NZ Natural Therapy Ltd (in liq) v Little
[2018] NZHC 2164
•22 August 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2013-404-4866
[2018] NZHC 2164
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of NZ Natural Therapy Limited (In Liquidation)
BETWEEN
NZ NATURAL THERAPY LTD (IN LIQUIDATION)
First Plaintiff
VIVIEN JUDITH MADSEN-RIES and HENRY DAVID LEVIN
Second Plaintiffs
AND
JOHN LAWSON LITTLE
First Defendant
JOHN LAWSON LITTLE and DEIDRE ANN LITTLE
Second Defendants
Hearing: 21, 22, 23 and 24 May 2018 Appearances:
P C Murray and G A Campbell for Plaintiffs P J Dale for First Defendant
Second named Second Defendant in person
Judgment:
22 August 2018
JUDGMENT OF BREWER J
This judgment was delivered by me on 22 August 2018 at 3:00 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Meredith Connell (Auckland) for Plaintiffs
Saunders Robinson Brown (Christchurch) for First Defendant
NZ NATURAL THERAPY LTD (IN LIQUIDATION) v LITTLE [2018] NZHC 2164 [22 August 2018]
Introduction
[1] On the face of it, this case should be quite straightforward. A company ceases trading leaving creditors, one of which, unopposed, puts it into liquidation. The liquidators then seek to recover balance-sheet debts from people associated with the company. For good measure, the liquidators seek compensation from the sole director of the company for breaches of his duties as a director: a common enough proceeding.
[2] But this is not a straightforward case. The company was part of a network of entities and trusts by which Mr Little and Mrs Little held their family’s assets and conducted family businesses. Mr Little gave evidence to the effect that, despite many years of doing business, he had little idea of the conventions of accounting or making returns to Inland Revenue. He did not, for example, know the difference between a drawing and a distribution. He did not know his duties as a director or as a trustee. He just took advice from lawyers and accountants and signed the accounting and other documents put before him from time to time. So far as money management is concerned, he treated all entities as existing for his family, transferred funds between them as seemed desirable and took money to pay for family life as necessary or convenient.
[3] There are not many documents recording the activities of the Little family’s network of entities and trusts. Certainly, there are not the records a competent accountant would keep. I was told that records were kept but, due to largely unspecified events, they cannot be found.
[4]Against this background, Mr Little defends the liquidators’ claims by saying:
(a)The balance sheet is wrong. It does not record what actually happened. No money is owed. In any event, the company was a corporate trustee for a trust, and the balance sheet is the Trust’s.
(b)There was no breach of his duties as a director. He always acted on professional advice.
(c)The liquidators are acting unprofessionally. The company was never really insolvent. Further, the creditors who proved their debts have either disappeared or are uninterested. In any event, the sums at issue are not large. What the liquidators are really doing is trying to raise money to pay their fees. Fees which are wholly disproportionate to what should have been a small and easily completed task.
[5] This is my second Judgment in this proceeding. The first concerned the claim in the then first cause of action against Mr Little for $1,059,590.49 which the liquidators argued were loans to him by the company.1 Mr Little defended the claim on the basis that the company was merely the corporate trustee of a similarly named trust. The payments were not loans, they were distributions.2 I held that the company was the corporate trustee of the trust and dismissed the claim. Subsequently, Mr Little’s current counsel found the Deed by which the company was appointed corporate trustee. Although this find will probably save the Court of Appeal the trouble of examining the merits of my judicial inferences underpinning the first Judgment, it does illustrate the difficulty of picking fact from supposition in a case where there is a lack of records, hazy memories and a lot of reconstruction by experts.
[6] I will complete this introduction by setting out, diagrammatically, the Little family’s network of entities and trusts:
NZ Natural Therapy Ltd (“the Company”)
(Sole director and a shareholder: Mr Little)
Corporate trustee for
NZ Natural Therapy Trust (“the Trust”) Woodside Trust (A trading trust which, inter alia, Two-way flow Trustees: Mr and Mrs Little bought and sold goods). of funds until 11 December 2014 when Beneficiaries: Mr Little Howick Trustee DL Ltd was Mrs Little appointed in their place by the Oscar (the Littles’ son) High Court. (An asset owning trust – real property and shares in another family business). Beneficiaries: Mr Little, Mrs Little, Oscar (the Littles’ son) 1 NZ Natural Therapy Ltd (in liq) v Little [2016] NZHC 2585.
2 For reasons I will not set out here, it was agreed I should hear evidence on the first cause of action and decide it separately.
A preliminary issue: when did the company become insolvent?
[7] NZ Natural Therapy Ltd (“the Company”) was, at the time it was placed into liquidation, the trustee of the NZ Natural Therapy Trust (“the Trust”). It was the legal owner of the assets of the Trust and could access those assets, by way of indemnity, for liabilities incurred as trustee. The Company had no function other than being trustee for the Trust. Therefore, the costs of its liquidation are liabilities incurred as trustee of the Trust.
[8] Three creditors filed claims in the liquidation which were admitted by the liquidators. They total approximately $207,000.3 All the admitted claims were incurred by the Company as trustee of the Trust.
[9] No financial statements were ever prepared for the Company. The Company, as the corporate trustee of the Trust, traded as trustee. The financial statements were prepared in the name of the Trust.
[10] All this complicates the solvency inquiry. Practically, the Company’s solvency is to be assessed by reference to the assets and liabilities of the Trust. An experienced chartered accountant, Mr Mason, gave evidence for the liquidators on this point. I accept his evidence. The company was insolvent from 31 March 2009 at the latest; possibly from as early 31 March 2008. My reasons follow.
