Madsen-Ries v Burrowes

[2013] NZHC 246

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-005120 [2013] NZHC 246

UNDER  the Companies Act 1993

IN THE MATTER OF     the liquidation of ELBUR DEVELOPMENTS LIMITED

BETWEEN  VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN AS LIQUIDATORS OF ELBUR DEVELOPMENTS LIMITED (IN LIQUIDATION)

First Applicants

ANDELBUR DEVELOPMENTS LIMITED (IN LIQUIDATION)

Second Applicant

ANDCRAIG BURROWES AND SANDRA KAYE BURROWES

Respondents

Hearing:         7 February 2013

Appearances: N H Malarao and K H Kuang for First and Second Applicants

A R Gilchrist for Respondents

Judgment:      19 February 2013

JUDGMENT OF COOPER J

This judgment was delivered by Justice Cooper on

19 February 2013 at 12.00 p.m., pursuant to r 11.5 of the High Court Rules

Solicitors:

Registrar/Deputy Registrar

Date:

Meredith Connell, PO Box 2213, Upper Shortland Street, Auckland 1140

Burton & Co., PO Box 8889, Symonds Street, Auckland 1150 (DX CP 24147) Copy to:

A R Gilchrist, PO Box 5444, Wellesley Street, Auckland 1141

MADSEN-RIES V BURROWES HC AK CIV-2012-404-005120 [19 February 2013]

[1]     The applicants, who are the liquidators of Elbur Developments Ltd (In Liquidation) (“the company”), seek an order setting aside a payment of $400,000 which was made by the company to the respondents on 12 July 2007. At the time of that payment, the first-named respondent, Mr Craig Burrowes, was a director of the company, and the other director was a Mr Collin Elder.

[2]      Fifty per cent of the shares in the company were owned by BP Trustees Ltd, a company owned by Mr Elder and his wife.  The other 50 percent of the shares were held jointly by Mr and Mrs Burrowes.

[3]      On  13  November  2008  the  Commissioner  of  Inland  Revenue  filed  an application in the High Court to place the company into liquidation. That application was granted on 21 January 2009, and Ms Vivien Madsen-Ries (the first-named first applicant)  and  Mr  David  Vance  were  appointed  as  the  liquidators.    Mr  Vance resigned from that office on 27 June 2011, and Mr Henry Levin, the second-named first aplicant, was appointed in his place.

[4]      The applicants claim that the payment of $400,000 (“the disputed payment”)

was an insolvent transaction within the meaning of s 292(2) of the Companies Act

1993 (“the Act”).  They seek an order setting aside the payment under s 294(5), and requiring the respondents to repay the money, as contemplated by s 295, together with interest.

Background

[5]      The application was supported by an affidavit filed by Mr Levin, sworn on

29 August 2012.  Mr Levin’s evidence is that the company was incorporated on 23

September 2003.  As at the date of liquidation, its sole director was Mr Elder, who had been a director of the company from its incorporation.  At the times material to the present  application,  Mr Burrowes  was  also  a director  of the company.    He continued in that role from the date of incorporation until he resigned on 1 October

2008.  Since incorporation, Mr and Mrs Burrowes have owned half of the shares of the company.

[6]      The company was in business as a property developer, and had subdivided two sections into four separate titles.  According to Mr Burrowes, in his affidavit sworn in opposition to the present application on 3 October 2012, the intention was for the Elders and the Burrowes to develop holiday homes together using the company as the development vehicle.  However, one of these properties was sold on

23 March 2007 and the remaining three were sold on 5 June 2007.

[7]      When the disputed payment was made on 12 July 2007, the company had a core GST debt due of $118,299.67 arising out of the sales of the properties.  On that core debt, penalties and interest totalling $62,347.85 accrued up to the date of liquidation of the company.  After the disputed payment, the company’s only asset was cash in its BNZ bank account in the sum of $11,273.72.  There were no other assets available to meet the company’s due debts.

