Nellies v Mark
[2024] NZHC 3630
•2 December 2024
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WAIHARAKEKE ROHE
CIV-2018-406-10
[2024] NZHC 3630
BETWEEN IAIN ANDREW NELLIES as liquidator of PMT 2010 Limited (in liquidation)
PlaintiffAND
PETER MARK and JEANETTE PATRICIA MARK
Defendants
CIV-2021-406-13 BETWEEN
PMT 2010 LIMITED (in liquidation) First Plaintiff
IAIN ANDREW NELLIES as liquidator of PMT 2010 Limited (in liquidation)
Second Plaintiff
AND
PETER MARK and JEANETTE PATRICIA MARK
First Defendants
WISHEART MACNAB & PARTNERS TRUSTEE COMPANY LIMITED and
DAVID JOHN PAUL as trustees of the Mark Family Trust
Second Defendants
Hearing: 29 July – 2 August and 6 – 7 August 2024 Appearances:
T J Shiels KC and D P MacKenzie for Plaintiffs P A Morten and M Robertson for Defendants
Judgment:
2 December 2024
JUDGMENT OF McHERRON J
NELLIES v MARK [2024] NZHC 3630 [2 December 2024]
Table of Contents
Scope of the present claim[5]
Background[18]
Summary of defence to liquidator’s claim[65]
Limitation defences[97]
My factual findings[102]
The defendants’ s 138 defence (reliance on information and advice provided by a
professional adviser) is rejected[188]
Summary of factual findings[196]
Liability under the pleaded causes of action[197]
First cause of action — knowing receipt by the Marks of $680,000[200]
Second cause of action — s 301 claim — breach of directors’ duties[212]
Third cause of action — s 347 Property Law Act — Assignment of vendor finance loan
and removal of other assets on 20 December 2013[226] Fourth cause of action — by PMT against Mr and Mrs Mark — for current account debt [239] Fifth cause of action — PMT against trustees — claim for debt due[244]
Sixth cause of action — PMT against Mr and Mrs Mark — knowing receipt of advance
owing by trustees[251]
Seventh cause of action — by PMT against trustees — dishonest assistance[260]
Eighth cause of action — by PMT against Mr and Mrs Mark — s 300 Companies Act[266]
Ninth cause of action — by PMT against Mr and Mrs Mark — ss 52 and 56 Companies
Act[273]
Conclusion[285]
[1] This complex insolvency dispute involving a closely held Blenheim flooring company called Peter Mark Ltd (PMT) began nearly two decades ago as a simple consumer dispute concerning the quality of tiling work.1 For the reasons set out below I uphold the liquidator’s claim to take possession of and realise PMT’s assets, by means of several causes of action under the Companies Act 1993 and other common law and equitable causes of action, all of which succeed. PMT’s directors instructed others to remove the assets from the company to defeat a relatively modest creditor’s claim. I find there has been a concerted effort by a range of individuals to conceal what happened and make it look like the assets were removed earlier than actually occurred. Largely for this reason, I have rejected the defendants’ limitation defences.
1 Peter Mark Ltd was incorporated in 1989. Its directors and shareholders were defendants Peter and Jeanette Mark. In July 2010 Peter Mark Ltd changed its name to PMT 2010 Ltd; I will refer to it as PMT throughout the remainder of this judgment unless it is necessary to use a different name to be precise.
[2] In 2006, PMT carried out tiling work for Iain and Margaret Harnett in Kaikōura. Mr and Mrs Harnett were disappointed with the quality of the work and did not pay for it. PMT sued the Harnetts for their unpaid bill. They successfully counterclaimed.2 Including costs, the Harnetts obtained judgment against PMT in the sum of $102,551.3
[3] If PMT had paid its judgment debt to the Harnetts straight away, things probably would have ended there. But PMT refused to pay. Seeking to enforce their judgment, the Harnetts applied to place PMT into liquidation. Their application was granted on 24 March 2015. Murray Allott was appointed liquidator. On 25 November 2022, Mr Allott relinquished his role and Iain Nellies took over as liquidator.
[4] The liquidation has been slow, difficult and expensive. The liquidators claim they have been obstructed in their work by actions taken by the defendants, their associates and advisors, to conceal what happened to PMT assets that could have been applied to pay the Harnetts.
Scope of the present claim
[5] In the present claim Mr Nellies seeks to take possession of and realise PMT’s assets, pursuant to his principal duty under s 253 of the Companies Act 1993:
253 Principal duty of liquidator
Subject to section 254, the principal duty of a liquidator of a company is—
(a) to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the company to its creditors in accordance with this Act; and
(b) if there are surplus assets remaining, to distribute them, or the proceeds of the realisation of the surplus assets, in accordance with section 313(4)—
in a reasonable and efficient manner.
2 Peter Mark Ltd v Harnett DC Blenheim CIV-2009-006-000033, 3 December 2013.
3 Costs were determined separately on 14 April 2014: Peter Mark Ltd v Harnett DC Blenheim CIV- 2009-006-000033, 14 April 2014.
[6] Once PMT’s assets have been recovered, Mr Nellies will need to distribute those assets in accordance with the rules applicable to creditors’ claims in pt 16 of the Companies Act.
[7] A significant part of the evidence and argument put forward on behalf of the defendants in the trial related to their challenges to the disproportionate amount of time spent and costs incurred by the liquidators in their prosecution of the present claims. Having carefully considered those arguments and evidence, I consider that it is not necessary to resolve that dispute as part of this judgment.
[8] Rather, to the extent there are concerns about the fees and expenses incurred by the liquidator, and with the liquidator’s remuneration, I uphold the plaintiffs’ claim that those concerns are peripheral to the present litigation and can be addressed subsequently.
[9] The Court is charged with supervising liquidations, and has significant powers to intervene to ensure liquidators properly discharge their duties. Under the Court’s supervisory role, a shareholder or director of a company in liquidation, if given leave, may apply for an order that a liquidator refund remuneration that is “unreasonable”.4
[10] The defendants’ argument that the liquidator’s costs have been disproportionate may be of greater relevance at a later stage of the proceeding, including in respect of any application under s 284 of the Companies Act. For now, this judgment only concerns the liquidator’s discharge of his principal duty to take possession of and realise PMT’s assets under s 253. It is not a compensation claim for either the creditors or the liquidator.
[11] The liquidator may have brought some of the defendants’ criticisms upon himself by including in the statement of claim prayers for relief seeking broad, unparticularised and discretionary remedies in some of the causes of action, such as:
(a)“such further or other relief as this honourable Court deems just” (first cause of action);
4 Companies Act 1993, s 284(1)(f).
(b)“orders that (in the alternative) Mr and Mrs Mark contribute such sum to the assets of PMT by way of compensation as the Court thinks fit” (second cause of action);
(c)“an order (in the alternative) under s 348 of the Property Law Act 2007 that the Court require Mr and Mrs Mark to pay reasonable compensation to Mr Nellies and/or PMT in respect of the dispositions” (third cause of action);
(d)“such further or other relief as made to this honourable Court seem just” (seventh cause of action);
(e)“a declaration under s 300 of the Companies Act that Mr and/or Mrs Mark are personally responsible without limitation of liability, for all or any part of the debts of the liabilities of PMT as the Court thinks fit and a direction that Mr and/or Mrs Mark personally pay to PMT such sum as the Court thinks fit to give effect to the declaration above and such further or other relief as this honourable Court deems just” (eighth cause of action);
(f)“such further or other relief as this honourable Court deems just” (ninth cause of action).
[12] Also relevant to this issue is a decision of Associate Judge Johnston in this proceeding, in the context of an application by the defendants for discovery of the liquidator’s costs.5 Possibly influenced by the breadth of the prayers for relief as set out above, the Associate Judge considered that if the plaintiffs were to succeed in their claims pursuant to s 301 of the Companies Act:
(a)it would be necessary for the Court to consider the amount of any order for recovery; and
5 Nellies v Mark [2023] NZHC 584.
(b)the costs incurred by the liquidator during the liquidation, and in relation to the litigation, would be a relevant consideration in that exercise.6
[13]However, the plaintiffs clarified at trial that they limit their claim to
$2,764,317, being the amount of PMT’s assets they allege were improperly removed from the company by journal entries made by PMT’s accountant on 20 December 2013. These journal entries, which are central to the outcome of the present decision, are discussed further below.
[14] To the extent that the plaintiffs’ pleading references claims for additional sums (as summarised above at [11]), the plaintiffs abandoned those claims in their closing submissions. The plaintiffs’ counsel made it clear that costs were to be considered in the usual way after the hearing. They reserved the right to make submissions on costs, including in relation to costs sought against third parties. However, in terms of any recovery of the liquidator’s costs, that would be done in accordance with the order of distribution reflected in ss 312 and 313 of the Companies Act.
[15] At the conclusion of argument, the plaintiffs’ lead counsel, Mr Shiels KC, undertook to give PMT’s shareholders notice of what the liquidator considered to be reasonable fees. Mr Shiels said the plaintiffs consent to the shareholders having one month to apply under s 284 of the Companies Act for an audit of the accounts of the liquidation, review of the liquidator’s remuneration, or other relief available under that section.
[16] Given Mr Shiels’ undertaking and the plaintiffs’ consent to shareholder scrutiny of the liquidator’s remuneration, I conclude that it is not necessary for the Court to assess the reasonableness of the liquidator’s remuneration in the present judgment. Rather, that exercise can occur later. That simplifies the matters for determination in this judgment, which are limited to considering the plaintiffs’ causes of action and prayers for relief as described in their closing submissions, in light of the defendants’ opposition to the claim.
6 At [21].
[17] Accordingly, in the present judgment, I assess whether the plaintiffs are entitled to take possession and recover the assets of PMT, and if so to what extent, pursuant to the liquidator’s principal duty under s 253 of the Companies Act.
Background
[18] About two years after carrying out the tiling work for the Harnetts, on 18 March 2008, PMT sold its flooring business to Glen Morrison and Lawrelle Morrison (as agents for a company to be formed). After selling its business, PMT stopped trading. On 27 March 2008, Peter Mark Floorpride 2008 Ltd (PMF) was incorporated to carry on the business.
[19] Under the agreement for sale and purchase of the business, PMT advanced to the purchasers a vendor finance loan of $680,000, at five per cent per annum for a term of seven years from the date of settlement. The sale and purchase agreement provided that the loan would be repaid by the purchasers over that term, with payments of interest and principal made monthly.
[20] At the end of 2008, David Boon, a chartered accountant, took over from Williden & Associates as PMT’s accountant. Mr Boon had a prominent role in relation to several of the transactions at issue in the present case, as will be discussed in more detail below.
[21] On 16 February 2009, PMT issued proceedings in the District Court against Mr and Mrs Harnett for unpaid bills of $32,835, relating to the tiling work carried out in 2006.7 On 5 August 2009, the Harnetts filed a counterclaim against PMT for
$131,176.
PMT’s asset base 2009-2013
[22] When the Harnetts brought their counterclaim in 2009, PMT’s accounts recorded a substantial asset base, more than adequate to meet that counterclaim.
7 The statement of claim names “Peter Mark Floor Pride Ltd” as plaintiff. However, in subsequent Court documents, including the judgments the plaintiff was named as “Peter Mark Ltd”.
[23] The financial statements for PMT for the year ended 31 March 2009, prepared by Mr Boon, record PMT’s:
(a)advances to the Mark Family Trust of $1,133,700; and
(b)current asset of $680,000 (the vendor finance loan to PMF).
[24] PMT’s financial statements for the year ended 31 March 2010 record as a current asset the Mark Family Trust’s indebtedness to the company of $1,174,800 as well as the $680,000 loan to PMF.
[25] While the Harnett proceeding was ongoing, Mr Mark considered winding up PMT. He considered changing the name of the company, as he did not want to attract adverse attention if the liquidation was advertised. However, for reasons that remain unclear, winding up of the company was not progressed.
