McGreal Floor Coverings Ltd (in liq) v McGreal
[2014] NZHC 2884
•19 November 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-004906 [2014] NZHC 2884
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of McGreal Floor
Coverings Limited (In Liquidation)BETWEEN
MCGREAL FLOOR COVERINGS LIMITED (IN LIQUIDATION) First Plaintiff
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN as liquidators of MCGREAL FLOOR COVERINGS LIMITED (IN LIQUIDATION)
Second Plaintiffs
AND
PAUL MATA MCGREAL Defendant
Hearing: 19 November 2014 Appearances:
M J Hammer and P C Murray for Plaintiffs
Judgment:
19 November 2014
INTERIM ORAL JUDGMENT OF VENNING J
Solicitors: Meredith Connell, Auckland
MCGREAL FLOOR COVERINGS LTD (IN LIQUIDATION) v MCGREAL [2014] NZHC 2884 [19 November
2014]
[1] This is a claim by the first plaintiff company and its liquidators against the defendant Mr McGreal for breach of his duties as a director of the company.
[2] The company was placed into liquidation on 1 June 2011 and Ms Madsen- Ries and Mr Levin were appointed liquidators. Mr Levin has sworn an affidavit in support of the plaintiffs’ claim in this proceeding.
[3] Mr McGreal purported to file a document entitled statement of defence on 7
February 2014. The plaintiffs took issue with the form of that document. An unless order was ultimately made at a second case management conference directing that unless Mr McGreal filed an amended statement of defence in proper form addressing a number of issues by 24 July 2014 the plaintiffs could apply for an order striking out the statement of defence and barring him from defending the claim.
[4] Mr McGreal filed a further purported defence which again was defective. At a hearing on 1 August 2014 Associate Judge Sargisson struck out the defendant’s statement of defence and barred the defendant from defending the claim. The claim has proceeded before me as a formal proof this morning.
[5] The company was incorporated on 14 August 2000 and provided flooring installation services. At all material times Mr McGreal was the sole director of the company and a shareholder of the company. The company ceased trading on 14 July
2010, approximately one year before liquidation. As liquidator Mr Levin received the financial statements for the company for the financial years ending 2008, 2009 and 2010. In summary those statements record:
(a) for the financial year ended 2007 a working capital deficit of in excess of $100,000 and an excess of liabilities over assets of $83,000;
(b)for the financial year ended 2008 there was a trading deficit of in excess of $31,000, a working capital deficit of just under $130,000 and an excess of liabilities over assets of in excess of $115,000;
(c) for the financial year ended 2009 there was a trading deficit of in excess of $27,000, a working capital deficit of in excess of $155,000 and the liabilities had grown to exceed assets by in excess of
$142,000;
(d)for the financial year ended 2010 the financial statements disclose a further trading deficit of just under $20,000, a working capital deficit of in excess of $173,000 and liabilities exceeding assets of in excess of $162,000.
[6] In Mr Levin’s opinion, based on the company’s financial statements, the company was severely insolvent from, at the latest, 31 March 2007. The financial statements together with the payments the company missed for tax, confirm Mr McGreal kept the company trading while it was insolvent leading to loss to creditors. Mr Levin’s investigation discloses that the company failed to pay its debts as they became due from at the latest around the end of December 2007.
[7] In particular, the company failed to comply with its obligations to pay GST and PAYE. From 30 November 2007 to 30 September 2010 the company failed to pay GST of $93,332.04, including interest and penalties of $35,176.18.
[8] For the period from 30 November 2007 to 31 July 2010 the company defaulted on its tax obligations in relation to PAYE of $156,241.62, including interest and penalties of $117,310.86. The company entered arrangements with the Inland Revenue Department to make payment of its debts but defaulted on not one but two such arrangements.
[9] It appears that during the period that the company was failing to meet its tax obligations Mr McGreal as director was nevertheless still continuing to draw money from the company.
