Lower v Traveller
[2005] NZCA 187
•26 July 2005
IN THE COURT OF APPEAL OF NEW ZEALAND
CA36/04
BETWEENKLAUS LÖWER
Appellant
ANDGARY TRAVELLER AND JOHN ANTHONY WALLER
Respondents
Hearing:22 and 23 November 2004
Court:McGrath, Glazebrook and Hammond JJ
Counsel:J E Sutton and M H L Morrison for Appellant
M D O'Brien and C E Manson for Respondents
Judgment:26 July 2005
JUDGMENT OF THE COURT
A. The appeal is dismissed.
B.The appellant must pay costs to the respondent of $12,000 together with reasonable disbursements to be agreed by counsel or failing agreement to be fixed by the Registrar.
Table of Contents
Para No
Introduction [1]
Background facts [2]
High Court judgment [16]
Statutory basis [26]
Appeal against factual findings [27]
Decision on factual appeal [28]
Was s 320 in force? [47]
Liability under s 320 [65]
Quantum appeal: submissions [66]
Quantum appeal: decision [78]
Result [94]REASONS
(Given by McGrath J)
Introduction
[1] This is an appeal by a director of a shipping company, which is in the course of being wound up, against a judgment of the High Court which found that the director had knowingly been a party to the carrying on of the company’s business in a reckless manner. The High Court held that the circumstances were covered by s320(1)(b) of the Companies Act 1955 and declared that the director was personally liable for $8.4m of the debts and liabilities of the company, not including its indebtedness to related party creditors. The High Court also ordered that the director pay interest on that sum from the date of liquidation and the costs and disbursements of the High Court proceeding which was brought by the liquidators. They are the respondents to the appeal.
Background facts
[2] South Pacific Shipping Co Ltd (SPS) was formed in January 1992 to operate on the trans-Tasman shipping routes. The appellant Mr Klaus Löwer, who is a German businessman, became a director of SPS on 20 May 1992. He had previously been involved as a shareholder in New Zealand Coaster Service Limited, a company which operated on the New Zealand coastal trade and which had chartered vessels from Germany, including one of which Mr Löwer was a part owner.
[3] By June 1993 Mr Löwer was the controlling shareholder of SPS, holding 85.5% of its share capital. Eventually he became the sole shareholder. He was the only shareholder of any financial substance. He continued to be a director of the company until shortly before it was placed in liquidation on 19 February 1998.
[4] SPS entered into bareboat charter arrangements in respect of vessels owned in Germany. Eleven such vessels became the subject of sub-charter agreements with SPS through companies in Antigua and The Netherlands.
[5] At the time there were tax incentives under German law that encouraged ship-building and ship ownership. Mr Löwer set up investment partnerships in Germany which acquired ownership of the vessels which SPS would use on its routes. He also set up the associated financing arrangement with Bremer Landesbank, a German bank. In each instance he received fees for these services. He also took up an ownership interest himself in the partnerships that came to own eight of the eleven vessels that were sub-chartered by SPS. As well, he benefited from receiving fees under management agreements that he entered into in respect of the vessels. The Judge found that the margins available to the intermediary Antiguan and Dutch companies, through the sub-chartering arrangements, over and above what the ship-owning partnerships received, were substantial.
[6] Mr Löwer benefited financially from each tier of these arrangements. He received fees of between $800,000 and $1m for setting up each of the partnerships that acquired ownership of one of the eight vessels. The vessel management fees were of the order of 4% to 5% on time charters and 8% on double charters. Had SPS met in full its obligations to his intermediary companies the margins they received would have been in the order of $2.8m per annum. The extent of his ownership interest in the vessels is indicated by the fact that he had contributed $16m towards the cost of $40m for the four vessels in which he had acquired an interest by early 1995.
[7] The head office of SPS was at Christchurch where its chief executive Captain Fast, who was also a director, resided. Mr Löwer resided in Germany, as did two others who were directors at various times. The chairman of the board of SPS, Mr McAllum, resided in Australia.
[8] The market which SPS entered in 1992 was about to experience major changes. Legislation regulating restrictive practices in New Zealand does not apply to international shipping (cf s 44(2)(a) Commerce Act 1986). In 1991 seven companies operated twelve ships on the trans-Tasman routes with three of them co‑operating through what was known as the Conference. As well, there was an arrangement between the Australian and New Zealand maritime unions, known as the Maritime Accord, the purpose of which was to preserve trans-Tasman trade for vessels manned by Australian and New Zealand crews. Historically, because of these restrictive practices and competition law limits, vessels with foreign crews, on international voyages which included a Trans-Tasman leg, were not able to fill empty space by cross-trading on that route.
[9] By the early 1990s the industry recognised that the Accord was likely to break down and by 1996 it had done so. Around this time the Conference arrangements also broke up. These events facilitated international competition on trans-Tasman routes from cross trading. The entry into the market of SPS, coupled with emergence of cross-trading considerably increased trans-Tasman shipping capacity. While the volume of trade also increased, significant excess in capacity developed on the trans-Tasman between 1991 and the end of 1997. The widespread cross trading that developed during 1997 and 1998 was to mark the end of the longstanding dedicated Trans-Tasman ship operations.
[10] There were several features of the financial performance of SPS during its period of trading. First, its income of $42.3m in the financial year to 30 June 1993 rose to $90.9m for the year to 30 June 1996 reflecting the company’s expansion of shipping capacity. Income fell to $82.5m in the following year and was only $34.5m for the final six months to 31 December 1997.
[11] SPS traded at a loss throughout. Its cumulative losses rose from $2.3m at the end of its initial six months trading period to 31 June 1992 to be $39.6m at 31 December 1997. The deficit in the company’s shareholders’ funds rose from $1.5m as at 31 June 1992 to $31.9m by 31 December 1997. The initial authorised capital of SPS had been $500,000, which was increased to $1 million shortly after its establishment. In June 1993 its capital was increased by $5.25 million and finally in June 1994 by a further $1.5 million to $7.75 million. The working capital deficit moved from $4.4m as at 30 June 1994 to $8.9m on 31 December 1997.