[26] For the year ended 31 March 2011, PMT’s statement of financial position records PMT’s total equity as $2,763,357. The financial statements record as current assets:
(a)an advance to the Mark Family Trust of $1,124,940;
(b)the $680,000 loan to PMF; and
(c)overdrawn shareholders’ current accounts in the sum of $928,740.
[27] According to PMT’s tax summary and tax return for the year ended 31 March 2012, a total asset base of $2,772,523 was recorded, with net assets or shareholder funds of $2,763,357. There was no direct evidence showing when this tax return was filed. However, PMT’s “myIR” imputation credit annual return for the year ending 31 March 2012 for PMT shows the tax return was processed on 8 April 2013.8 The defendants’ accounting expert Justin Martin said that in almost all cases the imputation credit return would be filed at the same time as the IR10 tax return. Accordingly, I
8 The “myIR” imputation credit annual return is a document produced by Inland Revenue.
infer that the tax return was likely filed shortly on or around the date on which the imputation credit account annual return was processed, 8 April 2013. A file note of Murray Allott dated 29 June 2015 records a conversation between Mr Allott’s colleague Mark Petrie and an unnamed individual from IRD on 24 June 2015 in which Mr Petrie was advised the 31 March 2012 tax return was filed on 8 April 2013. The defendants argued this file note was inadmissible hearsay. But, in light of Mr Martin’s evidence, I consider the circumstances surrounding the statement provide reasonable assurance that it is reliable and that undue expense or delay would be caused if the maker of the statement were required to be a witness. Therefore, it is admissible under s 18 or s 19 (as a business record) of the Evidence Act 2006.
[28] The District Court gave its judgment on the Harnett proceeding on 3 December 2013. Judge Susan Thomas (as she then was) confirmed her preliminary views (given in May 2013),9 awarding the Harnetts damages of $63,498.58. The plaintiffs allege that, at this point, PMT held approximately $2.7 million worth of assets with which to meet this judgment sum. In his opening submissions for the plaintiffs, Mr MacKenzie referred to “two incontrovertible facts”:
(a)as at 31 March 2012, $2,772,523 total assets were shown in PMT’s tax return;
(b)those assets were still on the company’s books as at 20 December 2013.
[29] Mr MacKenzie described the dates associated with these “incontrovertible facts” as “book ends”. At a concise 19 pages it was no “book”. But the District Court’s 3 December 2013 judgment in favour of the Harnetts is shelved between these “book ends”, during the period of PMT’s “incontrovertible” positive asset base.
The 20 December 2013 PMT general ledger entries
[30] However, instead of paying the Harnetts their judgment sum, PMT’s general ledger shows a series of debit and credit entries were made on 20 December 2013.
9 Peter Mark Ltd v Harnett, above n 2.
These entries, which were part of what was described as the “MYOB GL batch report #6” were as follows:
[31]These entries show:
(a)the removal of the $1,136,340.40 asset owed to PMT by the Mark Family Trust;
(b)the removal of the $680,000 asset owed to PMT by PMF;
(c)the removal of the $25,000 asset owed to PMT’s accounts receivable;
(d)payment of a dividend of $1,454,857 to PMT’s shareholders’ current account by way of a credit;
(e)payment of capital profits of $1,303,500;
(f)a balancing figure of $537,940.40 debited to the shareholders’ current account.
[32] Although they were made on 20 December 2013, these entries were mysteriously backdated to 31 March 2012.
[33]The defendants rationalised the general ledger entries as follows:
(a)PMT paid a dividend of approximately $2.76 million ($1.454 million plus $1.303 million) by way of credit to Mr and Mrs Mark’s shareholder loan accounts.
(b)PMT did not have $2.76 million in cash to make the payment owed to shareholders, so it applied that amount to Mr and Mrs Mark’s $928,000 (approx.) overdrawn shareholder current accounts, plus the $680,000 from the vendor loan to PMF, plus the loan/advance receivable from the Mark Family Trust of $1.1 million.
[34] But, whatever the precise breakdown or characterisation of those transactions, it is accepted that those debit and credit entries in the general ledger allowed $2.77 million worth of assets to be removed from PMT’s balance sheet, leaving only $5,000 behind. However, despite nominally being backdated to 31 March 2012, it was not until mid-2022 that the liquidator became aware this had happened.
[35] The plaintiffs ask the Court to infer that, following the award of damages to the Harnetts on 3 December 2013, Mr Mark instructed Mr Boon to retrospectively remove these assets from PMT’s balance sheet. The plaintiffs say that the 20 December 2013 general ledger entries show Mr Boon carrying out Mr Mark’s instructions.
Harnett judgment sum increases to $102,551.46 after costs added
[36]A costs judgment increased the total judgment sum in favour of the Harnetts to
$102,551.46 on 14 April 2014.10 The Harnetts then began enforcing their judgment. On 21 July 2014, they served Mr Mark with an application for financial assessment.
Creation of backdated documents to support the 20 December 2013 journal entries
[37] Shortly after Mr Mark was served with the application for financial assessment in July 2014, his solicitor David Clark created and printed a deed of assignment of the
$680,000 vendor finance loan. That deed was backdated to 31 March 2012. The deed of assignment records that PMF is indebted to PMT for $680,000 under the 18 March 2008 sale and purchase agreement, but that PMT agreed to assign that debt to Mr and Mrs Mark.
10 Peter Mark Ltd v Harnett DC Blenheim CIV-2009-006-000033, 14 April 2014 (Costs Judgment of Judge A A Zohrab).
[38] The plaintiffs link the timing of the creation of the deed of assignment with the service on Mr Mark of the summons to attend the District Court. The plaintiffs ask the Court to infer that Mr Mark needed some documents to support his instruction to Mr Boon in mid-December 2013 to remove assets from PMT and the subsequent actions taken by Mr Boon to implement those instructions on 20 December 2013.
[39] Other backdated documents relating to these 20 December 2013 journal entries were created:
(a)a deed of acknowledgement of debt between the Marks (as lenders) and the trustees of the Mark Family Trust (as borrowers), whereby the Marks advanced to the trustees the sum of $1,124,940;
(b)minutes of an annual general meeting of PMT, and two dividend statements recording net dividends paid to Mr and Mrs Mark of
$727,428.50 each;
(c)PMT financial statements for the period ending 31 March 2012.
[40] It is the last of these documents, the PMT financial statements for the year ended 31 March 2012, that are of central relevance in the present case. From those financial statements, I set out below PMT’s statement of financial position:
[41] Mr Mark accepted at the trial that, despite the date “31/3/2012” written at the foot of the page, this statement of financial position was not signed on that date and must have been backdated. However, Mr Mark could not recall when he signed this document, and other documents did not help resolve that question.
[42] Mr Mark took this statement of financial position to the financial assessment hearing, for his examination in the District Court on 21 November 2014.
[43] The 2012 financial statements produced by Mr Mark to the District Court showed a very different position as at 31 March 2012 than PMT had previously reported to Inland Revenue in its tax return for that financial year. That is because the 2012 financial statements reflected PMT’s altered position, after the series of backdated general ledger entries Mr Boon made on 20 December 2013.
The Harnetts apply to put PMT into liquidation
[44] As PMT did not pay the Harnetts any of the judgment debt owing to them, they successfully applied for PMT to be placed in liquidation. Murray Allott was appointed liquidator on 24 March 2015.
[45] Very soon after his appointment, in April 2015 Mr Allott requested documents under s 261 of the Companies Act from Mr and Mrs Mark (as PMT’s directors) and from Mr Boon (as PMT’s accountant). Only Mr Boon provided documents in response to that request, as Mr and Mrs Mark responded that all the documents were held by Mr Boon. Mr Boon provided:
(a)the 2012, 2013 and 2014 financial statements for PMT;
(b)a general ledger transaction details report from PMT’s MYOB accounting software;
(c)dividend statements for Mr and Mrs Mark recording dividends of
$727,428.50 declared on 31 March 2012 and paid to each of them on 1 April 2012;
(d)a solvency certificate signed and dated 31 March 2012;
(e)minutes of an AGM stated to have been held on 31 March 2012; and
(f)a deed of acknowledgement of debt between the Marks (as lenders) and the trustees of the Mark Family Trust (as borrowers) signed and dated 31 March 2012, under which the Marks advanced to the trustees
$1,124,940.
[46] However, the deed of assignment purporting to assign the vendor finance loan from PMT to the Marks personally was not provided to the liquidator.
The $680,000 vendor loan falls due for payment
[47] On 8 May 2015, the $680,000 vendor loan fell due for payment. Mr Mark’s lawyer David Clark issued a settlement statement seeking payment by PMF to Mr and Mrs Mark of $680,000. PMF’s solicitor, Stephanie Ginders, was not expecting that the statement would record that the $680,000 debt was payable to Mr and Mrs Mark personally, as it was PMT which had lent the money to PMF. Ms Ginders asked Mr Clark to advise when the debt had been assigned from PMT to Mr and Mrs Mark personally. Mr Clark replied “31 March 2012”. Ms Ginders responded that she was aware that PMT was in liquidation. She asked Mr Clark to undertake that payment to Mr and Mrs Mark would be in full and final satisfaction of the debt and there would be no recourse from the liquidators against PMF for any amount of the debt. Mr Clark responded to Ms Ginders providing her with a copy of the deed of assignment. He undertook on behalf of Mr and Mrs Mark that they would indemnify PMF in respect of any claim brought by the liquidator to claim any monies from PMF in relation to either debt. Mr Clark also offered to amend each of the settlement statements to record that receipt of payment discharged the debt and released PMF from all further obligation of indebtedness.
[48] Ms Ginders then advised PMF that the proper course would be to contact PMT’s liquidator. However, PMF’s director Mr Morrison told Ms Ginders that “under no circumstances [should she] make contact with the liquidators!!”, to seek confirmation that the liquidator would not challenge the payment.
Mr Allott was obstructed from identifying the $680,000 vendor loan as a PMT asset
[49] I find that Mr Morrison’s instruction to Ms Ginders was a deliberate effort to obstruct the liquidator from identifying the $680,000 vendor loan as a PMT asset.
[50] Without a copy of the deed of assignment relating to the $680,000, Mr Allott focused his attention on the documents that had been provided to him. But he could
not make sense of the financial statements dated 31 March 2012, or the supporting documents.
[51] Mr Allott commenced proceedings on 23 March 2018 seeking relief against Mr and Mrs Mark for failing to keep proper accounting records. From the documents discovered in that proceeding, Mr Allott obtained a copy of the 2008 sale and purchase agreement between PMT and Mr and Mrs Morrison as agents for PMF.
[52] Noticing the reference to the vendor finance loan in that agreement, Mr Allott wrote to PMF about the loan on 11 March 2019 and 6 May 2019. Mr Allott’s lawyer also wrote to Mr Clark on 11 April 2019 seeking proof of repayment or assignment of the loan. On 19 April 2019, Mr Clark responded:
I believe this request has previously been both asked and answered.
[53] However, Mr Clark’s response was wrong — the deed of assignment had not been provided previously to Mr Allott. It would be more than a year later before Mr Allott finally received a copy of that deed.
[54] Mr Allott then followed up his request to Mr Clark with a notice under the liquidator’s general power to obtain documents and information.11 Mr Allott also made a similar request under s 261 to Mr Boon, but received no response. Instead, an email from Mr Mark to Mr Boon on 19 November 2019 reveals Mr Mark had adopted a delaying strategy:
I know you are concerned about the court case but neither side wants this to end in court so we play a dance until I settle with a cheque. Allott is a bully and is trying to strengthen a weak case to make sure the settlement is enough to cover his cost’s [sic].
…
Anyway I have and am enjoying working with you and hope we can continue our relationship.
[55] It was not until 17 June 2020 that Mr Clark finally disclosed to the liquidator a copy of the deed of assignment of the loan. Mr Clark asserted that Mr Mark believed
11 Companies Act 1993, s 261.
the original of the document would have been among the documents sent to the liquidator at the start of the liquidation. However, neither side could provide a list of the documents that had been provided to Mr Allott in 2015.
