McKay Builders Limited (in liquidation) v McKay
[2017] NZHC 934
•10 May 2017
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000845 [2017] NZHC 934
BETWEEN MCKAY BUILDERS LIMITED (IN
LIQUIDATION) First Plaintiff
AND
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN AS LIQUIDATORS OF MCKAY BUILDERS LIMITED (IN LIQUIDATION)
Second Plaintiff
AND
PAUL JOHN MCKAY First Defendant
AND
KIM YVONNE MCKAY Second Defendant
Hearing: 5 May 2017 (By way of telephone conference) Appearances:
N H Malarao for Plaintiffs
A N Riches for DefendantsJudgment:
10 May 2017
JUDGMENT OF DUNNINGHAM J
Introduction
[1] This proceeding is set down for trial commencing 29 May 2017. However, on 1 May 2015 the defendants applied to adjourn the trial and also sought leave to commence a proceeding against a company in liquidation. On 5 May 2017, I issued a minute declining the defendants’ applications. I also granted the plaintiffs’ application for the hearing scheduled to commence on 29 May 2017 to proceed by way of a formal proof hearing and awarded costs in their favour. I now provide
reasons for my decision.
MCKAY BUILDERS LIMITED (IN LIQ) v MCKAY [2017] NZHC 934 [10 May 2017]
Background
[2] The first plaintiff, McKay Builders Limited (in Liq) (“the Company”) was an incorporated company providing labour-only building services. The Company began trading in 2003 and ceased trading by around mid-2013. On 1 October 2015, the second plaintiffs, Ms Vivien Madsen-Ries and Mr Henry Levin, were appointed liquidators of the Company (“the Liquidators”) by the High Court on the application of the Commissioner of Inland Revenue.
[3] The first defendant, Mr Paul McKay, was the sole director of the company at all times and held 50 per cent of the Company’s shares. The second defendant, Ms Kim McKay, holds the remaining 50 per cent.
[4] After investigating the financial and other affairs of the Company, the Liquidators brought proceedings against the defendants on various grounds. These claims can be broken in three parts:
(a) The plaintiffs’ first cause of action is for recovery of a shareholders’ current account debt, in the sum of $293,129, which the plaintiffs say is owed by the defendants.1 The second and third causes of action are pleaded as alternatives to the first cause of action and seek recovery of distributions to shareholders,2 or the setting aside of distributions that prejudice creditors.3 These causes of action are all pleaded against both the first and second defendant.
(b)The plaintiffs’ fourth cause of action seeks a declaration that the first defendant has breached the duties he owed to the Company. The Court is asked to order that the first defendant pay compensation in various alternative amounts, including the sum of $301,991.53 which
represents the loss to creditors.4
1 The amount claimed in the pleadings was $296,650 but was amended to this figure in the
plaintiffs’ evidence.
2 Under s 56(1) Companies Act 1997.
3 Under s 348 Property Law Act 2007.
4 Under s 301 of the Companies Act 1993.
(c) The plaintiffs’ fifth cause of action seeks a declaration that the first defendant has breached his obligation to prepare and keep accurate accounting records and financial statements of the Company.
[5] Of the $293,129 that the plaintiffs’ claim in the first cause of action, the defendants have admitted to owing a current account debt of $76,628. The defendants are presently unable to pay back even their acknowledged indebtedness to the Company.
Application for adjournment
[6] The defendant’s application for adjournment relates to the plaintiffs’ first three causes of action. The plaintiffs’ contention is that, during the time the defendants withdrew money from the Company to the amount of $293,129, they did so as advances or shareholder drawings, and not as wages.
[7] However, the defendants’ position is that they were employees of the Company who were entitled to derive income from the Company as wages. The defendants also claim that, pursuant to s 161 of the Employment Relations Act 2000, the High Court does not have jurisdiction to decide on whether an employment relationship existed. The defendants therefore seek an adjournment in order to commence proceedings before the Employment Relations Authority to determine whether an employment relationship existed between the defendants and the company.
