New Zealand Labour Enterprises Limited v Sanson
[2021] NZHC 986
•5 May 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-2127
[2021] NZHC 986
UNDER The Companies Act 1993 IN THE MATTER OF
The liquidation of New Zealand Labour Enterprises Limited
BETWEEN
NEW ZEALAND LABOUR ENTERPRISES LIMITED
First Plaintiff
CRAIG ALEXANDER SANSON and MALCOLM GRANT HOLLIS
Second Plaintiffs
AND
AMANDEEP SEMBHI
First Defendant
DAP SEMBHI
Second Defendant
Hearing: 3 March 2021 Appearances:
H L Hui for the Plaintiffs
No appearance for the Defendants
Judgment:
5 May 2021
JUDGMENT OF CAMPBELL J
This judgment was delivered by me on 5 May 2021 at 4:00 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
NEW ZEALAND LABOUR ENTERPRISES LIMITED & ANOR v SEMBHI & ANOR [2021] NZHC 986
Introduction
[1] The first plaintiff, New Zealand Labour Enterprises Limited (the company), was incorporated on 3 January 2013. It operated as a supplier of labour, trading from Papakura, Auckland.
[2] The company was put into liquidation on 31 May 2019. The second plaintiffs, Mr Sanson and Mr Hollis, were appointed the company’s liquidators. Mr Sanson and Mr Hollis are insolvency practitioners at PricewaterhouseCoopers (PwC).
[3] The plaintiffs have brought claims against Ms Amandeep Sembhi, the company’s sole shareholder and director, and against Mr Dap Sembhi, who the plaintiffs say was a shadow director of the company.
[4] The first cause of action is by the company against Ms Sembhi. It is for payment of money owed by Ms Sembhi on her current account with the company. The second cause of action is by the company and the liquidators against both Ms Sembhi and Mr Sembhi, alleging breaches of various duties as directors of the company. The plaintiffs seek compensation for breaches of those duties under s 301 of the Companies Act 1993 (the Act).
Procedural history
[5] The plaintiffs commenced this proceeding in October 2019. The proceeding was served on the defendants on 21 October 2019.
[6] The defendants filed and served a statement of defence on 20 November 2019. They did not provide initial disclosure with their defence. In March 2020, the defendants’ solicitor applied to withdraw as solicitor on the record. Since then the defendants have taken no further steps.
[7] In November 2020, Associate Judge Bell set this matter down for a formal proof hearing. In advance of the formal proof hearing, the plaintiffs filed a comprehensive affidavit from Mr Sanson. Among other things, Mr Sanson’s affidavit addresses Ms Sembhi’s current account with the company, and the financial position
of the company in the years leading up to its liquidation. The plaintiffs also filed an affidavit of Steve Farquhar, an associate director of PwC. Mr Farquhar has assisted the liquidators with the administration of the liquidation. His affidavit details interactions he had with Mr Sembhi following the appointment of the second plaintiffs as liquidators.
Factual background
[8] As noted, the company was incorporated on 3 January 2013. Ms Sembhi is its sole shareholder and director. Mr Sembhi is the husband of Ms Sembhi. The plaintiffs allege that Mr Sembhi was a deemed or shadow director of the company. I will address the basis of those allegations when I consider the second cause of action below.
[9] The company operated as a supplier of labour services. It ceased trading in March 2018. The High Court put it into liquidation on 31 May 2019, on the application of the Commissioner of Inland Revenue.
[10] The company had negligible assets, but substantial debts, at liquidation. The liquidators have admitted claims totalling $396,335.07 as debts of the company. Of that amount, almost $390,000 is owed to the Inland Revenue.
[11] The company’s debt to the Inland Revenue consists primarily of unpaid GST and PAYE deductions. The company was defaulting on its GST obligations from as early as 31 March 2014.
[12] The plaintiffs claim that the company was insolvent from, at the latest, 31 March 2015. I address that below, when considering the second cause of action.
First cause of action: current account debt
[13] Upon investigating the financial affairs of the company, the liquidators found that Ms Sembhi maintained a current account with the company.