[12] SPS’s related party debt grew substantially between 30 June 1994 when it was $4.6m, to 31 December 1997 when it was $23.5m. Related party debt largely represented arrears in sub-charter payments, in effect the unpaid margins due to Mr Löwer’s intermediary companies or loans representing that debt.
[13] Finally, during its period of trading, there was a growing shortfall between current assets and current liabilities of SPS. For the 30 June 1994 year this was $4.4m and the following years it was respectively $6.2m, $7.4m and $8.9m.
[14] SPS was able to continue to trade, despite its consistently deteriorating financial position, because of its liquidity. It was able to collect its trade debts within 14 days, while enjoying extended credit of between 30 and 90 days from its trade creditors. The company was also allowed some flexibility over when it would make charter payments, subject always to sufficient funds being remitted to cover the ship owning partnerships’ loan obligations to Bremer Landesbank. This was its method of financing its operations. It was at its most effective during the period up to 1 July 1996 during which the company’s turnover was increasing. Often, however, Mr Löwer, or his associates, put great pressure on SPS to meet its related party debt. The liquidity requirements of SPS rose steadily with its increasing turnover until 30 June 1996. They were reflected in the size of its related party debt for the 31 June 1997 year.
[15] On 18 February 1998, having failed over a six month period to negotiate a merger of SPS with the Union Direct line, Mr Löwer resigned as a director of SPS and on behalf of the subcharterer terminated the five remaining charters of vessels to the company. The company was placed in liquidation the following day. Its total liabilities were $41m together with a possible further liability of $3.2m to Bremer Landesbank for a shortfall in the loans to the shipping partnerships. At the time of the High Court hearing net realisations were of the order of $1m.
High Court judgment
[16] The High Court judge, William Young J, recognised that as SPS had a deficit in shareholders’ funds from the outset of trading, the company’s creditors were at all times providing it with liquidity and thus its working capital. He observed that it was highly unusual for a company to trade for several years, as SPS had, in this situation. He found that while trade creditors would be aware of industry risks they were not fully informed at any stage concerning the SPS financial situation. No accounts were filed with the Companies Office before May 1994 (when the 1992 accounts were submitted). The accounts for the years ended 30 June 1993 and 1994 were not lodged until August 1995. The Judge inferred that management was reluctant to let the SPS financial position become widely known in the market as it would then face difficulty in getting credit.
[17] The risks to trade creditors were compounded as the market environment became increasingly hostile. The Judge found that by the end of 1993 it was foreseeable that the Accord was likely soon to come to an end and competition emerge, with the probability of cross-trading once the Tasman routes were available to international shipping. The major increases in cargo capacity on the trans-Tasman routes would then bring freight rates down. In its financial situation, high standards of governance were required but the company did not adopt orthodox governance structures by putting financial planning in place, having regular and properly documented board meetings at which performance was matched against forecasts, or fully recording board proceedings in minutes. Nor did it ensure board decisions were implemented.
[18] In particular the Judge found that there was no orthodox budgeting process in place prior to the year ended 30 June 1994 nor any indication of serious analysis of variations between projections and performance. Projections discussed by the Board on 16 July 1993 were soon exposed as were subsequent projections in September 1993.
[19] There were informal projections of profitability for the next three months before the board of SPS at its meeting on 18 April 1994, but the minutes recorded nothing in the nature of long term detailed projections. At that meeting, the Board decided to charter three additional vessels. According to the chief executive only one was required to meet the need for a seventh ship in the trans-Tasman trade. As to the others the minutes recorded that their charter was agreed to:
…in view of the rising market for these type of vessels and the comfort they could be traded in the Caribbean, or along the European coast as feeder vessels in the event of a change in market conditions in the South Pacific.
[20] At the meeting on 30 June 1994, SPS resolved to acquire the capital of New Zealand Coaster Service Ltd by taking over its liabilities. Mr Löwer advanced $1m to enable its trade creditors to be paid.
[21] The Judge did not accept that the informal projections of profitability before the board in April 1994 warranted the decisions then taken. The company was then facing insolvency and if it had elected to trade on it should have put in place careful strategies. Instead it had embarked on an extraordinary programme of extensive expansion. Mr Löwer was not at the meeting but the Judge found that he was a party to the decisions which would not have been made without his approval. The Judge also found that he was motivated in his decisions by the collateral benefits to him, through the various fees and margins of continuing and expanded trading by SPS. He had an incentive to cause the company to keep trading despite the risks to trade creditors in doing so in its exacerbating financial situation.
[22] The Judge concluded that Mr Löwer’s situation was covered by s 320 of the Companies Act 1955 which was aimed at those who took illegitimate business risks which warranted a finding of reckless trading. The Judge said:
Given his wish to permit SPS to continue to trade despite insolvency, the hostile business environment, his unwillingness or inability to implement orthodox governance practices, and the proven unreliability of management reporting, he ought to have been prepared to put his own money up by capitalising the company to an extent that was appropriate given the risks he was taking with creditors’ money. His behaviour departed so markedly from orthodox business practice and involved such extensive and unusual risks to the creditors that it can fairly be stigmatised as reckless.
In my view the directors, as at 18 April 1994, if not before, ought to have shut the business down. They were by this stage trading with their creditors’ money in circumstances where the prospects of success simply did not warrant the taking of any further risks.
[23] Having found that Mr Löwer was a party to the carrying on of SPS’s business in a reckless manner, William Young J was required under s 320(1)(b) of the Companies Act 1955 to decide for what part of its debts he should direct that Mr Löwer was personally responsible. He proceeded on the basis that the power under s 320 was remedial, but that the Court had an element of discretion. He put aside from consideration the related party debt of $17.271m, because of the agreement that it would be subordinated.
[24] The Judge based this decision on the amount that Mr Löwer should be ordered to contribute to the company’s creditors on a notional liquidation of SPS. Making the assumption that all claims would be allowed the Judge found that the loss to trade creditors, in the absence of recovery from Mr Löwer, would be $27m. An allowance should, however, be made for losses they would have suffered if the company had been liquidated in April 1994, and the Judge accepted evidence that this would have been $9.2m. The difference, being around $18m, was an approximation of the losses suffered by trade creditors and set the upper limit for what the Judge should direct that Mr Löwer had to pay.
