Keshvara v Blanchett
[2012] NZCA 553
•30 November 2012
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA665/2011 [2012] NZCA 553 |
| BETWEEN RANJIT KESHVARA |
| AND DAVID MURRAY BLANCHETT AND GRANT EDWARD BURNS AS LIQUIDATORS OF APG HOLDINGS LIMITED (IN LIQUIDATION) |
| Hearing: 15 November 2012 |
| Court: Ellen France, Stevens and Asher JJ |
| Counsel: L Herzog for Appellant |
| Judgment: 30 November 2012 at 3.00 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay the respondents costs for a standard appeal on a Band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Stevens J)
Table of Contents
Para No
Introduction [1]
Background [5]
High Court judgment [8]
Evidentiary issues [8]
Breaches of duty [12]
Liability under s 194 of the Companies Act [18]
Relief[19]
First question – admissibility of business records [20]
Statutory provisions [26]
Our evaluation – admissibility [31]
The second question – liability [38]
Liability issues – High Court judgment [41]
Submissions on liability [55]
Our evaluation – liability [57]
Result [62]
Introduction
This appeal concerns findings in the High Court that the appellant had breached his duties as a director under ss 131, 133 and 137 of the Companies Act 1993.[1] In relation to those breaches the appellant was ordered to pay the sum of $1,439,084.00 by way of remedy under s 301 of the Companies Act.[2] The High Court also found that at the relevant times the board of directors of which the appellant was a member was in breach of s 194 of the Companies Act. In relation to that breach the appellant was ordered to pay $39,876.00 pursuant to s 300.
[1]Blanchett v Keshvara [2011] NZCCLR 34 (HC).
[2]Applying the approach of this Court in Mason v Lewis [2006] 3 NZLR 225 (CA) at [109]–[110] and [118].
The appellant is a former director of APG Holdings Ltd (APG). The respondents, Messrs Blanchett and Burns, are the liquidators of that company.
The central question is whether Venning J was correct to admit into evidence certain documents relating to the transactions in question pursuant to the provisions of s 19 of the Evidence Act 2006 dealing with admissibility of hearsay statements contained in business records. That was the first issue raised in the agreed list of issues. The second was whether, if all or some of the evidence is not admitted, the findings of the High Court on liability were affected.
At the hearing, Mr Herzog, counsel for the appellant, also sought to challenge the Judge’s findings on liability even if all of the challenged documents were ruled to be admissible. We address this question later in the judgment.
Background
The appellant was a director of APG from 11 March 2004 until 23 July 2004. APG was placed into liquidation on 9 February 2007. APG was one of the companies in a group known as “Capital Events”. The Capital Events companies were primarily controlled by Terry Wilson and David Andrew Tauber. The companies mainly provided hospitality services for sporting and cultural events.
The claims for breaches of duty related to three types of payment made by APG during the period in which the appellant was a director. These are:[3]
·An advance of $215,000 to Kap Nominees (2) Ltd (Kap Nominees) on 25 June 2004. The appellant was also a director of Kap Nominees, which was the parent company of APG.
·Three advances totalling $475,000.40 made to Rita Wilson between 17 March 2004 and 27 April 2004. Ms Wilson is the appellant’s daughter and the wife of Mr Terry Wilson.
·Net payments of $749,084.00 advanced to a company called Jokers Wild Ltd between 13 April 2004 and 20 July 2004. Jokers Wild was one of the companies associated with the activities of Messrs Wilson and Tauber. It was later placed in liquidation.
[3]The respondents originally pursued claims relating to payments to a fourth entity, Basin Ridge Management Ltd, but those claims were not pursued.
Evidence in support of the claims for breaches of provisions of the Companies Act was adduced in the High Court by the liquidator Mr Blanchett. In support of the claims the liquidators produced and relied upon a bundle of documents relating to the affairs of APG and the three types of payment made while the appellant was a director. These documents had been obtained by the liquidators during their investigation into the running of the company.
High Court judgment
Evidentiary issues
At the commencement of the hearing in the High Court counsel for the appellant had objected to a number of passages in Mr Blanchett’s brief of evidence. The objection was twofold. First, that Mr Blanchett was seeking to introduce hearsay statements contained in documents he himself had not created. Second, there was a challenge to opinion evidence to be given by Mr Blanchett who was said not to be qualified as an expert. This aspect of the challenge was not pursued on appeal.
As to the documentary evidence, Venning J upheld the objection in relation to two paragraphs of Mr Blanchett’s brief of evidence offering evidence referred to documents prepared by a Mr Barclay. Such documents were found to have no probative value. The Judge allowed the hearing to proceed on the basis that the remainder of the evidence was admissible. At the conclusion of the evidence the Judge heard further submissions on the admissibility of evidence advanced as business records under s 19 of the Evidence Act.