[14] The company’s financial statements for the year ending 31 March 2017 reported that Ms Sembhi owed the company $407,692 on her current account. Ms Sembhi signed those financial statements, as director, on 24 January 2018.
[15] Mr Sanson deposes that no financial statements were prepared for the company beyond the period ending 31 March 2017. Moreover, no ledgers or accounts were maintained for the company beyond that date. The liquidators therefore reviewed the company’s bank statements to ascertain whether there were any transactions (either debits or credits) that should properly be included on Ms Sembhi’s current account.
[16] The liquidators’ analysis of the company’s bank statements showed that in the period from 1 April 2017 to 31 May 2019 (the date of the company’s liquidation), the company:
(a)Transferred a total of $544,581.20 to or for the benefit of Ms Sembhi, which the liquidators have debited against Ms Sembhi’s current account;
(b)Was credited with a total of $265,685, which the liquidators have credited to Ms Sembhi’s current account.
[17] Mr Sanson deposes that the net effect of this analysis is that after 31 March 2017, the amount Ms Sembhi owed to the company increased by a further
$278,896.20.
[18] In his affidavit Mr Sanson explains, in detail, how the liquidators identified the amounts that should be debited to Ms Sembhi’s current account. These transactions are in three categories.
[19] First, there is expenditure which presents as being for personal rather than company purposes, as the expenditure is inconsistent with the type of work that the company undertook. For example, Mr Sanson explains that there are many transactions that appear to be for the purposes of food, liquor, hospitality, groceries, pet supplies, and personal entertainment. Mr Sanson explains that these transactions
all appear to relate to personal expenditure of Ms Sembhi, and bear no apparent relation to the business of the company. He says that neither of the defendants have provided the liquidators with any evidence that these transactions comprised legitimate company expenditure.
[20] Secondly, there are numerous cash withdrawals. Mr Sanson says that the liquidators have not been provided with any information as to the use to which this cash was put. There is no financial information that codes or otherwise categorises these withdrawals. He says the defendants have not provided the liquidators with any evidence that these withdrawals were for proper company purposes.
[21] Thirdly, there are numerous transfers to other bank accounts or to other bank cards. Mr Sanson explains that these other accounts or cards were found to be owned by the defendants. Transfers to these accounts or cards had been coded as drawings in the company’s general ledger in periods prior to 31 March 2017.
[22] The liquidators have also identified deposits into the company’s bank accounts that were either recorded in bank statements as being payments from Ms Sembhi, or which originated from accounts belonging to Ms Sembhi. The liquidators have credited these payments against Ms Sembhi’s current account.
[23] Mr Sanson’s assessment is that, after the above transactions are added to the current account balance as at 31 March 2017, Ms Sembhi was, as at the date of liquidation, indebted to the company in the sum of $686,588.20.
Decision on first cause of action
[24] A debit balance on a shareholder’s current account with a company represents a debt owed by the shareholder to the company. In the absence of an agreement to the contrary, the debt is repayable on demand.1
1 Thom Contractors Limited v Thom HC Auckland CIV-2008-404-6829, 28 April 2009 at [16].
[25] Ms Sembhi filed a statement of defence. She did not allege that there was any agreement that prevented the debt represented by her current account being repayable on demand. She merely disputed the amount that was outstanding.
[26] In respect of the amount outstanding, the burden is on the first plaintiff to prove, on the balance of probabilities, that Ms Sembhi owes the amount claimed. The first plaintiff has sought to discharge that burden in two distinct steps. First, it says, in reliance on the 31 March 2017 financial statements signed by Ms Sembhi, that as at that date Ms Sembhi owed the company $407,692 on her current account. Secondly, it says that Mr Sanson’s analysis of transactions after 31 March 2017 shows that the amount she owed to the company increased by a further $278,896.20.