[25] The Judge deducted $6m from the $18m losses to reflect uncertainties in his calculation, and also discounted the difference of $12m by 30% to reflect general industry risks that trade creditors should be taken to have been aware of and to have factored into their prices for goods and services provided to SPS. The resulting figure was $8.4m. William Young J declared that Mr Löwer was personally responsible for that part of the debts of SPS.
Statutory basis
[26] From 1 April, until its repeal on 30 June 1994, on the coming into force of the Companies Act 1993, s 320(1) of the Companies Act 1955 relevantly provided:
320. Responsibility for fraudulent trading of persons concerned –
(1) If in the course of the winding up of a company it appears that-
(a)Any person was, while an officer of the company, knowingly a party to the contracting of a debt by the company and did not, at the time the debt was contracted, honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts, (including future and contingent debts); or
(b)Any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner; or
(c)Any person was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose,-
…on the application of the Official Assignee or the liquidator or any creditor or contributory of the company the Court, may, if it thinks proper to do so, declare that the person shall be personally responsible, without any limitation of liability, for all or any part of the debts and other liabilities of the company as the Court may direct.
…
Appeal against factual findings
[27] In this Court, Mr Löwer challenged the factual finding that he had taken illegitimate business risks exposing him to an order under s 320(1)(b). In particular he took issue with the finding that the directors should have shut down the business on 18 April 1994. The argument of counsel for the appellant, Ms Sutton, who did not appear in the High Court, centred on five points. First, counsel said that the Judge’s conclusion was inconsistent with the continuing sound liquidity position of SPS. Secondly, the Judge’s finding was inconsistent with professional advice given to the directors, in particular by Buddle Findlay, later in 1994. Thirdly, in rejecting the evidence concerning the directors’ assessment of the company’s situation, the Judge put undue weight on the opinion evidence of a Mr Longley, who was the chief executive of a competitor. Fourthly, the judgment placed insufficient weight on the extent to which Mr Löwer had intended to provide substantial financial support for the company. Finally, the Judge had not adequately recognised the significance of the roles of the chairman and executives of SPS on whose advice the appellant as an overseas resident director had depended.
Decision on factual appeal
[28] It is convenient to start with the role of the other directors and executives. Ms Sutton emphasised in particular the importance of the roles of Mr McAllum as chairman and Captain Fast as chief executive of SPS. Both had extensive experience in the shipping industry, in Captain Fast’s case on trans-Tasman operations. Mr Löwer gave evidence of his reliance on Mr McAllum, an Australian resident, concerning formal requirements and legal matters. He had been a defendant in the proceeding who reached a settlement with the liquidator shortly before the trial. Captain Fast said in evidence that Mr Löwer was not an executive director, and that he had not been involved in the day to day operations of SPS which Captain Fast accepted were his responsibility. In his view Mr Löwer had always expressed his commitment to support the company and had performed on that commitment right up to 1998.
[29] Despite this evidence, the Judge concluded that Mr Löwer was primarily responsible for the company’s situation on the basis that he was in control of what was happening. He found that such significant decisions as those made at the meeting of 18 April 1994 would not have been made by the Board without Mr Löwer’s approval, thus inferring it was given and that he was party to the decisions. The Judge did not regard it as being significant that as an overseas resident Mr Löwer did not attend that or other Board meetings.
[30] The Judge also clearly saw as significant, in assessing Mr Löwer’s responsibility for the manner in which SPS had carried on business, that his involvement at each tier in the ownership, chartering and operation of the vessels used by SPS provided incentives for him to decide it should continue to operate. Mr Löwer’s overall interests were best served by both continued and expanded trading by SPS. Mr Logan, an expert who gave evidence concerning corporate governance arrangements, had described this as a very serious conflict of interest which had imposed on SPS major long term commitments to fixed costs. William Young J found that these interests of Mr Löwer drove SPS decision-making. The finding as to the degree to which he exercised control over the key decisions, especially but not confined to those concerning the continuation and expansion of the company’s operations in 1994, was central to the conclusion that Mr Löwer had the primary responsibility for what happened despite his overseas residency and the involvement of others including the chief executive in handling the day to day operations.
[31] These findings concerning Mr Löwer’s role in SPS to a large extent involved assessments by the Judge of the evidence of the principal witnesses at the trial, in light of the circumstances the company was apparently in on 18 April 1994, the decisions then and subsequently taken concerning its future, whose interests those decisions served, and who was put at risk at the time by them. The direct evidence of Mr Löwer, and other directors and executives as to the degree of his involvement and knowledge had to be assessed against the evidence of these circumstances. We have not been persuaded that in rejecting the evidence of Mr Löwer and Captain Fast as to their opinion of the extent of Mr Löwer’s involvement the Judge has been shown to have been wrong in the judgment he made as to the extent of Mr Löwer’s responsibility for the conduct of business by SPS over the period from April 1994. There was ample evidence in the circumstances, including Mr Löwer’s industry expertise, and his exercise of control over the company, that supported the Judge’s adverse finding as to his primary responsibility.
[32] In particular we are not persuaded by Ms Sutton’s submission that, because the liquidity position of SPS was satisfactory in April 1994, the Judge was wrong to conclude that Mr Löwer had taken an illegitimate business risk in being party to the company continuing to trade.
[33] The significance of the company’s ability to pay its creditors until the end of its operations must be seen in the context of other indications of its financial position. SPS had embarked on a new business, with the intention of securing market share through aggressive growth, in a competitive industry with surplus shipping capacity. SPS had high fixed costs and from the outset would certainly be at risk if its income projections were to fall short. It could not however ignore the need to achieve profitability in the foreseeable future. By 30 June 1992, the end of its second year of trading, the accumulated losses of SPS had reached $7.8m. In September 1993 the company projected an operating profit for the year ahead of $3m, but by 17 December 1993 it was reporting an operating loss to 30 November of $397,000 instead of a projected profit for that period of $462,000. This deterioration in the company’s position was reflected also in the deficit in shareholder’s funds of $6.8m by 30 June 1993.