The Judge held that, while the documents referred to by Mr Blanchett contained hearsay statements, they were admissible as business records.[4] He held that the person most likely to have produced the documents was Mr Antoo, a former employee of APG. Given that seven years had passed since the time of the creation of the records, Mr Antoo could not reasonably be expected to recollect now the matters dealt with in the documents. Accordingly s 19(1)(b) of the Evidence Act applied, as no useful purpose would be served by requiring Mr Antoo to be a witness.[5]
[4]The challenge centred on trial balances prepared for APG while the appellant was a director and other financial records, including the general ledger, prepared by employees of APG using accounting software known as Quick Books: Blanchett v Keshvara, above n 1, at [18].
[5] At [20].
The Judge also noted that,[6] as the objection to the documentary evidence was raised at a very late stage,[7] it would have been necessary to adjourn the trial to enable Mr Antoo to be located. The Judge found that undue expense and delay would have been caused and thus s 19(1)(c) also applied.
Breaches of duty
[6] At [21].
[7]Counsel for the appellant had not prior to the hearing signalled an objection to any documents contained in a previously filed “Bundle of Documents to be relied upon by the Plaintiffs”.
The liquidators argued that each of the payments referred to above at [6] amounted to a breach of s 131 of the Companies Act (the duty to act in good faith and in the best interests of the company). APG had advanced $215,000 to Kap Nominees, of which the appellant was also a director, without security and without any written loan agreement or terms as to payment of interest or repayment. The liquidators had been unable to find any documentation in the records of the company to explain why the payment of $215,000 had been made to Kap Nominees. Venning J held that it was difficult to imagine a clearer case of a breach of fiduciary duty or breach of the duty to act in good faith and in the best interests of the company.[8]
[8] At [39].
As to the payments to Ms Wilson, the company records did not disclose any documents outlining why Ms Wilson, who was not a shareholder or employee of APG, had been in receipt of multiple payments including a cheque for $400,000 in March 2004. Venning J found that there was a “strong inference, which I draw, that [the appellant] was effectively a nominee or, more colloquially in this case, a “patsy” director acting on behalf of and at the direction of either or both of Messrs Wilson and Tauber”.[9] Accordingly the Judge found that these payments were also in breach of s 131.
[9] At [46].
The position in relation to the payments to Jokers Wild Ltd was different because Jokers Wild was not an entity related to the appellant or one in which he had an interest. However, there was no evidence to show why the payments had been made. Venning J noted that there was some suggestion that the money was given to satisfy personal guarantees given by Messrs Tauber and Wilson in support of Jokers Wild. The Judge held that “in the absence of defence evidence the inference the payments were not in the best interests of [APG] is irresistible”.[10]
[10] At [60].
Section 133 of the Act places a duty on directors to exercise their powers for a proper purpose. The Judge noted that the existence of the s 133 duty added little given that the appellant had already been found to be in breach of s 131. However, he concluded that the defendant would also be liable for breach of s 133 in relation to the three categories of payment made by APG. In authorising those payments Venning J found that the appellant had exercised his powers as a director for an improper purpose.[11]
[11] At [65].
Section 137 creates a duty to exercise the care, diligence and skill a reasonable director would exercise in the same circumstances, taking into account the nature of the company, the nature of the decision, the position held by the defendant as director and the nature of the responsibilities undertaken by him. The Judge held that, even if he had erred in concluding that the appellant had breached his duty under s 131, the circumstances in which the payments were made lead to the inevitable conclusion that the payments were made without the exercise of the care, diligence and skill a reasonable director would have exercised.[12] There was no evidence that the appellant had made any inquiry about the ability of the payees to repay or that he had taken any steps to secure repayment. Accordingly the appellant was also liable under s 137.
[12]At [67].
The Judge referred to the discretionary remedies available for breaches of directors’ duties.[13] He acknowledged that APG was not placed into liquidation until some time after the appellant resigned.[14] However, he was satisfied that the impact of the appellant’s actions on the company was such that the company never recovered and liquidation was inevitable. The Judge also accepted Mr Blanchett’s evidence that the company’s financial position had deteriorated significantly while the appellant was a director. Accordingly Venning J found that the respondents were entitled to a full recovery of the moneys paid out in breach of the duties the appellant owed to APG.[15]
Liability under s 194 of the Companies Act
[13]Under s 301 of the Companies Act 1993 and citing Mason v Lewis, above n 2, at [109]–[110] and [118].
[14] At [74].
[15] At [82].
The liquidators also brought a claim founded on s 194 of the Companies Act (which requires accounting records to be kept) and s 10 of the Financial Reporting Act 1993 (which requires the preparation of financial statements). Venning J was not prepared to find that any breach of s 10 had any particular effect on this case. However, the Judge was satisfied that at the relevant times the board of directors of APG had been in breach of s 194. This led to a declaration under s 300 of the Companies Act against the appellant ordering payments totalling $39,876.[16]
Relief
[16] At [90].
