Lakeside Ventures 2010 Limited (in liquidation) v Levin
[2014] NZHC 1048
•19 May 2014
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2012-470-000585 [2014] NZHC 1048
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of Lakeside Ventures
2010 Limited (in liquidation)BETWEEN
LAKESIDE VENTURES 2010 LIMITED (IN LIQUIDATION)
First Plaintiff
AND
HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RILES
Second Plaintiffs
AND
TREVOR CYRIL BURROWS Defendant
Hearing: 14 May 2014 Appearances:
K Kuang for Plaintiffs
No appearance for DefendantJudgment:
19 May 2014
JUDGMENT OF KEANE J
This judgment was delivered by me on 14 May 2014 at 1pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland. Grey Street Legal Ltd, Gisborne.
LAKESIDE VENTURES 2010 LTD (IN LIQ) v LEVIN & ORS [2014] NZHC 1048 [19 May 2014]
[1] On 26 October 2010 Lakeside Ventures 2010 Ltd was placed in liquidation by order of this Court and Lakeside and its liquidators now seek to recover from Trevor Burrows, Lakeside’s sole shareholder and director, the sum claimed by Inland Revenue on the liquidation, $486,299.63.
[2] Alternatively, Lakeside and the liquidators claim $465,135.45: a distribution purportedly made to Mr Burrows on 22 February 2010 by resolution of the Tuamoto Trust, on the single vote of its sole trustee, Lakeside, retrospectively distributing to Mr Burrows as a beneficiary, drawings he had made between 6 August 2007 – 31
March 2008 on a fund in a bank account Lakeside held on behalf of the Trust.
[3] The bank account fund, which Mr Burrows drew down, was a $774,582.79 profit, which Lakeside had made, on behalf of the Trust, on a simultaneous purchase and sale of property in Sponge Bay, Gisborne, which Lakeside had entered into for the Trust within the compass of a joint venture. At the time Mr Burrows drew those funds down, as Lakeside confirmed in its income tax return for the year ended 31
March 2008, filed on 22 February 2010, the date of the resolution, it was subject to a related core income tax liability of $301,317.40.
[4] The resolution, if valid, denied Lakeside any ability to satisfy that tax liability. By that date Lakeside was left with $142 cash and, if as the resolution assumed and declared, Mr Burrows’ drawings were distributions to him as a beneficiary, it could no longer have recourse against him in debt on the basis that the drawings were shareholders’ advances repayable on demand.
[5] In this proceeding Lakeside contends that Mr Burrows is liable to repay those drawings, despite the resolution, contending that they were and never ceased to be shareholder advances. Alternatively, it contends that between 6 August 2007 – 31
March 2008 it was insolvent, as Mr Burrows must have known, and that it is entitled to recover the drawings from him under s 56 of the Companies Act 1993.
[6] The liquidators seek, independently, to recover the distributions, the subject of the 22 February 2010 resolution, under s 298, on the ground that they were not made for adequate consideration. Independently, they seek to recover them as
dispositions of Lakeside’s property, under s 348 of the Property Law Act 2007, and if need be s 60 of the Property Law Act 1952.
[7] Ultimately, Lakeside and the liquidators together seek, under s 301 of the Companies Act 1993, not just the drawings, the subject of the resolution, but the entire debt claimed by Inland Revenue, the core tax liability and the penalties and interest, $486,299.63. They contend that Mr Burrows ought to compensate Lakeside to that full extent, because he is culpable of misconduct as a director under ss 131,
134, 135, 136 and 137.
[8] In his statement of defence Mr Burrows contends that his drawings were, in reality, distributions he received as a beneficiary of the Trust, not shareholder drawings; and, consequently, that they are not governed by the Companies Act 1993. He also contends that between 6 August 2007 – 31 March 2008 the company was solvent.
[9] On 19 March 2013, however, Associate Judge Bell made an order debarring Mr Burrows from defending this proceeding any further. Mr Burrows was then in default, but that was not decisive. He had intimated that he no longer intended to oppose the claim and intended instead to become a bankrupt. His solicitor was given leave to withdraw. On that basis the proceeding was set down for formal proof only.
Decision in essence
[10] In this decision, on formal proof, I make an order in favour of Lakeside and the liquidators, under s 301, requiring Mr Burrows to contribute to Lakeside’s assets by way of compensation the full debt to the Inland Revenue, to which he exposed Lakeside, $486,299.63; and related declarations as to his misconduct as a director. I also give judgment or make orders in their favour in their causes of action to recover Mr Burrow’s drawings, $465,135.45, to the extent that those causes of action remain relevant to his liability.
[11] As I outline in this decision, in all of these causes of action, Lakeside and the liquidators advance on the indisputable evidence three critical propositions which I accept:
(a) Mr Burrows incorporated Lakeside, making himself sole shareholder and director, and settled the Trust, making Lakeside the sole trustee and himself a discretionary beneficiary, in order to pursue through those media the Sponge Bay joint venture.
