh was asked further about what steps, if any, he took to pursue payment of the PAYE owing by Carpet Call:
Kathleen:What was your thinking at the time when the debt was increasing in Independent Carpets? What was your thinking in terms of how am I gonna resolve this? Where am I gonna get the money from? Quite clearly, the money needed to come from Carpet Call, what was going through your mind at the time?
David: Quite honestly, I dunno and I don’t recall. There comes a certain point where you can push something to one side and consider it’s not there when, in fact, it is there and it’s staring you in the face […]
[…]
Kathleen: If Carpet Call was the one who was supposed to ultimately pay these PAYE amounts, I would think that at some point you would have said to Peter, “I’m racking up debt here with Inland Revenue; Carpet Call needs to help pay some of this money.” Did that conversation ever happen?
David: Not in the short term, no it didn’t. Kathleen: It didn’t happen at all?
David:No. Peter became aware of it when Independent Carpets was placed in liquidation. That was the first that he knew of it.
[35] Mr Hampton made corroborative statements regarding the features and operation of the arrangement:
Kathleen: What do you know about Independent Carpets?
Gerald: It is a company owned by a David Waugh. It operates within the same premises as Carpet Call. They operate in the same office and, therefore, when I’ve been in that office on behalf of Carpet Call I’ve been aware that things are happening for Independent Carpets but I have no knowledge of their business.
[…]
Gerald:My understanding is that Carpet Call employed staff for their carpet laying business. Independent Carpets acted as employer of record with Inland Revenue to record the PAYE and wage details.
[…]
Gerald:[…] The staff were paid direct by Carpet Call. PAYE, when paid, was paid direct by Carpet Call but the records were maintained by Independent Carpets pursuant to that “agreement” that existed between the shareholder of that company and the shareholder of that company
[…]
Vivien: Do you recall why that arrangement was put in place?
Gerald: No.My understanding was they were concerned that at some time, “they” being Carpet Call, was concerned that at some time they may get into industrial strife or strife over employment agreements that could result in a debt or a liability that could cause Carpet Call to go into liquidation. So therefore they tried to box their liabilities by keeping the records for IRD under Independent Carpets Limited but I do not believe it was an attempt to avoid or evade paying a PAYE tax. It was just an attempt to avoid getting into labour disputes that could affect the business of the company.
Vivien: That’s not uncommon. What is a little bit unusual is that normally the company that holds the employees would be somehow related to the trading company that’s using the employees. […] Do you know why the choice was made to use Independent Carpets as the employee holding company?
Gerald:I wouldn’t use the word “holding company”. I just believe it was the recording company because David had experienced or had previously employed staff […]
[…]
Vivien:What was in this for Independent Carpets or David? What could they get in return for being this …
Gerald: Nothing, there was no remuneration or benefit […] that I’m aware of […]
[…]
Vivien: So you’re saying that you were not aware of Independent Carpets’ debt to Inland Revenue prior to the liquidation?
Gerald: Correct. […]
Gerald: […]I’ve never done any accounting work for [Independent Carpets] as you pretty much already know and that’s possibly where this confusion arises in your mind that although I don’t act for Independent Carpets, through my acting for or being employed by Carpet Call and because of the close association that we all work in an office smaller than this that you hear and overhear things […]
[…]
Kathleen: You never discussed with David the preparation of any of those returns?
Gerald:No. He prepared the returns […] I’ve not accrued in the accounts of Carpet Call liability for penalty interest but […] In my opinion, I believe Carpet Call is liable for the payment of these PAYE payments, not Independent Carpets and I think on behalf of Carpet Call I might examine or get instructions to talk to you […]
[36] The pleaded contract, set out at paragraph [10] above, as is clear from the above excerpts, made no apparent commercial sense from the perspective of ICL. There did not seem to be any financial advantage flowing to ICL. Even ICL’s shareholder and director Mr Waugh obtained no wages for his role in administering the employees’ tax arrangements, obtaining instead apparently minor contributions from Carpet Call towards his personal mortgage obligations.