[27] As to the amount outstanding as at 31 March 2017, the burden of proof on the first plaintiff will be discharged, in the absence of evidence to the contrary, to the extent that signed financial statements acknowledge a debt owing by one of the signatories.2 Ms Sembhi signed the company’s financial statements for the year ending 31 March 2017. These recorded that Ms Sembhi owed the company $407,692 on her current account. Ms Sembhi alleged in her statement of defence that the current account recorded in those financial statements failed to reflect that the defendants had not received salaries, and failed to give credits for funds paid to the company by the defendants. Ms Sembhi did not particularise these allegations, and did not provide any initial disclosure to support them. She has not provided any evidence that the amount recorded in the financial statements is in any way incorrect.
[28] For these reasons, I find that Ms Sembhi owed the first plaintiff $407,692 on her current account as at 31 March 2017.
[29] As to the transactions after that date, I am satisfied from Mr Sanson’s evidence that Ms Sembhi’s debt to the company increased by $278,896.20 (net). That amount reflects three types of transactions:
(a)First, there is expenditure which, as Mr Sanson explains, presents as being for personal rather than company purposes. Given his
2 EBR Holdings Ltd v van Duyn [2017] NZHC 1698 at [75].
explanations, and Ms Sembhi’s failure to provide any evidence that this expenditure was for a company purpose, the first plaintiff has proved that this expenditure was for the personal benefit of Ms Sembhi. Ms Sembhi became liable to reimburse the company for this expenditure the moment it was incurred.
(b)Secondly, there are cash withdrawals. In the absence of an explanation, such drawings must be treated as advances from the company to Ms Sembhi.3 Ms Sembhi has provided no explanation.
(c)Thirdly, there are transfers to other bank accounts or bank cards owned by the defendants. These are no different from cash withdrawals. In addition, Mr Sanson’s evidence is that in the past these were treated in the company’s financial accounts as drawings. Ms Sembhi has provided no explanation for them.
[30]I therefore find that Ms Sembhi is indebted to the company in the sum of
$686,588.20. The company is entitled to judgment against Ms Sembhi in that amount. The company is also entitled to interest on that amount, under the Interest on Money Claims Act 2016, from 16 August 2019 (the date on which the company made demand on Ms Sembhi for repayment of her current account).
Second cause of action: breach of directors’ duties
[31] On the second cause of action, the company and the liquidators claim that both Ms Sembhi and Mr Sembhi breached duties as directors of the company. The plaintiffs allege the following breaches of duties found in the Act:
(a)The defendants failed to act in good faith and in the best interests of the company, in breach of s 131(1).
(b)The defendants failed to ensure the business of the company was not carried on in a manner that created a substantial risk of serious loss to
3 Mizeen Painters Ltd v Tapusoa [2016] NZAR 423 at [25].
its creditors, and in particular the Commission of Inland Revenue, in breach of s 135.
(c)The defendants allowed the company to incur obligations when they could not have believed on reasonable grounds that the company would be able to perform them when required to do so, in breach of s 136.
(d)The defendants failed to exercise their powers or perform their duties with the same care, diligence and skill that a reasonable director would exercise in the same circumstances, in breach of s 137.
[32]The plaintiffs seek compensation under s 301 for breaches of those duties.
[33] As part these allegations, the plaintiffs say that the company was insolvent from at least 31 March 2015. I will therefore begin by considering the company’s solvency. I will then deal with whether Mr Sembhi was a deemed or shadow director, and then turn to the allegations of breach of duties. Finally, I will address quantum.
Company’s solvency
[34] The company’s financial statements at 31 March 2015 reported that the company had net assets of $392,578 and working capital of $333,562. However, this reported position was based on two assumptions.
[35] The first assumption was that Ms Sembhi’s current account debt to the company, reported in the financial statements as $408,683, was available to meet the company’s liabilities. The plaintiffs submit that this was a false assumption, as Ms Sembhi was unwilling or unable to repay her debt on demand. I accept that submission. This is clear from her failure to repay the debt. Indeed, her debt to the company was considerably higher by the time it was put into liquidation.
[36] The second assumption was that the financial statements correctly reported the company’s GST liability to the Inland Revenue. Mr Sanson’s evidence is that this liability was understated by $67,975.87. I accept that evidence.