[10] The evidence before the Court satisfies it that the company’s liability significantly exceeded its assets from, at latest, 31 March 2007 and it was unable to pay its debts as they became due in the ordinary course of business from the end of
December 2007. The company would not have been able to satisfy the solvency test from at least 31 March 2007. Mr McGreal as a director could not have honestly believed the company would have been able to satisfy its past debts while continuing to incur new obligations.
[11] Following liquidation the liquidators raised issues with Mr McGreal about
the company’s financial position. In a questionnaire completed in December 2010
Mr McGreal stated, with hindsight, he was aware the company was in financial
difficulty from late 2008, but that he “always thought we could trade out.”
[12] In the claim against Mr McGreal the plaintiffs allege breach of his duty as a director in various ways:
(a) failing to exercise reasonable care;
(b)allowing the business of the company to be carried on in a manner likely to cause serious loss to creditors;
(c) agreeing to incur obligations without a belief the obligations could be fulfilled;
(d) failing to exercise powers for a proper purpose;
(e) failing to act in good faith and in best interest of the company; and
(f) agreeing to the company acting in a manner that contravenes the Act. [13] On the evidence before the Court I am satisfied that the company was
insolvent from 31 March 2007 and it was clearly unable to pay its debts from the end of December 2007.
[14] It appears Mr McGreal at no time responsibly considered the company’s financial position even once it became clear it could no longer meet its obligations to the Inland Revenue. Mr McGreal had sole responsibility for managing the company’s business and finances. In the circumstances he cannot be said to have
acted in good faith, honestly and with a proper motive. Any prudent director of a company in this position with the working capital and net asset deficits it had and with its difficulties in complying with its tax obligations would have caused the company to cease trading. By continuing to trade the company Mr McGreal acted to the detriment of creditors and the company. Mr McGreal’s actions led to the company’s taxation liabilities to be increased with penalties and interest and placed creditors at risk. Nor is there any evidence on the material that Mr Levin has obtained to show that Mr McGreal caused the company to prepare or have prepared business plans, budgets, cash flow projections and the like.
[15] Following liquidation and the investigation by Mr Levin unsecured creditors have filed proofs in the liquidation in the sum of $260,906.35. A substantial creditor is the Inland Revenue Department. There is also a creditor MiPS Financial Services for $1,200.51.
[16] On the evidence before the Court I am satisfied that the plaintiffs make out their claim against Mr McGreal on each and every one of the causes of action pleaded against him. They are entitled to a judgment accordingly. The issue then is the quantum of the judgment to be entered against Mr McGreal.
[17] In relation to that, as noted currently the proofs of debt total $260,906.35. Ms Hammer accepts it is appropriate that some credit be given in relation to obligations incurred in the period before a “sober assessment” would have required the company to be placed into liquidation. That reduces the amount from the
$260,906.35 currently proved by $20,576.31 to a sum of $240,330.04.
[18] I am satisfied that that is the appropriate sum to order that Mr McGreal contribute towards the assets of the company. Judgment will be entered for that sum subject to the following reservation of leave.
[19] In the prayers for relief the plaintiff also seeks an declaration that the liquidators may, for the purposes of calculating the liabilities of the company, as at liquidation and for the purposes of distribution, value at zero any claim made in the liquidation by Mr McGreal. There is on the accounts of the company a sum of
$114,177 owing by the company to Mr McGreal under his current account. Mr McGreal has not as yet proved in the liquidation for that sum. For that reason it has not been included in the quantum claimed by the company at present.