Mr Allott’s proceeding to recover the vendor finance loan
[56] Now that he had the deed of assignment, Mr Allott could bring a proceeding focused on the recovery of the vendor finance loan. He commenced the 2021 proceeding (CIV-2021-406-13) in April 2021.
Mr Allott confirms PMT’s 2012 financial statements were false
[57] In June 2022, Mr Allott obtained the original tax return records for PMT for the 31 March 2012 financial year. This confirmed to Mr Allott that the 2012 financial statements Mr Mark had been relying on were false. Mr Allot was now also able to confirm that the deed of assignment could not have been signed and dated on 31 March 2012, because the $680,000 was still recorded as an asset of PMT at that time.
[58] In 2022, Mr Allott recovered documents from a server held by Mr Boon confirming that the tax return for the year dated 31 March 2012 was prepared by him on 6 March 2013. He also confirmed the series of manual journal entries had been made on 20 December 2013, with a transaction date of 31 March 2012, to remove $2.7 million worth of assets from the balance sheet (as discussed above).
[59] Armed with this new information, Mr Allott sought to show that PMT’s assets were removed from its balance sheet on 20 December 2013, some 17 days after the District Court gave judgment in favour of the Harnetts.
Mr Nellies amends the claim to recover trustee debt to PMT of $1,124,940
[60] The current liquidator, Iain Nellies, replaced Mr Allott as liquidator in November 2022.
[61] In further discovery obtained from the defendants in February 2023, Mr Mark disclosed the financial statements of the Mark Family Trust. These financial statements record a debt to PMT of $1,124,940 as at 31 March 2011. However, by
31 March 2013 the same debt is recorded as being owed to the Marks personally, not PMT. The 31 March 2014 financial statements record repayment of the debt to the Marks at some point during that financial year. Mr Mark said he could not find the financial statements for the year ended 31 March 2012.
[62] Based on that information, Mr Nellies amended the claim to pursue the trustees of the Mark Family Trust for the debt of $1,124,940, which they have never repaid PMT. An alternative cause of action against the trustees alleges dishonest assistance of the payment of that sum to the Marks in the financial year ending 31 March 2014.
[63] A search of Mr Boon’s server recently revealed the financial statements for the Mark Family Trust for the year ending 31 March 2012. Two separate versions of those statements were discovered:
(a)one recording a liability to PMT of $1,074,140; and
(b)one recording a liability to the Marks personally for $1,124,940.
Summary of defence to liquidator’s claim
[64] Ultimately the defendants’ defence to the liquidator’s claim can be summarised as follows. The defendants had intended to wind up PMT. If that had occurred sooner then, by the time the Harnetts obtained their judgment, there would be no money to pay them and they would have to walk away empty handed. But the winding up did not happen in time. So documents had to be created and backdated to make it look as if this had occurred.
[65] The defendants adopted a two-prong approach of denying responsibility, blaming:
(a)Mr Allott for his ineffective and inefficient conduct of PMT’s liquidation;
(b)Mr Boon for failing to implement their instructions to transfer assets out of PMT sooner.
[66] The defendants accept there was an irregularity in PMT’s accounts and documentation supporting asset transfers. However, they blame Mr Allott for the delay in identifying this irregularity. They say Mr Allott could have resolved it at minimal cost without the need for litigation, but now it is too late. They refer to Mr Allott’s evidence that:
… the sad thing about this whole process is if Mr and Ms Mark had come to me…I could have fixed everything. Mr and Ms Harnett needed to be paid. There were some other little minor things needed to be paid, I would have had minimal fees. I could have fixed the capital dividend for them … the 680 that was coming in, sort of 150 could have paid Mr and Ms Harnett, paid me, and a couple of other things that needed to be sorted. And that was the end of this whole process.
[67] The defendants submit that the cost of liquidation as at 30 April 2024 ($1,483,523.79) is excessive and disproportionate, considering the principles for determination of reasonable liquidators’ costs set out in Madsen Ries v Salus Safety Equipment Ltd (in liquidation):12
(a)Liquidators are fiduciaries and their fundamental obligation is a duty to account. There is a conflict between the interests of the liquidator (fiduciary) in receiving remuneration and the interest of the creditors (those to whom the fiduciary duties are owed) who bear the cost of that remuneration.
(b)Liquidators are officers of the Court and are subject to its general supervisory function. They must attend diligently to their tasks and make all proper reports and inquiries. They have the same responsibilities as barristers and solicitors.
(c)Liquidators must justify their claims for remuneration. They bear the onus in this regard and the benefit of any doubt due to inadequate information must be resolved in favour of the creditors.
(d)Fixing liquidators’ remuneration requires judicial judgment. It is more akin to an administrative task. It is implicit that the judicial officer can draw on his/her own experience in performing this role.
(e)In fixing liquidators’ remuneration the Court is making a determination of the fairness and reasonableness of the proposed fees compared to the work undertaken and results achieved. The focus is on the value of services rendered to the creditors of the company.
(f)The Court will consider whether there has been unnecessary work or over servicing as this would not represent time reasonably expended at a reasonable rate.
12 Madsen Ries v Salus Safety Equipment Ltd (in liquidation) [2022] NZCA 101, [2022] NZCCLR 12 at [15].
(g)A broad brush approach is acceptable provided that there is an exercise of judicial judgment as opposed to an arbitrary choice of amount.
(h)The process of fixing remuneration needs to be proportionate. It should not be unduly prescriptive; nor should it unnecessarily add costs to creditors.
[68] The defendants say that their expert accountant, Justin Martin, confirmed that a distribution was lawfully made in July 2014 without causing PMT solvency issues. This is when the plaintiffs say the annual general meeting resolution, solvency certificate and deed of assignment were all signed.
[69] The defendants say that Mr Boon was instructed to wind-up PMT. He needed to take the necessary steps in the 2011–2012 financial year because, by then, a lower top tax rate had been introduced for individuals. PMT’s primary assets at that time were:
(a)the vendor loan to PMF of $680,000;
(b)the Mark Family Trust advance of $1.1 million;
(c)the overdrawn shareholder current account of $928,000; and
(d)accounts receivable of $25,000.
[70]According to Mr Martin, the following steps needed to be taken:
(a)pass a resolution putting the company into liquidation, signed by the shareholders;
(b)assign the accounts receivable to the shareholders;
(c)provide for contingent liabilities;
(d)assign the vendor loan and part of the Mark Family Trust loan to the shareholders;
(e)pay dividends leaving an amount in retained earnings to cover a contingent liability to the Harnetts.
[71] Mr Martin’s evidence was all very well, but seems to have been put forward as an attempt to reframe what actually occurred — namely that PMT’s assets were removed without providing anything to meet the Harnett contingent liability.
The rogue accountant theory
[72] The defendants deny that Mr Boon took instruction from Mr Mark to carry out the 20 December 2013 journal entries. They submit that an inference is also equally available that he made the journal entries on his own volition.
Defendants’ assessment of primary cause of action and defendants’ response
[73] The defendants consider the following causes of action to be the primary causes of action in the liquidator’s claim:
(a)(ninth cause of action) ss 52 and 56 of the Companies Act and the lack of proper supporting documents.
(b)(second cause of action) breach of s 131 of the Companies Act — directors’ duties and s 301 relief (including claims for liquidators’ costs).
(c)(eighth cause of action) ss 194 and 300 Companies Act relief — the obligation to keep proper financial records.
[74]The defendants’ primary defences to these causes of action are:
(a)s 138 of the Companies Act — the defendants say they relied on information and advice provided by a professional advisor (Mr Boon).
(b)limitation defences in respect of the plaintiffs’ claims brought six years after the date of the act or omission on which each claim is based. The
defendants say the plaintiffs cannot avail themselves of late knowledge within the definition of s 14 of the Limitation Act 2010.
Defendants’ narrative of relevant events
[75] The defendants advanced the following contextual narrative of events which they say supports their theory of the case.
[76] After a period of serious illness, Mr Mark returned to work in 2006 intent on selling PMT’s business. Elaine Reeves and Glen Morrison incorporated PMF. A single share of that company was issued to Peter Mark so they could continue to use his name in association with the new business.
[77] Settlement of the sale and purchase agreement for the business took place in May 2008 (despite the agreement having been signed on 18 March 2008). The sale and purchase agreement provided for vendor finance in the sum of $680,000 at five per cent interest per annum for a term of seven years from the date of settlement to 1 May 2015. The purchaser was required to pay interest and principal every month over the term of the loan. After Mr Morrison and Ms Reeves approached Mr Mark to see if they could defer the monthly principal repayments, Mr Mark proposed that PMF pay the vendor loan principal in a lump sum, seven years after the date of settlement, with interest payments to be paid to Mr Mark’s Family Trust. The defendants argue that the variation to cl 16 of the agreement amounted to an equitable assignment of interest. The defendants did not argue that the loan principal was equitably assigned.
[78] Mr Boon took over as PMT’s accountant in late 2008 or early 2009. He completed financial statements for the company from then until the year ending 31 March 2014.
[79] Mr Mark gave evidence that when he first met Mr Boon he told him he wanted to work through completing the wind-up of the business. Mr Mark’s evidence was that the reason the $680,000 vendor loan was recorded in the financial statements for the years 2009–2011, but not 2012, was because 2012 was the year that Mr Boon was instructed to wind-up the company, remove assets and transfer them to the shareholders. This date was to take advantage of the new 33% top tax rate for
individuals and resulting tax savings, as Murray Pashby, an accountant, had recommended to Mr Boon when he consulted with him in 2010.
[80] Judgment in the Harnett litigation was given on 3 December 2013. A costs judgment then followed on 14 April 2014. Mr Mark’s evidence was that while the Harnett proceeding was progressing, he took steps to instruct Mr Boon to wind-up the company. Mr Mark knew that this would involve formal documents being drawn up but his evidence was that he did not know what those documents would be.
The defendants’ concerns about the conduct of Mr Allott and the level of fees charged by him
[81] The defendants have concerns about several aspect of Mr Allott’s conduct as liquidator. They say that he did not contact the directors of PMF at the time of his appointment and did not attempt to do so until 2020. The defendants’ liquidation expert, Jessica Kellow, gave evidence that she would have expected a reasonable liquidator to have had a discussion with the company directors. Ms Kellow said that considering the documents that were supplied to Mr Allott, she would expect a reasonable liquidator to have turned their mind to when a contingent liability to the Harnetts might have been created, and then to look back at historical transactions. She said her experience was that a liquidator got better results from discussing and meeting with directors to explain why they needed information in the first place. She said the onus is on a liquidator to seek information because, without it, the liquidator could not do their job.
[82] Ms Kellow referred to other ways Mr Allott might have obtained the deed of assignment, for example that Mr Allott could have inferred that the “Peter Mark Floor Pride 2008 Ltd” current asset entry was a vendor loan and that Mr Allott could have inquired about it. She said that in her practice, liquidators did not jump to issuing a s 261 notice. What was important was that the liquidator set the scene and built relationships. She said that the liquidator was on notice that there were avenues of recovery enabling him to recover sufficient funds to pay creditors.
[83] Ms Kellow considered the number of hours recorded by Mr Allott seemed disproportionate to the liabilities of the company and was not a reasonable amount of time to have spent.
[84] Faced with a liability of about $100,000 to the Harnetts, in Ms Kellow’s opinion the liquidator should have made every effort to resolve matters without litigation. She said she would have done things differently at the outset to avoid accruing $1.4 million of liquidation costs.
[85] Mr Allott accepted the general ledger batch reports would have been available if he had asked for them. But he did not ask for them. Even when Mr Allott interviewed Mr Boon in 2020, he did not ask Mr Boon any questions about the general ledger batch reports (as opposed to the transactions report) during that interview. Ms Kellow said that it was a liquidator’s obligation to be inquisitive and insist on the provision of information. Mr Allott described the general ledger batch report as the crucial piece of missing information, because it showed what happened and when. If this had been obtained, and if Mr Allott had met with Mr and Mrs Mark then:
(a)the expected $680,000 could have been used to pay the Harnetts and the liquidator’s (then minimal) fees; and
(b)PMT’s capital dividend could have been arranged in favour of Mr and Mrs Mark. Mr Nellies admitted that the presence on the 2009 balance sheet of an entry for $680,000 next to the description Peter Mark Floor Pride 2008 Ltd could have indicated a vendor loan. Mr Nellies said that he would have gone back to Mr Boon to access the missing MYOB material. In addition, he would have sought information about the
$680,000 “as soon as practical” from PMT’s directors.