Accordingly, Venning J awarded judgment against the appellant in the sum of $1,478,960 calculated as follows:[17]
[17] At [91].
Advance to Kap Nominees (2) Ltd
$215,000
Advance to Ms Wilson
$475,000
Irrecoverable advances to Jokers Wild
$749,084
Additional costs (s 300)
$39,876
$1,478,960
First question – admissibility of business records
The appellant’s main ground of appeal was directed to the Judge’s conclusion that the hearsay statements contained in the documents referred to in Mr Blanchett’s evidence were admissible pursuant to s 19 of the Evidence Act as a “business record”.
The appellant submitted that none of the three conditions set out in s 19 was met in this case. Despite the fact that each of s 19(1)(a)–(c) focused on the identity of the person who supplied the information, there had been no attempt by the respondents to identify who had supplied the information used for the composition of various of the documents relied upon by the liquidators. Neither had there been any evidence adduced as to the circumstances in which the information used to create the documents had been supplied. Mr Herzog submitted that had the person who supplied the information been called as a witness, he would have been able to cross-examine that witness.
Mr Herzog noted that much of the APG documentation given to the liquidators was supplied by Mr Tauber, a former tax partner of Ernst & Young who played a significant role in APG. Yet the liquidators elected not to call Mr Tauber. Counsel submitted that it was necessary for the Court to hear evidence as to who supplied the information used in the composition of the business record before it could give a ruling on admissibility under s 19 of the Evidence Act.
For the respondents, Mr Branch submitted that the Judge was correct to apply s 19(1)(b) and s 19(1)(c) of the Evidence Act and admit the hearsay statements contained in business records. Counsel argued that in many cases, liquidators have limited resources with which to undertake investigations into the identity of persons who supplied information for, or compiled the original documents. Accordingly in cases where the accuracy of the information is not challenged, liquidators should be able to rely on the provisions of s 19(1) to establish admissibility.
Mr Branch referred the Court to the specific documents relied upon in relation to each of the three categories of transaction challenged. In relation to the Kap Nominees payments, the key document was the solicitors’ trust account ledger of Carter & Partners. In relation to the payments to Ms Wilson the evidence consisted of a copy of a cheque for $400,000 (not subject to any hearsay objection), and copies of bank records establishing that the payments had been made to Ms Wilson. Finally, the Jokers Wild payments were established by reference to transactions recorded in the transaction journal of APG.
The respondents further submitted that, even if the evidence were inadmissible under s 19, the appellant was estopped from pursuing the objection. Counsel submitted that this estoppel arises from the failure of the appellant to follow the proper process in disputing the admissibility of the documents. Mr Branch referred to the provisions of r 9.14 of the High Court Rules in support of this submission dealing with the consequences of incorporating a document in a common bundle. Incorporation in a common bundle (without objection) means that the document is considered admissible. The applicable procedure if a party objects to the admissibility of a document contained in the common bundle is prescribed in r 9.14(2) and requires the objection to be recorded in the common bundle itself. Counsel for the appellant did not raise any objection to documents contained in the common bundle until the morning of the trial. Mr Branch submitted that this failure to raise an objection disadvantaged the respondents as it prevented them from taking steps to identify the authors of the documents.
Statutory provisions
Section 16 of the Evidence Act relevantly provides a definition of business records:
business record means a document—
(a) that is made—
(i) to comply with a duty; or
(ii)in the course of a business, and as a record or part of a record of that business; and
(b)that is made from information supplied directly or indirectly by a person who had, or may reasonably be supposed by the court to have had, personal knowledge of the matters dealt with in the information he or she supplied
Section 19 provides that business records are admissible under certain circumstances. The statutory requirements for admissibility are:
19 Admissibility of hearsay statements contained in business records
(1) A hearsay statement contained in a business record is admissible if—
(a)the person who supplied the information used for the composition of the record is unavailable as a witness; or
(b)the Judge considers no useful purpose would be served by requiring that person to be a witness as that person cannot reasonably be expected (having regard to the time that has elapsed since he or she supplied the information and to all the other circumstances of the case) to recollect the matters dealt with in the information he or she supplied; or
(c)the Judge considers that undue expense or delay would be caused if that person were required to be a witness.
We make two preliminary observations. First, counsel for both parties accepted that each of the three parts of s 19(1) provides a different means of establishing admissibility. The word “or” following each of the subparagraphs is to be read disjunctively. Second, the focus in s 19(1) is on “the person who supplied the information used for the composition of the record”. Subparagraphs (b) and (c) both refer to “that person” which we accept is a reference back to the person who supplied the information used in subparagraph (a). This approach is different to that adopted in the provision dealing with general admissibility of a hearsay statement where the statute deals with the “maker” of the statement. This is apparent from s 18(1) which provides:
18 General admissibility of hearsay
(1) A hearsay statement is admissible in any proceeding if–
(a)the circumstances relating to the statement provide reasonable assurance that the statement is reliable; and
(b)either–
(i)the maker of the statement is unavailable as a witness; or
(ii)the Judge considers that undue expense or delay would be caused if the maker of the statement were required to be a witness.