[8] The defendants also seek an adjournment because their expert accounting witness cannot finalise his brief of evidence in a timeframe which would allow the plaintiffs to consider and respond to it before the scheduled hearing. The defendants explain that this has arisen because of difficulties with making the payments required for his services. By the time they had paid him for the services provided, he was unavailable because he was getting married and travelling overseas. The evidence he is preparing “reconstructs” the company’s accounts to convert $186,600.00 of current account debt to wages.
[9] I note that the defendants have already breached timetable directions set down by this Court on several occasions, and only raised the difficulties with completing their expert’s brief of evidence at the telephone conference on
27 April 2017.
Leave to bring proceedings in the Employment Relations Authority
[10] The first issue to determine is whether it is appropriate to grant leave to bring proceedings in the Employment Relations Authority. If it is, then this is likely to be determinative of the application for an adjournment and I need not consider the delays in provision of the defendants’ expert evidence, as there would be ample time to complete this before the rescheduled hearing.
[11] This issue involves, first, determining whether the defendants are correct in saying that there is a relevant jurisdictional issue in these proceedings which must be referred to the Employment Relations Authority, and then considering whether I should grant leave to bring the proceedings.
[12] Leave is required because s 248(1)(c) Companies Act 1993 prohibits any person commencing or continuing legal proceedings against the company or in relation to its property, unless the liquidator agrees or the Court orders otherwise. In Birchall v Project Works Construction Ltd (in liq),5 Frater J accepted that the factors that are relevant to the exercise of discretion to grant leave included those set out by Master Faire in Fisher v Isbey,6 such as that the assets of a company should not be dissipated in wasteful litigation.
[13] In addition, Frater J held that:7
(a) leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced even if successful, are likely to be fruitless;
and
5 Birchall v Project Works Construction Ltd (in liq) (2004) 9 NZCLC 263,547 at [23].
6 Fisher v Isbey (1999) 13 PRNZ 182 (HC) at [19].
7 At [24].
(b) delay by the applicant was relevant.
[14] The defendants claim there is a jurisdictional bar to this Court determining a relevant issue in the proceedings because s 161 of the Employment Relations Act
2000 states that “the Authority has exclusive jurisdiction to make determinations about employment relationship problems generally…”. “Employment relationship problem” is defined in s 5 of that Act to include:
[A] personal grievance, a dispute, and any other problem relating to or
arising out of an employment relationship…
[15] However, in Pain Management Systems (NZ) Limited v McCallum, Panckhurst J drew a distinction between what can be said to be “relating to or arising out of an employment relationship” as opposed to litigation where an employment relationship merely provided the context:8
To my mind the core concept which is determinative of the exclusive jurisdiction of the Authority is whether the determination which is required is indeed about an employment relationship problem. In the words of the definition of that concept is the underlying problem one relating to, or arising out of, an employment relationship. I think it is important to distinguish between a claim which may have its origins in an employment relationship on the one hand, and a claim the essence of which is related to or arises from the employment relationship of the parties on the other. Is the issue in a particular claim an employment relationship one, or is the subject- matter of the claim some right or interest which is not directly employment related at all? In this regard it may be necessary to distinguish between situations where the opportunity to breach the right or interest at stake arose in the context of an employment relationship as opposed to those where some employment right or interest is truly at stake.
[16] The plaintiffs say the issues in dispute fall into the former category, where the alleged employment relationship is simply the context of the dispute and not what is at issue. Thus, there is no jurisdictional barrier. In support of this submission, the plaintiffs say similar arguments to those currently employed by the defendants have previously been determined by the High Court.
[17] For example, in Chesterton Holdings Ltd (in Liq) v Durney, the liquidators of the plaintiff company applied for summary judgment against the defendant, a
8 Pain Management Systems (NZ) Limited v McCallum HC Christchurch CP72/01,
14 August 2001 at [22].
shareholder and director of the plaintiff.9 The claim was for a sum of $244,934 which represented the defendant shareholder’s current account debit in the books of the plaintiff. The defendant acknowledged that she received the monies in question, but claimed that she did so only as an employee of the plaintiff company and the monies were wages rather than drawings. Associate Judge Gendall held that the defendant, having recorded the payments received as a current account debt and in the absence of any other indicia that these were wages, such as an employment agreement or paying income tax on the payments received, could not credibly contend that the liquidators should not rely on the accounts prepared by the company. Summary judgment was entered in the plaintiffs’ favour.