[86] The fact that Mr Allott had a transcript of the District Court examination of Mr Mark meant that Mr Allott ought to have been able to hit the ground running. At the earliest, from the date of his appointment he knew that an accountant and a lawyer were highly critical of the removal of assets that had been disclosed in the year ending 31 March 2012 financial statements. The suspicions that Mr Allott expressed in his
first liquidator’s report appear to reflect those criticisms. The defendants say there was no justification for Mr Allott’s failure to recover more information, in particular the GL batch reports, that were held by Mr Boon.
[87] Moreover, the defendants point out that Mr Allott was unable to explain why he did not issue proceedings until 2018, or what happened between the date of his appointment in April 2015 and 2018 that caused the issuing of proceedings to be delayed so long. As the defendants pointed out, no explanation for this was contained in his six-monthly liquidator reports.
[88] Ms Kellow set out the five steps a reasonable liquidator should undertake to identify assets or possible avenues of recovery from a company in liquidation:
(a)Meet with the directors. Ms Kellow said that Mr Allott did not do this.
(b)Obtain financial information for current and historical periods. Ms Kellow’s evidence was that a reasonable liquidator faced with the contents of the 31 March 2012 balance sheet would undertake further investigations to determine why there had been such a significant movement in current assets from $2.765 million in 2011 to $6,159 in 2012.
(c)Conduct further investigations. Here, Ms Kellow’s major criticism of Mr Allott was his failure to obtain a copy of the sale and purchase agreement until January 2019.
(d)Analyse financial work papers and journals. According to Ms Kellow, Mr Allott knew further information was available underlying what he had seen in the general ledger, but he failed to access and interrogate the electronic MYOB records.
(e)Assess the vendor loan to PMF. Ms Kellow criticised Mr Allott’s failure to obtain information from PMF.
[89] Ms Kellow also criticised Mr Allott’s fees and the methods he used for recording his time. His timesheet records provided insufficient narrative detail for her to be able to analyse the work undertaken. Likewise, timesheet data lacked supporting detail and provided little in the way of narration detailing the exact nature of the work done by Mr Allott and his staff.13
[90] In addition, Ms Kellow considered the number of hours spent by Mr Allott was higher than expected, given the nature of the recovery actions he was pursuing and the fact that the Harnett judgment debt was only $102,551.56. Ms Kellow considered that if this matter could have been settled on a commercial basis in the first couple of years, liquidator fees of between $30,000 and $40,000 would have been justified.
[91] After a trial such as in the present case but with a simpler claim, Ms Kellow estimated that reasonable liquidator fees would have been in the order of $100,000 (excluding legal fees).
[92] Again, I consider Ms Kellow’s evidence may have some relevance to considerations on a s 284 inquiry. However, her observations as to the liquidator’s best practice have less relevance at the present stage of evaluating the liquidator’s core claim against the defendants.
Mr Martin’s evidence of how a competent accountant would have advised PMT
[93] Addressing the defendants’ criticisms of PMT accountant Mr Boon, Mr Martin set out in detail how a competent accountant would have advised PMT on the facts of this case, in relation to payment of a dividend. Mr Martin’s evidence demonstrated that there would have been lawful ways for PMT to resolve its affairs before being wound-up while retaining the money needed to satisfy the Harnetts’ judgment debt.
[94] Therefore, Mr Martin’s evidence on the appropriate way for achieving this served to confirm Mr Allott’s evidence that he as liquidator could have resolved
13 Ms Kellow identified this as a breach of principle 9(2) of the Restructuring Insolvency & Turnaround Association New Zealand Inc Code of Conduct: “A Practitioner must provide sufficient, meaningful, open and clear disclosure of their Remuneration or Remuneration claim to the Approving Body or Body of Creditors (as applicable)”.
matters. The difference, however, was that Mr Allott was talking about the situation he faced, namely a company in liquidation. By contrast, Mr Martin’s evidence focused on regularising the company’s pre-liquidation financial affairs to preserve its ability to meet the liability to the Harnetts.
[95] Mr Martin also opined that for an accountant to backdate a dividend to clear a balance sheet to nil at an earlier date, as Mr Boon did, would be a clear professional conduct breach. In Mr Martin’s opinion, Mr Boon failed to confirm the existence of contingent liabilities (namely to the Harnetts). Primary supporting documentation of some components was lacking, and the taxable dividend entry was backdated.
[96] The defendants submit that all parties were ready for trial on the 2018 proceeding, when Mr Allott issued a Property Law Act 2007 notice. The parties were on the verge of a fixture when the trial was adjourned. Mr Allott’s costs reached
$189,000 in the 2020 year.
Limitation defences
[97] It is a defence to a money claim if the defendant proves that the date on which the claim is filed is at least six years after the date of the act or omission on which the claim is based (the claim’s primary period).14 Section 16(1)(i) of the Limitation Act provides that the start date for the primary and long stop periods of a claim under s 301 of the Companies Act is the date on which the liquidator of the company was appointed. The limitation period is modified if the claimant has late knowledge of the claim and so the claim has a late knowledge date.15 Section 14 of the Limitation Act defines a claim’s “late knowledge date”. It is the date after the close of the start date of the claim’s primary period on which the claimant gained knowledge (or, if earlier, the date on which the claimant ought reasonably to have gained knowledge) of the fact that the act or omission on which the claim is based had occurred and the fact that the act or omission on which the claim is based was attributable (wholly or in part) to, or involved the defendant.
14 Limitation Act 2010, s 11(1).
15 Section 11(3).
[98] The defendants rely on the following principles set out by the Court of Appeal in Rea v Auckland Council:16
(a)A claimant will have knowledge when they know enough to make it reasonable for them to begin to investigate whether they have a claim against the defendant. The claimant then has six years (in respect of a money claim) on which to conduct inquiries, and if advised there is a course of action, to prepare and issue proceedings.
(b)A plaintiff cannot postpone the start of a limitation period by shutting their eyes to the obvious.
(c)Knowledge does not mean knowing for certain and beyond possibility of contradiction. It means knowing with sufficient confidence to justify embarking on the preliminaries to the issue of a proceeding. Suspicion, if vague and unsupported, is not enough. Reasonable belief will suffice.
[99] The defendants submit that Mr Allott had sufficient knowledge to embark on the preliminaries of a legal proceeding in April 2015. The defendants say that by the time Mr Allott filed his first report on 24 April 2015, he knew enough to make it reasonable for him to begin to investigate whether he had a claim against the defendants. However, Mr Allott did not issue proceedings until 15 March 2018. The defendants submit that Mr Allott’s delay has not been explained. There is no evidence that in the intervening period, Mr Allott became aware of information that then led to the issuance of the proceeding. Using Ms Kellow’s assessment of the hours worked by Mr Allott, the thrust of the defendants’ submissions is that Mr Allott did not work hard enough to make use of the information he already had to make the further inquiries needed, in order to commence a claim.
[100] The defendants say that the fourth cause of action (current account debt by Mr and Mrs Mark) and sixth cause of action (knowing receipt against Mr and
16 Rea v Auckland Council [2024] NZCA 313 at [64]–[67], approving Driver v Radio New Zealand Ltd [2019] NZHC 3275 at [29]. The Supreme Court declined leave to appeal in Rea v Auckland Council [2024] NZSC 148.
Mrs Mark) are out of time as they are fresh causes of action that are essentially different from causes of action previously pleaded.17
[101] The defendants say that the latest on which the liquidator could have brought proceedings under s 301 of the Companies Act was 24 March 2021. This was approximately five months before the amended statement of claim was filed and one month before the original statement of claim was filed on 23 April 2021. The defendants say that, notwithstanding the decision of Grice J in her judgment of 11 February 2022,18 s 50 of the Limitation Act does not apply. The defendants also say that issue estoppel does not arise and was rejected by Associate Judge Johnston in his discovery judgment in 2023.19
My factual findings
Pre-trial ruling on Mr Boon’s unavailability
[102] In a ruling dated 2 August 2024, I declared Mr Boon unavailable as a witness because of his mental condition.20 I ruled admissible a transcript of the liquidator’s s 261 Examination of 2 September 2020, an affidavit of Mr Boon sworn on 1 October 2020, and an affidavit affirmed on 23 September 2022. However, I excluded Mr Boon’s signed brief of evidence dated 14 May 2024 which had been prepared for the purposes of the trial. I acknowledged the defendants’ objection that the 2022 affidavit followed discovery of the GL batch reports and journal entries carried out by Mr Boon on 20 December 2023 and has all the hallmarks of an exculpatory statement by Mr Boon, realising he was in serious trouble. However, I was satisfied that the nature of the affidavit and its contents, as well as the circumstances relating to the making of the affidavit provided reasonable assurance as to its reliability at a threshold admissibility stage. I emphasised that the ultimate assessment of the reliability of the content of the affidavit remained for the Court to determine after considering all of the evidence. Any assessment of Mr Boon’s credibility and the weight to be given to the
17 Transpower New Zealand Ltd v Todd Energy Ltd [2007] NZCA 302; ISP Consulting Engineers Ltd v Body Corporate 89408 [2017] NZCA 160.
18 PMT 2010 Limited (in liquidation) v Mark [2022] NZHC 169 (Judgment of Grice J).
19 Nellies v Mark [2023] NZHC 584.
20 Nellies v Mark HC Blenheim CIV-2018-406-10, 2 August 2024 (Admissibility Ruling of McHerron J).
statements I ruled as admissible would be made when I considered all the evidence in light of the parties’ submissions before giving my judgment.
[103] Having had the opportunity to reflect on the evidence and submissions after the trial, I remain satisfied that Mr Boon’s affidavit evidence is reliable, for the reasons I gave in my ruling.
PMT’s assets as at 3 December 2013
[104] I accept the plaintiffs’ submission that the following “two incontrovertible facts” underpin the defendants’ liability in the present case:
(a)that PMT had $2.7 million worth of assets with which to meet the Harnett judgment when it was given on 3 December 2013. This is evident from its tax return filed with Inland Revenue for the period ending 31 March 2012. I accept this is a proven incontrovertible fact;
(b)instead of paying the judgment, on 20 December 2013, more than $2.7 million worth of assets were removed from PMT’s balance sheet. This occurred through a series of manual journal entries entered into PMT’s accounts for the year ending 31 March 2012. This allowed financial statements for PMT as at 31 March to be produced recording PMT as having net assets of only $5,000. Likewise, I accept this is a proven incontrovertible fact.
Finding as to who instructed Mr Boon to remove PMT’s assets on 20 December 2013
[105] The question remains: did Mr Boon act on his own initiative to remove PMT’s assets on 20 December 2013? Or was he following Mr Mark’s instructions? Counsel did not agree which was correct. I am not persuaded that it necessarily affects the outcome to the case. But I consider that the evidence supports a finding that Mr Boon did not act on his own initiative, but was instructed to do what he did.
[106] Mr Boon deposed that, in mid-December 2013, Mr Mark instructed him to remove the assets and liabilities from PMT’s balance sheet as at 31 March 2012.
[107] The defendants submit the Court should not consider Mr Boon’s affidavit, including Mr Boon’s attempt to exculpate himself after the MYOB GL batch report #6 was disclosed, revealing journal entries that Mr Boon effected on 20 December 2013. The defendants argued they had no opportunity to cross-examine Mr Boon, who did not attend the trial to give evidence in person. They say Mr Boon lacks veracity and his evidence is unreliable.