[37] The evidence as to the terms of the contract cannot be described as crystal clear, but reading it in totality, along with the fact that the employee wages and PAYE were in fact paid by Carpet Call (Mr Waugh acting as its agent) for a number of years, I conclude that there was a verbal contract as pleaded.
[38] I note that prior to liquidation, ICL made no claim against Carpet Call for failing to “pay” the IRD. In fact, Mr Waugh seems to take the blame for the non- payment by Carpet Call of tax and says he kept relevant details from Mr Neate, director of the party now alleged to be in default. While I do not consider the evidence is such as to conclude that ICL/Mr Waugh caused the breach (in which case it would be inactionable) or that Carpet Call could rely on arguments of estoppel or waiver (which in any event it does not assert), I do consider on the evidence that ICL would have no claim for interest until the date of demand by the liquidators, being 13 December 2019. Interestingly, that is the basis on which the liquidators calculate their entitlement to an award of interest under this heading.
[39] It follows that the plaintiffs have established the pleaded breach of contract, but with liability for interest flowing only from the date of demand by the liquidators.
Breach of Directors’ Duties
[40] I turn then to address the claim in respect of directors’ duties, which more comfortably arise on the facts. The plaintiffs say Mr Waugh breached the duties he owed to ICL as its sole director under ss 131, 135, and 137 of the Act. The plaintiffs say I should order him to compensate the company in respect of losses sustained as a consequence of those breaches.
Section 131
[41] Section 131 of the Act provides that 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.12
[42] The duty is subjective, in that it is focused on the director’s actual beliefs.13 However, a director cannot, as a matter of fact, “subjectively believe they are acting in the best interests of the company if they have failed to consider the interests of the company or, where required, the interests of all of the creditors”.14 The same is arguably true in respect of a director whose decision is “distorted by a conflict of interest”15, or whose decision can be described as irrational.16
[43] One implication of this duty is that a director must not put his or her own interests, or those of a third party, ahead of the company’s interests.17 Where a company is insolvent, near insolvent, or doubtfully solvent, its interests include the
12 This duty is subject to certain qualifications (found in ss 131(2)-(4)) that do not apply here.
13 Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [111], overruling Sojourner v Robb [2006] 3 NZLR 808 (HC) at [107].
14 At [114].
15 At [114] fn 131.
16 At [113(d)].
17 At [113(b)], [114], and [177]. See also Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11
NZCLC 98-024 at [55].
interests of its creditors, such that its best interests include discharging its obligations to its creditors before benefitting its shareholders.18
[44] The plaintiffs say that, as ICL received no benefit for the services it provided to Carpet Call, there is no way that Mr Waugh could have honestly thought it was in ICL’s best interests to have continued to incur tax liabilities from late 2015 onwards. Mr Shackleton submits that it would have been clear to Mr Waugh from that time that Carpet Call was unlikely to have sufficient funds available for ICL’s tax obligations to be met. As ICL had no source of funds available other than Carpet Call, counsel submits, it would have been an inescapable conclusion on Mr Waugh’s part that continuing with the arrangement, thereby increasing its tax arrears, would be to the unavoidable prejudice of the IRD as a creditor of the company. Mr Waugh, they say, failed to act in good faith by not resiling from the arrangement with Carpet Call,19 and by not making the necessary transfers from Carpet Call’s account to the Inland Revenue where that was at all possible.
[45] Mr Waugh was motivated to do this, the plaintiffs say, because Carpet Call was making mortgage payments on his behalf, meaning he put his personal interests before those of the company. The evidence as to amount and frequency of these payments is unclear. I do not have the impression from the evidence that those payments were particularly material to Mr Waugh or motivated his actions.