(b) Once Lakeside made the profit in the venture on the simultaneous purchase and sale of land, it immediately became liable to income tax on the profit and yet, despite that, Mr Burrows drew down that fund, then held by Lakeside for the Trust, as he was able to do as sole shareholder and director of Lakeside, its sole trustee.
(c) Mr Burrows was instrumental in Lakeside’s delay in filing its income tax return declaring that liability, but on the date that it did so, he was equally instrumental in having the Trust resolve that his drawings were distributions to him as a beneficiary, to render himself immune as a shareholder from any action in debt by Lakeside.
[12] In this decision, I hold, Mr Burrows is not shielded by his status as a discretionary beneficiary of the Trust. He controlled Lakeside and Lakeside controlled the Trust, and the 22 February 2010 resolution is a device, which cannot exempt him from his shareholder liability or his duties as a director, whether under the Companies Act 1993 or under the general law as it governs companies.
Advances repayable on demand
[13] In its first cause of action Lakeside claims the net sum of the payments it made to or for the benefit of Mr Burrows, $465,135.45: $550,040.54 drawn by Mr Burrows from Lakeside’s bank account in respect of the Trust between 6 August
2007 – 28 February 2008; and $9,849.63, further payments made by Lakeside itself between 6 September 2007 – 12 March 2008.
[14] Until 29 January 2010, the liquidators established, those payments were classified as drawings and were treated consistently in Lakeside’s financial statements for the year ended 31 March 2008, which Mr Burrows approved when on
22 February 2010 he signed the Trust minutes on behalf of its sole trustee, Lakeside, declaring the payments he had received to be distributions to him as a beneficiary.
[15] Accordingly, in this first cause of action, Lakeside contends, these drawings must be deemed shareholder advances, repayable on demand, unless and until it resolved itself to classify them otherwise.1 In this respect, it holds Mr Burrows to his duty as a director to ensure that the company’s records were correct so that its financial position was reasonably apparent, and its financial statements were able to be prepared and audited.2
[16] Mr Burrows, as I have said, may contend that the 22 February 2010 resolution confirming the distributions to him made is fatal to the drawings being deemed shareholder advances repayable as a debt to Lakeside. But in principle, and certainly in the absence of any submission from him, I do not accept that to be so.
[17] Lakeside may have entered into the joint venture transaction for the benefit of the Tuamoto Trust. It may have held the profit on behalf of the Trust. But immediately it obtained that profit it incurred a personal liability to income tax, imposed by statute, independent of the date on which Lakeside elected to file its return for the year ended 31 March 2008.3 In equity, Lakeside was immediately entitled to indemnity from the Trust for that liability, and thus to that extent to a charge over the fund it held for the Trust, which Mr Burrows drew down.4
[18] That equitable interest was sufficient, it seems to me, to bring into play the ordinary rule on which Lakeside relies that Mr Burrows’ drawings on the account were, on the face of it, made as a shareholder giving rise to a debt repayable on demand, unless displaced by a resolution, not just by the Trust but by Lakeside itself. Lakeside passed no such resolution, and the Trust’s retrospective resolution cannot in
my view suffice.
1 Thom Contractors Ltd (In Liquidation) v Thom HC Auckland CIV-2008-404-6829, 28 April
2009; Re Samarang Developments Ltd (In Liquidation) HC Christchurch CIV-2003-409-2094,
30 September 2004; New Zealand Game Meats Export Ltd (In Liq) v Lau HC Whangarei
CP34/98, 19 March 1999.
2 Companies Act 1993, s 194.
3 Commissioner of Inland Revenue v New Zealand Wool Board (1999) 19 NZTC 15,476.
4 AMP General Insurance Ltd v Macalister Todd Phillips Bodkins [2007] 1 NZLR 485; Levin v
Ikiua [2011] 1 NZLR 678 (CA).
[19] On that basis, I conclude, Mr Burrows is answerable to Lakeside in debt to the extent of the drawings. But if that is wrong, he is independently liable as a shareholder and director of Lakeside, I consider, in the several ways identified in the other causes of action.
Recovery of shareholder distribution
[20] In its second cause of action, under s 56 of the Companies Act 1993, in which Lakeside seeks to recover the drawings validated by the 22 February 2010 resolution, it once again puts in issue the retrospective efficacy of that resolution.
[21] The drawings, the subject of the resolution, indeed the resolution itself,
constituted a ‘distribution’, under s 52, capable of recovery under s 56.5
The
resolution authorised a direct or indirect transfer of money to or for the benefit of Mr
Burrows, Lakeside’s sole shareholder, effectively gifting his drawings to him and absolving him of any debt to Lakeside.
