NZ Natural Therapy Ltd (in liq) v Little
[2019] NZHC 3132
•29 November 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2013-404-4866
[2019] NZHC 3132
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of NZ NATURAL
THERAPY LTD (IN LIQUIDATION)
BETWEEN
NZ NATURAL THERAPY LTD (IN LIQUIDATION)
First Plaintiff
VIVIEN JUDITH MADSEN-RIES and
HENRY DAVID LEVIN as liquidators of NZ NATURAL THERAPY LTD (IN
LIQUIDATION)
Second PlaintiffsAND
JOHN LAWSON LITTLE
First Defendant
JOHN LAWSON LITTLE and DEIDRE
ANN LITTLE as former trustees of the Woodside Trust
Second Defendants
Hearing: 30 August 2019
[Further submissions filed: 6 September 2019 and 13 September
2019]Counsel:
K Morrison and H Hui for Plaintiffs P J Dale QC for First Defendant
Judgment:
29 November 2019
JUDGMENT OF BREWER J
NZ NATURAL THERAPY LTD (IN LIQ) v LITTLE [2019] NZHC 3132 [29 November 2019]
This judgment was delivered by me on 29 November 2019 at 3:00 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Introduction
[1] On 22 August 2018 I gave judgment against Mr Little on most of the causes of action brought against him by the plaintiffs.1 Of particular significance was my finding that Mr Little owes the first plaintiff (the Company) $323,148 because of an overdrawn current account.
[2] The second plaintiffs are the liquidators of the Company. Mr Little is unhappy with the way they discharged their duties. He expressed this in an affirmative defence which I summarised:
[142] Mr Little says the liquidators are not entitled to recover the costs of the liquidation because they have not acted in the best interests of the Company and have acted inconsistently with their obligations. This is framed as an affirmative defence. He says:
(a)They failed to make any, or any adequate, inquiries at the outset of the litigation as to the status of the Company as corporate trustee for the Trust.
(b)They failed to identify that the only creditors of the Company and Trust were the BNZ and Advanced Lifestyles Limited [the company’s actual name appears to be “Advanced Lifestyle International Retail Pty Ltd”].
(c)They made excessive and unjustified demands and in particular by letter dated 11 November 2013 demanded the sum of $1,059,590.49, thereby reducing any possibility of a commercial or reasonable settlement.
(d)They commenced proceedings without having ascertained the correct status of the Company as corporate trustee for the Trust, and in particular making reasonable inquiries of Mr Little and his advisers.
(e)They incurred costs including liquidators’ and legal fees disproportionate to the amount in issue and to the detriment of the Company, the creditors and the Trust, and because even if there is any liability on the part of Mr Little (which is denied) there would be insufficient funds available to make any payment to any creditors and so that the only beneficiaries
1 NZ Natural Therapy Ltd (in liq) v Little [2018] NZHC 2164.
from this proceeding would be the liquidators and their solicitors.
[3] I did not decide this affirmative defence. The sum I held Mr Little owes the first plaintiff exceeds the debts proved in the liquidation. The second plaintiffs are entitled only to their reasonable costs, as assessed by the Court at the end of the liquidation.2 I thought it premature, and likely unnecessary, for me to rule on the affirmative defence. I reserved that point and also reserved my decision on whether compensation should be paid to the Company and the liquidators under the third and fourth causes of action.3
[4] Mr Little appealed my finding that he owes the first plaintiff $323,148. However, at the commencement of the appeal hearing Mr Dale QC announced that Mr Little no longer contests that decision.4 Instead, he wished to argue that he should not be required to pay the full amount of that debt where it exceeded the extent of creditors’ claims against the company, and that a lack of proportionality in the liquidators’ conduct ought to disentitle them to recovery of substantially more than is required to satisfy creditors’ claims.5
[5] The Court of Appeal adjourned the hearing and referred the affirmative defence back to the High Court for determination in the light of the concession made by Mr Little.6
[6] By joint memorandum dated 1 November 2019, counsel asked me to also determine an issue of whether a particular sum is within my reservation of compensation.