[108] The plaintiffs point out that it is likely that Mr Mark instructed Mr Boon to adjust PMT’s balance sheet, given Mr Boon did not stand to benefit from the adjustment, but Mr and Mrs Mark did. Moreover, the plaintiffs referred to two communications between Mr Mark and Mr Boon, in 2019 and 2020, indicating that Mr Mark:
(a)had no concern about Mr Boon’s actions;
(b)knew and accepted that PMT had not yet been wound-up;
(c)was adopting a strategy of delaying resolution because he thought it would strengthen his position on any settlement; and
(d)reassured Mr Boon that Mr Boon was not responsible for the dispute that was unfolding and that Mr Mark was willing to assist to “make this easier” for Mr Boon.
[109] As the plaintiffs point out, Mr Mark was involved in signing the backdated deeds created by Mr Clark as well as the backdated solvency certificate, dividend declaration, AGM minutes and financial statements for the year ended 31 March 2012. Mr Mark then told the District Court, on oath, that the financial statements for the year ending 31 March 2012 were available on that day, when they clearly were not.
[110] Having regard to this evidence, I find it is likely that in mid-December 2013, Mr Mark instructed Mr Boon to remove the assets from PMT’s balance sheet backdated to 31 March 2012. Rather than suggesting that Mr Boon was a lone rogue
accountant who initiated the asset removal, my assessment of the evidence indicates Mr Mark directed him to do so.
[111] However, as I have already indicated, I do not think whether Mr Boon was instructed to remove the assets from PMT’s balance sheet, or did so on his own initiative, would change the outcome of the case. Either way, PMT’s assets were removed after the obligation to pay the Harnetts had crystallised on 3 December 2013. And PMT’s inability to pay that debt triggered PMT’s liquidation.
[112] The plaintiffs submit that Mr Mark had instructed Mr Boon in mid-December 2013 to remove these assets from PMT’s balance sheet. They rely on Mr Boon’s affidavit affirmed on 23 September 2022 in which he states:
In mid-December 2013 I was instructed by the director of PMT, Mr Peter Mark to make changes to the 2012 financial statements for PMT. I was told by Mr Mark that he wanted me to remove the assets and liabilities from the balance sheet as at 31 March 2012.
[113] The defendants deny that Mr Boon was instructed by Mr Mark to remove PMT’s assets. As stated, they unsuccessfully opposed admissibility of Mr Boon’s 2022 affidavit.21
[114] The defendants accept that the judgment in favour of the Harnetts was delivered on 3 December 2013 and that Mr Boon carried out the journal entries on 20 December 2013. However, they deny an inference can be drawn from those two facts. The defendants say there are two equal inferences that can be drawn:
(a)The steps Mr Boon took were on instruction from Mr Mark, who had just received the District Court judgment; or
(b)For some reason Mr Boon had not got around to removing the assets from the company’s balance sheet by the time the 3 December 2013 judgment was delivered.
21 Admissibility Ruling of McHerron J, above n 20.
[115] The defendants say it is not proper to choose between two equal inferences as that would involve guessing which of them was correct. The defendants say that, as Mr Boon did not attend the trial and could not be asked why he made those 20 December 2013 journal entries, it is unsafe for any inference to be drawn.
[116] Again, I find, the first inference is inherently more likely, given the timing of the Harnett judgment and the fact that Mr and Mrs Mark believed (and apparently still believe) that they stood to gain from a scenario in which PMT has few assets. But, in my assessment, it does not matter which alternative is correct as, either way, as I have found, PMT had approximately $2.7 million worth of assets with which to meet the Harnett judgment when it was given on 3 December 2013.
[117] Mr Morrison had worked for the company since 1990 and was its flooring installation foreman. Elaine Reeves ran the business for about 15 months in 2005 during Mr Mark’s absence while unwell. Mr Morrison and Mr Mark described each other as “family”. In a revealing moment in Mr Morrison’s cross-examination, he agreed that the “family position” was not to tell the liquidator about funds due to PMT because that would mean the Harnetts would get paid.
[118] I agree with the plaintiffs that this evidence supports an inference, and I find accordingly, that Mr Mark instructed Mr Boon in mid-December 2013 to remove the assets from the company.
Mr Clark’s actions helped hide the removal of PMT’s assets
[119] Mr Boon was not the only significant participant who was absent from the trial. Notably, the defendants did not call Mr Clark to give evidence. As the above narrative indicates, Mr Clark played a significant role in producing backdated documents to make it appear that the transactions recorded by Mr Boon on 20 December 2013 had already occurred by 31 March 2012. I find that Mr Clark’s actions helped hide the retrospective removal of PMT’s assets to avoid them being available to meet the Harnetts’ judgment:
(a)Mr Clark created the deed of acknowledgement of debt in February 2014 and the deed of assignment of the $680,000 vendor loan in July 2014. Both documents were backdated to 31 March 2012.
(b)Mr Clark signed the deed of acknowledgement of debt on behalf of Wisheart Macnab & Partners (WMP) as trustee of the Mark Family Trust.
(c)On 8 May 2015, Mr Clark told PMF’s solicitor Stephanie Ginders that the $680,000 debt was assigned on 31 March 2012, when he likely knew that was untrue.
Findings in relation to the deed of assignment of the $680,000 vendor loan
[120] There is nothing in the evidence to suggest that Mr Allott had received the deed of assignment of the $680,000 vendor loan before Mr Clark forwarded a copy on 17 June 2020. I find that Mr Allott’s conduct is consistent with the deed of assignment not having been provided to him earlier. I find it is unlikely that the deed of assignment was earlier provided to him.
[121] I find that Mr Clark assisted Mr Mark to conceal the deed of assignment from the liquidator, in breach of PMT’s disclosure obligations. I accept the plaintiffs’ submission that the concealment of this document is a key feature of the case. I also accept their submission no proper explanation has been given for the delay in its production.
Findings in relation to the documents supporting the 20 December 2013 general ledger journal entries
[122] In their closing submissions, the plaintiffs referred to several other instances of lies and deliberate concealment. In combination, the plaintiffs submit these instances support a finding that the 20 December 2013 general ledger entries were a key part of a coordinated strategy to divest PMT of assets, to prevent the Harnetts from receiving any money.
[123] Because the elements of the defendants’ concealment rely on several different strands of evidence, it is necessary to set these out in some detail.
[124] Once Mr Boon made the manual journal entries on 20 December 2013, they needed to be documented to appear as though PMT only had $5,000 in net assets. The following documents, all signed and dated 31 March 2012, were used to support this reconstruction of PMT’s asset base:
(a)financial statements for the period ending 31 March 2012 (an excerpt of which, the statement of financial position, is set out above at [40]);
(b)a solvency certificate;
(c)minutes of an annual general meeting declaring a dividend of
$1,454,857, payable on 1 April 2012;
(d)a deed of assignment in which PMT purportedly assigned its right, title and interest in the $680,000 vendor finance debt to Mr and Mrs Mark;
(e)a deed of acknowledgement of debt between Mr and Mrs Mark (as lenders) and the trustees of the Mark Family Trust (as borrowers) in which the Marks advanced to the trustees the sum of $1,124,940, repayable upon demand.
[125] The date of creation or signature of the documents listed at sub-paras (a)–(c) above is not known. Mr Mark, who signed each of these documents, was unable to remember when he signed them. However, I accept the plaintiffs’ submission (referring to the incontrovertible facts) that these documents must have been created and signed after 20 December 2013 because PMT retained $2.7 million of assets at that date, which these documents (in combination) purport to transfer away from it.
[126] There is more certainty about the date of the deed of assignment (at sub- para [124](c) above). This document was created by Mr Mark’s solicitor David Clark of WMP on 30 July 2014 and printed the same day. The evidence for the creation of this document comes from the native files corresponding to that document which were
provided by WMP. This was confirmed by unchallenged expert evidence given by forensic computer analyst Cameron Hansen-Beadle.
[127] Mr Hansen-Beadle also confirmed that the deed of acknowledgement of debt (sub-para [124](e) above) was created by WMP on 3 February 2014.
Mr Mark’s evidence to the District Court was incorrect
[128] On 21 November 2014, Mr Mark attended a financial assessment hearing at the Blenheim District Court before Judge Hastings. Mr Mark was placed under oath. He produced the financial statements dated 31 March 2012. The transcript of the financial assessment hearing includes the following passage of cross-examination:
Q. So in that period, say the 2012 accounts, you say it’s quite straight forward but would the accounts be prepared within days of the end of the financial year, weeks, a couple of months?
A.I think in the 2012 there was some pressure to have them done, um, um, pretty quickly because of the tax law changes that were happening, um, to my knowledge. I think I’d been, um, I think I’d had some pressure on the accountant for a couple of years to make sure that this happened, in fact, I think I wanted it done a couple of years before that, um, to make sure that we didn't miss the, um, the tax, um, period which, this was the last year, so, I think that he was, um, working in advance on sorting it out.
Q.Were the accounts actually available on the 31st of March 2012, to your knowledge?
A. To me? Yes.
Q. Were the accounts actually prepared and available on 31 March 2012 to your knowledge?
A. I believe so.
[129] As the plaintiffs submit, Mr Mark’s evidence as to the availability of the accounts on 31 March 2012 is wrong, given the Inland Revenue tax return for the year ending 31 March 2012, which was likely filed at some point between 6 March 2013 and 8 April 2013, and the subsequent journal entries on 20 December 2013.
[130] In the present proceeding in this Court, the plaintiffs warned Mr Mark that they would be submitting that he had lied to the District Court. He accepted that his answer
had been misleading, as the following excerpt from the notes of evidence from the present proceeding shows:
Q. And you explain: “I think in 2012, there was some pressure to have them day [sic: done],” and you go on to talk about the tax situation as you understood it. So on line 20, the question: “Were the accounts actually available on the 31st of March to your knowledge?” and you answer: “To me, yes.” Now, to be fair to you, the next question is: “Were the accounts actually prepared and available on 31 March 2012 to your knowledge?” which doesn’t seem very different from the previous question and the answer recorded there is: “I believe so,” and the question repeats that to you: “You believe they were,” and then goes on with his next question. So do you accept that at that hearing before the District Court on 21 November 2014, after you were sworn in to tell the truth, the whole truth and nothing but the truth, you were asked whether the accounts were actually available on the 31st of March to your knowledge and your answer was: “To me, yes,” and to be fair, you may be qualified that a little bit after that by saying: “I believe so.” So were you telling the District Court that your honest belief was that the accounts for the ended 31 March 2022, sorry, 31 March 2012 were available on 31 March 2012?
A. Thereabouts.
Q. Well, you don’t say “thereabouts” do you?
A. No, I know that.
Q. First you say: “Yes,” and then you say: “I believe so.”
A. Yes.
Q. Right. What made you think that?
A. Just because we were trying to make sure we were hitting a date and I would’ve thought that maybe we, maybe David Boon made a wee bit of extra effort. Probably a presumption that was…
Q. Well, that’s why they might’ve been available on that date. You’re not asked, you know, did you want them available on 31st of March, do you think David Boon tried to have them available on that date. What you were asked was were they prepared and available and you told the Court: “Yes,” and then: “I believe so.” So what – I’m not asking you why you thought they were done on that date, but I’m asking you what made you believe that was the case when you were giving evidence to the District Court?
A. Because were trying to hit a certain date for the tax.
Q. You knew the date written on them wasn't necessarily reliable because you’ve acknowledged that.
A. Correct.
Q. Or told us that you were told to put that date on the document.
A. Yes.
Q. It may not necessarily have been the date it was signed?
A. No
Q. Well, Mr Mark, I want to give you fair notice, we’re going to be submitting to the Court that your answers there were a lie to avoid paying, with a view to avoiding paying Mr and Ms Harnett, do you want to comment on that proposition any further?
A.I don’t know why I would think I needed to be in that position not to pay. It’s seems like a small amount to –
Q. To a $2.7 million company?
A. That’s what I’m saying.
Q. Yes. So that’s your answer to the proposition it’s a lie?
A. I don’t think it’s a lie.
Q. Well, what is it if it’s not a lie?
A.Well, I apologise, I thought that, you know, we were just talking about the 31st of March 2012 books and when we were preparing them, as all other accountants do, they prepare them and then you sign them for the date that they wish you to sign them for.