[8]      It is clear in the circumstances that as at 12 July 2007 the company was insolvent and unable to pay its due debts.

[9]      The company’s signed financial statements for the period ending 31 March

2004 were exhibited by Mr Levin to his affidavit. They showed that Mr and Mrs

Burrowes  had  a  current  account  with  the  company  which  was  in  credit  as  at

31 March 2004 in the sum of $305,745.09. The accounts were prepared by Staples Rodway, and signed by Mr Burrowes and Mr Elbur in February 2006.   Mr Levin stated that the net credit on the current account was as a result of introduced capital of $307,472.09, less drawings by Mr and Mrs Burrowes of $1,727.

[10]     Mr  and  Mrs  Burrowes’  current  account  with  the  company  remained unchanged  as at 31 March 2005  and 31 March  2006, according to the financial statements for the period ending 31 March 2005 (again signed by Mr Burrowes and Mr Elbur) and the unsigned financial statements for the period ending 31 March

2006, which were exhibited by Mr Levin to his affidavit.

[11]     Mr Levin stated that no further financial statements had been prepared for the company.   However, he also gave evidence that the liquidators had reviewed the bank statements for the account from 31 March 2006 to 30 August 2007, when it was closed.   In the course of that review, no transactions were identified which could result in further credits or debits to Mr and Mrs Burrowes’ current account.  On this basis, it was Mr Levin’s evidence that Mr and Mrs Burrowes were creditors of the company in the sum of $305,745.09 as at the date the payment of $400,000 was made.

[12]     The liquidators allege that the difference between those two amounts, the sum of $94,254.91, should be regarded as an advance, repayable on demand.   Formal demand has been made for its repayment, but repayment has not occurred.  Reliance is  placed  on  cases  such  as  Re  Samarang  Developments  Ltd  (in  liq)[1]   and    and National Trade Manuals Ltd (in liq) v Watson[2] where Venning J said:

Absent any proper explanation for the drawings or a valid resolution classifying the drawings in some other way, such as distributions or salary, drawings remain as advances repayable on demand. …

[1] Re Samarang Developments Ltd (in liq) HC Christchurch CIV-2003-409-2094, 30 September

2004 at [55].

[2] National Trade Manuals Ltd (in liq) v Watson (2006) 9 NZCLC 264,163 (HC) at [37].

[13]     As to the balance of $305,745.09, the applicants say that the payment was a voidable transaction on the basis that it was made by the company at a time when it was unable to pay its due debts;  it enabled Mr and Mrs Burrowes to receive more towards the satisfaction of the debt owed by the company than they would receive, or be likely to receive in the company’s liquidation;  it was entered into in the period two years before the making of the application to the Court placing the company into liquidation;  and it was not made by the company in the ordinary course of business.

[14]     The  only  creditor  who   has   filed  a  claim   in   the  liquidation   is  the Commissioner  of  Inland  Revenue.     The  Commissioner’s  claim  is  based  on preferential claims for unpaid GST in the principal sum of $118,980.04 (an amount which  Mr  Burrowes  challenged  in  his  affidavit)  and  Court  liquidation  costs  of

$2,639.74.  In addition there is an unsecured claim for $62,501.71, the latter amount

consisting of penalties  and interest on the outstanding GST.   As at the date of liquidation, the company had no assets.

Matters not in dispute

[15]     Although  the  issues  raised  in  Mr  Burrowes’ affidavit  suggested  a  wider factual contest, Mr Gilchrist, for the respondents, helpfully narrowed the extent of the dispute by recording in his written submissions that the respondents accept that the disputed payment was a transaction made by the company at a time when it was unable to pay its due debts.  Accordingly, it was an insolvent transaction within the meaning of s 292 of the Act, and voidable by the liquidators.

[16]     There was no contest that the disputed payment was made within the two year period  prior to liquidation, the “restricted period” for the purposes of s 294(4A) of the Act.  Mr Gilchrist also noted that the respondents accepted that the disputed payment enabled the respondents to receive more towards the satisfaction of the debt owed to them that they would have received in the liquidation.   In the course of argument Mr Gilchrist further advised that he was instructed there was no longer any dispute about the calculation of the Commissioner’s alleged debt.