[18] Similar issues were also addressed in the judgment of Keane J in Thom Contractors Ltd (in Liq) v Thom.10 Liquidators demanded that Mr Thom, the sole shareholder and director, repay shareholder advances totalling $655,105 made to him over a three year period. He disputed the demand, contending that the payments were, at least in part, salary. As in this case, he was unable to point to any contemporary record justifying his assertion. Although he had not finalised financial
statements, the Court considered that the liquidators were able to rely on the financial statements in their current form. Any salary he received would need to have been documented as s 161 requires and supported by a certificate. In addition, there was no evidence as to the hours Mr Thom worked, or that the company ever paid PAYE. Furthermore, the Court considered s 310 may be complicating in relation to salary claimed in the two years preceding liquidation.
[19] I am satisfied that, as in the cases cited, this Court has jurisdiction to consider the issues in dispute as they do not turn on the defendants’ status as employees. Rather the issue is whether sums recorded as, for example, shareholder advances can be retrospectively categorised as salary, when there is no corroborating evidence to support that assertion, and no evidence that the Company had certified their payment
as appropriate, in light of its ability to meet its debts.
9 Chesterton Holdings Ltd (in Liq) v Durney HC Napier CIV-2011-441-007, 19 May 2011.
10 Thom Contractors Ltd (in Liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009.
[20] This conclusion is supported by the fact the plaintiffs’ evidence does not turn on the defendants’ status as employees. For example, Mr Mason’s evidence states:
I am of the view that the wages being posted to the joint shareholders current account for the 2009-2013 years should fail on two counts – firstly that there was no evidenced nor properly formed employment relationship and, secondly, even if there was an employment relationship, with liability arising from non-payment on net wages would simply remain owing to the employees as unsecured creditors without the specific agreed right of offset.
[21] In short, I find that the present case is not an employment relationship problem, let alone one relating to or arising out of an employment relationship. The plaintiffs’ evidence makes it clear the amounts are claimed regardless of the defendants’ relationship with the Company. Thus, there is no jurisdictional barrier to this Court determining the proceeding. For this reason alone, I decided not to grant leave under s 248(1)(c).
[22] My conclusion is reinforced by the fact that, even if it was possible that the monies owed were employee wages and not shareholder drawings, it would not address the plaintiffs’ alternative claims, including for compensation to be paid in equal or greater amounts to the amounts pleaded in the first three causes of action. As noted above, the fourth and fifth cause of action allege that the first defendant has breached the duties he owed to the Company, and breached his obligation to prepare and keep accurate accounting records and financial statements. If the plaintiffs’ claims on the last two grounds succeed, the Court may, through the mechanisms of ss 300 and 301 of the Act, hold the first defendant personally liable to pay compensation equal to or greater than the claim under the first cause of action.
[23] Having considered the above factors, I am not satisfied that leave should be granted for the defendant to commence proceeding in the Employment Relations Authority under s 248(1)(c) of the Act. For that reason, I declined to grant an adjournment for this purpose.
Should an adjournment be granted nevertheless?
[24] My finding above leaves just the question of whether the hearing should be adjourned in order to allow the defendant time to file evidence from an accountant, which revises the company’s accounts to reclassify drawings as wages.
[25] Rule 10.2 of the High Court Rules confers the Court a very wide discretion to grant adjournments. The Court may, before or at the trial, if it is in the interest of justice, postpone or adjourn the trial for any time, to any place, and upon any terms it thinks just. Recently in Cygnet Farms Ltd v ANZ Bank New Zealand Ltd, Palmer J
held:11
In assessing the interest of justice I consider justice to all litigants – not only the parties here but the parties in the two similar cases which may be influenced by the outcome of this case as well the parties in cases in the queue that will suffer further delays and the public interest in achieving the most efficient use of court resources.
[26] Palmer J further cited O’Malley v Southern Lakes Helicopters Ltd, where
Tipping J held:12
… the essential question which the Court always has to consider when asked for an adjournment is whether or not that is necessary in order to do justice between the parties. One must not overlook that not only is it necessary to do justice to the party who is seeking the adjournment but also justice to the party who wishes to retain the benefit of the fixture. It is essentially a balancing exercise.