[37] Once those assumptions are corrected, the actual financial position of the company as at 31 March 2015 was that it had net liabilities of $84,080.87 and had a working capital deficit of about $143,000. I am therefore satisfied that it was insolvent at that date. I also accept Mr Sanson’s evidence that the company remained insolvent up to the date of liquidation. The company’s insolvency from that date is reflected in the company having accrued a liability for GST to the Inland Revenue from 31 March 2014, and that liability having continued to accrue through to liquidation.
Was Mr Sembhi a deemed or shadow director?
[38]Section 126 of the Act provides, relevantly:
126 Meaning of director
(1)In this Act, director, in relation to a company, includes—
(a)a person occupying the position of director of the company by whatever name called; and
(b)for the purposes of sections 131 to 141, 145 to 149, 291A to 293, 298, 299, 301, 318(1)(bb), 383, 385, 385AA, 386A to 386F, and clause 3(4)(b) of Schedule 7,—
(i)a person in accordance with whose directions or instructions a person referred to in paragraph (a) may be required or is accustomed to act; and
(ii)a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; …
[39] The plaintiffs rely particularly on s 126(1)(b)(i) and (ii). They say Mr Sembhi was a person in accordance with whose instructions Ms Sembhi was accustomed to act. Such a person is often called a “shadow director” (because they do not openly adopt the position of director).
[40] Mr Farquhar deposes that on the day the liquidators were appointed he spoke to Mr Sembhi by telephone. Mr Sembhi said that he was in charge of the day-to-day operations of the company. He said he was the “shadow director” of the company and that Ms Sembhi was just the “written director”. Mr Sembhi said they had set the company up this way on the advice of their accountant.
[41] Mr Farquhar interviewed Mr Sembhi on 19 June 2019. Mr Sembhi said he was the director of the company despite his wife being named the director, that he made the operational decisions and managed the accounts, and that he took full responsibility for the company. He again said the company had been set up this way for accounting reasons.
[42] Mr Sanson’s affidavit addresses the management roles performed by Mr Sembhi. He operated the company’s bank accounts as a signatory. He managed the company’s relationship with its employees. He handled the company’s dealings with the Inland Revenue, with Immigration New Zealand, and with the Ministry of Social Development.
[43] I am satisfied, based on this evidence, that Mr Sembhi was a director of the company under s 126(1)(b)(i) and (ii). This means that he was a director for the purposes of all the directors’ duties sections on which the plaintiffs rely. I now turn to the plaintiffs’ allegations of breach of those sections.
Did the defendants breach s 131?
[44] Section 131(1) provides that a director, when exercising powers or performing duties, “must act in good faith and in what the director believes to be the best interests of the company”. In Debut Homes, the Supreme Court confirmed that s 131(1) sets a subjective test.4 The Court also said that a breach of s 131 would be established where there was no evidence of the director giving actual consideration of the best interests of the company, or where, in an insolvency or near-insolvency situation, the director fails to consider the interests of creditors, including prospective creditors.5 The Court said it did not have to consider whether breach would be established where a director had acted with a conflict of interest, but noted that in an insolvency situation where the interests of all creditors had not been considered, a conflict of interest “may well exacerbate the breach”.
4 Madsen-Ries v Cooper [2020] NZSC 100 at [112].
5 At [114].
[45] The plaintiffs claim that from 31 March 2015 the defendants breached their s 131 duty by causing the company to continue to trade and by allowing Ms Sembhi to increase her current account debt, in circumstances in which:
(a)There is no evidence that the defendants gave any consideration of the best interests of the company; and
(b)From that date the company was insolvent, and the defendants failed to consider the interests of creditors.
[46] I am satisfied that the defendants breached their s 131 duty in those ways. This is because the company was insolvent from 31 March 2015, and:
(a)The defendants allowed the company to continue to trade after it was insolvent. They did not cease the company’s trading until March 2018. Over that three-year period the company’s debts, particularly to the Inland Revenue, grew considerably.