[11] As regards the balance sheet test, Mr Mason said it would have been clear at 31 March 2009 at least two of the Trust’s key assets were unlikely to be realisable. Mr Levin, one of the liquidators, considered there were four key assets: goodwill, the beneficiaries’ current account, a golf club investment and inventory. He also considered these assets unrealisable, especially in light of Mr Little’s evidence that:
(a)The golf club investment became worthless in 2006 or 2007.
(b)Despite the business winding down the goodwill figure was not changed or discussed with accountants.
3 Approximate because one of the admitted claims is in Australian dollars.
(c)He did not accept the beneficiaries’ current account was owed.
(d)The inventory figure was overstated.
[12] These assets are to be viewed against significant liabilities. These included debts owed to the BNZ and the Woodside Trust. The latter started to accrue from 1 April 2008, and was $110,000 at the end of the 2009 financial year. It stood at
$417,000 at the end of the 2012 financial year. Mr Little argued that debt should be excluded from consideration. I do not agree. There was nothing like a deed of postponement. The debt was payable; there is nothing to indicate it was not on-call or that the Woodside Trust in any way relinquished its rights. The fact that, due to Mr Little’s influence, the Woodside Trust might not have insisted on payment does not change that.
[13] To conclude on this point, I am satisfied the Company (by way of its indemnity out of the assets of the Trust) had insufficient assets from which to meet its liabilities, and therefore failed the balance sheet test, from 31 March 2009 at the latest. Possibly from as early as 31 March 2008.
[14] Turning to the cash flow test, the Company’s bank account was in overdraft from December 2008 onwards. Significant debts started to accrue in the 2009 financial year. Profits were decreasing at a significant rate from that year onwards and it was unlikely any assets were realisable. Mr Little’s answer to this was to transfer funds from the Woodside Trust when the need arose, increasing the Company’s debt to that Trust. Mr Little also continued to take money from the Company for his own benefit, as will become evident below.
[15] I am, therefore, satisfied the Company failed the cash flow test from December 2008 onwards.
The first cause of action
Does Mr Little owe the company $323,148?
[16] The 2012 financial statements record a debt owing to the Trust of $323,148 under the overdrawn beneficiaries’ current account. The financial statements also record a debt owing by the Trust to the Woodside Trust of $417,000 as a non-current liability.
[17] Mr Little’s evidence is that he swapped money back and forth between the Woodside Trust and the Trust as seemed convenient. In his view, money taken by him was simply for the purposes of his family and so were distributions and not drawings. No money is owing to the Trust, he says.
[18] Further, Mr Little’s position is that he paid the $323,148 to the Woodside Trust for the benefit of himself and his family. The amount owing to the Trust in the beneficiaries’ current account therefore offsets the $417,000 owed by the Trust to the Woodside Trust. Put plainly, Mr Little argues that he was entitled to distribute the
$323,148 to the beneficiaries of the Trust without paying it back to the Company and, if he was not, the money was used to pay off part of the debt owed to Woodside and it cannot now be recovered.
[19] Mr Mason gave expert evidence on this point. He analysed the (incomplete) financial records. In his view, the accounts correctly record the transactions between the Trust and the Woodside Trust as being separate to the transactions between the Trust and Mr Little.
[20] Mr Little called Mr Hussey, also an experienced chartered accountant, and currently the sole director and shareholder of the Court-appointed trustee of the Woodside Trust. Mr Hussey has a different opinion to that of Mr Mason. However, he and Mr Mason agree there is a set of transactions between Mr Little and the Trust which is separate to the Woodside Trust’s transactions with the Trust.
[21] Mr Hussey’s essential opinion is that, from the perspective of the Woodside Trust’s accounts, the total balance of the transactions between the two trusts shows the Trust indebted to the Woodside Trust in the sum of $94,891.22:
16.As part of my investigation, I have identified numerous transactions in the Woodside bank account which show funds flowing to and from NZNTT.
17.Mr Little’s explanation to me was that when NZNTT had surplus funds available, these would be transferred to Woodside so as to reduce the Woodside debt and therefore the interest that Woodside would otherwise incur, and that Woodside would return the funds as NZNTT needed them back.
…
19.The position is that, overall, Woodside sent more funds to NZNTT than it received from NZNTT. As such, I considered that NZNTT owes Woodside $94,891.22.
[22] The significance of this finding, according to Mr Little, is it supports his argument that the funds he drew from the Trust were used to offset the debt owed to the Woodside Trust. His case is the debt of $323,148 has no equivalent in the Woodside Trust accounts because no such debt exists, having been put towards offsetting the debt owed by the Trust to the Woodside Trust. Mr Hussey, aware of the Trust’s financial records, speculated as to the reasons for such a discrepancy:
21.In accounting for these transactions, I have treated all funds to or from NZNTT as being transactions between Woodside and NZNTT. Looking at the running balances, the position as between the two entities is that as of 10 August 2007 Woodside owed NZNTT
$374,500, but by 1 September 2010, NZNTT owed Woodside
$94,891.
…
23.I am aware that financial statements were prepared for NZNTT for 2012 and 2013 reported NZNTT as owing Woodside $417,000. The 2012 financial statements record Mr Little’s current account balance as overdrawn $323,148 whist the 2013 financial statements record the account as overdrawn by $326,200.