[46] Certainly, the evidence on this point is much less clear than it was in FAF Holdings Ltd (in liq) v Bethune, to which case Mr Shackleton referred me at length. There, it was clear that, from March or April 2013 onwards, Mr Bethune had allowed FAF, his payroll company, to incur increasingly large tax arrears in an attempt to provide bridging finance to another one of his controlled companies, Town Ball. This helped avoid Town Ball being obliged to break a lease. Mr Bethune had personally guaranteed Town Ball’s obligations under that lease.20 As a consequence, Woodhouse
18 At [31], approving Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 250 per Cooke J and 244 per Somers J; and Sojourner v Robb [2007] NZCA 493, [2008] 1 NZLR 751, [2008] NZCCLR 8 at [25]. See also at [113(b)], [114], and [177].
19 While, read literally, s 131 requires a director act in good faith, I agree with Woodhouse J that on a purpose interpretation this must include an obligation not to omit to act in good faith: FAF Holdings Ltd (in liq) v Bethune [2017] NZHC 2796, [2019] NZCCLR 6 at [109]-[111].
20 At [113]-[128].
J was satisfied that Mr Bethune had preferred his own interests, and the interests of Town Ball as a third party, over the interests of FAF, in breach of s 131.
[47] However, it is not necessary for me to be satisfied Mr Waugh has preferred his own interests in order to be satisfied he breached s 131. His statements to the liquidators make it clear he inappropriately preferred Carpet Call’s interests over those of ICL and its creditors. The arrangement was never in ICL’s interest and once the tax went into default Mr Waugh failed to either cancel or seek to enforce the agreement with Carpet Call. While the reasons for that omission are quite unclear, they clearly include his wish to not take any action that undermined Carpet Call. On Mr Waugh’s statements to Ms Masden-Ries and her staff, it appears he simply failed to consider altogether what was in the best interests of ICL and the IRD as its creditor.21 He clearly did not act in good faith or in what he believed to be ICL’s best interests.
[48]Accordingly, I am satisfied Mr Waugh breached his duty under s 131.
Section 135
[49]Section 135 of the Act provides, inter alia, that a director must not:
(a)agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
(b)cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[50] The focus under s 135 is the manner in which a company’s business is carried on. When a company “enters troubled financial waters” its directors are required to undertake an ongoing, sober, assessment as to the company’s likely future income. The directors must cease to trade if, on a suitably objective assessment, the company’s “modus operandi creates a substantial risk of serious loss.”22
21 Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [114].
22 FAF Holdings Ltd (in liq) v Bethune [2017] NZHC 2796, [2019] NZCCLR 6 at [131]-[133], citing
Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].
[51] For materially the same reasons I am satisfied Mr Waugh breached his obligations under s 131, I am also satisfied he breached his obligations under s 135.
[52] Because of the manner in which ICL’s affairs were structured pursuant to the arrangement between Mr Waugh and Mr Neate, ICL was entirely dependent on Carpet Call being able to make sufficient funds available to avoid causing any loss, or later any additional loss, to the IRD. Mr Waugh ought, from late December 2015, to have set aside his concern not to add to Carpet Call’s difficulties and started making the necessary sober assessment to avoid causing loss to ICL’s creditors, namely the IRD. The most obvious step would have been, if possible, to have sought to enforce the agreement. Alternatively, if Carpet Call was unable to provide enough funds to ensure the tax obligations could be satisfied, the only proper course of action was to cancel the agreement.23
[53] Mr Shackleton again refers to FAF Holdings Ltd. However, a point of distinction with that case is that there were certain periods after late 2015 during which PAYE payments were able to be made. In FAF Holdings Ltd, Town Ball had been a terminal case from the time it first ran into cashflow difficulties. Here, on the IRD summary of account exhibited to Ms Madsen-Ries’ affidavit, it appears that for at least some periods after the end of 2015, ICL did account in part for PAYE to Inland Revenue.