[34] The company’s liquidity was derived from two factors. The first was the speed of its debtor collection in relation to the extended period by which it was required to pay its trade creditors. The second was that it was able to defer payment of related party debt to the extent that it represented margins owed to Mr Löwer’s associate companies.
[35] Against this background the appellant’s argument that the company’s sound liquidity position justified a continuation of trading in April 1994 ignores the escalation at the time in the deterioration of its situation. Mr O’Brien’s submission that its liquidity facilitated the continuation of trading, without justifying it, is correct. Payment to creditors was being maintained, with difficulty, at the cost of an increasing deficit. In these circumstances the liquidity position of the company of itself afforded no justification for continuing to trade. The directors had to be confident that the company’s underlying situation was being effectively addressed to the extent that they could reasonably expect it to become profitable in the foreseeable future. Otherwise its continuing trading would be to the detriment of the creditors. In the absence of such measures the company’s continuing ability to pay creditors did not justify continued trading.
[36] The next matter relied on by the appellant, as justifying continuation of trading, was the advice that was obtained by the directors from the company’s professional advisers and executives. An opinion from Buddle Findlay given on 20 October 1994 had not suggested there was a continuing problem, and did not recommend that the company should cease to trade at that point.
[37] The significance that Ms Sutton placed on this opinion, (which was received six months after the crucial date and could not therefore have been relied on by Mr Löwer and the other directors to justify their earlier decisions) was that it supports the argument that the Judge’s conclusions were influenced by hindsight, rather than objective indications as to the company’s position in April 1994. Mr Russell of Buddle Findlay in his opinion of 20 October 1994 said:
The risk of directors’ liability is somewhat reduced by the fact that, as you have advised, the company has to date had no liquidity problems at present and has been able to meet its obligations as they fall due. This fact would certainly be a strong defence to any action under section 190, although to a lesser extent under section 189. However, this places a strict premium on the need for the directors to continually have the company’s trading performance and prospects under review.
The last sentence of course carried an important qualification. Mr Russell’s opinion, furthermore, was based on the information he was given by the company at the time, which he described as limited. It also proved to be inaccurate and unreliable. For example, Mr Russell was told:
The company has incurred operating losses in each completed financial year since its inception, (1992 net loss after tax of $2,344,483, 1993 net loss after tax of $5,455,890 and draft 1994 net loss after tax of $3,575,447.00) but a net profit after tax of $2,500,000 is projected for the year ending 30 June 1995. If this projected profit is supportable and reasonable, then this tends to support a conclusion by the directors that the company has good future prospects, and a good chance of trading to eliminate the current deficit in shareholders’ funds;
In fact a loss of $6m was incurred in the 1995 year, largely influenced by a write down of $1.9m in relation to the purchase of the coastal trading company, and a maintenance expense of $500,000 which was brought into account shortly after receipt of the October opinion from Buddle Findlay. Once the limitations on the information given to him became apparent, Mr Russell’s view changed. This is reflected in his subsequent opinion of 21 April 1995.
[38] Overall, the Judge recognised, Mr Russell’s first opinion was expressed in conditional terms. For example his view that a deficit in shareholders’ funds did not necessarily result in the company having to discontinue trading was put in this way:
If the directors, on the basis of reasonable and supportable information and advice received, take the view that the company’s trading position is going to substantially improve in the foreseeable future, it is legitimate to continue trading.
Any comfort to be derived by Mr Löwer in October 1994 from this opinion was accordingly clearly conditional on the quality of the projections of profitability. We are satisfied that this cautious opinion does not support the submission made for Mr Löwer that it was only in hindsight that it can be seen that the company should have ceased to trade in April 1994.
[39] Ms Sutton also relied on a report from Cooper and Lybrand of 5 October 1994 which referred to the information given on the course of the 1994 audit and its record keeping as having been of the highest quality. It did not suggest that the company should cease to trade. Nor was it directed to the information provided to Mr Russell or the assessments made relating to profitability. We are satisfied that nothing said concerning SPS by Cooper and Lybrand assists the appellant’s argument. That is also the position in relation to what was said by executives of the companies including its accountant.
[40] There is also little merit in Ms Sutton’s argument that too much weight was given to Mr Longley’s evidence by the Judge. Mr Longley was the chief executive of Tasman Express Line Limited, a competitor of SPS. He had presented papers at industry forums on 28 February and 1 March 1994 and another on 4 and 5 May 1994. In the first paper Mr Longley expressed the view that removal of trading bans would lead to the trans-Tasman trade being opened up in the future. In the second paper he added that it was only the Maritime Accord which prevented the use of cross trading on the Tasman. The Judge used this evidence to support his finding that the opening up of the Tasman to competition from international shipping was foreseeable in April 1994.
[41] Mr Longley had also given evidence concerning the operation of German shipholding entities, which evidence, he said, was based on several years of dealings and discussions with German shipowners and legal experts. He referred to ownership structures and regimes in place during the period in which SPS was trading and the historic pattern of heavy subsidisation of the shipbuilding and shipowning industries through the national tax regime. Mr Longley’s evidence also covered a meeting he had, as chief executive of Tasman Express, with Mr Löwer in Germany. At that meeting Mr Longley and the Tasman Express chairman had sought to warn Mr Löwer of the pressure SPS would put on trans-tasman freight rates, the risks of cross-trading emerging, and their opinion of the likely continuing unprofitability of SPS if it adhered to its trading practices.
[42] Mr Longley’s views, however, were only part of the evidence that the Judge relied on. There was also evidence that cross-trading had already started on the trans-Tasman route by April 1994. Relaxation of cabotage rules was also then in prospect. As well the Dynamar credit report, which SPS had obtained in December 1993, and used to gain financial credibility overseas, had told the company that the opening up of the Tasman for foreign companies could have a negative effect on SPS operations. This evidence of itself provided a strong basis for the Judge’s inference. The Judge was also careful to make his findings of the foreseeability of cross trading on the Tasman on the basis of what was known at the time. The Judge was also critical of Mr Longley’s evidence on the question of whether Mr Löwer had agendas which made running SPS profitably only a secondary concern. He described this evidence as “debatable and probably inadmissible expressions of opinion” and put them to one side. Overall we are satisfied that Mr Longley’s evidence was not given undue emphasis in the Judge’s findings of fact.