24.Obviously the sum said to be owed to Woodside does not accord with the Woodside position namely that NZNTT owes it $94,891.
25.I concluded that the most likely explanation for NZNTT recording a debt to Woodside so far in excess of the amount that Woodside considered it was owed by NZNTT was that, in its accounting, NZNTT had treated some of the sums transferred from NZNTT to
Woodside as being advanced to Mr Little whilst treating the repayment of such amounts as being amounts received from Woodside.
[23] Mr Mason, however, refutes Mr Hussey’s theory. He says the reason for the discrepancy is not because the Trust recorded distributions made to the Woodside Trust as being made to Mr Little personally; rather, it is because of a capital distribution from the Trust to the Woodside Trust sometime between 2005 and 2006 that would not have been recorded in the Woodside Trust bank statements. The plaintiffs summarise Mr Mason’s evidence in this regard as follows:
3.14 …
(a)In the period leading up to FYE 2006, the NZ Natural Therapy Trust had transferred significant cash amounts to the Woodside Trust (quantified by Mr Hussey at being net
$364,500). This must be recorded somewhere in the accounts of the NZ Natural Therapy Trust.
(b)The cash amount of $364,500 is represented as an asset (i.e. a loan to the Woodside Trust) on the balance sheet of the NZ Natural Therapy Trust as the “Westpac Bank” asset. The NZ Natural Therapy Trust did not bank with Westpac, but Woodside did.
(c)The “Westpac Bank” asset in the FYE 2005 financial statements had a value of $421,601. In FYE 2006 it had a value of zero. This reduction was a result of the 2006 Capital Distribution declared by the NZ Natural Therapy Trust in the sum of $511,601.
(d)The capital distribution was distributed to the Woodside Trust, and Mr Little, which was used repaid (sic) the separate amounts they owed the NZ Natural Therapy Trust.
(e)As a result, the NZ Natural Therapy Trust financial statements for FYE 2007 record that the FYE 2006 opening balance of Mr Little’s current account and the Woodside Trust loan account was nil.
(f)The counter-factual of the capital distribution not being made would be the NZ Natural Therapy Trust forgiving the separate debts owed by the Woodside Trust and Mr Little, which would have triggered an income tax liability. There is also no other possible explanation for the removal of the “Westpac Bank” asset from the NZ Natural Therapy Trust’s accounts.
[24] Mr Mason therefore concludes the discrepancy between the two trusts’ financial records was not due to the Trust incorrectly attributing to Mr Little what were
in fact advances made to the Woodside Trust. Mr Mason does not suggest that no such advances were ever made. It is simply that such advances were separate from the
$323,148 which Mr Little took from the Trust as a drawing. Overall, I find his reasoning persuasive.
[25] Mr Mason also raises the point that even if the $323,148 had been distributed to the Woodside Trust for the benefit of the beneficiaries, there is no evidence to suggest that the Woodside Trust agreed to enter into any such transactions or made any distributions to the beneficiaries.
[26] There was also evidence given by Mr Levin, one of the second plaintiffs/liquidators. This was to the effect that the increases in the beneficiaries’ current account as recorded in the Trust’s financial statements aligned broadly with the bank statements of the Company. These bank statements documented a raft of transactions including “J Little” payments, school fees and credit card bills. Year upon year, the combined total of these transactions matched the corresponding increases in the amount owed to the Trust under the beneficiaries’ current account. This is said to show that the funds drawn from that account were not then distributed to the Woodside Trust, but rather were spent elsewhere.
[27] I prefer the evidence of Mr Mason, supported by the evidence of Mr Levin. I note that Mr Hussey did not conduct a review of the accounting carried out for the Trust and is not in a position to comment on the beneficiaries’ current account or whether there can be any offset with the Woodside Trust liability in the accounts of the Trust. Mr Hussey has been concerned with the Woodside Trust side of the accounting.
[28] I do not accept Mr Little’s position that he did not appreciate he was borrowing from the Trust when he took money from it. At the 2016 trial of the then first cause of action, Mr Little’s evidence was that he took drawings from the Trust. His evidence in the latest hearing is that he did not receive drawings but, rather, took money from the Trust as distributions to the beneficiaries. I find this difference lessens the weight I can give to Mr Little’s evidence on this point.
[29] I now come to the matter of which party bears the onus of proving the accuracy or inaccuracy of the Trust’s financial statements. This was discussed by Keane J in Thom Contractors Ltd (in liq) v Thom:4
[16] As long as the financial statements are to be accepted at face the liquidators are able to contend, as they do, that advances made to Mr Thom on his shareholders’ current account remain a debt due to the company repayable on demand…
[17] As to the financial statements, to which Mr Thom has not subscribed, the liquidators are also able to say that insofar as they, or the company’s records from which they derive, are deficient Mr Thom must accept responsibility. As sole director he was obliged under s 194(1) of the Companies Act to ensure that the company’s records… correctly recorded and explained the company’s transactions… and enabled its financial position to be determined with reasonable accuracy at any time… and its financial statements to be readily and properly audited…
[30] This position was qualified somewhat by Heath J in EBR Holdings Ltd (in liq) v van Duyn.5 There his Honour said:
[72] The existence of a debt is something that [the plaintiff] must prove on a balance of probabilities. The first question is whether the Court may only look beyond the signed accounts if the [defendants] can demonstrate that the financial statements were incorrect.