[17]     These concessions were all properly made having regard to the evidence in

Mr Levin’s affidavit which I have discussed above, and which I accept.

The issues

[18]     There was a factual dispute about the extent of the company’s indebtedness to the Burrowes.   In his affidavit of 3 October 2012 Mr Burrowes asserted that, in addition to advancing the sum of $305,745.09 to the company, he and his wife had paid various bills on behalf of the company in the region of $110,000 to $120,000. He stated that he had been advised by Mr Elder that if the Burrowes “settled” at

$400,000, all of the company’s creditors would be able to be met.   Mr Gilchrist relied on Mr Burrowes’ affidavit to submit that the whole of the disputed payment was the repayment of the company’s indebtedness to the Burrowes.

[19]     Mr Burrowes gave no supporting evidence to explain what the payments allegedly made on the company’s behalf were for, other than a vague reference to “various loans that we had taken out in relation to the project”, and “various bills” he claimed had been paid.  There were no invoices or other documentary evidence.  Nor did he give any explanation as to why any debts would not have been reflected in the company’s accounts.

[20]     Mr Burrowes was one of two signatories of the company’s accounts prepared for the years ending 31 March 2004 and 31 March 2005, in which there was no reference to any indebtedness of the company other than the amount recorded in the Burrowes’ shareholders’ account.   The Burrowes’ account was also unchanged in draft accounts prepared for the company in respect of the year ending 31 March

2006.   Mr Burrowes did not attempt to argue directly that these accounts were incorrect. In the circumstances I am not prepared to accept his bare assertion that he had  paid  any  more  than  the  original  sum  of  $305,745.09  recorded  in  the shareholders’ accounts.  I find that the indebtedness of the company to the Burrowes was limited to that amount.

[21]     On this basis, I accept the submission made by Ms Kuang, for the applicants, that the part of the $400,000 disputed payment that exceeds the amount in the shareholders’ account, namely $94,254.91, is properly characterised as an advance repayable on demand, in accordance with the authorities referred to in [12] above. Mr Gilchrist submitted that, if the Court reached that conclusion, it would be appropriate to order that only that sum should be repaid, or alternatively, if that was not accepted, that only the $305,745.09 should be repaid, since requiring the full amount to be reimbursed would result in the payment of more than was necessary to meet the debt due to the Commissioner.

[22]     That submission was advanced on a number of bases, but had as its starting point the fact that s 295 of the Act provides that if a transaction is set aside under s 294, then the Court may order that “a person pay to the company an amount equal to some or all of the money that the company has paid under the transaction.”   It should be noted that the argument really arises on the assumption that the payment is voidable as a whole, and must be set aside under s 294(5): the Court then has to

determine whether it should order the repayment of an amount equal to some or all of the money paid.    In this respect I accept Ms Kuang’s submission based on the decision of the Court of Appeal in Carter Holt Harvey Ltd v Fatupaito,[3]  that a transaction is either voidable by the liquidators in accordance with the relevant statutory provisions or not, and if it is, it is wholly voidable.

[3] Carter Holt Harvey Ltd v Fatupaito (2003) 9 NZCLC 263, 285 (CA) at [26].

[23]     In  this  part  of  the  argument  Mr  Gilchrist  relied  on  evidence  given  by Mr Burrowes that when the disputed payment was made he genuinely believed that the company was solvent, that it had in fact met all its obligations to creditors including any liability for GST.  In his affidavit, Mr Burrowes said that Mr Elder had been responsible for “driving” the subdivision project, dealing with all the accounts, and meeting tax and other obligations.  Although Mr Burrowes had tried to become more involved, Mr Elder always resisted that, and as the project dragged on over a period of two years, Mr and Mrs Burrowes became “nervous and frustrated”, particularly as their own personal interest obligations built up. He referred to what he described as “constant questioning” of Mr Elder about the financial position, and about completing or quitting the development in a way that would see creditors paid and, if possible, their investment returned. According to Mr Burrowes, at the time of both the first and second sales of the subdivided sections, he had been assured that the company was in good shape and able to meet all outstanding debts.  He had been assured that a “settlement” at $400,000 would mean that all outstanding debts were paid, and this specifically included GST.  Consequently, when the disputed payment was received, he believed that the GST liability would be met.   He received the payment in good faith, believing that to be the position, and had “no reason whatsoever to believe that the company was insolvent.”

