Kelstworural Ltd (In liq) v Mounsey-Ross

[2019] NZHC 752

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2541

[2019] NZHC 752

IN THE MATTER OF

the liquidation of KELSTWORURAL LIMITED (In Liquidation )

BETWEEN

KELSTWORURAL LIMITED

(In Liquidation) First Plaintiff

MALCOLM GRANT HOLLIS and CRAIG ALEXANDER SANSON,

Liquidators Second Plaintiffs

AND

KELLY MICHELLE MOUNSEY-ROSS

First Defendant

KELLY WILLIAM ROSS

Second Defendant

Hearing:	9 April 2019 at 10:00am
Appearances:	S Farnell and K Morrison for the Plaintiffs Deep Purusram for the Defendants
Judgment:	9 April 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Meredith Connell (Kathleen Morrison/Sarah Farnell), Auckland, for the Plaintiffs Victorian Lawyers (Deep Purusram), Papakura, Auckland, for the Defendants

KELSTWORURAL LIMITED (In Liquidation) v MOUNSEY-ROSS [2019] NZHC 752 [9 April 2019]

[1]                  Kelstworural Ltd ran the Red Fox Tavern at Maramarua. The company was put into liquidation on 13 July 2018 on the application of the Commissioner of Inland Revenue. The second plaintiffs are the liquidators of the company.

[2]                  There are two claims in this proceeding. The company sues the defendants, the directors of the company, for $326,219.86 as money owing under their joint current account. The second cause of action is a claim for breach of directors’ duties brought under s 301 of the Companies Act 1993. The company is the plaintiff for the first cause of action. The liquidators are the plaintiffs for the second cause of action. The company applies for summary judgment for its cause of action. There is no application for summary judgment on the second cause of action.

[3]                  The principles on which plaintiffs’ summary judgment applications are decided are now well settled. The Court of Appeal re-stated them in Krukziener v Hanover Finance Ltd:1

[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. … 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. … 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: … 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. …

[27]      Under r 141A, the defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.

(Citations omitted)

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26]-[27].,

[4]                  Kelstworural Ltd was incorporated in March 2011. The defendants, Mr Ross and Mrs Mounsey-Ross, are the directors of the company. They each held a 50 per cent shareholding in the company. As I have mentioned, the company ran the Red Fox Tavern at Maramarua. The business was unsuccessful. Financial statements for the company show that it consistently made losses every year. It was put into liquidation because it was unable to pay its debts.

[5]                  The company’s case is that the defendants had a joint shareholders’ account with it and their drawings from the company, plus interest charged on their account, exceeded the funds that they had put into the company, and salaries credited to them. The financial statements for the year ending 31 March 2017 show that the defendants owed the company $326,219.86 under their account. The company made demand for repayment on 17 September 2018.

[6]                  To prove the defendants’ indebtedness, the company has relied on financial statements for each year. In the year ending 31 March 2012, the defendants were in credit. They introduced of $8,445.78. But for every later year they were indebted to the company. For the year ending 31March 2013 they owed $46,367.86; for the year ending 31 March 2014 they owed $138,561.34; for the year ending 31 March 2015 they owed $228,786.29; for the year ending 31 March 2016 they owed $285,946.24 and there was also the amount owing for the year ending 31 March 2017 – the amount stated above. The liquidators have checked whether the debt was reduced between  31 March 2017 and the date of liquidation. Mr Sanson’s affidavit attaches records taken from the company’s Xero accounting programme which shows that  between  1 April 2017 and 13 July 2018 (the date of liquidation) the Rosses introduced

$39,950.00, but their drawings came to $69,719.887, thereby increasing their indebtedness to $355,989.73. For this proceeding, however, the company relies only on their indebtedness at 31 March 2017 and does not claim for any increase in indebtedness between March 2017 and the date of liquidation.

[7]                  The Rosses’ notice of opposition denies any breach of directors’ duties and alleges that the sum claimed by the plaintiffs is exaggerated and not substantiated. It also pleads that it will be unfair for costs to be awarded against them.

[8]                  Mrs Mounsey-Ross has sworn an affidavit, which contains general denials.    I quote from two paragraphs:

9.      … I am in the process of understanding how the figures are arrived at. I have not had any chance to peruse the information. I had applied for legal aid to be notified just last week that the legal aid application has been declined; I have just engaged a private lawyer to assist me and need some time to understand the figures before I can comment further. I just wish to add here that the figures seem to be exaggerated but I would like to comment further at a later state.

…

11. I do not accept that we are indebted to the Company in the amount mentioned therein until I have been provided with all the information in support and have been able to assess these within a reasonable time. I further state as a matter of an initial assessment that the final figure as representing the indebtedness of the Company together with the penalties is grossly exaggerated and I have not been provided with any explanation as to how this figure has been arrived at.

She swore that affidavit on 12 February 2019. Today, Mr Purusram sought an adjournment to give his clients more time to investigate matters to see whether they had a defence.