[73] On the liquidators’ argument, I would need to be satisfied on the balance of probabilities that a different amount was owed. Mr Murray, for the liquidators, relied on cases such as Thom Contractors Ltd (in liq) v Thom, Chesterton Holdings Ltd (in liq) v Durney, and CGES Ltd (in rec and in liq) v Kelly to support that stance. With respect, I take a different view.
[74] The authorities to which I was referred by Mr Murray tend to conflate notions of legal and evidential onus. In those cases, it was not necessary to dwell on the difference between them. For that reason, it is not surprising that the Judges who decided them did not embark on a review of the applicable principles.
[75] In my view, the legal onus remains of the [the plaintiff] to prove that the alleged debtors owe money to [the plaintiff] in the amounts claimed. The standard of proof is the balance of probabilities. In the absence of evidence to the contrary, that standard will be met if signed financial statements acknowledge a debt owing to one of the signatories.
[76] In a case where the alleged debtor can point to evidence that tends to cast doubt on whether the amount claimed is owing, the Court must determine both liability and quantum by reference to whether the liquidator has proved a debt on a balance of probabilities, having regard to the totality of evidence adduced on the issue. For example, in this case, if I took the view that the
4 Thom Contractors Ltd (in liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009.
5 EBR Holdings Ltd (in liq) v van Duyn [2017] NZHC 1698.
financial statements were unreliable, they should be put to one side and the claims determined on the balance of the available evidence.
(Citations omitted)
[31] I respectfully concur with Heath J’s analysis. Moreover, I consider that the financial statements of the Trust are accurate. Mr Little has failed to point to any contemporaneous evidence to the contrary. It follows that I consider the plaintiffs have proved on the balance of probabilities that the debt of $323,148 is owing to the Trust and by extension the Company.
[32] Mr Little set up the network of companies and entities to run the family businesses and protect the family assets. The structure provided a number of benefits, including asset protection and tax minimisation. The position of the Trust as a trading entity, and its financial dealings with Mr Little, were recorded in the records and accounts prepared at the time and signed off over the years by Mr Little. I pay particular regard to the evidence that if Mr Little is correct, then income tax would have had to have been paid on the distributions. It was not. The drawings were recorded as such and accordingly no income tax was paid.
[33] Mr Little’s position would effectively mean the following records are incorrect:
(a)All the financial statements and tax returns, signed by Mr Little, that recorded the beneficiaries’ current account.
(b)The bank statements recording regular payments to Mr Little of $2,400, described as “Little J Drawings”. Mr Little was the only person who dealt with the bank and must have recorded the description and authorised the payments.
(c)There is a letter from Inland Revenue to Mr Little dated 29 September 2016 providing his “income verification”. The income recorded for each year accords with the distributions recorded in the financial statements. It does not record the drawings as income, as would be required if they were distributions.
(d)The interview notes of a meeting with Inland Revenue on 25 February 2009 attended by Mr Little on the subject of the Trust. They record a discussion of Mr Little’s current account and his drawings.
(e)There was a follow-up letter sent by Mr Little’s accountants to Inland Revenue dated 15 May 2009. It records Mr Little’s current account and his drawings consistent with the financial records.
(f)The MYOB records show a breakdown and allocation of payments to the “owner/shareholder” general ledger account.
[34] What I am left with is a consistent manner of accounting for the finances of the Trust which have, over several years, been treated as accurate by the accounting professionals advising Mr Little. Now, Mr Little simply says the accounts do not align with his understanding of the transactions at the time. I do not accept his evidence. Mr Little has many years’ experience in business. He is an entrepreneurial businessman who has been successful in the past. I found his evidence of his own naivety in basic accounting concepts implausible.
[35] Mr Little further argues, seemingly if all else fails, that the beneficiaries are not identified. They could include Mr Little, Mrs Little, their son Oscar, or the Woodside Trust. He says the plaintiffs’ case must, therefore, fail for lack of proof.
[36] I am satisfied Mr Little is the debtor in respect of the debt recorded in the beneficiaries’ current account because of four reasons. First, he was the only person who took drawings. These were narrated “J Little” in the bank statements. Second, the amounts taken decreased by year from the 2009 to the 2012 financial year. This is consistent with Mr Little’s evidence that he reduced his drawings from 2009 onwards as the business became less profitable. Third, Mr Mason gave evidence that, based on his experience of corporate trustees and in the absence of documentation to the contrary, it is not unreasonable to assume the person in control of the corporate trustee received the funds. Fourth, ultimately it was Mr Little’s duty to keep proper records. Such records would have assisted with this inquiry but he failed to keep them. He should not now be allowed to take advantage of the resulting uncertainty.
[37]I find for the plaintiffs on this cause of action.
Second cause of action (alternative to the first) against the second defendants: setting aside of dispositions which prejudice creditors
[38] The second cause of action is alternative to the first. It claims that the $323,148 recorded in the Trust’s financial statements as beneficiaries’ current account debt came from the Company as dispositions to the second defendants. This occurred after the Company became insolvent, or the Company was made insolvent by the dispositions. Therefore, the dispositions prejudiced the Company, its creditors and the liquidators. The liquidators are, they plead, entitled to recover from the second defendants, as compensation, the sum of the dispositions.
[39] I do not need to decide this alternative cause of action given my decision on the first cause of action. But, in the event I am wrong on the first cause of action, I will discuss it briefly and give the result I would have reached. I therefore proceed on the basis that the drawings by Mr Little were instead distributions, or were used to reduce the debt owed by the Trust to the Woodside Trust.