[43] The final question concerns the appellant’s complaint that Mr Löwer’s own opinion of the company’s prospects, and the extent to which he provided funding for the company, were not given sufficient weight by the Judge when he concluded that Mr Löwer was a party principally responsible for the company carrying on business in a reckless manner.
[44] The funding that was provided by Mr Löwer largely took the form of unpaid charter hire margin. The basis on which it was provided did not entail formal subordination of the debt or its conversion to equity. Mr Löwer eschewed any commitment to such courses that would have bound him. These were the findings of the Judge which were amply supported by the evidence. For his financial support to have been treated as supporting his belief as to the company’s viability, Mr Löwer would have had to have given evidence of the collateral benefits he received. His failure to do so was seen as significant by William Young J who said:
There was no detailed evidence from him in which he brought to account all losses and gains made. The potential for him to derive substantial collateral advantages from his involvement with SPS encouraged him to gamble with the funds of his creditors and I see nothing unjust in requiring him to make a significant albeit only partial contribution to their losses.
[45] The Judge’s view was that the assistance provided was never enough to eliminate the company’s deficit; it was sufficient only to allow it to trade, ultimately at its creditors’ expense.
[46] For these reasons we see no merit in the grounds of appeal that challenge the factual finding that Mr Löwer was knowingly a party to reckless trading and primarily responsible for it taking place. In reaching his conclusion that Mr Löwer had forfeited the protection of limited liability William Young J took into account a number of further overlapping factors beyond those we have discussed. They included the fact that the creditors were unaware of the special risks of trading with SPS over and above the risks of the industry, what the Judge called the “lamentable” governance of the company at all times, including its failure to monitor performance against forecasts, and, above all, the extraordinary decisions taken in April 1994 to expand very substantially the company’s trading. Overall we conclude that there was ample evidence to support the Judge’s conclusion that the business should have been shut down by 18 April 1994. The company’s circumstances considered objectively did not warrant the taking of the further extensive risks and it was reckless for Mr Löwer as a director to exercise his controlling position to ensure the company carried on business in the way it did.
Was s 320 in force?
[47] The liquidators’ proceeding against Mr Löwer was issued in 1998 with three other directors also being made defendants at various times. By the time of the trial Mr Löwer alone was a defendant. The third amended statement of claim pleaded four causes of action. The first cause of action was brought under s 320(1)(b) of the Companies Act 1955. It alleged that Mr Löwer was knowingly a party to the carrying on of business by SPS in a reckless manner during a period that did not extend beyond 30 June 1994. The second cause of action addressed the period of the company’s trading after 1 July 1994. The third and fourth causes of action respectively pleaded breach of contract and estoppel. William Young J’s findings of breach of duties were confined to the first cause of action.
[48] The principal legal issue in the appeal concerns whether s 320 of the Companies Act 1955 applies to the first cause of action. It was repealed, with effect from 1 July 1994, that is prior to the winding up of SPS. Ms Sutton’s argument for the appellant is that, although all other events founding the first cause of action had taken place by 1 April 1994, the cause of action in reckless trading upheld by William Young J could not accrue until the winding up of the company commenced. As the 1955 Act had by then been repealed Ms Sutton argued that there was no basis for liability under s 320(1)(b).
[49] Ms Sutton went on to argue that as the actions of Mr Löwer that were the subject of the first cause of action were all taken before the 1993 Act came into force no cause of action lay under the 1993 Act. In any event there was no reckless trading provision under that Act which was equivalent to s 320. It followed, counsel said, that there was no basis under either Act to impose liability on Mr Löwer for being a party to reckless trading of SPS.
[50] The question of when a cause of action under s 320 of the 1955 Act accrued has been addressed by this Court, in the context of determining when a limitation period for the bringing of such a claim begins to run. Unlike s 321, which was a procedural provision, based on common law causes of action, s 320 was a new form of liability introduced by the 1955 Act. In Re Maney & Sons De Luxe Service Station Limited, Maney v Crown [1969] NZLR 116 this Court held that, on its terms, the new cause of action accrued when the company was put into liquidation rather than when the wrongful acts giving rise to liability had all occurred. In his judgment North P said:
In my opinion it is plain that s.320 does create a new cause of action for it confers on a liquidator, a creditor or a contributory on liquidation the right to ask the Court, in the circumstances stated, to require the offending party to pay the debts or other liabilities of the company. This is surely a new liability and a new right not previously known to the law. Section 320 first appeared as s.268 of the Companies Act 1933 following upon the passing of the Companies Act 1929 (Eng.), which adopted in s.275 the recommendation of the Committee on Company Law of which Mr Wilfred Greene K.C. was chairman. Its introduction was hailed in England as providing a new potent weapon in the hands of creditors. As Mr Gower has said in his Modern Company Law, 2nd ed. 186:
Of all the exceptions to the rule in Salomon’s case this section is probably the most serious attempt which has yet been made to protect creditors generally (as opposed to the Revenue) from the abuses inherent in the rigid application of the corporate entity concept.
I am accordingly of opinion that the liquidation is a material part of the cause of action and therefore the period of limitation does not begin to run until the commencement of the winding up and perhaps not until the appointment of a liquidator (a distinction which is of no importance in the present case.)
[51] Turner J, after discussing s 321 of the Act along similar lines said:
If these very obvious tests are applied to s.320 it is clear that the time cannot begin to run, as regards the new causes of action which are given by the section, until the winding up has commenced, for until then there can be no liquidator to make a claim; and if not the liquidator, but some “creditor or contributory of the company” is postulated as plaintiff, no such person can have a right of action until it has first appeared in the course of the winding up of the company that there has been fraud.
See also the judgment of Haslam J to the same effect at p135.
[52] SPS was not placed in liquidation until 19 February 1998, three and a half years after the repeal of s 320. While s 319 and s 321 were incorporated in a modified form in the 1993 Act, it did not contain a provision which was the equivalent of s 320. In these circumstances Ms Sutton said that s 320 was a statutory provision which was not founded on and stood apart from common law principles, and which had been repealed prior to the liquidator’s cause of action accruing. Thereafter there was no basis in statute law or common law under which it could accrue and there was accordingly no lawful basis for the Judge’s order against Mr Löwer.