[54] That raises the question of whether, at least in respect of some of the period between late 2015 and the time the company was placed in liquidation in 2019, Mr Waugh could have reasonably concluded a reversal of Carpet Call’s fortunes was afoot, such that persevering with providing ‘services’ to Carpet Call might eventually have allowed the debt owing to the Commissioner to be repaid. Relevantly, it has been accepted elsewhere that a director is not obliged to cease trading as soon as insolvency is threatened if, on a suitably “sober assessment”, limited additional expenditure could allow insolvency to be avoided.24 Similarly, if Mr Waugh could have reasonably
23 Compare [134]-[135].
24 See Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC ¶96-964 (HC) at [125(3)], in which the equivalent provision of the 1955 Act was in issue. The Supreme Court in Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [69] fn 83 expressly left open the question of whether William Young J’s approach in that case was correct.
thought Carpet Call’s position would radically improve, maintaining the arrangement might have been an appropriate conclusion to reach after a sober assessment.
[55] Ultimately however, the available evidence tends to suggest there is no basis on which Mr Waugh could have reasonably concluded a reversal of Carpet Call’s financial position would have allowed ICL to keep ahead of its already, by 2017, considerable core debt to the Commissioner and the increasing interest burden associated with that debt. That is consistent with Mr Waugh’s own statements to the liquidators, in which he described the interest burden as punitive. The significant overall increase in the tax arrears from late 2015, through to the company being placed in liquidation in 2019, indicates that from at least some point in late 2018, and likely from some point in 2016 or 2017, Mr Waugh was failing in his continuing duty to undertake an appropriately sober assessment of the company’s position.
[56] For these reasons, I am satisfied Mr Waugh breached his duty under s 135. The fact there is some doubt as to the exact date that breach began is relevant to the assessment of quantum under s 301, which I address below.
Section 136
[57]Section 136 of the Act provides:
136Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
[58] Obligations, for the purposes of s 136, extends not only to voluntary incurred obligations, such as ICL’s contractual obligations with Carpet Call, but also to involuntary consequential obligations to creditors, such as those owed by ICL to the IRD.25 The relevant obligations here are those ICL incurred to the IRD.
[59] For much the same reasons that I am satisfied Mr Waugh breached his duties under ss 131 and 135, I am satisfied Mr Waugh acted in breach of his obligation under
25 Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [91], [96], and fn 104.
s 136. He continued to employ staff pursuant to the arrangement with Carpet Call, in respect of whom obligations to account for PAYE became due. In this sense, he agreed to ICL’s continuing to incur these obligations, pursuant to the arrangement with Carpet Call. He did not resile from that arrangement once Carpet Call’s inability to meet those obligations became obvious and then persistent. This in circumstances where ICL did not itself trade and had no assets and was therefore entirely reliant on Carpet Call to meet its obligations. As the accumulating debt to IRD grew, together with associated interest and penalties, in those circumstances, there was no way that Mr Waugh could have believed on reasonable grounds that ICL could meet its obligations to the IRD, let alone as they fell due. Moreover, on the available evidence, it appears Mr Waugh’s actually held belief was in fact quite the opposite, given his admission he did not make tax payments on ICL’s behalf because of Carpet Call’s difficulties.
[60]For these reasons, I am satisfied Mr Waugh breached his duty under s 136.
Section 137
[61]Section 137 of the Act provides, inter alia:
137Director’s duty of care
A director of a company, when exercising powers or performing duties as 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.
[…]
[62]The standard is objective.26 Accordingly, a director’s responsibilities under s
137 are not lessened by the director’s possessing more modest knowledge and experience than might ordinarily be expected of a director of a company of that type.27
26 At [112] and [112] fn 26; and Morgenstern v Jeffreys [2014] NZCA 449 at [89].
27 Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NHZC 1483 at [105].
However, the position of the director is relevant, and as follows the relevant standard here is that of “someone assuming responsibilities … as director of a relatively small trading business, without the opportunity for detached guidance from a board.”28
[63] The plaintiffs have not produced expert evidence as to what a reasonable director in Mr Waugh’s position would have done here. However it is clear from the arrangement entered into by Mr Waugh and his own statements to the liquidators that he simply did not consider how to properly administer ICL’s affairs from at least 2004 beyond deciding to pursue the arrangement with Carpet Call. As follows, he has failed to exercise care, diligence, and skill to even a minimal degree,29 and I am satisfied he breached his duty under s 137.