[40] Subpart 6 of Part 6 of the Property Law Act 2007 (PLA) allows the Court to restore the property of a debtor that has been disposed of in a manner that prejudices its creditors, for the benefit of those creditors. The purpose of the subpart is to enable the Court to order that property acquired through prejudicial dispositions made by a debtor be restored for the benefit of creditors, so long as the value of securities held by the creditors over the debtor’s property is not increased as a result.6 Under s 347(1), the liquidator of a company in liquidation may apply for an order setting aside dispositions made by a debtor.
[41]Section 346 of the PLA sets out the main requirements:
346 Dispositions to which this subpart applies
(1)This subpart applies only to dispositions of property made after 31 December 2007—
(a)by a debtor to whom subsection (2) applies; and
6 Property Law Act 2007, s 344.
(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2)This subsection applies only to a debtor who—
(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
[42] The operation of the provisions was considered by the Supreme Court in McIntosh v Fisk.7 To resolve this cause of action, it is necessary to determine whether the following requirements under the PLA were met:8
(a)The payments by the Company under the beneficiaries’ current account were “dispositions”.
(b)The dispositions were dispositions of “property”.
(c)The Company was a debtor when it made the dispositions.
(d)The Company was insolvent when it made the dispositions or became insolvent as a result of making them.
(e)Either the payment was made with intent to prejudice a creditor, or by way of gift, or the Company did not receive reasonably equivalent value in exchange for the payment.
7 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863 at [19]–[23]. See also Boat Harbour Holdings Ltd v Steve Mowat Building & Construction Ltd [2012] NZCA 305, (2012) 13 NZCPR 489 at [30]–[38].
8 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863 at [23]
Dispositions of property
[43] The plaintiffs’ case is that the balance of the beneficiaries’ current account increased from $1,982 as at FYE 2008 to $323,148 as at FYE 2012. The plaintiffs seek orders in respect of the whole sum of $323,148; however, it is acknowledged that due to the absence of proper records it is not clear when the payments comprising the net balance of $1,982 as at FYE 2008 were made. They could have been made prior to 31 December 2007, thereby falling outside the ambit of the PLA.9
[44] Given this uncertainty, I will exclude the $1,982 from my consideration. On the other hand, payments of the remainder of the $323,148 clearly were made after 31 December 2007. I will, therefore, approach the potential order in relation to
$321,166.
[45] I turn to whether the increase in the beneficiaries’ current account reflects dispositions of property. Both “disposition” and “property” are broadly defined by the PLA. A disposition includes a conveyance, transfer or payment of property or the release of a debt over any property.10 Property means “everything that is capable of being owned, whether it is real or personal property, and whether it is tangible or intangible property”11 and includes the proceeds of any property.12
[46] It is therefore irrelevant, the plaintiffs submit, whether the drawings from the beneficiaries’ current account represent distributions made to the Woodside Trust or forgiveness of debt owed to the Woodside Trust. In either case they clearly amount to distributions of property. I accept the plaintiffs’ submissions.
[47] The fact that the Company was at the material times the corporate trustee of the Trust is also said to be immaterial; this is because a trustee has a proprietary interest in the distributed property to the extent of its right to be indemnified in relation to liabilities incurred as trustee. The High Court decision of Lakeside Ventures 2010 Ltd
9 Section 346(1)(a).
10 Section 345.
11 Section 4.
12 Section 345.
(in liq) v Levin is offered as an example of when distributions made to a beneficiary by a corporate trustee were held to be recoverable as prejudicial dispositions.13
Debtor
[48] The Company was clearly a debtor. It owed obligations to pay debts to a range of creditors. This alternative cause of action has also been pursued on the basis the increases in the beneficiaries’ current account reflected payment of the Company’s debt to the Woodside Trust, whether directly or indirectly.
Insolvent
[49] As regards the Company’s insolvency, I have accepted the plaintiffs’ argument that the Company was insolvent from 31 March 2009, possibly from as early as 31 March 2008. While some of these dispositions occurred before 31 March 2009, when it is not clear the company was insolvent, I am satisfied the company became insolvent as a result of the dispositions made after 31 December 2007. The cash disposed of from the Company’s bank account was its only realisable asset. The dispositions exceeded the debts the Company owed to its creditors, excluding the Woodside Trust.
Intent to prejudice or no reasonably equivalent exchange of value
[50] Lastly, the plaintiffs argue that the dispositions could meet either of the following tests: being made with intent to prejudice a creditor; or being made without receiving reasonably equivalent value in exchange.
[51] The plaintiffs direct the Court to the comments of Elias CJ in Regal Castings v Lightbody on intention to prejudice:14
[7] The financial position of the transferor at the time of the alienation is always a key consideration. It is not determinative against intent to defraud if the transferor is solvent at the time, particularly if he is contemplating entering into a risky venture. But where the transferor’s financial position is precarious, it is objective evidence of an intention to defraud if he acts to put
13 Lakeside Ventures 2010 Ltd (in liq) v Levin [2014] NZHC 1048 at [35]–[39].
14 Regal Castings v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433. The Chief Justice’s discussion centred on the equivalent provision in the Property Law Act 1952; I consider her reasoning is applicable to the modern provision.
property beyond the reach of creditors. Other indications of fraud commonly occurring are transfers to close relatives, particularly where the transfer is at an undervalue, alienations in which the transferor retains the use or benefit of the property, and secrecy in the transfer or a misleading explanation for it.
