Industrial and Commercial Enterprises Ltd (in liquidation) v Howes

[2024] NZHC 3398

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2024-404-1850 [2024] NZHC 3398

BETWEEN

INDUSTRIAL AND COMMERCIAL

ENTERPRISES LIMITED (in liquidation) Plaintiff

AND

D P HOWES

Defendant

Hearing:	6 November 2024
Appearances:	O W N Mohamed and D I Durovich for Plaintiff No appearance for Defendant
Judgment:	14 November 2024

JUDGMENT OF O’GORMAN J

This judgment was delivered by me on 14 November 2024 at 4 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

…………………………………

Solicitors: Dentons, Auckland

INDUSTRIAL AND COMMERCIAL ENTERPRISES LIMITED (IN LIQ) v HOWES [2024] NZHC 3398

[14 November 2024]

[1]                 This is a claim brought by a company in liquidation against its director and shareholder for receiving company payments into his personal bank account and then misappropriating the money for his own purposes. The two causes of action are for money had and received and knowing receipt.1

[2]                 The defendant is Dereck Howes. The plaintiff company is Industrial and Commercial Enterprises Ltd (in liquidation) (“Industrial”). Before liquidation, the business conducted through the company was leasing shipping containers (as lessee) and then purporting to sell them  (in breach of the  lessor’s rights) to third parties.  On 1 September 2023, Jared Booth and Tony Maginness were appointed as liquidators of Industrial.

[3]                 On 19 August 2024, Mr Howes was personally served with the statement of claim and initial disclosure, including the liquidators’ financial analysis of the payments.

[4]                 Mr Howes has not  taken any steps to  defend the  claim.  Accordingly,  on  15 October 2024, this matter was set down for a formal proof hearing as soon as possible. That hearing took place on 6 November 2024 without any appearance by or on behalf of Mr Howes.

Formal proof hearings

[5]                 Under r 15.9(4) of the High Court Rules 2016, the plaintiff must, before or at the formal proof hearing, file affidavit evidence establishing, to a judge’s satisfaction, each cause of action relied on and, if damages are sought, providing sufficient information to enable the judge to calculate and fix the damages.

[6]                 The plaintiff is only required to prove a cause of action so far as the burden of proof lies on the plaintiff. The plaintiff is not required to engage with any matters of affirmative defences, set-off or counterclaim.2

1      Conversion was also pleaded but was not pursued at the proof hearing. On facts such as this, other claims might have been available, including direct claims for breaches of statutory and fiduciary duties.

2      Ferreira v Stockinger [2015] NZHC 2916 at [36].

Factual background

[7]                 Industrial was incorporated on 4 June 2020. Mr Howes was appointed as a director on 19 October 2021.

[8]                 Industrial hired shipping containers from ContainerCo (NZL) Ltd (“ContainerCo”) pursuant to a Master Hire Agreement between Industrial and ContainerCo dated 16 July 2021. The agreement did not provide Industrial with any right to sell the containers. Nonetheless, Industrial purported to sell the containers to third parties in breach of the agreement.

[9]                 Industrial did not have any bank account in its own name. Instead, all monies intended for Industrial were paid into Mr Howes’ personal bank account. Mr Howes used the funds for mixed purposes — some funds were applied to meet Industrial’s company expenses; other funds were spent on himself. There are no remaining funds in his bank account to repay Industrial.

[10]             After their  appointment,  the  liquidators  investigated  Industrial’s  affairs. As part of the liquidators’ investigations, on 22 September 2023 they conducted a formal examination of Mr Howes under s 261 of the Companies Act 1993. The questions and answers were in evidence. Among other things, the interview confirmed the following:

(a)Mr Howes said he does not have any accounting or other records for Industrial, nor was he aware of anyone else holding any accounting or other records for Industrial.

(b)Industrial did not have a  bank account  in  its  own  name.  Instead, Mr Howes’ personal bank account was used.

(c)The GST number on the invoices issued by Industrial was Mr Howes’ personal tax number.

(d)Mr Howes signed the Master Hire Agreement with ContainerCo. He was aware that containers supplied by ContainerCo were on hire and Industrial did not own them. Nonetheless, Industrial purported to sell those containers to others.

[11]             During the interview, Mr Howes admitted that all funds for the company were paid into his personal bank account and those funds were used in part for his personal benefit. Mr Howes provided copies of his bank statements to the liquidators. The liquidators then prepared a spreadsheet setting out their analysis of all transactions in the account, categorising each to one of 13 different codes according to their transaction details. From that analysis, I am satisfied of the following:

(a)Funds of at least $1,303,249 intended for Industrial were paid into the account.

(b)Mr Howes deposited $121,115 into the account.

(c)$425,597.69 was paid from the account to meet Industrial’s expenses.

(d)$156,665 was paid out of the account for unknown purposes.

(e)The balance was withdrawn and/or spent by Mr Howes for his own personal benefit.

[12]             Accordingly, under each of the two causes of action, the liquidators are seeking judgment in the sum of $599,871.78, plus costs and interest, based on the following:

Company revenue	$1,303,249
Less company expenditure	-$425,598
Less unknown expenditure	-$156,665
Less funds introduced	-$121,115
DEBT	$599,871

[13]             The above calculation is conservative and gives Mr Howes the benefit of the doubt about funds paid out of the account for unknown purposes.

Analysis

[14]             Based on the facts outlined above, the liability of Mr Howes under each of the two causes of action is straightforward.