Relief – Section 301
[64]Section 301(1) of the Act provides, inter alia, that:
(1)If, in the course of the liquidation of a company, it appears to the court that […] a past or present director […] of the company, has […] 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 […],—
(a) […]
(b) order that person—
(i) […]
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
[65]The Court of Appeal in Mason v Lewis noted that:30
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.
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 […]
28 Boutique Tanneries (in liq) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008 at [31].
29 See FAF Holdings Ltd (in liq) v Bethune [2017] NZHC 2796, [2019] NZCCLR 6 at [154].
30 Mason v Lewis [2006] 3 NZLR 225 (CA) at [108]-[109], approved Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [158] fn 181 and [162].
[66] In Löwer v Traveller, the Court of Appeal had earlier addressed the concepts of causation and culpability as follows:31
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. In a case such as the present that involves an assessment of how much the liabilities of the company were increased because of the illegitimate delay in its ceasing to trade and the identification of a point in time when the director knew that continuing to trade would be reckless. The resulting figure however is no more than a relevant consideration for the Court although the amount of the director’s liability would not exceed the sum identified as caused by the known reckless trading.
[…]
The relevance of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of Mr Löwer’s conduct, bearing in mind that at one end of the range the nature of a director’s involvement will be blind faith or muddleheadedness, 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.
[67] Recently, the Supreme Court in Debut Homes Ltd (in liq) v Cooper approved the comments in Mason v Lewis, and Löwer v Traveller, confirming that “any redress under s 301 must be tailored towards the combination of breaches found”32, having regard to “all of the circumstances, including the nature of the breach, the level of culpability and what is required to hold a director to account.” It is not necessary here, as the IRD is ICL’s only creditor, to address the issues associated with directors who “rob Peter to pay Paul”.33
[68] In terms of causation, the structuring of ICL’s affairs means there is an unambiguous and proximate link between Mr Waugh’s not resiling from the arrangement with Carpet Call and the growth of the tax arrears. It is difficult to conceptualise a clearer causal relationship between breach and loss.
[69] The position in respect of duration and culpability is not quite as clear. On the available evidence it appears that for at least some periods of time between late 2015
31 Löwer v Traveller [2005] 3 NZLR 4379 (CA) at [79] and [83], approved Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [162] fn 187.
32 Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100 at [162].
33 See at [83]-[84], [94], [150], and [166].
and the point when the company was placed into liquidation in November 2019, ICL was able to make some limited inroads into its tax arrears as Carpet Call could make some funds available. However, even on the most favourable view of the available evidence the period of insolvent trading would have lasted for at least two years, and so longer even in the best case than the “long period” of eighteen months in issue in FAF Holdings.34
[70] Moreover, any lessening of Mr Waugh’s culpability is modest at most. From 2002-2004 onwards, Mr Waugh had elected to structure ICL’s affairs in such a way that, if Carpet Call failed to make payments, ICL would have no ability to meet any debts that would accrue. As noted during Mr Waugh’s examination, this was compounded by ICL and Carpet Call not being in common control. Nonetheless, it appears Mr Waugh was less concerned with fulfilling his duties to ICL than he was in avoiding causing further difficulty to Carpet Call. It is very difficult to understand his actions or his real motivation.
[71] For these reasons, I have arrived at the same conclusion in respect of Mr Waugh and ICL that Woodhouse J did in respect of Mr Bethune and FAF Holdings Ltd, namely that this:35
is not a case where the conduct of the director gives rise to reasonable arguments on both sides as to the extent to which the director’s defaults contributed to the loss. For all of the reasons recorded in this judgment, on a range of issues, responsibility rested solely with [Mr Waugh].
[72]It is necessary he be held wholly accountable for the losses that have resulted.