(Citations omitted)
[52]In this regard, the plaintiffs argue:
4.29By transferring funds or making distributions to the Woodside Trust Mr Little preferred his own interest ahead of those of the Company’s unrelated creditors. Mr Little’s disregard for creditors is illustrated by his evidence that he allowed the Company to go into liquidation because he considered the creditors were “going after something that isn’t there”. Instead of preserving property in order to pay creditors, Mr Little extracted significant funds and either reduced the amount outstanding to the Woodside Trust or distributed the value to the Woodside Trust.
[53] Alternatively, the plaintiffs submit that if the dispositions were simply distributions made to the Woodside Trust, then the Company received no value in exchange. Similarly, if the dispositions were repayments of a loan, then the reduction in debt to the Woodside Trust was less than the amount of the dispositions.
[54]In his defence, Mr Little submits:
(a)The dispositions were not prejudicial because they were applied in whole or in part to reduce the Trust’s indebtedness to the Woodside Trust.
(b)The dispositions thereby provided a basis for a defence against any claim by Woodside.
(c)There was a circular flow of funds.
(d)The Trust was not insolvent because of its access to Woodside funds.
[55]I do not find any of Mr Little’s arguments to be persuasive.
[56] The argument that the funds were applied to reduce the debt owed to the Woodside Trust, even if accepted, does not mean other creditors were not intended to
be prejudiced. Rather, in causing the Company to repay that debt, Mr Little preferred his own interests over those of the Company and its other creditors. He caused the Company to make dispositions to another trust of which he was a trustee and beneficiary. He did so to preserve the family assets. I am satisfied he had the requisite intent to prejudice creditors.
[57] The suggestion that Mr Little could have transferred funds back to the Trust after advancing them to the Woodside Trust is of no import given this possibility did not eventuate. If it had, then the liquidators would not have been required to bring this proceeding.
[58] The following passage from the evidence given by Mr Little during the 2016 hearing is germane:
Q.Mr Little… you must have been astonished when the company was put into liquidation because you’ve just said that the company had no, had no records, didn’t trade, had – it was just a name on a bank account? Did it puzzle you that the company was put into liquidation?
A.It was – I had always said to Advanced Lifestyle in the early, all the way through and it was also in the supply agreement that it was in the name of NZ Natural there. The company is not a trading, the Company has never traded and it’s always been a trust and they were fully aware of that so when they decided they didn’t want to play reasonably they decided to put the Company into liquidation and the limited advi – or the advice that I took and got at the time was, well the Company has no assets so, therefore, they’re going after something that isn’t there. And so if they liq – put the Company into liquidation that company has no assets.
Q. I see so that explains why you took no steps in the liquidation?
A. Correct.
Q.And yet you’d accept that the debt owed to the BNZ was, therefore, a debt of the trust?
A. Yes.
Q. And the debt owed to Advanced Lifestyle was a debt of the trust?
A. Yes.
[59]Similarly, Mr Little gave this evidence in the hearing this year:
Q.It’s your evidence that you ran all of this, you looked at the cash that was coming in, if there was money and you wanted it or needed it you took it, and you weren’t troubled to think about the basis upon which you took it, the accountants produced the books and you just accepted what the accountants did, is that what you’re telling me?
A. Yes, the flow between NZ Natural Therapy Trust and the Woodside Trust if there was funds available from NZTT Trust was generating it went via me to the Woodside Trust to pay the interest for those assets. And if there wasn’t it didn’t and when there wasn’t, the Woodside Trust would put the money back to NZTT Trust and the reason for that was at the time when it’s profitable and things was to reduce the borrowings that Woodside, which would reduce the annual interest rates and was using simply the cashflow.
Q.So although there was a company and there were trusts and all the rest of it, you just treated it as a family trading business and you shuttled the money around accordingly?
A. Yes.
Protections under s 349
[60] Mr Little cannot rely on either of the protections contemplated by s 349 of the PLA. These require the person receiving the property to do so “in good faith and without knowledge of the fact that it had been the subject of a disposition” specified in s 346. Mr Little, during the relevant times, was a trustee of the Woodside Trust to which the dispositions were made. He cannot claim ignorance, in his capacity as a trustee, of the nature of the dispositions he made to the Woodside Trust in his capacity as director of the Company.
Conclusion on Property Law Act claim
[61] I would find for the plaintiffs in this alternative cause of action. Were it not for the findings I have made in favour of the plaintiffs in the first cause of action, I would order that the defendants pay the plaintiffs compensation of $321,166 pursuant to s 348 of the PLA.
Third cause of action against first defendant: breach of directors’ duties
[62] In this cause of action, the plaintiff liquidators throw the book of directors’ duties at Mr Little. Their aim is to obtain declarations of breach (seven of them) and:
Pursuant to section 301(1)(b)(ii) of [the Companies Act 1993], an order that [Mr Little] contribute such sum to the assets of the Company by way of compensation as the Court thinks just, calculated by reference to the loss or damage pleaded at paragraph 108 above.
[63]Paragraph 108 pleads:
As a result of [Mr Little’s] breaches of duties, the Company has suffered loss or damage as follows:
(a)the loss to creditors, represented by their claims in the liquidation;
(b)the loss represented by the proceeds of the Post Liquidation Sales; and
(c)the costs of the liquidation (including the liquidators’ fees and disbursements) incurred from 2 September 2016 onwards, in a sum yet to be determined.