[22] That resolution, as I have said, does not seem to me capable of having that effect, simply because Lakeside was throughout acting as corporate trustee for the Trust. That cannot exempt either Lakeside, or its sole director and shareholder Mr Burrows, from the discipline of the Companies Act 1993.6
[23] The distributions, authorised retrospectively by the 22 February 2010 resolution, could only have been validly made if at the time Lakeside’s sole director, Mr Burrows, had reasonable grounds to be satisfied that Lakeside was solvent and
would remain so immediately after the distribution, and had given a certificate to
that effect setting out his grounds.7
no basis for doing it.
He did not do that, and on the evidence he had
[24] To be solvent at the date of or after that distribution, Lakeside had to be able
to pay its debts as they became due; and the value of its assets had to be greater than
5 Companies Act 1993, s 2 “distribution”; Re DML Resources Ltd Ltd (In Liq) [2004] 3 NZLR 490 (HC).
6 Levin v Ikiua, above n 4.
7 Companies Act 1993, s 52.
its actual and contingent liabilities;8 and that assessment needed to be set against the whole circumstances of the company.9
[25] As at the date of the resolution, Lakeside was on the evidence insolvent. It had only $142 cash left. Its core liability to income tax stood at $301,317.40, which had accrued on 31 March 2008, leaving aside penalties and interest. Its net negative asset position as at 22 February 2010 was $535,498. In the event that the distributions actually began on 6 August 2007, moreover, I accept the liquidators’ opinion that Lakeside was by then already insolvent.
[26] As at 6 August 2007 Lakeside had only two assets independent of the sum it held on behalf of the Trust: a $450,000 vendor’s loan to the joint venture, and a 10 per cent interest in the venture; and, even then, as the liquidators say, they were speculative assets.
[27] The joint venture itself, as they say and I accept, was high risk from the outset. It involved a large scale residential subdivision of rural land on the outskirts of a provincial city with a static population. It involved first, second and third mortgage finance. It relied on presales becoming unconditional, many of which had been entered into for little or no deposit. Titles within the subdivision had not been issued and unconditional sales could not be completed until they were. Whether and when that was to happen was not then foreseeable.
[28] A measure of the eventual actual worth of the joint venture to Lakeside, and thus to the Trust, lies in this. On 15 December 2008 Lakeside transferred the
$450,000 loan to Mr Burrows’ family trust, the Beachside Trust. In August 2010 it relinquished its 10 per cent interest in the joint venture for a payment of $1.
[29] On 22 February 2010, if not before, Mr Burrows had to be aware of
Lakeside’s insolvency in the face of its liability to income tax since 30 March 2008;
and he had equally to be aware that the effect of the resolution would be to deny
8 Companies Act 1993, s 52(2).
9 Companies Act 1993, s 4.
Lakeside any ability to look to him for the drawings he had made on its then only asset, however notional.
[30] That being so, I hold, the 22 February 2010 distribution, made by the trust at the instance of Lakeside as sole trustee, at the instance in turn of Mr Burrows as its sole shareholder, is recoverable from him under s 56(1), and furthermore also recoverable under s 56(2).
Related party recovery
[31] The liquidators pursue Mr Burrows independently, under s 298(2), contending that the distribution made to Mr Burrows, as sole director and shareholder, was a related party transaction for inadequate consideration, within the three year period that the section specifies.
[32] That period, according to s 298(4), is the three years before the Commissioner applied to have Lakeside liquidated, 12 July 2010, extending to the date of liquidation, 26 October 2010. It lies between 12 July 2007 – 26 October
2010, within which all the drawings and further payments were made and the resolution passed.
[33] All of the drawings the subject of the resolution were made, as I have held, out of funds in which Lakeside had an equitable interest by way of indemnity having incurred a related income tax liability; and it is equally manifest that Lakeside did not receive any consideration for the distribution. Mr Burrows has admitted that to be so.
[34] The only basis then on which Mr Burrows could avoid liability under s 298 would be if the drawings were characterised as a distribution by the Trust to him as a beneficiary and I have held that does not avail him. On that basis, I hold, the liquidators are entitled to recover the drawings from him under s 298(2).
Distribution to prejudice of creditors
[35] In their next cause of action the liquidators invoke s 348 of the Property Law Act 2007, or s 60 of the Property Law Act 1952, in essence contending that the drawings were made to the prejudice of Lakeside’s creditor, the Inland Revenue.
[36] For the reasons I have given I am equally satisfied that the distributions the subject of the 22 February 2010 resolution, and the resolution itself, constituted a disposition by Lakeside at a time when it was insolvent. I am equally satisfied that the purpose of the resolution was to render Mr Burrows immune from any action in debt by Lakeside in order to meet its income tax liability.