[7]This judgment decides those issues.
2 Companies Act 1993, ss 276 and 284.
3 NZ Natural Therapy Ltd (in liq) v Little, above n 1, at [143] and [144].
4 Little v NZ Natural Therapy Ltd (in liq) CA598/2018, 23 May 2019 (minute).
5 At [2].
6 At [8].
The pleadings
[8] The relevant pleadings in the amended statement of defence dated 2 March 2018 are:
(a)The second plaintiffs are not entitled to recover the costs of the liquidation including liquidators’ fees and disbursements because:
(a)They failed to make any or any adequate inquiries at the outset of the litigation as to the status of the Company as corporate trustee for the Trust.
(b)They failed to identify that the only creditors of the Company and Trust were the BNZ and Advanced Lifestyles Limited.
(c)They made excessive and unjustified demands and in particular by letter dated 11 November 2013 demanded the sum of $1,059,590.49, thereby precluding any possibility of a commercial or reasonable settlement.
(d)Commencing proceedings without having ascertained the correct status of the Company as corporate trustee for the Trust, and in particular making reasonable inquiries of Mr Little and his advisers.
(e)Incurring costs including liquidators’ and legal fees disproportionate to the amount in issue and to the detriment of the Company, the creditors and the Trust, and because even if there is any liability on the part of Mr Little (which is denied) there were (sic) be insufficient funds available to make any payment to any creditors and so that the only beneficiaries from this proceeding would be the liquidators and their solicitors.
(b)That if the second plaintiffs had acted in the best interests of the Company and consistent with their obligations as liquidators they would have:
(a)Identified at the outset that the Company was a corporate trustee for the Trust.
(b)Identified that there were only two outstanding creditors.
(c)Invited Mr Little to explain why:
(i)the Company ceased trading;
(ii)Advanced Lifestyles Limited had not been paid;
(iii)the BNZ had not been paid.
(d)Invited Mr Little to endeavour to enter into a settlement with the outstanding creditors.
(e)Not incurred fees of more than $20,000 plus GST.
(f)Not issued proceedings against Mr Little until the steps taken in the preceding subparagraphs had been satisfied, and in any
event ensured that the proceedings were focused on the best interests of the Company, the creditors and the Trust.
[9]The plaintiffs pleaded in reply:
50.In respect of paragraphs 102 to 103 of the statement of defence, the plaintiffs deny the positive allegations contained in those paragraphs and say further that:
(a)The second plaintiffs have duties as prescribed by the Companies Act 1993.
(b)The second plaintiffs have not acted in breach of their duties.
(c)The positive allegations contained in paragraphs 102 to 103 of the statement of defence are not a defence to the claims pleaded in the fifth amended statement of claim.
Discussion
[10] In my Minute of 30 August 2019, I recorded the agreed position as to how I should determine the issues:
[3] Counsel are agreed that my task now is to determine Mr Little’s second affirmative defence. Save for one matter, I am to do that as I could have done at the conclusion of the trial. That is to say, I will apply the submissions of counsel made at the time to the evidence I heard. Counsel are agreed also that I should have regard to the submissions made by them to the Court of Appeal. The saved matter is the issue of whether the pleading in the second affirmative defence can found the remedy Mr Dale QC seeks on behalf of Mr Little. It is agreed that submissions can be made.
[4] The parties are agreed there is no need for a further hearing. Once the further submissions are received I will make my decision as I could have at the end of the trial. Costs overall will be considered once I have delivered my judgment.
[11] I will begin with the issue of whether the affirmative defence can found the remedy sought by Mr Little. Put plainly, if I were to find for Mr Little on his allegations against the liquidators, would that reduce his liability to pay the $323,148 which he owes to the first plaintiff?
[12] In my view it would not. The issue of whether Mr Little owes a current account debt to the Company and the issue of whether the liquidators are entitled to their costs are separate and distinct.