[64] I have already found Mr Little liable to pay a sum significantly in excess of the loss to creditors. Therefore, any compensation could only be to contribute to the liquidators’ costs. I do not know what those costs are finally going to be (the claim at trial is for $76,495.51), and in any event, they would have to be assessed for reasonableness, and Mr Little’s actions and omissions would likewise have to be assessed for causation.
[65] I will decide the allegations against Mr Little in this cause of action. As I will come to, I have found breaches of his duties as a director both pre-liquidation and post- liquidation. I will reserve the issue of compensation which might prove moot given the amount Mr Little has already been found liable to pay.
Alleged breaches
[66] The plaintiffs allege that Mr Little breached the following duties contained in the Companies Act 1993:
(a)Section 131: to act and in good faith and in what the director believes to be the best interests of the company.
(b)Section 133: to exercise powers for a proper purpose.
(c)Section 134: to not act, or agree to the company acting, in a manner that contravenes the Companies Act or the constitution of the company.
(d)Section 135: to not agree to, cause or allow the business of the company to be carried on in a manner likely to create substantial risk of serious loss to the company’s creditors.
(e)Section 136: to 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.
(f)Section 137: to exercise care, diligence and skill expected of a reasonable director in the circumstances.
[67] There is considerable overlap between these alleged breaches. Put less generally, the substance of the plaintiffs’ claim is that Mr Little:
(a)Failed to ensure the Company retained sufficient funds to pay its creditors.
(b)Failed to make proper assessment of the Company’s future income stream and its ability to pay debts.
(c)Allowed the Company to not pay its debts.
(d)Failed to repay the current account debt when the Company became insolvent or, if that debt wasn’t owed, prejudiced creditors by way of the dispositions.
(e)Allowed the Company to continue trading and failed to sell assets or appoint a liquidator when the Company became insolvent.
(f)Allowed the Company to continue to incur obligations knowing it would be unable to perform them.
[68] The plaintiffs submit the combination of the above-mentioned breaches caused the Company to suffer the following losses:
(a)Loss to the creditors.
(b)The costs of the liquidation.
[69] I will briefly address each duty. But, first, I comment that I consider Mr Little did not understand the nature of his duties as a director. He may have been aware of the existence of duties, but he was ignorant of both their ambit and content. This was made clear by the evidence he gave during the hearing:
Q.No, no, you’ve just said that you were aware of your duties as a director and you’ve just said that you were aware of how those duties related to the company as a trustee. You’ve said, “I was aware of those duties,” I’m just asking how did you gain that awareness, who taught you what those duties were?
A. Nobody.
Q. So how did you become aware of them?
A.I guess I was aware that we were a trading trust, I didn’t quite understand the difference between a corporate trustee and running it as a trading trust, which I always thought that NZNTT was a trading trust, but I didn’t understand the difference or there were responsibilities between the corporate trustee and the trust itself.
Q.All right, and what are the duties in your mind of the director of a company?
A.To trade it ethically to meet their obligations, if it’s in a position where it’s not able to trade then making the decisions that it needs to either close the business.
Q. Anything else?
A. To be able to meet its obligations.
Q. So when Mr Murray asked you whether you were aware of your duties as a director and you said that you are, those are the duties that you were referring to?
A. Yes.
Section 131 – duty to act in good faith and best interests of the company
[70]Section 131(1) provides:
131 Duty of directors to act in good faith and in best interests of company
(1)Subject to this section, a director of a company, 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.
[71] I have already found that Mr Little shuttled funds back and forth between the trusts as suited the interests of his family without regard to the interests of the Company, or its creditors. He also did this while the Company was insolvent, by increasing the debt owed under the beneficiaries current account. The following exchange from his cross-examination illustrates his general approach:
Q.You say there in the second sentence that both trusts were operating for the benefit of your family. See that?
A. Mhm, yes.
Q. So would it be fair to say that when you were running the business NZ Natural Therapy that in your mind your duty was to the beneficiaries of the trust?
A. Yes.
[72]And in his brief of evidence he said:
33The day-to-day transactions of the trusts and entities were conducted as if the total funds available were able to be applied holistically to our requirements as a family. …
[73] Mr Little was entitled to have regard to his own interests, and those of his family, but he could not put those ahead of the Company’s. That, however, is exactly what he did. Preferring other interests in this way is a clear breach of s 131. I also consider he breached this duty by continuing to trade, and increasing the Company’s liabilities, when it was insolvent. More on this below.
[74]Mr Little breached the duty in s 131.
Section 133 – duty to act for a proper purpose
[75]Section 133 provides:
133Powers to be exercised for proper purpose
A director must exercise a power for a proper purpose.
[76] For this duty, the Company relies on the same matters outlined above under my consideration of s 131. I have concluded Mr Little exercised his directorial powers to serve his own benefits, and those of his family. That is not a proper purpose. A breach of s 133 is established.
Section 134 – duty not to contravene the company’s constitution or the Act
[77]Section 134 provides:
134Directors to comply with Act and constitution
A director of a company must not act, or agree to the company acting, in a manner that contravenes this Act or the constitution of the company.
[78]On this duty, the Company submits:
Mr Mason discussed in his evidence failure to ensure that the Company complied with its own constitution. In particular, Mr Mason observes that Mr Little failed to keep minutes of material decision making in respect of the NZ Natural Therapy Trust.
This is a further example of Mr Little’s failure to keep sufficient records of the Company’s affairs and transactions.
[79]I accept this submission. A breach of s 134 is established.