[53] As North P recognised at pp127‑128 the Court’s approach gives s 320 a wide meaning. By treating the liquidation as an essential element of the cause of action the limitation period commenced only at the point when the improper conduct could be appreciated. North P cited a judgment of the English Court of Appeal In re Cyona Distributors Ltd [1967] 1 Ch 889 in which Lord Denning MR at p902 had said of the equivalent English provision:
In my judgment that section is deliberately framed in wide terms so as to enable the Court to bring fraudulent persons to book.
[54] This reasoning has no application to the present case where the effect of treating the liquidation as an element of the cause of action is rather to restrict the application of s 320 during the period in which it was in force. The principle that the liquidation of a company is an element of the cause of action under s 320 was however a well established interpretation of s 320, and does not obviously permit of variation in the present case simply because all other elements of conduct giving rise to the liquidators’ cause of action are in place. Accordingly, unless there is some principled basis for treating s 320 as being saved until SPS was put into liquidation, the legislation which has been repealed must be treated as having never existed so that there is no basis for the High Court finding.
[55] That raises the question of whether ss 17, 18 and 19 of the Interpretation Act 1999 apply to this situation as the successor to the Acts. They read as follows:
17. Effect of repeal generally –
(1) The repeal of an enactment does not affect-
(a)The validity, invalidity, effect, or consequences of anything done or suffered:
(b)An existing right, interest, title, immunity, or duty:
(c)An existing status or capacity:
(d)An amendment made by the enactment to another enactment:
(e)The previous operation of the enactment or anything done or suffered under it.
(2)The repeal of an enactment does not revive-
(a)An enactment that has been repealed or a rule of law that has been abolished:
(b)Any other thing that is not in force or existing at the time the repeal takes effect.
18. Effect of repeal on enforcement of existing rights –
(1) The repeal of an enactment does not affect the completion of a matter or thing or the bringing or completion of proceedings that relate to an existing right, interest, title, immunity, or duty.
(2) A repealed enactment continues to have effect as if it had not been repealed for the purpose of completing the matter or thing or bringing or completing the proceedings that relate to the existing right, interest, title, immunity, or duty.
19. Effect of repeal on prior offences and breaches of enactments –
(1) The repeal of an enactment does not affect a liability to a penalty for an offence or for a breach of an enactment committed before the repeal.
(2) A repealed enactment continues to have effect as if it had not been repealed for the purpose of-
(a) Investigating the offence or breach:
(b) Commencing or completing proceedings for the offence or breach:
(c) Imposing a penalty for the offence or breach.
[56] This raises the question of whether as at 30 June 1994, SPS had an existing right to compensation under s 320 even though a further event, namely its liquidation, had to take place before the right could be enforced.
[57] Authorities have tended to the view that a right is not in existence where some further event still has to take place before its crystallisation (See Director of Proceedings v Ho Pang Sang [1961] 2 All ER 721, 732 and the discussion in Burrows The Retrospective Effect of Changes in the Law [1976] NZLJ 343, 347). Under s 20(e)(iii) of the Acts Interpretation Act 1924 (the equivalent in that Act of s 17(1)(b)) the requirement was that a right be “acquired”. The term used in the 1999 Act is “existing”, but the change is only one of modern expression without difference in meaning. In Dental Council of New Zealand v Bell [1992] 1 NZLR 438 Tipping J said of this requirement at 443:
The essence of an accrued right in this context is that something must have happened to give the person claiming the right the ability to prosecute the same to judgment. Although the right need not have matured into formal legal relief the facts entitling the person concerned to relief must have happened before the repeal in such a form that the right, although not having matured into judgment or relief, can nevertheless be described as inchoate or contingent.
[58] In Official Assignee v NZI Life Superannuation Nominees Limited [1995] 1 NZLR 684 HC, Blanchard J observed that a trustee’s entitlement to claim a beneficiary’s contribution to a superannuation fund, on the bankruptcy of the beneficiary, was an existing right accruing on the settlement of a trust. It did not matter if the bankruptcy had occurred after the regulation permitting that arrangement had been repealed. At p695 Blanchard J said:
The term “right” in s 20(e)(iii) is to be given a broad meaning: Wellington Diocesan Board of Trustees v Wairarapa Market Buildings Ltd [1974] 2 NZLR 562, 571 per Cooke J. A right does not have to be specifically defined or numerically assessed. The fact that it can be described as inchoate or contingent does not prevent it from being an accrued right: Free Lanka Insurance Co Ltd v Ranasinghe [1964] AC 541, 552-553 (PC). However, it must be something more than the possibility of a benefit to come from the exercise of a discretion. In Dental Council of New Zealand v Bell [1992] 1 NZLR 438, 443 Tipping J said:
“…the distinction between what is and is not a right for present purposes must often be one of great fineness, but it must be something more than a hope or expectation or a spes as it is sometimes called.”
[59] In the present case all of what the Court has found to be reckless conduct giving rise to the claim under s 320 had taken place before its repeal. Although accrual of the cause of action required the liquidation to commence, the events entitling SPS relief had all happened. The passages cited from the Dental Council and NZI Life Superannuation Nominee Co cases support the conclusion that by 30 June 1994 SPS had an existing right to bring a proceeding under s 320.
[60] A purposive approach to the 1955 and 1993 legislation also indicates that a right to bring a proceeding under s 320 was in existence at the time that the 1955 Act was repealed. The common legislative purpose of each measure was to denounce and deter those responsible for such trading and require that they pay compensation. To this end both the 1955 and the 1993 Acts contain provisions designed to empower the Court to require directors who trade recklessly to compensate the company or those affected for their losses. The requirement under s 320 of the 1955 Act that the company be in the course of being wound up before a proceeding is brought was obviously linked to when it would be practicable to bring a claim in reliance on wrongful conduct that had taken place while the director held office. It is a procedural requirement rather than a substantive one. Although s 320 was not replicated in the 1993 Act, this is obviously not an instance where it was Parliament’s purpose that conduct which it had previously pronounced to be wrong was no longer to be so treated. The general legislative purpose was rather that reckless directors would be liable under one or other of the two regimes depending on whether their wrongful acts took place before or after 30 June 1994. Treating the saving provisions of the Interpretation Act as applicable would serve the common purpose of both the 1955 and 1993 Acts.