Q.Well, that’s not what you were asked. You were asked were the accounts prepared and available on 31 March 2012.
A. Yes, clearly, I’m not listening properly.
Q. I’m sorry?
A. Clearly, I’m not understanding. I know what the question is, I can see what you’re saying and I can –
Q. You can see what your answer was –
A. – see what my answer was which is mis – which is, I would think misleading because that can’t have been the day, the actual day that the accounts were done on the 31st of March 2012, not on that day.
[131] Juries are directed when assessing evidence in criminal trials that there is a difference between credibility and reliability. Reliability is about accuracy. A witness can be genuinely trying to tell the truth, but they can nevertheless be mistaken because of a variety of circumstances. One of the most common examples is when witnesses are giving evidence about events in the past because, as we all know, memories dim
over time. Credibility is different. It is about whether a witness is genuinely trying to tell the truth.
[132]In the above two transcript excerpts above Mr Mark:
(a)told the District Court in November 2014 that PMT’s accounts had actually been available on the 31st of March 2012; then, in this Court
(b)admitted that was “misleading”.
[133] On balance, my assessment is that Mr Mark’s evidence crosses the line from reliability to credibility. I find Mr Mark was not genuinely trying to tell the truth in his District Court financial assessment hearing, having regard to the evidence of the date of creation of:
(a)the deed of assignment of the $680,000 vendor finance debt (30 July 2014); and
(b)the deed of acknowledgment of debt (3 February 2014); and
(c)all of the documents supporting the 20 December 2013 journal entries dated after 20 December 2013 because PMT retained $2.7 million of assets at that date, which these documents (in combination) purport to transfer away from it.
[134] I therefore accept the plaintiffs’ submission that Mr Mark lied under oath to the District Court in his evidence on 21 November 2014 relating to the date on which the 2012 accounts were available.
Mr and Mrs Mark’s failure to disclose documents to the liquidator in response to the 22 April 2015 s 261 notice
[135] The month after his appointment as liquidator, on 22 April 2015, Mr Allott issued a notice under s 261 of the Companies Act to Mr and Mrs Mark for production of the books and records relating to PMT including (but not limited to):
(a)all correspondence, including facsimiles and emails;
(b)banking and financial records relating to company transactions;
(c)all cheque books, deposit books and bank statements;
(d)accounting books, including cash book and ledgers;
(e)minute book.
[136] The liquidator’s 22 April 2015 s 261 notice also stated “if any of these records are kept in an electronic form [then] a full backup with source codes and programme files will also be required.”
[137] In his evidence in this Court, Mr Mark accepted that he received a copy of the 22 April 2015 s 261 notice and that he spoke to his solicitor Mr Clark about it. In relation to Mr Clark’s involvement, Mr Mark said he was “was just taking his advice as to how we deal with this”. As the plaintiffs point out, Mr Clark had the deed of assignment of the $680,000 vendor finance loan because Mr Clark had created it nine months earlier and was about to provide it to PMF’s solicitor Ms Ginders on 8 May 2015. Although the defendants did not call Mr Clark to give evidence, the plaintiffs submit that the Court should infer that he advised Mr Mark to withhold the deed of assignment because it would lead to the liquidator challenging the imminent repayment of the $680,000 vendor finance loan. Having regard to Mr Clark’s role in the creation of the deed, his failure to disclose the deed of assignment until 2020 and his attempt to conceal that failure to disclose the deed (to which I turn shortly), I accept that this is a reasonable conclusion to draw from the evidence.
[138] Ms Kellow agreed that the deed of assignment was a document that should have been provided to the liquidator in response to the s 261 notice. Despite this, Mr Mark did not:
(a)provide the liquidator with the deed of assignment;
(b)mention the imminent repayment of the vendor finance loan, which was due to be repaid on 15 May 2015;
(c)check with Mr Boon as to what documents he sent to Mr Allott.
[139] I agree with the plaintiffs’ submission that Mr Mark’s failure to provide the liquidator with the deed of assignment or mention the imminent repayment of the vendor finance loan was a failure to respond to Mr Allott’s 22 April 2015 s 261 notice. Ms Kellow agreed with this characterisation. Section 261(6A) of the Companies Act provides that a person who fails to comply with a notice given under that section commits an offence and is liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding two years.22
[140] In relation to the delays caused by PMT’s directors failing to volunteer a copy of the deed of assignment of the loan, the defendants criticised Mr Allott for not finding other ways of obtaining that document or deducing that it existed by reference to other sources of information. The defendants submitted that Mr Allott ought to have relied on such other sources of information to infer that the PMF current asset entry of $680,000 was a vendor loan.
[141] However, accepting the defendants’ submission would make Mr Allott responsible for their own failure to provide the documents he requested, reversing the applicable onus of proof. Section 261 of the Companies Act recognises that the liquidator is a stranger to the company’s affairs. It is the directors that are assumed to be familiar with the company. That is why it is the company’s directors who must provide company records responsive to a liquidator’s notice.
[142] Ms Kellow accepted that a liquidator relies on a company’s director to provide the relevant records and that a liquidator might not be aware whether there was, for example, a deed of assignment that might be relevant to be provided.
[143] Accordingly, I do not accept that the liquidator is at fault for PMT’s directors failing to provide him with the deed of assignment.
22 Companies Act 1993, s 373(3).
Mr Boon’s response to the 16 April 2015 s 261 notice was also deficient
[144] Mr Allott issued a request to provide information under s 261 of the Companies Act on 16 April 2015. Specifically, Mr Allott asked for any PMT records that Mr Boon was holding, including:
(a)PMT’s accounting files and work papers, including a backup copy of any electronic file that may contain this information (MYOB, bank link or other including any permissions required to access any online package used by the company such as Xero);
(b)the most recent financial statements prepared for PMT and any subsequent draft or management accounts;
(c)any files concerning any other matter(s) Mr Boon was attending to on PMT’s behalf.
[145] Mr Boon provided some documents on 20 April 2015. However, he failed to provide:
(a)the Inland Revenue tax return for the year ending 31 March 2012 prepared on 6 March 2013 and filed sometime between then and 8 April 2013;
(b)a full printout of the MYOB ledger batch report recording the date the journal entries were entered and revealing the batch #6 manual journal entries made on 20 December 2013 (this was despite being expressly asked to provide backup copies of electronic files from MYOB).
[146] I find Mr Boon’s failure as PMT’s agent to provide these documents to Mr Allott is a failure attributable to Mr Mark. Mr Mark must ultimately take responsibility for Mr Boon’s obstructing Mr Allott from progressing the liquidation in this way.
Mr Clark’s response about the date of the assignment of the $680,000 vendor finance loan lacks credibility
[147] On 8 May 2015, Stephanie Ginders, a partner at Hardy-Jones Clark, PMF’s solicitors, emailed Mr Clark to ask “can you advise when the debt was assigned from Peter Mark Ltd to him and his wife personally and the Mark Trust? Seven minutes later, Mr Clark responded to Ms Ginders, “31 March 2012”.
[148] However, the $680,000 vendor finance loan remained an asset of PMT as at 31 March 2012 (as shown in its tax return). Mr Clark only drafted the deed of assignment on 30 July 2014. There was no evidence that the debt assignment occurred on 31 March 2012.
[149] I find that Mr Clark’s response to Ms Ginders that the assignment took place on 31 March 2012:
(a)lacks credibility; and
(b)prevented the liquidator from taking steps to prevent the payment of
$680,000 from being made to the Marks personally, so that it could be used to pay PMT’s creditors, in particular the Harnetts.
Mr and Mrs Mark received the $680,000 vendor loan and did not inform the liquidator
[150] On 15 May 2015, following the exchange of communications between Mr Clark and Ms Ginders, the $680,000 vendor loan to PMF was paid to Mr and Mrs Mark. They failed to tell the liquidator about it. This was despite Mr Mark’s evidence in the District Court six months earlier that he had no means to pay the Harnetts, then or at any stage.
[151] At trial in this Court, Mr Mark blamed his lawyers for the Harnetts never receiving their money, as shown in the following excerpt from the notes of evidence:
A.… we know that we owe the Harnetts the money and are quite happy to pay it and I apologise to the Harnetts for not being able to pay it earlier, it’s not something that I relish.
Q. Have you ever said to the Harnetts, between when they got their judgment and today “look I’m sorry we couldn’t pay you, we’ve sorted it out now, we’ll pay you”?
(a)to act in good faith and in what the directors believe to be in PMT’s best interests when exercising powers or performing duties; and
(b)that a director must not agree to the business of PMT being carried on in a manner likely to create a substantial risk of serious loss to PMT’s creditors; and
(c)not to cause or allow PMT’s business to be carried on in a manner likely to create a substantial risk of serious loss to PMT’s creditors.
34 As in Fordyce Road Development Ltd (in liquidation) v Khan [2019] NZHC 2288 at [52]–[54].
[214] The plaintiffs allege that Mr and Mrs Mark breached their duties as directors in three ways:
(a)they caused the vendor loan to be repaid to themselves instead of to PMT;
(b)by disposing of property as recorded in the December 2013 journal entries;
(c)by directing that the trustees’ advance be paid or credited to themselves, rather than to PMT.
[215] Claims under s 301 of the Companies Act have a six year limitation period under s 16 of the Limitation Act. When the claim was filed it was out of time and therefore Mr Allott sought leave under s 50 of the Limitation Act to advance that claim as an out of time “ancillary claim” to a within time “original claim”.
[216] Grice J granted that leave in her judgment of 11 February 2022. Grice J held that the claim could be advanced out of time as ancillary to either the first or third causes of action.35
[217]As the plaintiffs point out, Grice J’s judgment was not appealed.
[218] The defendants submit that no issue estoppel arises and that it is for this Court to determine on the facts after hearing all the evidence whether Mr Allott ought reasonably to have gained knowledge of the facts outlined in s 14(1) of the Limitation Act. The defendants submit that Mr Allott ought to have gained the requisite knowledge in or about April 2015, shortly after the date of his appointment and that the s 301 claim is statute barred.
[219] I agree with the plaintiffs’ submission that the defendants may not plead a limitation defence in relation to the second cause of action, because Grice J’s decision stands. If I am wrong about that, I consider that the liquidator is entitled to rely on
35 Judgment of Grice J, above n 18, at [117].
s 48 of the Limitation Act. Section 48 is the fraud exemption to a claim’s longstop period. It applies on the present facts.
[220] In relation to the substance of the claim, the defendants refer to duties under ss 131 and 135 of the Companies Act. In respect of s 131, the defendants submit that the obligation for a director to act in the best interest of the company is subjective. However, a director cannot subjectively believe they are acting in the best interests of the company if they have failed to consider the interests of the company or, where required, the interests of creditors.36 The defendants emphasise that a finding of breach of s 131 of the Companies Act is not a finding of fraud or dishonesty. Whether a breach has occurred is to be decided on the facts. They submit that if the Court finds Mr Mark breached his duty under s 131 then the evidence does not show he did so fraudulently or in bad faith.
[221] The defendants submit that Mr Mark relied on his professional advisors to carry out their tasks professionally, which did not occur. However, they submit that Mr Mark did not intentionally wind-up his company with the purpose of defeating the Harnetts’ judgment debt. They submit the timing is coincidental.
[222] In relation to s 135 of the Companies Act (reckless trading), the defendants submit that this is not a s 135 case. They submit that ordinarily a breach of this duty arises where a company is insolvent but continues to trade with risk of serious loss being faced by creditors. However, PMT was not trading and therefore its business was not being “carried on”. Further, the defendants submit that s 135 adds nothing further to the claim of breach of s 131.
My assessment
[223] I agree with the plaintiffs’ claim that the actions taken by the Marks by removing assets from the PMT balance sheet, leaving it with no ability to pay the Harnett judgment debt, was a breach of their fiduciary duty to PMT under s 131 of the Companies Act to act in good faith and in the best interests of PMT.