[73] I therefore consider it just that Mr Waugh compensates ICL for the whole loss that it has suffered. That is $191,259.54. It follows, in terms of r 15.9(4), that the plaintiffs have succeeded in establishing this cause of action to my satisfaction, and also the quantum of the relief to be awarded under this heading.
34 See FAF Holdings Ltd (in liq) v Bethune [2017] NZHC 2796, [2019] NZCCLR 6 at [154].
35 At [169].
Failures with Respect to Accounting Records and Financial Statements
[74] Finally, I turn to the plaintiffs’ cause of action founded on ss 194, 201 and 300 of the Act. Section 300 provides:
300 Liability if proper accounting records not kept
(1)Subject to subsection (2), if—
(a)a company that is in liquidation and is unable to pay all its debts has failed to comply with—
(i)section 194 […]; or
(ii)section 201 […]; and
(b)the court considers that—
(i)the failure to comply has […] substantially impeded the orderly liquidation; or
(ii)for any other reason it is proper to make a declaration under this section,—
the court, on the application of the liquidator, may, if it thinks it proper to do so, declare that any 1 or more of the directors […] of the company is […] personally responsible, without limitation of liability, for all or any part of the debts and other liabilities of the company as the court may direct.
(2)The court must not make a declaration under subsection (1) in relation to a person if the court considers that the person—
(a)took all reasonable steps to secure compliance by the company with the applicable provision referred to in paragraph (a) of that subsection; or
(b)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 court may give any direction it thinks fit for the purpose of giving effect to the declaration.
[75]Sections 194 and 201 provide, relevantly:
194 Accounting records must be kept
(1)The board of a company must ensure that there are kept at all times accounting records that—
(a)correctly record the transactions of the company; and
(b)will enable the company to ensure that the financial statements […] of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
[…]
201 Financial statements must be prepared
Every company […] to which this section applies (A) must ensure that, within 5 months after the balance date of A, financial statements that comply with generally accepted accounting practice are—
(a)completed in relation to A and that balance date; and
(b)dated and signed on behalf of A by 2 directors of A, or, if A has only 1 director, by that director.
[76] Ms Madsen-Ries’ evidence is that Mr Waugh “delivered a small quantity of wage, PAYE, and GST records and related correspondence with Inland Revenue to the Liquidators”, but that “no financial documents for the company have been obtained, aside from Inland Revenue’s own records.” This is consistent with Mr Waugh’s admission offered during his examination on oath that from the time the arrangement with Carpet Call was concluded in 2002-2004, no financial statements or accounting records were prepared in respect of the company as it was not trading. According to Ms Masden-Ries, the only information the liquidators have been able to obtain has come from their own investigations, and their efforts in obtaining tax records from Mr Waugh and the IRD. She refers to having also obtained records relating to a bank account held by the company with the BNZ, but this was closed in 2007.
[77] I am satisfied on the basis of this evidence that no accounting records or financial statements compliant with ss 194 and 201 were prepared from at least 2002- 2004. It follows that Mr Waugh as Carpet Call’s sole director and therefore the board of the company36 failed to ensure that accounting records compliant with the requirements of s 194 were kept. Moreover, it is clear the company did not ensure annual financial statements were prepared pursuant to s 201. It follows the requirements of s 300(1)(a) are satisfied.
36 Companies Act 1993, s 127(b). See also Thom Contractors Ltd (in liq) v Thom HC Auckland CIV- 2008-404-6829, 28 April 2009 at [17].
[78] As to the requirements of s 300(1)(b), the effect of Ms Masden-Ries’ evidence is that, because of the state of the company’s records, the liquidators have been forced to reconstruct the company’s records from scratch. She deposes, having reviewed her staff’s timesheets, that this has produced additional costs of $10,000, which sum seems prima facie reasonable having regard to the period of insolvent trading involved and virtually complete lack of business records.