…
Prior to the enactment of the 2006 Act, the “business records” exception was contained in s 3 of the Evidence Amendment Act (No 2) 1980. That section provided:
3 Admissibility of documentary hearsay evidence
(1) Subject to subsection (2) of this section, and to sections 4 and 5 of this Act, in any proceeding where direct oral evidence of a fact or an opinion would be admissible, any statement made by a person in a document and tending to establish that fact or opinion shall be admissible as evidence of that fact or opinion if—
...
(b) The document is a business record, and the person who supplied the information for the composition of the record—
(i) Cannot with reasonable diligence be identified; or
(ii) Is unavailable to give evidence; or
(iii) Cannot reasonably be expected (having regard to the time that has elapsed since he supplied the information and to all the other circumstances of the case) to recollect the matters dealt with in the information he supplied ...
The draft Evidence Code prepared by the Law Commission in 1999 did not include a specific section dealing with business records.[18] As a result, the original version of the Evidence Bill 2005[19] did not contain any section equivalent to s 3 of the Evidence Amendment Act (No 2). This was altered at the select committee stage, when the business records exception was re‑introduced. The Select Committee report records that the Committee considered that both time and cost would be saved by retaining the business records exception.[20]
Our evaluation - admissibility
[18] Law Commission Evidence Code and Commentary (NZLC R55(2), 1999) at 44–56.
[19] Evidence Bill 2005 (256-1).
[20] Evidence Bill 2005 (256-3) (select committee report) at 3.
We do not consider that there is any merit in the appellant’s submissions relying on s 19 of the Evidence Act. First, we do not accept that the Judge failed to consider who had supplied the information used for the composition of the business records in question. Venning J specifically considered this question and concluded that the most likely candidate was Mr Antoo, who was employed in the accounts section of APG. The Judge said this:
[18] The principal documents to which Mr Herzog took issue were trial balances prepared for the company during the currency of the defendant’s directorship. The trial balances and other financial records were prepared by employees of APG using accounting software known as QuickBooks.
[19] The person most likely to have prepared the documentation was a Mr Antoo. He was employed in the accounts section of APG. But it is by no means certain that he was the only person who may have been involved in inputting the data.
…
[20] In the circumstances I was satisfied that no useful purpose would have been served by adjourning the proceeding to enable the liquidators to locate Mr Antoo and to require him to attend merely to produce records of APG which he may or may not have authored in 2004. Given that seven years has elapsed since the relevant time, even if Mr Antoo had created the documents he could not reasonably be expected to recollect the matters dealt with in the information recorded in the documents. He would inevitably have had to rely on the documents themselves. Section 19(1)(b) applies.
[21] In addition, given that the matter was only raised at this very late stage the trial would have to have been adjourned to enable Mr Antoo to be located. Undue expense and delay would have been caused if I was to adjourn for that reason. Section 19(1)(c) applies.
We cannot fault the Judge’s reasoning. Moreover the Judge had considered, and made findings on, the issue of whether the documents concerned were “business records”.[21] We are satisfied on the evidence that the Judge was entitled to make these findings. The documents themselves, and the evidence of Mr Blanchett, established that each element of the definition of business record was established. It was not necessary in the circumstances of this case for the liquidators to seek to call more detailed or specific evidence directed at proof of the statutory requirements of the definition. The fact that it is open to the court to draw inferences in this context is evident from the use of the statutory language in (b) of the definition of “business record” that personal knowledge about the information concerned may be such that the person actually had “or may reasonably supposed by the court to have had”.
[21] At [17].
With respect to the requirements in s 19(1), even if we had considered that Mr Antoo was unlikely to be the person who supplied the information used in composing the documents, the Judge’s conclusions on admissibility are still valid. Nothing in s 19 requires the judge to make an explicit finding as to the identity of the person who supplied the information relevant to the documents in question. We are satisfied that a judge may rely on s 19(1)(b) if satisfied that, given that sufficient time has passed, whoever the precise person or persons might be, no useful purpose would be served by requiring that individual (or individuals) to be a witness. We do not accept the appellant’s submission that the identity of the person or persons who supplied information used for the compilation of the record needs to be precisely demonstrated as a pre-requisite to admissibility. Depending on the nature of the document and the information that went into compiling it, more than one person may have been involved. As Mr Branch suggested the person or persons may be unknown and it will be sufficient for the Judge to have regard to the generic role of the supplier of the information.