(b)Over that same period the defendants allowed Ms Sembhi’s debt to the company to grow by about $280,000. That represented net drawings that the defendants allowed Ms Sembhi to make, at the expense of the company’s creditors.
(c)Mr Sanson’s evidence is that he has seen nothing in the company’s records indicating the defendants prepared any forecasts or gave any thought as to how the company might be able to trade its way out of its perilous financial position, of them making a sober assessment of the company’s financial position, or of them considering the options available to them under the Act to address the insolvency of the company.
Did the defendants breach s 135?
[47] Section 135 provides that a director must not agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss
to the company’s creditors, or cause or allow the business of the company to be carried on in such a manner. Section 135 imposes an objective standard.
[48] The plaintiffs allege that from 31 March 2015 the defendants breached s 135 by failing to assess the company’s financial position, and by instead continuing to allow the company to trade and to advance further funds to Ms Sembhi.
[49] I find that the defendants breached their s 135 duty in the ways alleged. It is plain from Mr Sanson’s evidence that there was a substantial risk of serious loss to the company’s creditors, particularly the Inland Revenue, from continued trading. That risk was exacerbated by the defendants allowing or causing the company to advance further funds to Ms Sembhi.
Did the defendants breach s 136?
[50] Section 136 provides that a director must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. The Supreme Court in Debut Homes held that s 136 is not limited to incurring contractual obligations. It includes incurring consequential obligations, such as tax obligations to the Inland Revenue.6
[51] The plaintiffs say that the defendants breached s 136 by allowing the company to continue to trade, thereby incurring further tax obligations (primarily for GST and PAYE), without believing on reasonable grounds that the company would be able to discharge those tax obligations.
[52] I find that the defendants breached s 136. At 31 March 2015, the company already had an outstanding GST liability of about $180,000. As I have explained, at that point the company was insolvent. There is no evidence that the defendants made any assessment, at that time or at any time thereafter, of whether the company could discharge that liability. Instead, the defendants allowed the company to continue to trade and thereby incur further tax obligations. The defendants did so without any
6 At [91].
reasonable belief that the company could pay those further obligations. As time went on, the company’s outstanding tax liabilities increased, and the breach of s 136 continued because the defendants allowed the company to trade.
Did the defendants breach s 137?
[53] Section 137 provides that a director, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances. This is an objective test.
[54] The plaintiffs say that the defendants breached s 137. The plaintiffs point to the same matters I have referred to in the other allegations of breach of duty.
[55] I find that the defendants breached s 137 from 31 March 2015. They did not make any assessment of the company’s ability to pay its then outstanding tax liabilities. Instead they simply allowed the company to continue to trade, thereby increasing the company’s tax liabilities, and in the meantime Ms Sembhi withdrew further funds from the company.
Quantum of relief under s 301
[56] Section 301 gives the court power to order relief where, in the course of a liquidation, it appears to the court that there has been a breach of directors’ duties. Relief can be restitutionary under s 301(1)(b)(i) or compensatory under s 301(1)(b)(ii). Here the plaintiffs seek compensation under s 301(1)(b)(ii).
[57] Section 301 is a procedural short cut by which a liquidator may pursue claims that a company in liquidation may have against its directors. Section 301 does not impose any new duty or create any new cause of action. Directors cannot be required to pay more under s 301 than could have been awarded against them in a direct claim by the company for breach of that duty.7 It is therefore necessary to start by considering what compensation could be recovered by the company from the defendants, and then to consider what award should be made under s 301.8
7 Yan v Mainzeal Property and Construction Ltd [2021] NZCA 99 at [298], [299], [301] and [302].
8 At [482].
What compensation could the company recover from the defendants?
[58] The plaintiffs put their case on the basis that the defendants were in breach of their duties from, “at the latest”, 31 March 2015. Despite the qualifying words “at the latest”, the plaintiffs did not attempt to prove any breach prior to 31 March 2015. I therefore approach the question of compensation on the basis that the defendants were in breach only from that date.