36 Madsen Ries v Cooper [2020] NZSC 100, [2021] 1 NZLR 43 at [111] and [112].
[224] I also agree with the plaintiffs’ submission that the appropriate remedy for s 301 is to order Mr and Mrs Mark to restore to PMT all the assets from the balance sheet, as recorded in its tax return filed with Inland Revenue for the financial year ending 31 March 2012.
[225]Thus, under the second cause of action, Mr and Mrs Mark are ordered to pay
$2,764,317 to Mr Nellies as PMT’s liquidator.
Third cause of action — s 347 Property Law Act — Assignment of vendor finance loan and removal of other assets on 20 December 2013
[226] As an alternative and additional claim, the plaintiffs allege that Mr Nellies is entitled to the return of the money ($2,764,317) purportedly removed from the balance sheet on 20 December 2013, under ss 347 and 348 of the Property Law Act 2007. These provisions apply to a debtor that was insolvent because of the disposition and with an intent to defeat a creditor without receiving reasonably equivalent value in exchange.37 The plaintiffs allege that the disposition of that property was for no other reason than to avoid paying the Harnetts’ judgment debt.
[227] In relation to the third cause of action, Grice J considered the relevant act for limitation purposes is the date that the allegedly unlawful distribution of the vendor loan took place. Grice J considered, on the facts before her, that the late knowledge provisions in the Limitation Act applied to the s 347 claim, with the effect that the claim was within time.38 She determined on the facts that Mr Allott had knowledge in June 2020, so that, in her view based on the facts before her, the limitation period on this cause of action expired in June 2023.39
[228] In relation to the substance of the third cause of action, the defendants submit that s 346 of the Property Law Act requires the plaintiffs to prove:
37 Property Law Act 2007, s 346(1).
38 Judgment of Grice J, above n 18, at [74].
39 At [76].
(a)that each of the transactions recorded in the GL batch report on 20 December 2013 in respect of the vendor finance loan, the shareholders current accounts and the advance were “dispositions”;
(b)that the dispositions were made by PMT:
(i)with the intent to prejudice Mr and Mrs Harnett; or
(ii)the 20 December 2013 transactions were made without receiving reasonable equivalent value in exchange; and
(c)PMT was insolvent at the time, or became insolvent as a result, of making the disposition.
[229] The defendants submit that the plaintiffs must prove that Mr and Mrs Mark knew that alienating property would hinder, delay or defeat the Harnetts’ recourse to that property, and that they were exposing the Harnetts to a significantly enhanced risk of not recovering the amounts owed to them. If those things are established then the requisite intent is established even if that outcome was not Mr and Mrs Mark’s wish.40 The defendants submit that it is a matter for the Court to determine on the evidence available whether it can safely conclude that it was Mr Mark’s intention (when he requested PMT be wound-up and its assets distributed) to defeat the Harnett judgment or whether there is a perfectly reasonable explanation for the transactions that took place without the requisite intent.
[230] By reference to Mr Martin’s evidence, the defendants submit that the transactions on 20 December 2013 were transactions that would be made in circumstances where a company is being wound-up and its assets distributed to its shareholders. The defendants submit that the fact that the contingent liability to the Harnetts was not accounted for in the accounts prepared by Mr Boon and the amount of the dividend payment adjusted accordingly, does not demonstrate that Mr and Mrs Mark acted intentionally or dishonestly in receiving that distribution.
40 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863 at [35]–[36].
My assessment
[231] I agree with the plaintiffs’ submission that the removal of PMT’s assets from its balance sheet on 20 December 2013 fits within the broad definition of “disposition”, most likely as a form of “transfer” under para (a):41
disposition—
(a)means any sale, mortgage, transfer, grant, partition, exchange, lease, assignment, surrender, disclaimer, appointment, settlement, or other assurance; and
(b)includes the creation of—
(i)an easement, profit à prendre, or any other interest in property; and
(ii)a trust in the lifetime of the settlor or by will, and a devise, bequest, or appointment by will in respect of property; but
(c)in subpart 6 of Part 6, has the meaning given to that term by section 345(2)
[232] On the basis of the disposition, PMT seemingly became insolvent given the financial statements presented to the District Court show only $5,000 of net assets. I accept the plaintiffs’ submissions that PMT made the dispositions to defeat the Harnetts’ judgment.42 I also accept the plaintiffs’ submission that PMT’s liquidator is prejudiced by the dispositions in terms of s 348(1)(b).
[233] In relation to the limitation defence to the third cause of action, I accept the plaintiffs’ submissions that Mr Allott only learned about the deed of assignment when it was provided to him on 17 June 2020. That was the earliest a cause of action under s 347 of the Property Law Act could have been brought in respect of the vendor finance loan.
[234] Grice J gave Mr Allott leave to be joined as a plaintiff and file an amended claim, which he did on 4 October 2021, well within the three year limit.43 I accept the plaintiffs’ submissions that the liquidator only had late knowledge of the other
41 Property Law Act, s 345(2).
42 Property Law Act, 346(1)(b).
43 Limitation Act, s 11(3)(a).
dispositions on 15 August 2022, when the general ledger batch report was obtained from Mr Boon’s server.
[235] Mr Nellies’ amended claim, including these wider dispositions was filed on 29 March 2023, well within the limitation period. I reject (as did Grice J) the defendants’ submission that Mr Allott ought to have learned about this cause of action earlier. Rather, I accept the plaintiff’s submission that the key elements of this cause of action were deliberately concealed from him. The cause of action is not time- barred.
[236] As the plaintiffs submit, two remedies are available under s 348(2). The Court can either vest in the liquidator the property that is the subject of the dispositions, or it can require reasonable compensation to be paid to the liquidator.
[237] In the present case, I accept the plaintiffs’ submission that it is appropriate for Mr and Mrs Mark to be ordered to return all $2,764,317 worth of dispositions. The evidence established that the $2.3 million purchase price received by PMT from PMF for the sale of the business was paid out to Mr and Mrs Mark through their overdrawn current accounts and loan advance to the trustees of the Mark Family Trust.
[238] I do not propose to make any provision for an alternative remedy of compensation. That is, in part, because as I indicated above I do not intend to engage now with the defendants’ argument relating to the reasonable fees of the liquidation. That is because I accept the plaintiffs’ submission that the appropriate time for the Court to consider such argument is in relation to any application under s 284 of the Companies Act. I have made provision for such application at the end of this judgment.
Fourth cause of action — by PMT against Mr and Mrs Mark — for current account debt
[239] The fourth cause of action is the claim against Mr and Mrs Mark in respect of the current account they, as shareholders of PMT, owed to that company. The debt itself amounted to $928,740 as at 31 March 2011 and is undisputed.
[240] Mr and Mrs Mark admit that no part of this debt has been paid but they say, without more, that they are not liable to make payment.
[241] The sole basis for the defendants’ stance is that this claim could have been brought as early as April 2015 and would have been the most straightforward claim to bring at that time. The claim was first raised in the third amended statement of claim on 29 April 2024 and leave was not sought to file it.
[242] The plaintiffs do not accept that this cause of action is time barred. They submit that a current account is repayable on demand.44 They only made demands for the repayment of the current account in the third amended statement of claim. The plaintiffs do not accept that leave was required to add this cause of action but, if it was required, leave is sought. The plaintiffs submit there is no prejudice to the defendants. The plaintiffs submit that the defendants are fully aware of the case they have had to meet and are answerable for the current account debt under both the second and third causes of action.
My assessment
[243] I accept the plaintiffs’ claim that they are entitled to make demand of Mr and Mrs Mark for the unpaid current account debt of $928,740. I reject Mr and Mrs Mark’s denial of liability to repay the current account debt. I do not accept that the debt was validly removed from PMT’s balance sheet on 20 December 2013, or otherwise. I accept the plaintiffs’ submission that leave was not required to add this to their statement of claim and that time began running on this cause of action from the date of the plaintiffs’ demand, which was made in the third amended statement of claim filed on 29 April 2024.
Fifth cause of action — PMT against trustees — claim for debt due
[244] The fifth to the seventh causes of action relate to PMT’s claim for the return of its advance to the trustees of the Mark Family Trust. The Mark Family Trust’s statement of financial position as at 31 March 2011 records that it owes PMT
44 Vance v Vey Group Ltd [2022] NZHC 75 at [48]–[68].
$1,124,940. The PMT financial statements align with the Trust’s. Nothing has been done to repay this amount and the plaintiffs submit that no internal entry in PMT’s records could amount to a repayment.
[245] The trustees deny that the advance remains an asset and that it has not been repaid. They say PMT’s right to repayment arose from the date of the advance and that the claim is time barred.
[246] The defendants claim that if Mr Allott wished to pursue a claim against the trustees in relation to PMT’s advance to them he ought to have done so in or about April 2015 when he received a copy of PMT’s statements, the Gascoigne Wicks material and when he completed his first liquidator’s report on 24 April 2015.
My assessment
[247] I accept the plaintiffs’ submissions that no journal entry within the accounts of PMT could serve to extinguish the trustees’ liability. I also accept that there is no pleading or evidence to the effect that the trustees have ever taken any steps to repay PMT. I therefore accept the plaintiffs’ characterisation of this as a simple debt claim in respect of money that has never been repaid.
[248] In relation to the plaintiffs’ late knowledge, I accept that PMT only learned of the cause of action on or around 15 August 2022, when the liquidator first obtained the MYOB general ledger batch report #6. I accept that, while examination of the 2011 financial statements revealed a debt owing by the trustees, that debt was no longer showing on the 2012 financial statements that had been presented to the liquidator. I accept the plaintiffs’ submission that the elements of the cause of action include not only the existence of the debt but the fact it has not been repaid. I also accept that the liquidator could not have known that the debt had not been repaid and that it had disappeared from the 2012 financial statements purely by way of a journal entry internal to the company, until the GL batch report was provided to him.
[249] I accept the plaintiffs’ submission that the liquidator lacked knowledge of the true situation because he was misled by the documentation provided. Mr and Mrs Mark knew the true situation but failed to provide details of it when they should
have in response to the liquidator’s s 261 request. I accept the plaintiffs’ submission that the Marks’ failure to provide information amounted to fraud within the meaning of s 48 of the Limitation Act. The definition of fraud in that Act provides:45
fraud includes—
(a)dishonest or fraudulent concealment; and
(b)fraudulent breach of trust
[250] I agree with the plaintiffs’ submission that Mr and Mrs Mark dishonestly concealed information they had a duty to disclose. Any mistake of fact by the liquidator is understandable given the Marks’ dishonest concealment. At the hearing, Mr Shiels submitted that the plaintiffs would abandon their reliance on s 48 of the Limitation Act in relation to this cause of action because on any view the claim was within the late knowledge period in s 14. I accept that submission. It was only when the liquidator obtained the GL batch reports that what really happened became clear.
Sixth cause of action — PMT against Mr and Mrs Mark — knowing receipt of advance owing by trustees
[251] The sixth cause of action is a claim against Mr and Mrs Mark for knowing receipt of the $1,124,940 advance by PMT to the trustees of the Mark Family Trust. The plaintiffs submit, instead of repaying that loan, the trustees appear to have believed that they could simply change the lender’s identity from PMT (as recorded in the financial statements for the year ended 31 March 2011) to Mr and Mrs Mark (in the financial statements to 31 March 2013).
[252] Mr Mark claimed not to be able to find the Trust’s financial statements for the year ended 31 March 2012. Mr Allott’s colleague Mr Petrie found them on Mr Boon’s server. There were two versions produced for that financial year, one of which showed the trustees’ debt as still owing to PMT. The other showed the trustees’ debt owed to Mr and Mrs Mark personally (and not to PMT). In their submissions, the plaintiffs asked the Court to infer that these documents had been prepared at the same time as, or soon after, the 20 December 2013 journal entries were prepared.