[24]     On the basis of this evidence, Mr Gilchrist submitted that Mr Burrowes had made all proper enquiries, and had made every effort to ensure that all creditors were paid.  There was no suggestion of cheques being dishonoured, or history of failure to pay creditors, and Mr Burrowes had Mr Elder’s assurance that the creditors were

paid in full.  In the circumstances it would be unfair to require full repayment.

[25]     However,  the GST debt  was  the only liability of any substance that  the company had, and simply accepting assurances that it would be met notwithstanding the disputed payment to the Burrowes was not in my view consonant with the duties Mr Burrowes had as a director.   This was not a murky set of complex facts that needed to be unravelled: the subdivision was the only activity ever carried out by the company, the obligation to pay GST was self-evident and Mr Burrowes must have known what the company’s approximate position was, including its liability for GST having regard to the sale prices of the properties.  A straightforward examination of the company’s bank account by Mr Burrowes would have revealed the true position. In addition, enquiry of the Inland Revenue Department would have revealed the true state of affairs.  Mr Burrowes was the joint signatory on the company’s bank account so must have realised, or could very easily have established, that the company had not made any direct payment. Simple reliance on Mr Elder’s assurances was inconsistent with Mr Burrowes’ purported concerns about the funding of the development, and his stance of “constant questioning” directed to Mr Elder.  I do not consider it was consistent with Mr Burrowes’ duties as a director, having regard to

what was said by the Court of Appeal in Mason v Lewis:[4]

[83]     In the result, we find ourselves a considerable distance from the weight the trial Judge placed on this factor in the proceeding before him. Directors must take reasonable steps to put themselves in a position not only to guide but to monitor the management of a company. The days of sleeping directors with merely an investment interest are long gone: the limitation of liability given by incorporation is conditional on proper compliance with the statute.

[4] Mason v Lewis [2006] 3 NZLR 225 (CA) at [83].

[26]     Effectively, Mr Burrowes left it to Mr Elder to attend to the payment of the GST, and did not make his own enquiry about whether that had occurred.  Given that he was concerned about how the company was being run, that was a failure to monitor the management to the company that ought not now to have the result that the Court should not order repayment of the full amount of the disputed payment.

[27]     Mr Gilchrist also argued that since the payment had been received by the

Burrowes in  good  faith,  and the money subsequently spent in reliance on their

entitlement to it, they should be entitled to rely on s 296(3) of the Act.   That provides:

(3)       A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

(a)      A acted in good faith; and

(b)       a   reasonable   person   in  A's   position   would   not   have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

(c)       A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

[28]     For this submission, Mr Gilchrist relied on the evidence already discussed about the enquiries made by Mr Burrowes of Mr Elder, and noted that the vast amount of the disputed payment had been spent on the repayment by the Burrowes of money that had been borrowed to fund their contribution to the company for the purposes of the subdivision.  As noted earlier, Mr Burrowes’ evidence was that after receipt of the money,   he settled various loans taken out in relation to the project, with the balance used to purchase a new car (valued at $13,000) and “meet more bills”. The latter were presumably nothing to do with the company.

[29]     The difficulty that I have with this submission is that if Mr Burrowes had acted reasonably as a director of the company he ought to have known that the company could not afford to make the payment.   I am not satisfied in the circumstances that the Burrowes can prove the facts  needed for s 296(3)(b) to apply. In that respect for reasons already discussed I do not consider that Mr Burrowes can properly assert that a reasonable person in his position would not have suspected, and did not have reasonable grounds for suspecting, that the company was insolvent.