[13] In the first cause of action the Company sued Mr Little for his current account debt. It is no answer to that claim for Mr Little to say, in effect, “I accept I owe the debt, but because of the disproportionate actions of the liquidators in pursuing it I do not have to pay it, or at least not all of it”.
[14] The commencement of liquidation vests custody and control of a company’s assets in the appointed liquidator.7 The liquidator’s principal duty is to take possession of, protect, realise and distribute the company’s assets or their proceeds of realisation to its creditors in a reasonable and efficient manner.8 Liquidators have the powers necessary to carry out their functions and duties.9 In sum, liquidators are entitled to call in debts on the company’s behalf. A debtor’s complaints regarding the liquidators’ conduct will not alter the fact of the debt they owe to the company.
[15] Further, as the pleadings I have quoted above make clear, the affirmative defence does not relate to the Company’s first cause of action. The pleading is that “[t]he second plaintiffs are not entitled to recover the costs of the liquidation including the liquidators’ fees and disbursements …”.
[16] The Company’s and the liquidators’ claim for “the costs of the liquidation (including the liquidators’ fees and disbursements)” are contained in the third cause of action. The liquidators’ claim for those costs is contained separately in the fourth cause of action. In my view, those are the causes of action to which the affirmative defence is directed.
[17] There are two statutory routes through which I might make an order in response to the third and fourth causes of action. In this context they serve a similar function, so I will set them out together before considering whether the affirmative defence precludes an award under each of them.10 The first, in relation to the third cause of action, is s 301 of the Act:
7 Companies Act 1993, s 248(1)(a).
8 Section 253(a).
9 Section 260; and sch 6.
10 For an example of a case where the liquidators, who are the same liquidators as in this case, did not have a preference as to which section was used to recover liquidation costs see Madsen-Ries v Petera [2015] NZHC 538 (Petera High Court) at [83].
301 Power of court to require persons to repay money or return property
(1)If, in the course of the liquidation of a company, it appears to the court that … a past or present director … has misapplied, or retained, or become liable for, money or property of the company, or been guilty of negligence, default, or breach of duty of trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,−
(a)inquire into the conduct of the … director …; and
(b)order that person−
(i)to repay or restore the money or property or any part of it with interest at a rate that the court thinks just; or
(ii) to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; …
[18]The second route, which applies to the fourth cause of action, is s 300:
300 Liability if proper accounting records not kept
(1)Subject to subsection (2), if−
(a)a company that is in liquidation and is unable to pay all its debts has failed to comply with−
(i)section 194 (which relates to the keeping of accounting records); …
… and
(b)the court considers that−
(i)the failure to comply has contributed to the company’s inability to pay all its debts, or has resulted in substantial uncertainty as to the assets and liabilities of the company, or has substantially impeded the orderly liquidation; or
(ii)for any other reason it is proper to make a declaration under this section,−
the court, on the application of the liquidator, may, if it thinks it proper to do so, declare that any 1 or more of the directors and former directors of the company is, or are, personally responsible, without limitation of liability, for all or any part of the debts and other liabilities of the company as the court may direct.
(2)The court must not make a declaration under subsection (1) in relation to a person if the court considers that the person−
(a)took all reasonable steps to secure compliance with the applicable provision referred to in paragraph (a) of that subsection; or
(b)had reasonable grounds to believe and did believe that a competent and reliable person was charged with the duty of seeing that that provision was complied with and was in a position to discharge that duty.
[19]I set out the general approach to awards under s 301 in my 2018 judgment:11
[109] Subject to the Court’s discretion, relief under s 301(b) will be calculated by examining the nature of the breach and judging the appropriate amount of compensation to be awarded based on common law and equitable principles.12 As regards a breach of s 131, in Morgenstern v Jeffreys the Court of Appeal said:
[99] … A breach of s 131 involves the breach of a fiduciary obligation, requiring a strict standard of causation and imposition of the fiduciary measure of damages, including on a “restitutionary” or notional account of profits basis. A company’s loss, where “loss” is in any event the appropriate measure of compensation, is calculated based on the deterioration of its financial position between the date of the breach and the date of liquidation. The onus is on the delinquent director to prove that the loss, or part of it, would have been caused regardless of the breach.