Moreover, we are satisfied that the circumstances of this case were such that it was open to the Judge to conclude that the person(s) who supplied the information relevant to the documents in question could not reasonably be expected to recollect the matters dealt with in the information he or she supplied. In R v Baptista, a decision of this Court dealing with the interpretation of s 3(1)(b)(iii) of the Evidence Amendment Act (No 2), Randerson J held that:[22]
... there may be circumstances which plainly demonstrate ... that the person making the business record could not reasonably be expected to recollect the matter. An obvious example is the routine recording of large numbers of manufactured components of an identical kind or where there has been such a lapse of time that the person making the record could not reasonably be expected to recall the matter.
We are satisfied that, given that seven years had passed since the time the records were produced, and given that the records were routine documents, it would not be reasonable to expect that the person(s) who supplied the relevant information would recollect the matters dealt with in the records.[23]
[22] R v Baptista (2005) 21 CRNZ 479 (CA) at [35].
[23]In Carpenter v Police, Randerson J found that this condition was met where two years had passed since the events in question: [2006] DCR 440 at [38].
The Judge also relied on s 19(1)(c) finding that undue expense or delay would be caused if the person who supplied the information contained in the business record were required to be called as a witness. We consider this finding was correctly made. It arose out of the circumstances of the failure to signal an objection when the common bundle was served and the late challenge by the appellant to the documents in question. The assessment by a judge of the proof of the statutory requirements in s 19(1) may take into account factors such as the timeliness of the challenge. After all one of the purposes in s 6 of the Evidence Act is the avoidance of “unjustifiable expense and delay”.
We observe that any hearsay statements contained in business records, if admitted into evidence, will always be subject to the issue of the weight to be ascribed to such statements. Some of the arguments raised by the appellant on the admissibility issue might well, depending upon the circumstances of the creation of particular documents and any other available evidence, be relevant to the issue of weight. But that does not assist the appellant on the first ground which relates to threshold admissibility of the business records.
In the light of these conclusions we have considered each of the classes of documents the admissibility of which was challenged by the appellant. We are satisfied that the findings of the Judge were in each case correct. All of the challenged documents were business records. The hearsay statements contained in each were correctly held to be admissible in evidence under s 19(1)(b) and (c) of the Evidence Act. As a result of these conclusions we do not need to consider the respondents’ alternative argument on estoppel. This ground of appeal fails.
The second question – liability
A second issue on appeal was whether, if all or some of the challenged documentary evidence is not admitted, that affected the findings of the High Court on liability. Given that we have upheld the Judge’s conclusions on admissibility and rejected the appellant’s challenges, we do not need to consider this question.
However, when the hearing started Mr Herzog sought to raise a further issue which had not been raised in the notice of appeal or the agreed issues. Counsel sought to argue that, even if all of the hearsay statements in the challenged documentary evidence were admissible, the Judge erred in his findings on liability on all causes of action. Counsel submitted that there was no evidence that any of the three sets of transactions were improperly made or were made for other than valuable consideration during the period the appellant was a director of APG. Further, there was no evidence that the appellant made, was instrumental in, or had knowledge of, any of the payments concerned.
This further argument was a surprise to the Court and to counsel for the respondents. Nevertheless, Mr Branch accepted that he was able to deal with the further submission and his clients’ position would not be compromised by the late change by the appellant. However the late raising of this topic meant that the argument was limited. It also means that it will be necessary for us to provide some reasonably detailed elaboration of the findings and reasoning of Venning J in the High Court.
Liability issues – High Court judgment
We have already summarised the key conclusions of the Judge on liability.[24] We will refer to the Judge’s key factual findings on causes of action alleging breach of fiduciary duty and breach of s 131 of the Companies Act.
[24] At [12]–[18] above.
With respect to the advances to Kap Nominees, the Judge stated:
[38] Mr Blanchett was unable to find any documentation in the records of the company to explain why APG advanced $215,000 to Kap Nominees (2) Ltd on 25 June 2004 or on what terms it was advanced. The only documentary record relating to the advance appears to be a facsimile from law firm Carter & Partners showing that funds had been transferred through their trust account in two tranches ($190,000 and $25,000) and which referenced the advance as a loan to Kap Nominees (2) Ltd.
[39] As noted, at the time the defendant was a director of Kap Nominees (2) Ltd. Kap Nominees (2) Ltd was a wholly owned subsidiary of Kap Nominees Ltd of which the defendant was, at the material time, the sole shareholder and director. In the absence of any evidence from the defendant, the position is that APG, a company of which the defendant was a director, advanced $215,000 apparently without security and in the absence of any written loan agreement or terms as to payment of interest or repayment, to a company of which the defendant was also a director. Further, the borrower was a wholly owned subsidiary of another company of which the defendant was the sole shareholder and director at the time. It is difficult to imagine a clearer case of a breach of fiduciary duty or breach of the duty to act in good faith and in the best interests of the company by a company director.
