Jeffreys v Pan
[2024] NZHC 1545
•13 June 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-002057
[2024] NZHC 1545
BETWEEN STEPHANIE BETH JEFFREYS and MALCOLM RUSSELL MOORE as
liquidators of CAODE HOLDINGS LIMITED and RED BEACH
CONSTRUCTION LIMITED (BOTH IN LIQUIDATION)
PlaintiffsAND
CHANGXIN (JASON) PAN
Defendant
Hearing: 6 June 2024 Appearances:
I J Thain and S Khatau for Plaintiffs No appearance for Defendant
Judgment:
13 June 2024
REASONS JUDGMENT OF ANDREW J
This judgment was delivered by Justice Andrew on 13 June 2024 at 10.00 am
pursuant to r 11.5 of the High Court Rules 2016 Registrar / Deputy Registrar
Date …………………………………..
JEFFREYS v PAN [2024] NZHC 1545 [13 June 2024]
[1] At the conclusion of the hearing, I granted the plaintiffs’ application for summary judgment and on the terms sought in the statement of claim.
[2] This judgment contains my reasons for granting the summary judgment application.
Introduction
[3] These proceedings were undefended. The defendant has taken no steps to oppose them. On 5 June 2024, he was adjudicated bankrupt in this Court, and on the application of an unrelated creditor.
[4] Under s 76(1) of the Insolvency Act 2006, on adjudication, all proceedings to recover any debt provable in the bankruptcy are halted. However, under s 76(2) the Court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the Court thinks appropriate.
[5]It is appropriate in this case to allow the proceedings to continue.1
[6] The plaintiffs are the liquidators of Red Beach Construction Ltd (RB Construction) and Gaode Holdings Ltd (Gaode). The defendant, Changxin (Jason) Pan (Mr Pan), was the sole director and shareholder of both RB Construction and Gaode.
[7]Mr Pan ran a property development business through the following companies:
(a)RB Construction;
(b)Gaode;
1 An order under s 76(2) is only required in relation to the first cause of action, because those are the only causes of action which involve the recovery of a debt provable in the bankruptcy. The second, third, and fourth causes of actions are not proceedings to recover any debt provable in the bankruptcy. The compensation that I order under s 301 of the Companies Act 1993 in relation to the second, third, and fourth causes of action are not debts or liabilities that the bankrupt defendant owed at the time of adjudication. No debt or liability arose in relation to the second, third, and fourth causes of action until such time as I made the relevant orders at the conclusion of the hearing.
(c)Red Beach Development Ltd (RB Development);
(d)Fangzhou International Ltd (Fangzhou);
(e)CNNZ Trustee Services Ltd (CNNZ); and
(f)Wanbao Solution Ltd (Wanbao).
[8] RB Construction was put into liquidation on 19 May 2021. Gaode was put into liquidation on 22 September 2022.
[9]The plaintiffs seek summary judgment against Mr Pan in relation to:
(a)Mr Pan’s outstanding shareholder account debt in relation to Gaode, which he has failed to repay on demand ($255,314); and
(b)Payments that Mr Pan had made from RB Construction’s accounts to related entities (himself and companies) when RB Construction was unable to pay its debts, particularly debt to the Inland Revenue Department (IRD).
[10] The plaintiffs seek relief under s 301 of the Companies Act 1993 (the Act) in the sum of $196,842 for breach of directors’ duties under ss 131, 133 and 135 of the Act.
[11]Mr Pan was served in December 2023 but has taken no steps in opposition.
Relevant legal principles
[12] Under High Court Rules 2016 r 12.2(1) the Court may give judgment against a defendant if the plaintiff satisfies the Court that the defendant has no defence to a cause of action in a statement of claim or to a particular part of any such cause of action.
[13] The Court of Appeal summarised the applicable principles in Krukziener v Hanover Finance Ltd:2
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
Analysis and decision
(a) First cause of action – outstanding shareholder account debt – Gaode
[14] Mr Pan was the sole shareholder of Gaode and operated a shareholder’s current account, from which he paid himself drawings. When Gaode was put into liquidation on 22 September 2022, Mr Pan’s shareholder account was overdrawn by $255,314. That figure is stated in Gaode’s draft financial statements for the year ended 31 March 2021, which provides no explanation for those drawings. That amount remains outstanding, despite the plaintiffs demanding that Mr Pan repay the amount.
[15] In Mizeen Painters Ltd (in liq) v Tapusoa,3 the Court held that generally advances made by a company to its shareholders are debts owed by the shareholders to the company and repayable on demand. They remain as repayable advances unless and until a company resolution classifies them otherwise.
[16]More recently, in Kelstworural Ltd (in liq) v Mounsey-Ross the Court held:4
[10] Advances on a shareholder’s current account are a debt owed by the shareholder to the company, which is repayable on demand. A liquidator is entitled to rely on financial statements and other accounting records prepared
2 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
3 Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423 at [24]–[25].
4 Kelstworural Ltd (in liq) v Mounsey-Ross [2019] NZHC 752 at [10].
by the company before liquidation to establish the company’s assets and liabilities. Under s 194 of the Companies Act 1993, directors are under a duty at all times to keep accounting records and to correctly record the transactions of the company so as to enable the company to prepare its financial statements which should also be capable of being audited.
[17] Gaode’s financial statements for the year ending 31 March 2021 included two resolutions for that year that: (a) no shareholder’s remuneration would be paid, and (b) no dividends would be paid. The financial statements provide no explanation for the drawings and there is no evidence of any resolution to classify the drawings as anything other than advances to Mr Pan. Therefore, they amount to a debt, repayable on demand.
[18] On 29 September 2022, the plaintiffs demanded that Mr Pan repay the debt. However, he has failed to do so.
