Madsen-Ries v Twine
[2015] NZHC 227
•20 February 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV2014-404-001317 [2015] NZHC 227
BETWEEN VIVIEN JUDITH MADSEN-RIES &
ORS Plaintiffs
AND
RENE TWINE & ANOR Defendants
Hearing: 5 February 2015 Appearances:
K Wakelin, M Hammer for the plaintiffs
No appearance for the defendantsJudgment:
20 February 2015
JUDGMENT OF GILBERT J
This judgment is delivered by me on 20 February 2015 at 12 noon pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
MADSEN-RIES & ANOR v TWINE & ANOR [2015] NZHC 227 [20 February 2015]
[1] View Road Panelbeaters Ltd was placed in liquidation on 27 July 2012 owing the sum of $236,973.12 to the Commissioner of Inland Revenue and a further sum of
$23,581.93 to trade creditors. The defendants were at all relevant times the directors and shareholders of the company. The first plaintiffs, the liquidators, have investigated the company’s trading history and financial position. They consider that the company was insolvent from March 2006 onwards and that by continuing to trade the defendants breached the duties imposed on them by the Companies Act 1993, in particular under ss 131, 133, 134, 135, 136, and 137. They seek orders pursuant to s 301 of the Act requiring the defendants to pay compensation to the company sufficient to meet the creditors’ claims and the costs of the liquidation.
[2] The proceedings were served on the defendants on 10 July 2014 but they have taken no steps and no statement of defence has been filed. The plaintiffs therefore seek judgment by default pursuant to r 15.9 of the High Court Rules.
[3] Mr Levin, one of the liquidators, has provided an affidavit detailing the creditors’ claims and the trading history and financial performance of the company from 1 April 2005 to 31 March 2012. The company made trading losses in each of these years with the exception of 2009 and 2011 when modest trading surpluses were achieved. Current liabilities exceeded current assets throughout this period, ranging from $14,410 in 2006 to $154,748 in 2012. Taking into account non-current assets and liabilities, the company had negative equity in each of these years, ranging from
$39,611 in 2006 to $136,095 in 2012. Mr Levin considers that the company was insolvent from March 2006.
[4] The company made no payments of Goods and Services Tax after
31 January 2008; no PAYE deductions were accounted for after September 2008; and no KiwiSaver contributions were made after December 2008. The directors must have been aware that the company was in serious default of its tax obligations and was unable to meet creditors’ claims as they fell due.
[5] The company was only able to continue trading by using creditors’ funds and
by relying on related party loans. The directors commenced repayment of the related
party loans during the financial year ended 31 March 2009 and these were fully repaid by 31 March 2010. In Mr Levin’s opinion, the repayment of these loans placed the company’s cash flow under intolerable stress.
[6] On the basis of Mr Levin’s evidence, and in the absence of any defence having been filed, I am satisfied that by continuing to trade, particularly after January 2008, the directors breached the duties they owed to the company as alleged in the statement of claim. The debts due to the creditors were all incurred after this date.
[7] In considering what compensation may appropriately be awarded under s 301, the Court must consider the causal connection between the breach of duty and the loss for which compensation is claimed, the degree of culpability of the directors, the duration of trading and any other relevant factors.
[8] In this case, the losses suffered by creditors were the direct and foreseeable result of the directors’ unjustifiable decision to continue trading long after it was clear that the company was insolvent and would not be able to meet the claims of creditors. As a result of the directors’ serious dereliction of their duty over a lengthy period, creditors were exposed to unacceptable risk. It is clearly appropriate that the directors should be required to pay compensation in an amount equalling the unpaid debts to creditors.
[9] The plaintiffs also seek compensation pursuant to s 301 for the costs of the liquidation. These costs amount to $46,318.31, excluding the legal costs for the proceedings.
[10] The question of whether compensation should also be ordered in relation to the liquidators’ costs in undertaking the liquidation is less straight-forward. Such costs may well be recoverable in a case where, for example, liquidators have been required to incur expense in reconstructing books of account because the directors failed to keep proper records in breach of their duty to do so. However, that is not the situation here. In this case, the directors ought to have ceased trading by early
2008, if not earlier. But it is not clear from the evidence that the costs incurred by
the liquidators in carrying out the liquidation would have been any less if they had been appointed earlier. The liquidators would still have had to realise the company’s assets for the benefit of creditors and take all other steps required in any liquidation. It appears that a significant part of the liquidators’ costs were incurred in preparing the present proceeding. Such costs are not normally recoverable. For these reasons, I am not persuaded that an order requiring the directors to meet the costs of the liquidation is appropriate in this case.
[11] The plaintiffs seek costs for the proceeding. Costs assessed on a 2B basis exceed the actual costs and the costs award must be limited accordingly. The plaintiffs’ solicitors advise that actual costs total $15,695.38.
Result
[12] I make an order pursuant to s 301(1)(b)(ii) of the Companies Act 1993 requiring the defendants to contribute the sum of $260,555.05 to the assets of the company.
[13] I make an order requiring the defendants to pay the plaintiffs’ costs of the proceeding in the sum of $15,695.38.
M A Gilbert J
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