[40] Mr Herzog submitted there was no evidence the liquidators had taken any steps to recover the advance made to Kap Nominees (2) Ltd. But that does not provide a defence to the plaintiffs’ claim in relation to the $215,000 against the defendant. Kap Nominees (2) Ltd may be liable to repay the advance as a debt. The defendant’s liability is different. It arises as a consequence of his breach of the duties he owed to APG as a director. There is no reason at law why the borrower and the defendant cannot both be liable. The plaintiffs cannot recover twice, but they have not recovered anything from Kap Nominees (2) Ltd as yet. They are not obliged to exhaust their remedies against that company before pursuing the defendant for his breach of the independent duty he owed the company.
The three advances made by APG to the appellant’s daughter, Ms Wilson, during his directorship totalled $475,000. This included one payment of $400,000 in respect of which the appellant drew and signed a cheque for $400,000. Mr Blanchett’s evidence established that, despite his search of the company records, he was unable to locate any documents disclosing why Ms Wilson, who was neither a shareholder nor an employee of APG, should have received either that amount, or the other two sums which were transferred to her bank account by direct credit.[25]
[25] At [42].
The Judge then referred to separate proceedings in which APG had sought inter alia summary judgment against Ms Wilson in the sum of $475,000 in respect of the payments made between March 2004 and April 2004.[26] The Judge referred to an affirmation made by the appellant to support Ms Wilson’s opposition to the summary judgment application. The appellant had stated:
1.I was a director of the plaintiff company when it was called Capital Events Limited between 11 March 2004 and 23 July 2004. I am aware of certain payments directed to be paid to Rita Wilson which are the subject of these proceedings.
2.In particular, on 16 March 2004 I was requested by Terry Wilson to write out a cheque in the sum of $400,000.00 to Rita Wilson. I was the company’s authorised signatory. Mr Wilson along with Mr Andrew Tauber controlled the business of the plaintiff. A copy of the cheque is exhibit “D” to the affidavit of Mr Blanchett dated 17 February 2010. Mr Wilson advised that the cheque was his share of the funds available in the company’s account. I was aware that Mr Tauber also received similar amounts and directed that those payments be made to companies that he controlled. I understand that the plaintiff is claiming that funds paid to Rita Wilson were on demand advances or loans. To the best of my knowledge Rita Wilson did not have any loans nor did she request any monies be advanced to her at any time.
[26]APG Holdings Ltd (in liq) v Wilson HC Auckland CIV-2010-404-1216, 15 July 2010 and on appeal Wilson v APG Holdings Ltd (in liq) [2011] NZCA 647. The Supreme Court dismissed Ms Wilson’s application for leave to appeal: Wilson v Blanchett [2012] NZSC 6.
The Judge found, correctly in our view, that the appellant’s statement in the affirmation was an admission that the appellant made the payments to Ms Wilson at the direction of Mr Wilson who, despite the fact that he was not then a director, apparently controlled the business of APG. With respect to the payments to Ms Wilson the Judge concluded:
[45] In the absence of any further evidence on behalf of the defendant I find that, during the time the defendant was a director of the company, it paid $475,000.40 to Ms Wilson. The money was apparently paid without documentation. The only explanation suggested for the advances is the defence raised in opposition to the application for summary judgment that the moneys represented Mr Wilson’s drawings. But the company records confirm that, during the time the defendant was a director of APG, Mr Wilson was not a shareholder. The payments could not have been made in good faith. The defendant paid the $400,000 at the direction of Mr Wilson. If the defendant had made any proper inquiry about that or the other payments he must have known they could not have properly been made.
[46] Given APG was only one of a number of companies that otherwise were generally controlled by Messrs Wilson and Tauber, the relationship of the defendant to Mr Wilson through his daughter, and the limited time that the defendant spent as a director of the company there is a strong inference, which I draw, that he was effectively a nominee or, more colloquially in this case, a “patsy” director acting on behalf of and at the direction of either or both of Messrs Wilson and Tauber. Neither Mr Wilson nor Mr Tauber were directors of the company at the time. In addition to the defendant, Warren Barclay and Candy Mendez were directors. There is no evidence of the role they played. However, in the case of any conflict even nominee directors must act in the best interests of the company, not those of his or her appointer: Kuwait Asia Bank EC v National Mutual Life Nominees Ltd.[27]
[47] Mr Herzog submitted that the nature and proper treatment of the transactions involving Ms Wilson were the subject of other proceedings currently before this Court and the summary judgment was under appeal and was due to be heard shortly in the Court of Appeal. However, Mr Herzog’s submission that the other proceedings involving the advances are, in some way, a bar to the liquidators’ claim against the defendant in relation to the moneys is misconceived. The issue in these proceedings is whether, as a consequence of his actions as a director in relation to the advances he made to Ms Wilson, the defendant breached the duties he owed to the company. If he did then prima facie he is liable to the company. Ms Wilson may also be liable to repay the money. If she does repay any part of the $475,000, then such sum may be deducted from the amount due by the defendant under any judgment against him in this case. …
[27] Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 NZLR 513 (PC).