(citations omitted)
[110] And in FXHT Fund Managers Ltd (in liq) v Oberholster the Court of Appeal said:13
[28] … If the duty is of a truly fiduciary nature – that of loyalty or fidelity – then liability is strict and the “but for” test applies, effectively reversing the onus onto the delinquent director to prove that the loss would have been caused regardless of the breach. However, if the breach is of a general duty of care, akin to one arising in common law rather than equity, then the less onerous orthodox or standard principles of causation apply, placing the onus throughout on the plaintiff to prove the necessary causal nexus or link or, in other words, that his loss is attributable to the director’s breach.
[111] It follows a strict standard of causation is adopted for breaches of s 131. The director will prima facie be liable for all loss that accrues after the breach.14
[112] If the breach is of a duty akin to a general duty of care arising in common law rather than equity, such as those contained in ss 135 and 137, less onerous principles apply. The Court will determine compensation having regard to the extent of deterioration of the company’s financial position after the breach, causation, culpability and the duration of trading.15 In Mason v Lewis, the Court of Appeal said:
11 NZ Natural Therapy Ltd (in liq) v Little, above n 1.
12 Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [99] and see also
Ulsterman Holdings Ltd (in liq) v Walls [2017] NZHC 3040 at [45]–[52].
13 FXHT Fund Managers Ltd (in liq) v Oberholster [2010] NZCA 197 at [28]–[30].
14 Ulsterman Holdings Ltd (in liq) v Walls, above n 12, at [51].
15 Mason v Lewis [2006] 3 NZLR 225 (CA) at [109]–[110].
[109] The standard approach has been to begin by looking to the deterioration in the company’s financial position between the date inadequate corporate governance became evident (really the “breach” date), and the date of liquidation.
[110] Once that figure has been ascertained, New Zealand courts have seen three factors – causation, culpability, and the duration of the trading – as being distinctly relevant to the exercise of the Court’s discretion…
[20] Historically the Courts have been willing to make orders for compensation under s 301 which resulted in a surplus of funds available relative to the losses suffered by the company’s creditors, with the liquidators being regarded as entitled to recover from those funds.16 In Morgenstern v Jeffreys the Court of Appeal ordered recovery for a breach of s 131 of $3,499,999 even though the claims filed in the liquidation were no more than $1,315,807.80. The Court considered the liquidators were entitled to be paid from that order and any surplus could be returned to Mr Morgenstern as the sole shareholder in the company.17 Similar orders have been made for breaches of s 131 in other cases, including where money was also recovered as debt from overdrawn current accounts, on the basis that the debt and breach of duty claims were conceptually different.18
[21] More recent decisions have emphasised that a director may only be required to pay the costs and expenses that arise from the breach itself.19 The courts will not automatically include all liquidators’ costs in relief granted under s 301 or s 300, particularly where those costs would have been necessarily incurred in the liquidation process regardless of whether the breach occurred.20 In Madsen-Ries v Petera the Court of Appeal accepted that a simple cumulative approach to recovery, rather than one focussed on attributing specific amounts to specific breaches, ignored the language used in ss 300 and 301 and would encourage liquidators and legal advisors
16 See Morgenstern v Jeffreys, above n 12, Auckland Crash Repairs Ltd (in liq) v van Rooy [2015] NZHC 2640; Barring Horticulture New Zealand Ltd (in liq) v Barring [2016] NZHC 304, [2016] NZCCLR 17; and Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826, [2016] NZAR 423.
17 Morgenstern v Jeffreys, above n 12, at [103].
18 See Auckland Crash Repairs Ltd (in liq) v Van Rooy, above n 16; Barring Horticulture New Zealand Ltd (in liq) v Barring, above n 16 Mizeen Painters Ltd (in liq) v Tapusoa, above n 16; and Superior Blocklayers Ltd (in liq) v Bacon [2016] NZHC 2601, (2016) 14 TCLR 425.