[37] It can hardly be coincidental that on 22 February 2010 Lakeside also filed its overdue income tax return declaring its core liability to tax, $301,317.40, a liability that had accrued on 31 March 2008. Or that this return was only filed then because the Inland Revenue had advised Lakeside’s accountants that Lakeside was under audit for having failed to file its return within time.
[38] The resolution that day, ostensibly by the Trust, but in reality at the instance of its sole trustee, Lakeside, and thus at the instance of Lakeside’s sole shareholder and director, Mr Burrows, could only have had one purpose and that was to nullify any claim against him by Lakeside in order to satisfy its liability to income tax.
[39] The liquidators, I hold, are entitled to an order under s 348 setting aside the disposition made by the resolution; and to the extent that their claim lies rather under s 60 of the Property Law Act 1952, as to drawings made before 1 January 2008, they are equally entitled to an equivalent order.10
Breaches of director’s duty
[40] Finally, Lakeside and the liquidators seek an order under s 301 of the
Companies Act 1993 requiring Mr Burrows not just to repay or restore the funds he received by way of drawings, but to contribute to the assets of the company as a
10 Regal Castings Ltd v Lightbody [2009] 2 NZLR 433 (SC) at [5]–[8].
matter of just compensation the full income tax liability to which he exposed
Lakeside.11
[41] Mr Burrows is answerable, Lakeside and the liquidators contend, in the following way:
(a) In failing to act in good faith and in what he believed to be the best interests of the company, (s 131(1));
(b) In failing to exercise the care, diligence and skill expected of a reasonable director, (s 137);
(c) In causing or allowing Lakeside to conduct its business in a manner likely to cause serious loss to creditors, (s 135);
(d) In allowing Lakeside to incur an obligation without believing on reasonable grounds that it was able to meet its liability if required, (s
136); and
(e) In acting or agreeing to Lakeside acting, in a manner that contravened the Companies Act 1993 or Lakeside’s constitution, (s 134).
[42] I am satisfied that Mr Burrows was in breach of his duty under s 131(1) to act in good faith and the best interests of the company. He appropriated Lakeside’s only tangible asset, its profit from the joint venture, depriving it of its ability to meet its related liability as and when it fell due. He delayed in filing Lakeside’s income tax return, exposing it to penalties and interest. He sought to render himself immune from suit by causing Lakeside to pass the trust resolution dated 22 February 2010.12
[43] Equally, under s 137, at the very least Mr Burrows failed to exercise the care,
diligence and skill expected of a reasonable director, judged objectively.13
In this I
agree with the prescient comment in one of the cases that a firm line must be taken
11 Companies Act 1993, s 301(1)(b).
12 Robb v Sojourner, above n 11; Re Wait Investments Ltd (In Liq) [1997] 3 NZLR 96 (HC).
13 Boutique Tanneries (In Liq) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008.
as to what is expected of directors. Otherwise they may have an incentive ‘to strip their companies on the basis that they can argue about it later’.14
[44] Equally, on 22 February 2010, Mr Burrows had to be in breach of his duty as a director under s 135 not to trade recklessly (to trade in a manner likely to create a substantial risk of serious loss to the company’s creditors); and his duty under s 136 not to allow Lakeside to incur an obligation unless he believed at the time on reasonable grounds that Lakeside could perform.15
[45] Mr Burrows, in breach of his duty as a director, used his controlling interest in Lakeside to cause it to pass the trust resolution depriving Lakeside, and thus its creditors, of any recourse in debt to him for the drawings he had made, the one asset, however notional, that Lakeside had left.
[46] So too on 22 February 2010 when Mr Burrows obtained that absolving resolution, he had to be in breach of s 134, both under Lakeside’s constitution and under the Companies Act 1993. He could not truthfully have given a solvency certificate on that date.
Outcome
[47] Lakeside and the liquidators are entitled to the declarations they seek in this last cause of action under s 301 and I make a corresponding order that Mr Burrows contribute to the assets of Lakeside by way of compensation $486,299.63, Lakeside’s full liability to income tax, penalties and interest.
[48] I also give judgment in favour of Lakeside and the liquidators, or make the orders they seek, in their preceding causes of action confined to Mr Burrows’ drawings, the subject of the 22 February 2010 resolution, which are subsumed effectively within the s 301 order I have made, which fixes Mr Burrow’s actual
liability.
14 Mako Holdings Ltd (In Liq) v Crimp HC Invercargill CP23/99, 28 November 2000.
15 Peace and Glory Society Ltd (In Liq) v Samsa [2010] 2 NZLR 57 (CA); Fatupaito v Bates
[2001] 3 NZLR 386 (HC); Goatlands Ltd (In Liq) v Borrell (2007) 23 NZTC 21,107 (HC).
[49] Lakeside and the liquidators are entitled to the costs of and incidental to this
proceeding at scale 2C and disbursements as fixed by the Registrar.
P.J. Keane J
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