45 Limitation Act, s 4.
[253] To support this change, the trustees produced a deed of acknowledgement of debt by Mr and Mrs Mark to them, purportedly signed and dated 31 March 2012. However, Mr Hansen-Beadle’s unchallenged expert evidence was that this document was created on 3 February 2014. It was created by WMP, and Mr Clark was one of the signatories. Moreover, as the plaintiffs submit, nothing in the deed of acknowledgement of debt gives any logical or legal basis for the trustees to no longer consider that they owed the same sum to the company.
[254] The trustees, on their own financial statements, have then recorded the debt owing to Mr and Mrs Mark as having been repaid at some point in the financial years 1 April 2013 to 31 March 2014. None of the trustees (apart from Mr Mark himself) was called to give evidence.
[255] The primary basis for the defendants’ denial of this cause of action appears to be based on a limitation defence. They submit that:
(a)as the claim was first raised on 29 April 2024, the claim is barred;
(b)if Mr Allott wished to pursue this claim he ought to have done so in or about April 2015 when he first received a copy of PMT’s statements, the Gascoigne Wicks material, and when he completed his first liquidator’s report.
[256] The defendants also claim that Mr Mark did not at any relevant time appreciate that the transfer of the advance was wrongful or improper or that it continued to be the property of the company.
My assessment
[257] I accept the plaintiffs’ submission that the liquidator could not reasonably have known of the trustees’ unjust enrichment until the trust’s financial statements were disclosed by Mr Mark on 1 February 2023.
[258] I find that Mr and Mrs Mark are liable to pay to PMT the amount of the company’s advance to the trustees of the Mark Family Trust, $1,124,940. I accept that
the liquidator could not have reasonably known of this unjust enrichment until he was able to obtain the general ledger batch reports and to understand what occurred in relation to the 2012 accounts. It was only confirmed by the discovery on 1 February 2023 of the Mark Family Trust’s financial statements.
[259] I accept that the plaintiffs are entitled to interest on this amount from the date the trustees paid that amount to Mr and Mrs Mark, as documented in the trustees’ 31 March 2014 financial statements.
Seventh cause of action — by PMT against trustees — dishonest assistance
[260] The seventh cause of action is PMT’s claim against the trustees for dishonest assistance in relation to the repayment of $1,124,940 to the Marks. The plaintiffs allege that the trustees knew that the money was owed to PMT and not the Marks, yet they repaid the Marks anyway. The plaintiffs claim that the trustees are personally liable for full payment of the debt of $1,124,940 plus interest.
[261] In terms of the substance of this cause of action, the defendants submit that the test for dishonest assistance cannot be made out on the facts of the present case.46 The defendants submit that there is no evidence that the trustees had actual knowledge that the transactions undertaken by Mr Boon to distribute the capital of PMT were in breach of Mr Mark’s duties and the distribution rules in the Companies Act. The defendants submit that Mr Mark’s intention from 2011 was to wind-up PMT.
[262] The defendants submit that leave to file the claim was granted on 23 March 2023. However, the claim is statute barred and Mr Allott ought to have pursued the claims when he received a copy of PMT’s statements, the Gascoigne Wicks material, and when he completed his first liquidator’s report in April 2015.
My assessment
[263] I accept the plaintiffs’ submission that the liquidator could not have reasonably known of the trustees’ dishonest assistance causing Mr and Mrs Mark to be unjustly
46 Sandman v McKay [2019] NZSC 41[2019] 1 NZLR 519; Scott v ANZ Bank New Zealand Ltd, above 27, at [24].
enriched until the liquidator obtained the GL batch reports in August 2022, as confirmed by Mr Mark’s discovery of the trust’s financial statements in February 2023.
[264] I also accept the plaintiffs’ submission that, by the trustees’ actions, they made Mr Mark their agent. What he knew, they knew. They knew the 2012 accounts for the company were based on the 20 December 2013 journal entries and there was no legitimate basis for treating the amount previously owed to PMT as subsequently owed to Mr and Mrs Mark. Despite that, the trustees signed a deed acknowledging that sum to be owing to Mr and Mrs Mark. They did not provide any basis for believing that the amount previously owed to the company was no longer owed to it.
[265]Accordingly, I find in favour of the plaintiffs on the seventh cause of action.
Eighth cause of action — by PMT against Mr and Mrs Mark — s 300 Companies Act
[266] The eighth cause of action is a claim by PMT against Mr and Mrs Mark for failure to keep accurate accounting records in breach of s 194 of the Companies Act. This is the initial claim upon which the present proceedings were based in 2018. Based on the alleged breach of s 194, the plaintiffs submit that Mr and Mrs Mark are personally liable under s 300 of the Companies Act for PMT’s liabilities.
[267] At the relevant time, s 194(1)(a) imposed obligations on PMT’s board to keep accounting records that correctly recorded and explained the company’s transactions. The liquidator submits that the financial accounts for the year ending 31 March 2012 did not correctly record PMT’s transactions, as they depend on the December 2013 journal entries.
[268] To the extent that the Court finds PMT’s accounting records were inadequate, the defendants plead reliance on Boon’s advice in relation to the keeping of records. The defendants submit that Mr Boon kept PMT’s accounting records and was responsible for creating the records required to fill Mr Mark’s obligations. They submit that Mr Mark had no capacity to be able to carry out those tasks himself.
[269]No limitation defence is pleaded in relation to the eighth cause of action.
My assessment
[270] I accept the plaintiffs’ submission that, on any view, PMT’s accounts and accounting records that were available to the liquidator in 2015 fell well short of explaining the company’s transactions. Section 300(1) of the Companies Act enables the Court to declare that one or more of the directors is personally responsible, without limitation of liability, for all or part of the debts and other liabilities of the company where there is an insolvent liquidation and a breach of s 194.
[271] Although the Court has a discretion about the extent of the responsibility, I accept the plaintiffs’ submission that, in the present case, there is no good reason not to impose full liability. I accept the plaintiffs’ submission that the state of PMT’s records has caused substantial uncertainty as to its assets and liabilities, and has substantially impeded its orderly liquidation.
[272] To the extent that the Court’s findings in relation to other causes of action do not result in reimbursement of the company in respect of its assets, Mr and Mrs Mark are liable to meet the shortfall under the eighth cause of action.
Ninth cause of action — by PMT against Mr and Mrs Mark — ss 52 and 56 Companies Act
[273] Under the ninth cause of action, PMT claims under s 56 of the Companies Act against Mr and Mrs Mark for the recovery of distributions made when the company was insolvent. However, the plaintiffs acknowledge that, before liability can be established under this cause of action, a finding would be necessary that the 20 December 2013 journal entries made a distribution rather than merely serving to obscure the true position.
[274] Again, the defendants submit that in determining whether the solvency test has been satisfied, a director is entitled to rely on information prepared by a professional advisor, providing that the director believes on reasonable grounds that the professional advisor’s advice is within that person’s professional competence and the
director acts in good faith, makes proper inquiry and has no knowledge that such reliance is unwarranted.47
[275] The defendants submit that the problems in this case arise from Mr Boon’s failure to:
(a)properly record the Harnett debt in the company accounts as a contingent liability;
(b)carry out Mr Mark’s instructions to wind-up the company in a timely manner;
(c)advise Mr Mark properly on what he needed to do to make lawful distributions from PMT so that it could be liquidated without prejudicing the Harnetts;
(d)properly document transactions that are required by the Companies Act.
[276] Again, the defendants rely on Mr Martin’s evidence that the assets could have been removed from the balance sheet and redistributed while still preserving sufficient funds to cover the Harnett contingent liability.
[277] The defendants submit that if the Court finds Mr and Mrs Mark are liable to PMT it would be a proper exercise of the Court’s discretion to order that Mr and Mrs Mark may retain the amount of the distribution that should have been made had the proper process under s 52 been followed.
[278]No limitation defence is pleaded in relation to the ninth cause of action.
My assessment
[279] The definition of “distribution” in s 2 of the Companies Act is “broad and wide”:
47 Companies Act, s 138.
distribution, in relation to a distribution by a company to a shareholder, means—
(a)the direct or indirect transfer of money or property, other than the company’s own shares, to or for the benefit of the shareholder; or
(b)the incurring of a debt to or for the benefit of the shareholder—
in relation to shares held by that shareholder, and whether by means of a purchase of property, the redemption or other acquisition of shares, a distribution of indebtedness, or by some other means
[280] The defendants admit that Mr Boon, as agent for PMT, and in accordance with their instructions removed assets and liabilities from PMT’s balance sheet including:
(a)the declaration of a dividend of $1,454,857 to Mr and Mrs Mark;
(b)an advance of $1,124,940 from Mr and Mrs Mark to the trustees of the Mark Family Trust;
(c)an assignment to Mr and Mrs Mark of the right to receive payment of the vendor finance loan of $680,000.
[281] I accept that these transactions amount to a direct or indirect transfer of money to or for the benefit of Mr and Mrs Mark. Accordingly, they fall within the definition of “distribution”.
[282] Under s 56 of the Companies Act, a distribution made to a shareholder at a time when the company did not, immediately after the distribution, satisfy the solvency test may be recovered by the company from the shareholder unless:
…
(a)the shareholder received the distribution in good faith and without knowledge of the company’s failure to satisfy the solvency test; and
(b)the shareholder has altered the shareholder’s position in reliance on the validity of the distribution; and
(c)it would be unfair to require repayment in full or at all.
[283] In the present case, the defendants submit that assets could have been removed from the balance sheet and redistributed while still preserving sufficient funds to cover
the contingent liability that Mr and Mrs Harnett would succeed in their counterclaim and recover costs. The defendants submit that it would be a proper exercise of the Court’s discretion to order that Mr and Mrs Mark be entitled to retain the amount of the distributions that should have been made if the proper process under s 52 had been followed.
[284] I accept the defendants’ submission to the extent that relief under the ninth cause of action should be limited to the amount that was owing to the Harnetts,
$102,551.46.
Conclusion
[285] I give judgment in favour of the plaintiffs in respect of each of the nine causes of action. All of the defendants’ affirmative defences fail. In accordance with the plaintiffs’ submissions, I make the following orders:
(a)Under the first cause of action, PMT is entitled to judgment for
$680,000 from Mr and Mrs Mark, plus interest calculated under the Interest on Money Claims Act 2016 from the receipt of payment on 8 May 2015 until the date of judgment.
(b)Under the second and third causes of action, I order the restitution of
$2,764,317 to PMT from Mr and Mrs Mark.
(c)Under the fourth cause of action, I order Mr and Mrs Mark to repay PMT $928,740, plus interest on that amount from 31 March 2012.
(d)Under the fifth cause of action, I order the trustees of the Mark Family Trust to repay PMT $1,136,340, plus interest from 8 April 2013.
(e)Under the sixth cause of action, I order the trustees of the Mark Family Trust to pay PMT $1,136,340, plus interest from 31 March 2014.
(f)Under the seventh cause of action, I order the trustees of the Mark Family Trust return to PMT the advance of $1,136,340, plus interest from 31 March 2014.
(g)Under the eighth cause of action, I give judgment to the plaintiffs and order that to the extent that the Court’s findings in relation to the other causes of action do not result in full reimbursement of PMT in respect of its assets, Mr and Mrs Mark must meet the shortfall.
(h)In respect of the nineth cause of action I order Mr and Mrs Mark pay PMT $102,551.46.
[286] I reserve costs. If it is not possible for the parties to resolve costs as between themselves they may file memoranda (of no more than three pages):
(a)the plaintiffs within 14 days of this judgment; and
(b)the defendants within 14 days thereafter.
[287] I will then resolve costs on the papers unless the parties persuade me that a hearing is necessary.
[288] Finally, as foreshadowed earlier in this judgment, the plaintiffs undertook to give PMT’s shareholders reasonable notice of what the liquidator considers to be reasonable fees. Once that occurs, the defendants will have one month to apply for leave under s 284 of the Companies Act 1993 for an audit of the accounts of the liquidation, a review of the liquidator’s remuneration or other relief available under that section.
McHerron J
Solicitors:
Clark Boyce, Lawyers, Christchurch for Plaintiffs
Wisheart Macnab & Partners, Blenheim for Defendants
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