[61] It might be said that this application of the Interpretation Act provisions to s 320 would enable the bringing of a claim under s 320 long after that section had been repealed. We are satisfied however that there is little prospect of many such historic claims being brought under the repealed provision. If it were inappropriate for the Court to grant relief on account of the age of a particular claim the Court’s discretion under s 320 can be exercised accordingly.
[62] Accordingly we conclude that s 320 continued in effect after its repeal for the purpose of bringing proceedings based on conduct that had occurred by that date.
[63] In these circumstances it is unnecessary to consider an alternative argument advanced by Mr O’Brien, based on the principles of interpretation articulated in Northland Milk Vendors Association Inc v Northern Milk [1988] 1 NZLR 530 at 537, and applied in relation to different provisions of the 1955 and 1993 Acts by Wild J in Walker v Allen [2002] 1 NZLR 278. Mr O’Brien submitted that, if necessary, s 301 of the 1993 Act, which is an enforcement provision, should be read as enabling enforcement of breaches of duty under s 320 of the 1955 Act.
[64] For these reasons the submission that because of the repeal of s 320 it has no application to the acts of Mr Löwer is rejected.
Liability under s320
[65] As we have rejected the appellant’s challenge to both the Judge’s factual findings and his further finding that s 320 applied at the relevant time, Mr Löwer’s appeal against the Judge’s decision that he was liable to be made personally responsible for debts of SPS is dismissed.
Quantum appeals: submissions
[66] We confine our consideration of the arguments that concern quantum to those premised on the application of s 320.
[67] Ms Sutton argued that the proper date for the assessment of the quantum of Mr Löwer’s liability was not 30 April 1994 but 31 October 1994, which was after the directors had received legal advice cautioning them as to their position. Counsel made much of a change of approach to the applicable date by the respondents prior to the trial in the course of amending their pleadings. She suggested that the reason for this change of course was the greater loss that could be claimed at the earlier date. That argument is however met by this Court’s acceptance of the High Court’s finding that it was established that Mr Löwer was party to reckless trading at that date.
[68] Other points made in support of the appeal against quantum rested on a critical analysis of figures incorporated in the Judge’s calculations. First Ms Sutton challenged the liabilities figure of $27.246m, arguing that the correct figure of $21.39m was reached by deducting from overall liabilities of $40.63m the related party debt figure of $17.271m and claims not yet made or admitted of $2.12m. In her submission claims not yet accepted by the liquidator should not be considered at all.
[69] Ms Sutton also criticised the Judge’s figure of $9.197m as the allowance for the deficit as at April 1994. She argued for a higher figure, saying that the Judge’s figure ignored unsecured wage claims of $3.3m and actual liabilities generally simply focussing instead on the shortfall to creditors.
[70] On counsel’s submission the figure of $9.197m should have been $12.43m, together with the wage claims of $3.3m, giving a total of $15.73m. Deducting the $15.73m from $21.39m gave $5.509m, from which there should have been a 30% deduction to reflect market realties, leaving a liability figure of $3.8563m. Counsel’s submission is that this is the maximum sum for which judgment should have been entered against Mr Löwer.
[71] In response for the respondents, Mr O’Brien argued that the net reduction in shareholders’ funds is a legitimate guide to the company’s loss which was open to the Judge to accept. He also addressed the specific criticisms by Ms Sutton. First he argued that claims not yet admitted should be taken into account with an appropriate discount, as there was no basis for treating them as invalid. Secondly he accepted that the wage claims should be taken into account but were in fact valued only at $1.030m in 1994 an adjustment of about $1m should therefore have been made. Thirdly the $3.233m estimated realisations was an appropriate figure as the money would actually have been available. That might give rise to the need for an adjustment to the actual liquidation figure as the Judge did not take realisations into account, doubting that any money would reach the creditors.
[72] Mr O’Brien also submitted that a reduction of $1.9m should be made to the 1994 liabilities’ figure reflecting the fact that one of the transactions that had been entered into at that point would have been voided if the liquidation had then taken place.
[73] While responding in this way to the detailed argument for the appellant Mr O’Brien’s submission was that the overall position on quantum reached by the Judge reflected the true position of the creditors and should not be disturbed.
[74] In their cross-appeal the respondents argued the Judge had been wrong to make two further adjustments to quantum. The first was a reduction of $3m for the unavailability of the company’s assets in a notional liquidation as most would have been absorbed by liquidator’s costs. Mr O’Brien’s argument here was that the net realisation figure of $3.233m already reflected liquidation costs so that in adjusting the 1998 figure it would be appropriate to allow $2.114m being the net realisation of the 1998 liquidation if costs were ignored or by $0.903m if costs were recognised and taken into account. Mr O’Brien preferred the latter option because the litigation costs were a consequence of trading on and should not have to be borne by the creditors. He said the $3m reduction was inappropriate.
[75] His next point was that the reduction for the creditors’ appreciation of risk should not have been made. It was said to be unnecessary, arbitrary and unreasonable and without precedent. Also on the evidence the creditors were far from informed about the position of the company. If the creditors had taken risks these were legitimate and those of the appellant illegitimate.
[76] The result, he contended, should have been an award of $14m.
[77] In response to the cross-appeal Ms Sutton said that on the first point the respondents were seeking to reverse a position taken prior to the trial. On the second point she said that the 30% reduction was open to the trial Judge and the Court should not interfere with it.
Quantum appeal: decision
[78] Section 320 of the 1955 Act conferred a power on the Court in the exercise of its judgment, if it thought it proper to do so, to impose personal liability without limitation on an impugned officer of a company for all or any part of its debts. The principal purpose of the section was to compensate those who suffered loss as a result of illegitimate trading, the extent of the required contribution being a matter for the Court’s judgment. The factors of particular relevance to the exercise of the Court’s judgment concerning the amount of a declaration under s 320 are causation, culpability and duration: Re Bennett, Keane & White Ltd (1988) 4 NZCLC 64,317 per Eichelbaum J.