[20] The plaintiffs seek the declaration referred to either in the Court’s inherent jurisdiction or in accordance with s 284(1)(a). Reference is made to a decision of Re HIH Casualty and General Insurance (NZ) Ltd,1 a decision of Paterson J. In that case the liquidators had formally applied for directions under s 284. The liquidators were in the position of making distributions to creditors. The company had assumed the liabilities of another insurance company and it also entered an agreement with
another company to purchase part of its business. There was an issue as to whether policy holders might still have the right to claim and their might be some future claimants. The liquidators sought the following directions:2
1. THAT any claim which could be made against HIH Casualty and General Insurance (N.Z.) Limited (in liquidation) ("Casualty & General") under any insurance policy that is a "Contract", as "Contracts" is defined in Recital B of the Portfolio Assumption Deed dated 24 May 2001 between Casualty & General, QBE Insurance (International) Limited ("QBE International") and HIH Insurance Limited (in provisional liquidation) (the "Portfolio Assumption"), (the "Contracts") is not a "claim" against Casualty
& General in the liquidation of Casualty & General within the meaning of section 303 of the Companies Act 1993 (the "Act");
2.THAT any person seeking to make a claim in the liquidation of Casualty & General in respect of the Contracts be granted leave to apply for a variation of any order made pursuant to paragraph 1 hereof, but that:
(a) any such person so applying may only seek a variation of any order made pursuant to paragraph 1 hereof insofar as any such variation affects only that person's own rights under the Contracts; and
(b) if any such person is entitled to claim in Casualty & General's liquidation, any such person shall only be entitled to receive the benefit of any distribution from Casualty & General's assets if any assets remain, or, in the opinion of the liquidators of Casualty & General (the "Liquidators"), are likely to remain, available for distribution;
3. IN the alternative, the Liquidators may, for the purposes of any distribution (including any interim distribution), value at zero any claim
1 Re HIH Casualty and General Insurance (NZ) Ltd HC Auckland CIV-2003-404-2838, 17
December 2003.
2 At [7].
made in the liquidation of Casualty & General by any person in respect of the Contracts and:
(a) the Liquidators do not have to make any provision for any claims made by any such persons in respect of the Contracts; and
(b) the Liquidators do not have to make any further contact with any person who may be entitled to claim in respect of the Contracts in Casualty & General's liquidation; …
[21] Paterson J noted that the first order sought, if approved, would mean that a policy holder taken over by QBE would have no claim against Casualty & General, even if the policy holder had not accepted that QBE was liable under the policy.
[22] His Honour concluded that it was not appropriate to make the directions numbered 1 and 2 sought by the liquidators, noting the Court should not take away further legal rights of a policy holder without that policy holder being represented. However the Judge did go on to make an order in relation to the declarations sought at 3 accepting that the directions sought were properly directions in the course of and in connection with the liquidation. The difference was between an alteration of contractual rights of a third party (which the Judge was not prepared to endorse) and a declaration in the course of giving effect to a distribution.
[23] I am not prepared to make the declaration sought at present either under s 284 or in the Court’s inherent jurisdiction. There is no separate cause of action pleaded in relation to the declaration sought. The declarations simply appear in the prayer for relief. I do not consider it appropriate to make a declaration effectively altering any contractual entitlement Mr McGreal may have in relation to a claim against the company.
[24] However, as noted the current claim has proceeded on the basis that the quantum of creditors’ claims totals the $260,906.35. That is because Mr McGreal has not lodged a proof of debt. If he had then the claim made by the plaintiffs, assuming that proof of debt was accepted by the liquidators, would have been substantially higher.
[25] For that reason this is an interim judgment fixing quantum against Mr McGreal in the figure of $240,330.04. I reserve leave to the liquidators to file an amended claim to address the issue of any claim Mr McGreal may make in the future in relation to the current account debt. That is, of course, assuming the liquidators accept the validity of such debt and accept that it is properly able to be proved in the liquidation.
[26] For those reasons judgment is entered for the plaintiffs against the defendant in the sum of $240,330.04.
[27] Interest is also sought. Interest is referred to in the prayer for relief. Interest is to run on that sum from the date of issue of the proceedings rather than the date of liquidation.
Costs
[28] The plaintiffs are entitled to costs on a 2B basis together with disbursements as fixed by the Registrar.
Venning J
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