[59] As at 31 March 2015 the company had, as set out at [37] above, a deficiency of assets compared to liabilities of $84,080.87. The liquidators have, in the liquidation, admitted claims totalling $396,335.07 as debts of the company. As the company has no assets, those claims represent the company’s current deficiency. Thus, there has been a net deterioration of $312,254.20 over the time that the defendants, in breach of their duties, allowed the company to continue to trade.
[60] The plaintiffs nonetheless pleaded and argued that the defendants should be ordered to pay compensation in an amount referable to the entirety of the deficiency in the liquidation, namely $396,335.07. This can be called an “entire deficiency” approach. Ms Hui, for the plaintiffs, submitted that such an approach has been taken in numerous other cases.9
[61] I do not accept that submission. The cases on which the plaintiffs rely do not support their proposition. Rather, they support the proposition that where the breach of duty consists in allowing an insolvent company to continue to trade, compensation will usually be assessed by reference to the net deterioration in the company’s financial position over that period (the “net deterioration” approach).10
[62] There are two relevant qualifications to that approach, but neither affects the overall approach to compensation in this case. First, the Court of Appeal accepted in Yan v Mainzeal that the net deterioration approach is not a straitjacket. The Court said
9 Löwer v Traveller [2005] 3 NZLR 479 (CA); Morgenstern v Jeffreys [2014] NZCA 449; Lakeside Ventures 2010 Ltd (in liq) v Burrows [2014] NZHC 1048; Bay Kiwifruit Contractors Ltd (in liq) v Ladher [2015] NZHC 63; Bay Metal Fabricators Ltd (in liq) v Steenson [2016] NZHC 1634; O’Neill Earthworks Ltd (in liq) v O’Neill [2017] NZHC 989; Independent Carpets Ltd (in liq) v Carpet Call 2000 Ltd [2020] NZHC 2757.
10 See, for example, Mason v Lewis [2006] 3 NZLR 225 (CA) at [109], approved in Madsen-Ries v Cooper [2020] NZSC 100 at [164].
that, for example, if a breach of s 135 brings about the insolvent liquidation of an otherwise solvent company, “the loss to the company may well include the entire deficiency on liquidation”.11 But the present case is not one where the defendants’ breaches caused an otherwise solvent company to become insolvent.
[63] Secondly, in claims under s 136 a different measure of loss (and therefore compensation) is usually appropriate. This is the “new debt” approach. This approach concentrates on individual creditors. The starting point for compensation under this approach is the obligations that the directors agreed to the company undertaking, in breach of s 136, and that the company failed to perform.12 The plaintiffs’ evidence did not identify the quantum of compensation under this approach, but it appears likely that it would be less than under the net deterioration approach.13
[64] I conclude that the quantum of compensation in this case for the defendants’ breaches of ss 131, 135 and 137 is $312,254.20, being the net deterioration in the company’s financial position during the time that the defendants, in breach of those sections, allowed the company to continue to trade. I am unable to make a finding as to the quantum of compensation for the defendants’ breaches of s 136.
What award should be made under s 301?
[65] Section 301 confers a discretion in relation to the amount to be awarded against a director for breach of duty. In Debut Homes, the Supreme Court said that relief must take account of all the circumstances, including the nature of the breach or breaches, the level of culpability of the director, causation, duration of the breach, holding the director to account and reversing the harm to the company.14 Recently, in Yan v Mainzeal, the Court of Appeal observed that the breadth of the remedial discretion does not appear to have been in contest before the Supreme Court. The Court of Appeal expressed its own disagreement as to the breadth of the s 301 discretion.15
11 Yan v Mainzeal Property and Construction Ltd [2021] NZCA 99 at [292].
12 Madsen-Ries v Cooper [2020] NZSC 100 at [165] and [166]; Yan v Mainzeal Property and Construction Ltd [2021] NZCA 99 at [294].
13 This is because some of the net deterioration is a result of Ms Sembhi’s further drawings on the company’s funds, rather than a result of new debt.