[9]                  The demand for repayment of the funds under the current account was made in September last year. Since then, the defendants have had the opportunity to investigate matters to establish whether there can be any errors in the sums stated in the financial statements. As the company’s case relies on the Rosses’ drawings from the company, they would have had their own banking records to refer to. I am sure that with the assistance of their accountants they could have accessed the accounting records of the company held by the liquidators to determine whether there were any errors in the preparation of their financial statements. Even since February 2019, they have had the opportunity to make more enquiries to see if there is some basis for casting doubt on the figures stated in the financial statements. I am not persuaded that any useful purpose will be served by adjourning the proceeding. The matter is to be decided on the current evidence.

[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 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.

[11]              In EBR Holdings Ltd (in liquidation) v van Duyn,2 Heath J considered some of the principles that apply in proceedings to recover a shareholder’s current account debt. He recognised that the legal onus remains on the company throughout to prove that the debtor owes the company the money in the amounts claimed.3 He said that in the context of an ordinary defended proceeding. For this case, a summary judgment application, the legal onus remains on the company to make out its case to the summary judgment standard: that is, to show that there is no arguable defence to the claim.

[12]              Heath J endorsed the approach taken by Judge McElrea in Kiwibilt Engineering Ltd (in liquidation) v Pavlovich.4 That was a case for recovery of sums owed under a shareholder’s account. Judge McElrea noted that there was a strong inference from the accounts that the debt was owing to the company and said:

[12]      …But even in that case it must be open to a director to show that the account was not correct. That is not to say that there was a legal onus of proof upon such a person, but only that in the absence of evidence to the contrary, the normal and proper inference to be drawn from the accounts would be that the amount shown had been advanced to the director. It is, if you like, an “evidential onus” although speaking of it as an onus can be misleading. It is simply an application of the usual rules of evidence that apply in a commonsense way in all cases, civil and criminal. Triers of fact are entitled to draw conclusions (or “inferences”) from proved facts if in the circumstances they are logical conclusions to draw whether the inference can properly be drawn against all the evidence including whether there is any evidence pointing in the opposite direction.

[13]And in the EBR case Heath J said:5

The liquidators come to the affairs of EBR as strangers, with no contemporaneous knowledge of the reasons why certain of the funds were advanced, and for what reason. The statutory scheme recognises the need for

2      EBR Holdings (in liquidation) v van Duyn [2017] NZHC 1698.

3 At [75].

4      Kiwibilt Engineering Ltd (in liquidation) v Pavlovich [2004] DCR 193.

5 `    EBR Holdings (in liquidation) v van Duyn [2017] NZHC 169 at [85].

them to rely on financial statements prepared in the period before liquidation intervenes.

[14]      The liquidators have made out their case to prove the debt by producing the financial statements. The reliability of the financial statements is reinforced by certain factors. First, the Rosses signed them, and, except for the first year, they passed resolutions as directors approving the accounts. Next, they engaged professional accountants to prepare their financial statements. The financial statements are in conventional form. While the accountants have added disclaimers to the effect that they have relied on information provided and have not undertaken any audit or review, it is safe to assume that they were competent in preparing the financial statements. The company used the Xero cloud-based accounting system, which provides an efficient and accurate way of recording transactions for accounting purposes.

[15]      Against that, there is no hard evidence from the Rosses taking issue with the accuracy of the financial statements. As Keane J observed in Thom Contractors Ltd (in liquidation) v Thom:6

A bald assertion without elaboration or detail is unlikely to be seen as raising an arguable defence for the purpose of resisting summary judgment.

There is nothing from the defendants which suggests that it is not safe to rely on the financial statements which they did approve. In the absence of any specific evidence from them pointing to errors in the calculation of the current account, I find that the company has made out its case to the summary judgment standard.

[16]      Accordingly, I enter judgments against both defendants for $326,219.86. The company will have interest on that sum under s 10 of the Interest on Money Claims Act 2016 from 17 September 2018 until the judgment is paid in full.

[17]      The plaintiff submitted a schedule of costs, calculated under category 2 band B for a proceeding in this court. The plaintiff has, however, recovered summary judgment for a sum which is in the jurisdiction of the District Court. The District Court can hear a claim up to $350,000. In response, the plaintiff submits that it also

6      Thom Contractors Ltd (in liquidation) v Thom HC Auckland, CIV-2008-404-6829, 28 April 2009 at [13].

has a claim for breach of directors’ duty, which it can pursue only through s 301 of the Companies Act, and the amounts claimed in that are for more than $350,000. It therefore says that it was sensible to sue for the first cause of action in this court as well. All the same, for present purposes the claim on which the summary judgment application was brought is for less than $350,000 and the plaintiff will have costs under the District Court scale. If the liquidators succeed with the further claim under s 301 of the Companies Act, they will have their costs under the High Court scale, although they will not be able to double-up in costs as, for example, for the commencement of the proceeding. That is, they may have a top-up for the costs of starting the proceeding in this court after allowing for the District Court costs which they have already recovered.

[18]      I ask counsel to confer as to the calculation of costs in the District Court. If they are unable to agree, memoranda may be filed.

[19]      As to the balance of the claim, the liquidators may wish to assess whether they will pursue the second cause of action. I am not indicating whether they should do so or not. If they do wish to continue with the proceeding, they should advise the court and ask for the matter to be listed on a companies’ liquidation day before an associate judge to be called in the miscellaneous list at 11:45am. That is because a claim under s 301 of the Companies Act is within the jurisdiction of an associate judge.

……………………………….

Associate Judge R M Bell