19 Madsen-Ries v Twine [2015] NZHC 227 at [10]; Petera High Court, above n 10, at [110] to [124]; Madsen-Ries v Petera [2016] NZCA 103, (2016) 11 NZCLC 98-043 (Petera Court of Appeal); GL Investment and Development Ltd (in liq) v Gao [2018] NZHC 868; and Shaw v Owens [2017] NZCA 315, [2018] NZAR 606
20 Petera High Court, above n 10, at 112; citing Madsen-Ries v Twine, above n 19, at [10]; and Shaw v Owens, above n 19, at [22].
to adopt an approach to litigation of this type that would be neither cost-effective nor proportionate.21
[22] Examples of breaches causing expenditure in the liquidation include where liquidators are required to incur expense in reconstructing books of account because the directors had breached their duty to keep proper records themselves22 or where directors’ breaches render an otherwise healthy company insolvent, directly causing the liquidation in its entirety.23
[23] In Shaw v Owens the Court of Appeal reversed a High Court decision to order compensation under s 301 (for breaches of ss 135 and 137) including all of the liquidation costs and disbursements alongside the full amount of the company’s debts, saying it was “not easy to follow how non-litigation costs of $26,679 could justifiably be incurred in a liquidation relating to a very modest level of indebtedness” ($99,005.03, largely owed to a single creditor).24 The Court considered the majority of the liquidators’ focus and liquidation expenditure had been directed towards proving an unsuccessful allegation that the directors set up the company to defeat creditors from the outset, rather than the general functions of liquidation.25 The litigation was “not a commercially rational exercise” on the liquidators’ part.26 The Court assessed provision for liquidators’ costs flowing from the proven breaches on a “broad brush” basis, reducing the award from $26,769.56 to $7,500.27
[24] A similar “broad brush” approach was taken in Grant v Gifford, wherein the High Court was unwilling to include the full liquidators’ fees in an award under s 300, considering $45,000 of approximately $68,000 in costs were properly attributable to deficiencies in record-keeping on the available evidence, with the desire to incentivise cost-effective approaches to liquidation (the liquidation in question not being “overly complex”) as a factor supporting denial of full recovery.28
21 Petera Court of Appeal, above n 19, at [9]; discussing Petera High Court, above n 10, at [83].
22 Madsen-Ries v Twine, above n 19, at [10].
23 Grant v Guo [2015] NZHC 2480 at [53].
24 Shaw v Owens, above n 19, at [20]–[23].
25 At [21].
26 At [22].
27 At [23].
28 Grant v Gifford [2018] NZHC 26, at [49].
[25] In Madsen-Reis v Petera liquidators sought recovery under ss 300 or 301 (for breaches of ss 131, 135, 136, 137 and 194) of $453,003.33, made up of $132,355.69 for creditors’ claims together with $280,647.64 for liquidators’ costs up to the start of trial and $40,000 for the liquidators’ costs in relation to the trial, on top of a current account debt of $140,134.70.29 The High Court instead determined the directors should be required to compensate the company for $64,708 under s 301, being the losses to the Commissioner of Inland Revenue following the date at which they continued to operate the company despite there being no realistic prospect of it trading on,30 and $20,000 under s 300, as an appropriate provision for liquidation costs which could be attributed to reconstructing the company’s affairs due to the directors’ failure to keep proper records.31 The Court of Appeal upheld the decision. The liquidators’ approach indicated a degree of double counting because it would have resulted in the recovery severely outstripping the debts to creditors, which would have meant (liquidation notwithstanding) the company would have been in a position to make a distribution back to the directors.32
[26] In Madsen-Ries v Twine the company in liquidation owed roughly $260,000 to its creditors.33 The liquidators claimed for breaches of directors’ duties (under ss 131, 133, 134, 135, 136 and 137), seeking remedies under s 301 amounting to all the creditors’ claims plus $36,318.31, being the costs of the liquidation excluding the proceedings in question. The Court declined to include the liquidation costs in the award:
[10] The question of whether compensation should also be ordered in relation to the liquidators' costs in undertaking the liquidation is less straight- forward. Such costs may well be recoverable in a case where, for example, liquidators have been required to incur expense in reconstructing books of account because the directors failed to keep proper records in breach of their duty to do so. However, that is not the situation here. In this case, the directors ought to have ceased trading by early 2008, if not earlier. But it is not clear from the evidence that the costs incurred by the liquidators in carrying out the liquidation would have been any less if they had been appointed earlier. The liquidators would still have had to realise the company's assets for the benefit of creditors and take all other steps required in any liquidation. It appears that