Mr Herzog submitted that there had been an acceptance in the related proceeding against Ms Wilson that it was arguable some of the money paid to Ms Wilson had been repaid to the company.[28] This was essentially a rerun of arguments that Ms Wilson had advanced in the summary judgment case which were found by the Associate Judge to be “not strong”.[29] Mr Branch responded that the appellant had failed to produce any real evidence as to the services allegedly provided for the funds. We agree and note that, even if full credit had been given for the amount involved, it would simply have reduced the amount owing.
[28]See APG Holdings Ltd (in liq) v Wilson, above n 26, at [28]–[36]; Wilson v APG Holdings Ltd (in liq), above n 26, at [37].
[29]APG Holdings Ltd (in liq) v Wilson, above n 26, at [33]. This finding was not discussed in the judgment of this Court on appeal.
The Judge was satisfied that the advances by the appellant to the two parties related to him, Kap Nominees and Ms Wilson, were clearly made in breach of the appellant’s duty to act in good faith and in what he believed to be the best interests of the company. We agree with those conclusions.
However, the Judge accepted that the position in relation to the advances made to Jokers Wild was different in that Jokers Wild was not an entity related to the appellant, nor one in which he had an interest.[30]
[30] At [49].
Between 13 April 2004 and 20 July 2004 APG made net payments to Jokers Wild of $749,084. Venning J found as follows:
[51] … Mr Blanchett said his search of APG’s records in relation to the advances disclosed that the first two and the last two payments are recorded as being payments to Dominion Finance on behalf of Jokers Wild. There are no other documents to provide an explanation as to why APG made payments to a finance company on behalf of Jokers Wild.
[52] The third, fourth and fifth payments were recorded in APG’s accounting system under a Jokers Wild advance account as payments to D Bourke, S A Bourke, and a loan via ARH. It appears that the payments were made on behalf of Jokers Wild but, as Mr Blanchett again said, there is no evidence why the payments were made.
[53] It does appear that Messrs Tauber and Wilson had given personal guarantees to support Jokers Wild. Given the defendant’s relationship with them, the inference is the defendant authorised or allowed APG to make the payments for their benefit, and not for APG’s benefit. To act in that way was a clear breach of s 131.
In terms of the reasons for, or justification of such payments, the Judge concluded:
[54] There is no evidence or any other documentation to show that the defendant made any inquiries as to the financial position of Jokers Wild before advancing money to it, or paying accounts on its behalf. Nor is there any record of any loan documentation or security being provided for the sums or even whether security was considered. Again there are no arrangements regarding repayment and no provision for interest to be charged.
[55] Mr Blanchett gave evidence of the financial position of Jokers Wild at the time the advances were made. The Jokers Wild financial statements (which Mr Blanchett has access to as liquidator of that company also) disclose that as at 31 March 2004 the company had net assets of $43,952. However, as at that date a sum of $1,494,242 was included as a valuation for property, plant and equipment following the creation of an asset revaluation reserve in March 2003. The description in the accounts is curious. It records “Revaluation of business At directors’ valuation”. As at 31 March 2003 and immediately preceding the implementation of the revaluation reserve there were negative retained earnings of $579,618 and an operating loss in excess of $1,600,000. With the revaluation reserve removed from the account Jokers Wild would have been grossly insolvent as at 31 March 2004. The position worsened over the ensuing year. By March 2005 Jokers Wild’s financial statements disclosed negative equity of in excess of $2,600,000 even allowing for the revaluation reserve of $1,494,242. If the revaluation reserve had been removed the net asset position as at 31 March 2005 would have shown a negative value in excess of $4,162,000.
[56] Mr Herzog submitted there was no evidence the defendant had any ability to determine the financial position of Jokers Wild at the time. There is force in that submission in that the defendant was not a director of Jokers Wild. Mr Blanchett has the information as the liquidator of that company. However, at the very least the defendant should have made inquiries about the financial position of Jokers Wild before advancing such large sums to it or for its benefit. The fact that over $476,000 was paid to a finance company on behalf of Jokers Wild should have led the defendant to consider the payments would not have been in the best interests of APG.
In reaching these conclusions the Judge relied on two Australian authorities, Walker v Wimborne[31] and Paul A Davies (Australia) Pty Ltd v Davies.[32] In each of those cases the court held that liability should be found against the directors where the lending was free of interest, without security and with no provision being made for repayment. In the former case there was the added factor that the money of the company was paid to a related company when the directors knew of the other company’s financial difficulties and failed to make adequate provision for security for repayment.
[31]Walker v Wimborne (1976) 137 CLR 1.