[79] The element of causation is concerned with the link between the carrying on of the company’s business recklessly, to the knowledge of the impugned director, and the indebtedness of the company for which it is sought to impose personal liability. In a case such as the present that involves an assessment of how much the liabilities of the company were increased because of the illegitimate delay in its ceasing to trade and the identification of a point in time when the director knew that continuing to trade would be reckless. The resulting figure however is no more than a relevant consideration for the Court although the amount of the director’s liability would not exceed the sum identified as caused by the known reckless trading.
[80] To the extent that the calculations of the deficiency caused are uncertain the Court should be conservative in its approach: Malloc Construction Limited v Chadwick & Ors (1986) 3 CLC 99,794, 99,811 per Tompkins J. That caution is reflected specifically in the way the Judge dealt with the uncertainties in making his assessment in this case and in reaching the figure of $8.4m (see paras [24] and [25] above). That figure is a fair assessment of losses caused by illegitimate trading to the knowledge of Mr Löwer from mid April 1994.
[81] It is not necessary that all claims be resolved before the directors are pursued under s 321. The mere fact that the claims are not all proven can be accommodated within a broad approach to the sum that is to be paid. In this case the discount for uncertainties achieved that.
[82] In ascertaining what notionally would have been the position had the liquidation of SPS taken place in 1994 it would have been appropriate to take account of the fact that a transaction might then have been voided. It is more difficult to see a justification for the discount allowed by the Judge to reflect ordinary trade risks. The Judge’s approach to these factors, however, favoured the appellant.
[83] The relevance of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of Mr Löwer’s conduct, bearing in mind that at one end of the range the nature of a director’s involvement will be blind faith or muddleheadedness, while at the other end there will be actions or instances of inaction which are plainly dishonest: Thompson v Innes (1985) 2 NZCLC 99,463. The deterrent purpose of the section is served in cases involving a high degree of culpability by orders which are punitive as well as compensatory: Re Cyona Distributors Ltd (Supra) at p902.
[84] The culpability of Mr Löwer is clearly a highly relevant factor in the present case. We are very much in agreement as to its extent with the findings of the High Court Judge. Along with other directors Mr Löwer was unreasonably optimistic about the risks to SPS of trying to trade through its difficulties in April 1994 when the extraordinary decisions to expand the operations of SPS were taken. Along with other directors he must also have known of the company’s limitations in its supervisory financial systems and its planning capacity, and have been aware that close monitoring of future trading was essential if the risk of serious loss to creditors was to be adequately managed. This was simply not done. He also knew that public disclosure of the company’s situation was being withheld through late filing of accounts.
[85] Mr Löwer was of course the director primarily responsible for the company’s decisions. He had a serious conflict of interest but put his own substantial extraneous interests ahead of those of the unsecured creditors. These matters are the subject of elaboration by William Young J in his judgment. Overall these significant factors demonstrate that Mr Löwer’s level of culpability is near to the most serious of the range of conduct that amounts to illegitimate trading.
[86] As to the duration of the wrongful trading, the company continued to trade after April 1995 until February 1998 accumulating an increasing deficit in the shareholders’ funds. The duration of the wrongful trading to which Mr Löwer was a party was lengthy.
[87] Joint and several liability is usually imposed on directors, but the real question here is what sort of liability should be imposed in the particular circumstances of the case. In a case where the sole director found liable by the Court had obtained substantial benefits from reckless trading, not enjoyed by other directors, several liability of that director seems appropriate.
[88] We approach the present appeal in relation to the quantum of the declaration against Mr Löwer on this basis.
[89] In the assessment of a “just” figure for the culpable director to contribute to the assets of the company by way of compensation, the Judge in this case looked to the increase in the liabilities of SPS following commencement of reckless trading. One measure of the worsening of the company’s position is of course the increase in its creditors. As the duty under the statute is one owed to the company, the assessment is properly related to the claimants on it rather than individual complainants. The approach of William Young J is essentially a comparison of the outcome of a notional liquidation with the probable actual one. It gives an accurate picture of the company’s decline as a result of the culpable reckless trading.
[90] The Judge recognised that there were a number of different ways in which the assessment of loss could be approached and the approach he followed was not the sole basis for his decision. His conclusion was that considering the evidence as a whole $8.4m was a reasonable assessment of the appropriate loss figure. The improper benefits derived had largely been applied to meet his financial needs. As Mr Löwer who had a dominant position in the company was also primarily responsible for what had happened, the Judge did not consider the sum of $8.4m was excessive.
[91] Overall we are satisfied that the criticisms made by counsel, including those advanced in the cross appeal, do not demonstrate that the liability figure selected by the Judge was erroneous. The Judge’s approach to compensation was one that was open to him. His model followed a principled approach. While the sum that he ordered Mr Löwer to pay is a very large one, that reflects the extent of the losses to the unsecured creditors caused by the illegitimate trading, Mr Löwer’s high degree of culpability, and his failure to be forthcoming over the benefits he derived.
[92] The Judge was not prepared to make any allowance for the financial losses suffered by Mr Löwer, because of his motivation for acting as he did in relation to SPS, and his failure to provide detailed evidence of all the losses and gains he had made from his wider arrangements so that the ultimate extent of their benefit to him was assessed. He had also clearly concluded that the degree of Mr Löwer’s recklessness was of a very high order both in relation to decisions taken in April 1994 and the state of governance in SPS then and thereafter. In the end the Judge was required to make a significant but only partial contribution to the loss of the SPS creditors. In all the circumstances of this extreme case we consider the sum he has been required to contribute to the company is a just one.
[93] Accordingly we also reject the appeal and cross-appeal against quantum.
Result
[94] The appeal and cross-appeal are accordingly dismissed with costs of $12,000 to the respondents together with the usual disbursements.
Solicitors:
Lowndes Jordan, Auckland for appellant
Bell Gully Buddle Weir, Wellington for respondent
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