[27] Furthermore, in Gray v Thom Penlington J said:13
I recognise, as did the learned Judge, that the administration of justice is a relevant factor. An adjournment affects not only the party opposing the adjournment, but also the other patient litigants waiting in the queue. The opponent of an adjournment is inevitably delayed in getting a resolution of the matter to which he or she is a party. Likewise, waiting litigants are deprived of the opportunity of using the Court time because of inadequate lead time to get ready for trial. An adjournment disrupts the Court programme. It sometimes leads to a wastage of a scare resource, judicial time.
11 Cygnet Farms Ltd v ANZ Bank New Zealand Ltd [2016] NZHC 1945 at [8].
12 O’Malley v Southern Lakes Helicopters Ltd HC Christchurch CP513/89, 4 December 1990 at
1-2.
13 Gray v Thom (1997) 20 PRNZ 373 (HC) at 379.
[28] Therefore, in guiding my discretion to grant an adjournment, I must consider whether it is in the interests of justice to do so, taking into account any prejudicial effect the decision may have on the party applying for adjournment and on the party wishing to retain the benefits of the fixture. I must also take into account the scarce resource of judicial time, the court programme, and the other litigants in the queue waiting for their cases to be heard.
[29] The defendants acknowledge that while they might be able to exchange their expert evidence prior to the scheduled hearing date, this would not allow the plaintiffs sufficient time to consider and respond to it in reply evidence and in submissions. They also do not dispute that there have been earlier non-compliances by them with timetabling directions and those directions have already been amended to accommodate delays and non-compliance.
[30] Normally, where there is a credible defence to the claim which could be determinative of the proceedings, the Court would likely allow an adjournment, albeit with cost consequences, because that would be in the interests of justice.
[31] However, in this case, I have had to consider the utility of the evidence proposed to be provided in light of my findings above. The expert accounting evidence relies on the defendants’ ability to satisfy the Court that there is a proper basis for re-categorising most of these payments as wages. His evidence cannot prove that assertion. It is simply evidence that demonstrates the effect on the company’s accounts if that assertion is proved. If it was proved, then altering the accounts to reflect that would be a mechanical exercise which could be completed in due course.
[32] In any event, for the reasons already stated, the provision of this evidence would not dispose of all the plaintiffs’ claims. I cannot see that the outcome of the proceedings turn on it. In my view, there is no practical benefit to be gained for the defendants by adjourning the trial to allow this evidence to be finalised. There is, however, a detriment to the plaintiffs if the hearing is adjourned, particularly as the Court is not in a position to offer a confirmed fixture until the end of October this year. Given this hearing date has been allocated since 13 December 2016, I do not
consider that an adjournment is warranted in the interests of justice. Therefore, I
have declined to grant an adjournment.
Application for formal proof hearing
[33] That leaves the plaintiffs’ application to proceed by way of formal proof hearing on the first day of the allocated hearing date. Given all the matters discussed above, and the fact the defendants have failed to file evidence in accordance with the Court’s directions, I consider the plaintiffs are entitled to proceed on the scheduled hearing date and seek judgment on their claims. The amended statement of defence will signal to the Court the issues raised by the defendants which the plaintiffs will have to address to satisfy the Court that they have proved their case to the required standard. For these reasons, I held it appropriate to grant the plaintiffs’ application for a formal proof hearing on 27 May 2017 with one day allocated.
Result
[34] As set out in my minute dated 5 May 2017:
(a) the defendants’ application for leave to commence proceedings
against a company in liquidation is declined;
(b) the defendants’ application for an adjournment of the trial scheduled
to commence 29 May 2017 is declined;
(c) the plaintiffs’ application for a formal proof hearing to proceed on
29 May 2017, with one day allocated, is granted; and
(d) I award the plaintiffs costs on a 2B basis in respect of:
(i) attendance at the telephone conference on 27 April 2017;
(ii) preparation of the memorandum for that telephone conference; (iii) preparing opposition to the defendants’ application for leave
and for an adjournment;
(iv) the plaintiffs’ application for a formal proof hearing; and
(v) attendance at today’s telephone conference.
Dunningham J
Solicitors:
Meredith Connell, Auckland
Saunders & Co., Christchurch
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