[32] Paul A Davies (Aust) Pty Limited v Davies (1982) 1 ACLC 66 (NSWSC).
The Judge also relied on the High Court decision in Sojourner v Robb.[33] There Fogarty J stated that the standard to be applied under s 131 of the Companies Act was: [34]
an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criterion as to whether the directors have done what they honestly believe to be right. The standard does not allow a director to discharge the duty by acting with a belief that what he is doing is in the best interest of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company …
[33]Sojourner v Robb [2006] 3 NZLR 808 (HC). An appeal to this Court was dismissed: Sojourner v Robb [2008] NZCA 493, [2008] 1 NZLR 751.
[34] At [102].
Applying these authorities to the facts, the Judge concluded:
[60] With defence evidence it would have been difficult for the defendant to suggest that the payments made for the benefit of Jokers Wild and Messrs Wilson and Tauber (apparently without inquiry as to its financial position, and without obtaining security or any arrangement for repayment) were in the best interests of APG. In the absence of defence evidence the inference the payments were not in the best interests of the company is irresistible.
[61] The payments to or for Jokers Wild are payments which a director with any understanding of the fiduciary duty or duty to act in the best interests of APG could not have undertaken without at least proper inquiry. I am inevitably led to the conclusion the payments could not have been made in good faith: Australian Growth Resources Corp Pty Ltd v Van Reesema.[35]
[35] Australian Growth Resources Corp Pty Ltd v Van Reesema (1988) 13 ACLR 261 (SASC) at 269.
There is no need for us to traverse the Judge’s findings and reasoning relating to liability on the remaining causes of action.
Submissions on liability
The essential submission by the appellant was that there was no evidence that the appellant either authorised, or had any knowledge of, any of the transactions other than the one transaction carried out on 17 March 2004 when he signed a company cheque made payable to Ms Wilson. Moreover, counsel submitted that there was no evidence of any impropriety in the transactions concerned. Neither had the liquidators proved that any of the transactions involved a lack of valuable consideration. These submissions were essentially a rerun of matters submitted in the High Court. In support of the appeal, counsel did not identify any particular part of the judgment of Venning J which were alleged to be erroneous.
In response, Mr Branch for the respondent relied on the findings and reasoning of the Court below.
Our evaluation – liability
We reject the appellant’s submissions on this ground of the appeal. We consider that there was admissible evidence available to the Judge to support all the findings made and inferences he drew in the passages summarised above. Moreover, any claim by the appellant regarding lack of proof of absence of valuable consideration cannot avail the appellant. The issue is whether there was a breach of duty and a want of prudence.
In this context it is instructive to refer to the Judge’s conclusions in response to similar arguments advanced in the High Court. The Judge said:
[70] Mr Herzog then submitted that there was no evidence that the defendant was even aware of the particular transactions. Insofar as the payment of $400,000 to Ms Wilson is concerned that submission is plainly wrong. I infer that with his knowledge of that transaction and his direct involvement in the company to that extent the defendant would have been aware of the other transactions as well. Further as a director of Kap Nominees (2) Ltd he must have known that that company received the $215,000.
[71] However, even if the transactions were made without his knowledge then, as a director of a private company that made substantial payments totalling in excess of $1,577,000 over a four month period to three entities the defendant clearly failed to exercise the reasonable care and skill a director should have exercised in that he would have failed to take the necessary steps to place himself in a position to guide and monitor the management of the company.[36] If the defendant was unaware of the payments that in itself provides evidence of a failure to satisfy the duty on him under s 137.
[36] Mason v Lewis, above n 2, at [115].
On appeal, Mr Herzog did not press his untenable submission as to lack of knowledge of the cheque for $400,000 paid to Ms Wilson. We are satisfied that the “no evidence” argument on the issues of authorisation and/or knowledge in respect of the other payments cannot succeed. The reasoning of Venning J amply demonstrates that the Judge considered all of the evidence, including that given by Mr Blanchett, as well as the documentary evidence and made findings that the appellant breached various duties owed by him to APG. The key issue in the High Court was the lack of prudence on the appellant’s part in allowing the payments to be made and the absence of any inquiry. In the circumstances, the conclusions drawn by the Judge were inevitable. Accordingly we uphold the Judge’s findings on liability for the reasons he gave in the judgment.
In coming to this view we have independently considered the evidence, including the hearsay statements in the business records produced. The liquidators have amply made out the case establishing breaches of duty by the appellant in relation to the three categories of payments made during his tenure as a director. This additional ground of appeal cannot succeed.
For completeness we note that the appellant did not challenge the Judge’s findings on remedy or quantum.
Result
The appeal is dismissed.
The appellant must pay the respondents costs for a standard appeal on a Band A basis and usual disbursements.
Solicitors:
Mark Henley-Smith, Auckland for Appellant
Harkness Henry, Hamilton for Respondents
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