29 Petera (High Court), above n 10.
30 At [104]–[105].
31 At [107]–[108]. The $20,000 figure was “arbitrary” and “relatively modest” due to limited evidence regarding the liquidators’ costs in reconstructing the company’s affairs.
32 Petera Court of Appeal, above n 19, at [8].
33 Madsen-Ries v Twine, above n 19.
a significant part of the liquidators’ costs were incurred in preparing the present proceeding. Such costs are not normally recoverable. For these reasons, I am not persuaded that an order requiring the directors to meet the costs of the liquidation is appropriate in this case.
[27] In this case the Company went into liquidation because Mr Little thought that was a convenient way to avoid defending a claim being made against the Company by Advanced Lifestyle International Retail Pty Ltd (Advanced Lifestyle). Only two creditors had their proofs of debt accepted by the liquidators initially. They were Advanced Lifestyle in the sum of AU$28,791.00 and BNZ in the sum of $173,498.83. Subsequently, the Commissioner of Inland Revenue filed a claim which, on amendment, was $5,947.48. The total of the claims was approximately $207,000.34 Mr Little personally owed the company $323,148 as a current account debt.
[28] Mr Little criticises the liquidators for not inviting him to endeavour to enter into a settlement with the creditors. He submits the liquidators should have realised that Advanced Lifestyle had ceased to be a functioning entity (having been removed from the Australian Register of Companies) and so would not need to be paid. The liquidators should have determined that BNZ was not interested in obtaining payment from Mr Little personally and so a negotiated settlement was probable.
[29] I do not accept these criticisms. The liquidators had admitted debts totalling approximately $207,000. They were obliged to get in the assets of the company to settle them. One of the assets was a current account debt that was clear on its face and of sufficient amount, if paid, to immediately clear the debts and pay the reasonable cost of the liquidation. Mr Little refused to pay.
[30] In my view, the liquidators were entitled to require Mr Little to pay what they determined he owed without incurring delay and possible unnecessary expense by seeking to have creditors who had proofs of debt already admitted reduce or withdraw those proofs of debt.
34 Approximate because one of the admitted claims is in Australian dollars.
[31]Mr Little further criticises the liquidators for their initial demand that he pay
$1,059,590.49. In Mr Little’s submission, this precluded any possibility of a commercial or reasonable settlement.
[32] The liquidators made this demand because on the face of what few documents were available to them the Company had paid that sum to Mr Little in various advances. Those advances could be characterised as loans due for repayment. Mr Little’s position was that the Company traded solely as a corporate trustee. The payment of the monies were distributions pursuant to a trust and so could not be recovered by the Company.
[33] In my judgment of 28 October 2016, I gave my reasons for finding in favour of Mr Little on what was then the plaintiffs’ first cause of action claiming that sum. I held the Company did trade as corporate trustee.35
[34] Subsequently, the deed appointing the Company as corporate trustee was located and discovered in the litigation.
[35] I do not accept Mr Little’s criticisms. Mr Little had breached his duty to maintain proper records. He did not give the liquidators the deed appointing the Company corporate trustee. He did not accept liability to pay the current account debt.
[36] The liquidators were entitled to sue Mr Little. They did not have to confine their suit to the current account debt. They could not be sure it would succeed, or, if it did, what the quantum might be. Further, it was always possible that more creditors might be identified.