14 Madsen-Ries v Cooper [2020] NZSC 100 at [182].
15 Yan v Mainzeal Property and Construction Ltd [2021] NZCA 99 at [307].
[66] However broad (or narrow) the s 301 discretion may be, I am firmly of the view that the award against the defendants in this case should be for the full amount of the net deterioration in the company’s financial position. The breaches were deliberate. They went on for three years. The defendants’ actions or omissions caused the full amount of the net deterioration. Both defendants were fully culpable in allowing the company to continue to trade and Ms Sembhi to draw more funds from the company. This is an all too familiar situation of directors treating the Inland Revenue as the involuntary financier of trading by an already insolvent company. Worse, the directors used some of that involuntary finance to benefit Ms Sembhi. Both directors need to be fully held to account for this. Others need to be deterred from similar behaviour.16
Conclusion
[67] It is appropriate to make an order under s 301(1)(b)(ii) that the defendants are liable to contribute the sum of $312,254.20 to the assets of the company by way of compensation. The defendants will be jointly and severally liable for this amount.
Recovery under both causes of action
[68] Ms Hui submitted that, as the plaintiffs advance distinct and separate claims under the two causes of action, they are entitled to a separate award on each. She acknowledged that the total judgment sum sought (about $1 million) exceeds the deficiency of the company’s assets to liabilities (about $397,000, before the costs of liquidation). She submitted that this was not a reason to reduce the award of compensation against the defendants under s 301, because if the plaintiffs recover sufficient funds to pay liquidation costs and creditors in full, any surplus will be distributed to Ms Sembhi (as shareholder). Ms Hui referred me to several cases where separate awards of this sort had been made, and in which the courts had recognised that if the liquidators recovered a surplus, it would be distributed to the shareholders.17
16 Relief under s 301 can take into account general deterrence: Madsen-Ries v Cooper [2020] NZSC 100 at [162].
17 Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423, Shannon Agricultural Consulting Ltd (in liq) v Shannon [2015] NZHC 1133, Barring Horticulture New Zealand Ltd (in liq) v Barring [2016] NZHC 304, [2016] NZCCLR 17.
[69] I accept that the plaintiffs are entitled to judgment on each of their causes of action. That is a consequence of the plaintiffs having succeeded on each. It is not a bar to the entry of judgment on each cause of action that the total of the two judgments will exceed the loss that is the basis of the plaintiffs’ second cause of action.18
[70] This is not to say that the plaintiffs would be able to recover both judgments in full. A plaintiff cannot recover in the aggregate from one or more defendants an amount in excess of his or her loss.19 If, for example, the plaintiffs managed to recover
$650,000 from Ms Sembhi on the judgment on the first cause of action, that recovery would not only reduce the amount recoverable on that first judgment, but also fully satisfy the loss that is the basis of judgment on the second cause of action, and the plaintiffs would not be able to recover that second judgment further. By contrast, if the plaintiffs recovered money from Mr Sembhi on the second judgment, that would not reduce the amount recoverable on the first judgment, since the first cause of action is not based on a loss suffered by the company.
Costs
[71] The plaintiffs, having succeeded, are entitled to costs. They seek costs on a 2B basis. I agree that 2B is appropriate for each step the plaintiffs have taken in this proceeding.
Result
[72] On the first cause of action, I enter judgment in favour of the first plaintiff against the first defendant in the sum of $686,588.20, together with interest on that amount, under the Interest on Money Claims Act 2016, from 16 August 2019.
[73] On the second cause of action, I make an order under s 301(1)(b)(ii) of the Companies Act 1993 that the defendants are liable, jointly and severally, to contribute the sum of $312,254.20 to the assets of the company by way of compensation.
18 Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC) at 522.
19 Tang Man Sit v Capacious Investments Ltd [1996] AC 514 (PC) at 522; Allison v KPMG Peat Marwick [2000] 1 NZLR 560 (CA) at [125] and [134].
[74]The defendants are liable to pay costs to the plaintiffs on a 2B basis.
Campbell J
10
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