[79] In Petranz Ltd (in liq, ex parte Madsen-Ries) v Petera, in which case somewhat more fulsome but still inadequate financial records had been maintained,37 Lang J considered that:
The liquidators should not have been put to the expense and inconvenience of having to reconstruct the company’s affairs using documents obtained from third parties. The company’s own records ought to have enabled the liquidators to ascertain and understand the transactions that the company had entered into […]
[80] Similarly, in Madsen-Ries v Twine, Gilbert J considered it clear that liability under s 300(1)(b)(i) can be imposed 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.”38
[81] I agree. For the reasons identified, the liquidators had no basis for understanding the company’s affairs except for their own efforts at reconstruction. That is entirely attributable to Mr Waugh’s failure to ensure the company complied with its requirements under ss 194 and 201. Mr Waugh took no steps at all, reasonable or otherwise, to ensure the company complied with these obligations. Section 300(2) can be of no benefit to him here.
[82] Accordingly, I consider it appropriate to declare that Mr Waugh is personally liable for the debts of the company in the amount of $10,000. In terms of r 15.9(4), the plaintiffs have succeeded in establishing this cause of action, and the amount of relief to be awarded, to my satisfaction.
37 Petranz Ltd (ex parte Madsen-Ries) v Petera [2015] NZHC 538 at [107].
38 Madsen-Ries v Twine [2015] NHZC 227 at [10].
Result and Orders
[83] For all of the above reasons, I consider the plaintiffs have established the pleaded agreement between ICL and Carpet Call, and that Carpet Call breached its obligations under that agreement. There is no question that ICL’s indebtedness to IRD is the entirely foreseeable consequence of that breach. Accordingly, I give judgment for the plaintiffs against Carpet Call Ltd in the sum of $191,259.54, being the amount of ICL’s indebtedness to IRD, together with:
(a)interest on that sum from 13 December 2019 (being the date of demand) to 20 August 2020 (the date of judgment), being $4,220.60; and
(b)interest on the sum of $195,480.14 (being the two figures above) from the date of judgment (20 August 2020) to the date of payment, pursuant to s 10 of the Interest on Money Claims Act 2016.
[84] The plaintiffs have also established their causes of action against Mr Waugh founded on ss 131, 135, 136, 137, 194, 201 and 300 of the Act, and claim for compensation or declaration as to liability in respect of those breaches under ss 300 and 301 of the Act.
[85] In consequence, pursuant to s 301(1)(b)(ii) of the Companies Act 1993, I order that Mr Waugh contribute the sum of $191,259.54 to the assets of Independent Carpets Ltd by way of compensation.
[86] Also, pursuant to s 300(1) of the same Act, I order that Mr Waugh is to be personally liable, without limitation of liability, for part of the debts of Independent Carpets Ltd, to the amount of $10,000, and make a direction pursuant to s 300(3) of that same Act that he pays that amount to the plaintiffs.
[87] My understanding, based on discussions with counsel at the hearing, and despite counsel’s earlier memorandum dated 5 August 2020, is that the plaintiffs do not seek an order for payment of interest in accordance with the Interest on Money Claims Act 2016 in respect of the claims based on breach of directors’ duties. None is made.
[88] Finally, I note that the consequence of this judgment is such that the total judgment debt will materially exceed the creditor losses and the likely liquidation costs. If there is a surplus in the liquidation, the money will be returned to Mr Waugh as the sole shareholder of ICL. I am concerned that the potential surplus in such circumstances and the potential circularity of a significant part of the total award should be a relevant factor in fixing quantum with regard to compensation for breach of directors’ duties. However, the Court of Appeal has rejected such an argument, considering it sufficient that if there were a surplus, the money would be returned.39
Costs
[89] The plaintiffs having succeeded, and costs following the event, an award of costs and disbursements in their favour is appropriate.40 I make an order that Mr Waugh and Carpet Call are jointly and severally liable to pay the plaintiffs’ costs on a 2B basis and disbursements in the amount of $19,684, as specified in counsel for the plaintiffs’ memorandum of 5 August 2020.
Hinton J
39 Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [103].
40 High Court Rules 2016, r 14.2(1)(a).
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