Money had and received

[15]             It is well-established that money had and received is made out where company funds are misappropriated by a director.3 The legal test for a claim of money had and received requires proof that:4

(a)money was received by the defendant; and

(b)the defendant had no right to retain it or has improperly disposed of it.

[16]             As explained above, funds categorised as company payments were received into the personal bank account of Mr Howes.

[17]             Mr Howes used those funds for personal purposes, to the extent of the claimed amount of at least $599,871. He had no right to use the funds in that way:

(a)A director owes statutory duties to the company to act in good faith and for a proper purpose,5 as well as fiduciary duties not to put his or her own interests ahead of the company and not to personally benefit without appropriate approvals.6

(b)Mr Howes has not alleged that he was entitled to the funds. For example, there is no evidence that he was entitled to any remuneration as an employee or director. Such obligations need to be documented in accordance with ss 161 and 194 of the Companies Act. In any event,

3      Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839 at [168]; upheld in Napier v Torbay Holdings Ltd [2016] NZCA 608, [2017] NZAR 108 at [23].

4      McKay v Johnson [2016] NZHC 1691, [2018] NZAR 543 at [46] and [48]; Purucker v Huebler (No 3) [2023] NZHC 2246, [2023] NZFLR 334 at [70], referencing Nimmo v Westpac Banking Corp [1993] 3 NZLR 218 (HC) at 238; and Wang v Yuan [2024] NZHC 2526 at [26].

5      Companies Act 1993, ss 131 and 133.

6      First NZ Properties Ltd v Millar [2024] NZHC 1225 at [232]–[234]; Peter Watts Directors’ Powers and Duties (3rd ed, LexisNexis, Wellington, 2022) at [6.2].

the amounts far exceed any reasonable assessment of the value of the “work”, let alone the fact that the purported sale of leased assets was wrongful.

[18]             With only limited exceptions, it is no defence to an action for money had and received that the defendant has parted with the money.7 A potential defence of change of position is:8

(a)contingent on the defendant having acted in good faith;

(b)not available where the defendant changed his or her position with knowledge of the facts entitling the plaintiff to restitution; and

(c)of limited application.

[19]             There could be no conceivable change of position defence in circumstances where Mr Howes had knowledge of these facts and was not acting in good faith.

Knowing receipt

[20]Liability for knowing receipt arises when:9

(a)there is a transfer of property in breach of trust or breach of fiduciary duty;10

(b)the defendant beneficially receives that property; and

7      Agip (Africa) Ltd v Jackson [1990] Ch 265 (Ch) at 282; McKay v Johnson, above n 4, at [50].

8      McKay v Johnson, above n 4, at [51]; referencing Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 (HL) at 580.

9      Chris Kelly and others Garrow and Kelly Law of Trusts and Trustees (8th ed, LexisNexis, Wellington, 2022) at [15.115], referencing Scott v ANZ Bank New Zealand [2020] NZHC 906, [2020] 3 NZLR 145 at [101].

10 See Byers v Saudi National Bank [2023] UKSC 51, [2024] 2 WLR 237 at [31] about misappropriation by directors being an extension to the traditional requirement of an original trust with split legal and beneficial ownership. In Torbay Holdings Ltd v Napier, above n 3, liability was imposed for director misappropriations under causes of action for money had and received, knowing receipt and breaches of director duties. See also Fordyce Road Development Ltd (in liq) v Khan [2019] NZHC 2288, [2019] NZAR 1563 at [51]–[57].

(c)the defendant has the required level of knowledge that the transfer was in breach.

[21]             There has been considerable debate about the requisite knowledge for this type of claim, including about whether it should be based on unconscionability or unjust enrichment (in which case some argue the claim should be receipt-based without any knowledge requirement).11 In New Zealand, the Court of Appeal has recognised a requirement of unconscionability.12 For making that assessment, five different categories of actual or constructive knowledge have often been considered.13

[22]             I am satisfied that the plaintiff has established its claim under the second cause of action for knowing receipt:

(a)Mr Howes breached his fiduciary duties owed to the company by receiving company funds into his personal bank account and using them for his own benefit/purposes, in conflict with the interests of the company.

(b)The financial analysis has identified funds received in breach of duty in that way.

(c)Mr Howes behaved unconscionably in receiving the funds and misappropriating them in that manner, at best in reckless disregard of his various company law obligations.

[23]Mr Howes has not repaid the sums that were misappropriated.

11 Kelly, above n 9, at [15.118]. See Byers v Saudi National Bank, above n 10, at [29]–[30] and [33]−[35] for the United Kingdom Supreme Court noting, but not determining, these issues.

12 McLennan (as Liquidators of Neil Timber Ltd (in liq)) v Livaja [2017] NZCA 446, [2018] NZAR 405 at [40].

13 Westpac Banking Corp v Savin [1985] 2 NZLR 41 (CA) at 52–53 discussing that any of the five categories of knowledge in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (Ch) may suffice to establish unconscionability. In McLennan (as Liquidators of Neil Timber Ltd (in liq)) v Livaja, above n 12, at [44], the Court of Appeal applied a test of wilful blindness.

Result

[24]Accordingly, in respect of each cause of action:

(a)I enter judgment in favour of the plaintiff against the defendant for the sum of $599,871; and

(b)I award interest on the above sum under s 10 of the Interest on Money Claims Act 2016 from 15 March 202414 until the date of payment.

[25]             The plaintiff is entitled to costs on a 2B basis, together with disbursements as fixed by the Registrar.

O’Gorman J

14     The date of the liquidators’ letter of demand.