[37] In one sense, the amounts the liquidators sued Mr Little for did not matter. He could not be liable for a sum greater than the admitted debts and the liquidators’ reasonable costs. Any surplus would be returned to him as sole shareholder.
[38] I also find that Mr Little unduly contributed to the expenses of the liquidation by the way he defended the current account claim. It was only at the 2016 trial that
35 NZ Natural Therapy Ltd (in liq) v Little [2016] NZHC 2585.
he unexpectedly raised the defence that the records showing the current account amount were wrong. He wished to call expert evidence to establish that point. The liquidators had no choice but to go to the considerable trouble of examining Mr Little’s experts’ opinions and to counter them. In the end they were successful.
[39] It follows I find that the affirmative defence does not succeed against the liquidators. The liquidators are entitled to be paid their reasonable costs. The quantum of those costs will be determined in due course.
[40] The position as regards the third and fourth causes of action remains as held in my 2018 judgment:36
[144] The decisions I have reached are:
…
(b)On the third cause of action, I make declarations that Mr Little breached his duties as director of the Company as stipulated herein. I reserve the issue of compensation. I reserve leave to the plaintiffs to apply for specific compensation in the event that the liquidation is concluded and the amount awarded under the first cause of action is insufficient to satisfy the creditors and the reasonable costs of the liquidation.
(c)On the fourth cause of action, I find for the plaintiffs and make a declaration that Mr Little is personally liable to the plaintiffs for such part of the debts of the Company and the costs of the liquidation as the Court may consider just. I reserve the issue of quantum. I reserve leave to the plaintiffs to apply for specific payment in the event the liquidation is concluded and the amount awarded under the first cause of action is insufficient to satisfy the creditors and the reasonable costs of the liquidation...
The second issue
[41] There remains the second issue. In my 2018 judgment I found Mr Little breached his duties as a director post-liquidation by entering the company into various transactions with Prince and Princess Ltd, another company of which he was a director.37 I held:
[106] It follows that Mr Little is responsible for the Company not receiving income it should have. As explained below, I consider the quantum of any
36 NZ Natural Therapy (in liq) v Little, above n 1.
37 NZ Natural Therapy (in liq) v Little, above n 1.
compensation is a matter for later inquiry, if the need arises. I also note
$56,090 of the management fees remain unpaid despite the Trust having declared this amount as income to Inland Revenue. This amount is therefore still owed to the Company by PPL.
[42] The parties, by joint memorandum of counsel dated 1 November 2019, ask that I determine now whether the $56,090 is immediately payable to the first plaintiff or whether it has to be considered as part of the question of compensation reserved in my 2018 judgment.
[43] My 2018 judgment could only determine the rights and liabilities of the parties to the proceeding in relation to the issues raised in their pleadings. Prince and Princess Ltd was not a party. The observation I made in [106] of my 2018 judgment was in the context of Mr Little’s breaches of his duties as a director post-liquidation. As a consequence of those breaches the Company (inter alia) incurred liability to the Commissioner of Inland Revenue and there is an unsatisfied debt owed to the Company by Prince and Princess Ltd of $56,090.
[44] If Prince and Princess Ltd accepts the debt is owed and pays it then any residual liability of Mr Little’s to pay compensation on the third and fourth causes of action will be reduced by $56,090. It is, of course, open to the liquidators to pursue Prince and Princess Ltd.
[45] To put the point more starkly, so far as Mr Little’s position is concerned, his liability to pay the $56,090 is apparent but reserved and can be considered if an application is made for compensation under the third and fourth causes of action to pay outstanding liquidators’ costs.
Decision
[46]The second affirmative defence does not succeed.
Costs
[47] The question of costs in the proceeding is fully at large given I have recalled that part of my 2018 judgment which awarded costs to the plaintiffs.
[48]The parties may file memoranda as to costs no later than 4 January 2020.
Brewer J
Solicitors:
Meredith Connell (Auckland) for Plaintiffs Neilsons Lawyers (Auckland) for First Defendant
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