[19] I am satisfied that the plaintiffs have established that the defendant, Mr Pan, has no defence to the first cause of action. I accordingly enter summary judgment in favour of the plaintiffs as follows:
(a)For the sum of $255,314;
(b)Interest on that sum under s 10 of the Interest on Money Claims Act 2016 from the date of demand (29 September 2022) to the date of judgment;5 and
(c)Costs.
(b) Second, third and fourth causes of action – RB Construction – relief under s 301 of the Act
[20]The plaintiffs apply for relief under s 301 of the Act.
[21]In Smartpay Ltd v Kumar, the Court held that s 301:6
5 See Mizeen Painters Ltd (in liq) v Tapusoa, above n 3, at [27].
6 Smartpay Ltd v Kumar [2022] NZHC 997, [2022] NZCCLR 29 at [33].
… creates a “procedural short cut” by which a liquidator … of a company in liquidation may bring claims against a director for breaches of duty in relation to that company. The same section empowers the Court (once a breach is established) to require the director to “contribute such sum to the assets of the company by way of compensation as the court thinks just”.
[22] RB Construction’s application is based on Mr Pan’s alleged breach of his duties under ss 131, 133 and 135 of the Act. All breaches are said to be a result of payments Mr Pan arranged from RB Construction to other entities he owned and controlled. Liability for breach of any one of those duties is sufficient for the Court to award relief under s 301.
[23] RB Construction sold its last property on 7 November 2018 and as a result incurred a GST debt to IRD of $240,947 (although RB Construction managed to reduce this to $147,847 by 26 February 2021). RB Construction did not develop or sell any further properties after that. Therefore, it had no income and was cashflow insolvent. By 31 March 2019, RB Construction had a negative equity position; therefore, it was balance-sheet insolvent.
[24] Despite the insolvency, between 24 March 2019 and 19 May 2021, Mr Pan (as RB Construction’s sole director) made net payments out of RB Construction’s accounts (effectively net withdrawals for his benefit) totalling $196,842 (related party net payments) to other entities that he controlled. This is summarised in the following table:
Related party
Withdrawals ($)
Deposits ($)
Net (withdrawals)
/deposits) ($)
RB Development
240,300
38,000
(202,300)
Gaode
269,760
9,500
(260,260)
Fangzhou
752,000
220,200
(531,800)
CNNZ
45,000
10,000
(35,000)
Changxin (Jason) Pan
56,000
62,375
6,375
Guard for Land
-
816,143
816,143
Wanbao
-
10,000
10,000
Total
1,363,060
1,166,218
(196,842)
[25] At all relevant times, Mr Pan was effectively the sole shareholder and director of all the recipients listed in the above table. This gave rise to a clear conflict of interest for Mr Pan, because he was the sole:
(a)Shareholder and director of RB Construction, Gaode, Fangzhou and CNNZ; and
(b)Director of RB Development and, because Fangzhou was the sole shareholder of RB Development, Mr Pan was effectively the sole shareholder of RB Development.
[26] None of RB Construction’s record contain any explanation for the payments to the related entities. Under s 194 of the Act, Mr Pan had of course an obligation to maintain proper accounting records or to establish and maintain a satisfactory system of control over those records. In the circumstances, I therefore infer that there was no explanation for the payments. Furthermore, given that RB Construction had not developed a property since its last sale in November 2018, there was no apparent business need or purpose for the related party net payments, which appear to be unrelated to RB Construction’s businesses.
[27]In summary, when Mr Pan arranged the related party net payments:
(a)RB Construction was both cashflow and balance-sheet insolvent;
(b)The IRD debt had already arisen;
(c)RB Construction gained nothing from the transactions;
(d)Mr Pan’s interests were conflicted as the director/shareholder of all relevant companies.
[28] I find that in making the related party net payments, Mr Pan was in breach of his obligations under ss 131, 133 and 135 of the Act; he did not act in good faith and in what was the best interests of the company. He did not exercise his powers for a
proper purpose and agreed 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 creditor.
[29] I find that the plaintiffs have established that the defendant, Mr Pan, has no reasonably arguable defence to the second, third, and fourth causes of action.
[30]I turn then to address the quantum of relief under s 301.
Quantum of relief under s 301
[31] I accept that in most cases the appropriate starting point is an amount equal to the deterioration in the company’s financial position between the date when trading should have ceased and the date of actual liquidation (the net deficiency approach).7
[32] The related party net payments in breaches of the Act (whether under all or any of ss 131, 133 and 135) resulted in a net loss of $196,842 to RB Construction, which was then unavailable to repay creditors. I find that Mr Pan should restore/contribute a sum in that amount to RB Construction’s assets.
[33] I accept that the plaintiffs have taken, responsibly, a conservative approach to quantum. The related net party payments or the net withdrawals from RB Construction’s accounts is the result of all transactions, taking into account significant deposits from an unrelated party (Guard for Land). The related party net payments therefore represent the lowest possible amount of RB Construction’s loss resulting from Mr Pan’s breaches of his director’s duties.
[34] I accordingly grant summary judgment in respect of the second, third, and fourth causes of action as follows:
(a)An order under s 301 of the Act that Mr Pan restore/contribute $196,842 to Red Beach Construction Ltd’s assets;
7 Madsen-Rees as liquidators of Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100, [2021] NZLR 43 at [163]–[164].
(b)Interest in the judgment sum from the date of liquidation (i.e. 19 May 2021) to the date of judgment (13 June 2024) under s 10 of the Interest on Money Claims Act 2016; and
(c)Costs on a 2B basis plus disbursements.
Conclusion
[35]I grant summary judgment on the terms set out at [19] and [34] above.
Andrew J
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