[30]     Ms Kuang argued in addition that the Burrowes could not bring themselves within s 296(3)(a) or (c).   However it is not necessary for me to deal with her argument on those paragraphs.  The fact that paragraph (b) is not met means that the

respondents are not entitled to rely on s 296(3), since each of the paragraphs must be proved for the defence to be established.

[31]     Mr Gilchrist referred in argument to two other matters which he claimed would justify ordering that only part of the disputed payment should be repaid.  They were Mr Burrowes’ inability to pay the full amount, and delay in bringing the application. As to the claimed inability to pay, he conceded that the evidence for this was insubstantial.  In fact, Mr Burrowes did not address his and his wife’s financial position in his affidavit, in which (in summary) he simply emphasised the fact that they had made payments on the basis that the $400,000 payment was valid and asserted that it would be inequitable to require the money to be paid back to the company.   At one stage, Mr Gilchrist sought an adjournment so that appropriate evidence as to the Burrowes’ position could be filed, but there was no explanation of why this could not have been done prior to the hearing.  I rejected that application. The suggestion that impecuniosity, if it could be demonstrated, should be a basis for exercise of the power to order repayment of less that the full amount of the money that has been received under a voidable transaction is unattractive.  Such issues, if they arise, are more appropriately addressed under the Insolvency Act 2006.

[32]     The other matter raised was delay on the part of the liquidator in commencing the present application.  Mr Gilchrist emphasised that the company had been placed in liquidation on 21 January 2009, but it was not until 28 October 2010 that the liquidators wrote to the Burrowes in respect of the disputed payment, and not until 3

June 2011 that they issued a notice to set aside the transaction under s 294 of the Act. After the Burrowes served a notice of objection dated 4 July 2011, the present application was not made until 30 August 2012, almost 13 months later. The passage of time meant that penalties and interest continued to accrue on the company’s debt to Inland Revenue, and therefore reduced the amount of money available for distribution in the liquidation to the Burrowes as creditors of the company.

[33]     Mr Levin endeavoured to provide an explanation for the delays, noting that after the liquidators wrote to the Burrowes in October  2010, the Burrowes had written twice promising to forward relevant documents, and there had been a solicitor’s  letter  dated  24  November  stating  that  a  formal  response  would  be

provided on behalf of the Burrowes by 30 November which was never received.  He also stated that the time between issue of the voidable notice and the date of filing the present application “was to enable the Liquidators to consult with affected creditors and to obtain further information in respect of the relevant transactions in view of the grounds contained in Mr and Mrs Burrowes’ notice of objection”, as well as considering whether to pursue the next stage of legal proceedings.   In the circumstances, the liquidators asserted that there had been no unnecessary delay.

[34]     Mr Gilchrist accepted that some of the delays might properly be attributable to the failure of the Burrowes to engage with the liquidators at an early stage but he submitted that the delay of over a year between the objection and commencement of the proceeding was unjustified.  I agree that the reasons given by Mr Levin for that delay are insubstantial.  There was only one creditor and the facts were reasonably straightforward.  I do not accept that a delay of over a year can properly be explained on the basis put forward.

[35]     However, I do not accept that should be a reason to order that the Burrowes should repay less that the full amount of the disputed payment. Throughout the period since receipt of the liquidators’ notice they have known of the circumstances relied on by the liquidators to assert that the transaction was voidable.  They could have prevented the ongoing accumulation of penalties and interest by making an arrangement for repayment.  I note also that any order that the Mr Burrowes repay less than the full $400,000 could only have the effect of reducing funds available to pay out their shareholders’ account in the liquidation.

Result

[36]     For the reasons I have given the application is granted.

[37]     The applicants are entitled to costs calculated in accordance with category 2, band B.  I note however that the matter was not such as would justify costs relating to  two counsel.