Section 135 – reckless trading
[80]Section 135 provides:
135Reckless trading
A director of a company must not—
(a)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
(b)cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[81] In Ulsterman Holdings Ltd (in liq) v Walls, Peters J described this duty as follows:15
[30] The duty is owed by a director to the company, rather than to a particular creditor. The test is an objective one. The focus is not on the director’s belief but whether the manner in which the company’s business has been carried on has created a substantial risk of serious loss. A director is required to make a “sober assessment” of the company’s position if it enters “troubled financial waters”. The assessment must be of an ongoing nature as to the company’s likely future income and prospects.
(citations omitted)
[82] I adopt that statement. In the present case, I have found the company was insolvent from 31 March 2009 at the latest. A director may, however, be permitted some time to see whether trading improves. Simply trading while the company is insolvent will not automatically breach s 135.
[83] There is nothing to indicate Mr Little conducted the “sober assessment” he was required to do. But even if I allow Mr Little six months after the date of insolvency, as Peters J did in Ulsterman Holdings Ltd and Heath J in Syntax Holdings (Auckland) Ltd (in liq) v Bishop,16 I am satisfied Mr Little breached s 135 thereafter. He breached it by allowing the company to continue to trade. In particular, he allowed the company to trade in a manner that effectively funnelled its cash away from its creditors. That created a substantial risk of serious loss to the creditors.
Section 136 – duty in relation to obligations
[84]Section 136 provides:
136Duty in relation to obligations
A director of a company 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.
[85] Mr Little caused the company to incur an increasing overdraft liability to BNZ from December 2008. From the 2009 financial year onwards, he also caused the
15 Ulsterman Holdings Ltd (in liq) v Walls [2017] NZHC 3040.
16 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171. See also Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [102] and M J Pidgeon Builder Ltd (in liq) v Pidgeon [2016] NZHC 1566, (2016) 11 NZCLC 98-047 at [50].
Company to increasingly borrow from the Woodside Trust. And a further debt was incurred in relation to Advanced Lifestyle in 2011. All of this while increasing the debt owed to the company under the beneficiaries’ current account. In these circumstances, I do not consider there were reasonable grounds to believe the company would be able to perform the obligations incurred.
[86]A breach of s 136 is established.
Section 137 – duty of care
[87]Section 137 provides:
137Director’s duty of care
A director of a company, 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 taking into account, but without limitation,—
(a)the nature of the company; and
(b)the nature of the decision; and
(c)the position of the director and the nature of the responsibilities undertaken by him or her.
[88] Plainly, Mr Little was negligent. For the reasons given so far, he did not exercise the care, diligence and skill that a reasonable director would have exercised in the same circumstances.
[89]Mr Little breached s 137.
Post liquidation duties
[90] The ambit of a director’s duties post-liquidation was helpfully summarised by Heath J in EBR Holdings:
[137] As previously indicated, the statutory duties on which the liquidator relies (ss 131, 135 and 137 of the Act) are all contained in Part 8 of the Act. They appear in the context of provisions that define the terms “director” and “board of directors” of a company… All of those provisions are directed to the regulation of the affairs of a trading entity. That is the context in which the duties set out in ss 131-137 of the Act must be considered.
[138] On the other hand, s 301 appears in Part 16 of the Act, which deals with the topic of liquidation. Like s 321 of the 1955 Act before it, s 301 empowers the Court to tailor relief to fit the type of breach with which it is concerned. Although s 301 deals also with claims of similar types against a range of other people… in the context of claims against directors who hold office at the time of liquidation, s 301(1) provides:
…
[139] While s 301(1) could potentially apply to the types of acts or omissions of a director that occur after liquidation intervenes, relevant acts or omissions will have occurred before a liquidator brings proceedings. In that situation, the use of the past tense does not conclusively restrict the circumstances in which s 301 could be invoked to pre-liquidation conduct.
…
[145] Part 16 of the Act, which deals with liquidations, does confer specific duties on directors that are to be exercised in the post-liquidation phase. Without necessarily being exhaustive, examples are obligations:
(a)At the request of the liquidator, “to deliver to the liquidator such books, records, or documents of the company” in his or her possession or control.
(b)To attend on the liquidator if required to do so, and to provide information about “the business accounts or affairs of the company” as the liquidator may require. This extends to a requirement that the director attend for examination on oath before the liquidator, if required to do so.
(c)“To assist in the liquidation” to the best of the director’s ability.
(d)To identify property of a company that has been put into liquidation and to give the liquidator details of it.
…
[147] Generally, those obligations can be characterised as involving co- operation with liquidators to ensure that assets are identified for realisation and distribution among participating creditors in an efficient way…
…
[153] While s 301 may be used to inquire into actionable post-liquidation conduct of directors that falls within the ambit of that provision, claims of that type must be based on the post-liquidation duties I have identified. Generally, these require directors not to put assets of the company into jeopardy, to co- operate with a liquidator, and not to misapply or misuse company property…
(Citations omitted)
[91] The plaintiffs allege several post-liquidation breaches of duty. After the commencement of the Company’s liquidation, Mr Little is said to have:
(a)Failed to identify and deliver the property of the company to the liquidators.
(b)Misapplied or misused the property of the company.
(c)Failed to co-operate with the liquidators.
[92] These allegations centre on the so-called Post Liquidation Sales. The plaintiffs’ claim is essentially that Mr Little entered the Company into various transactions with another company of which he was a director, Prince and Princess Limited (PPL). These transactions involved Mr Little providing “management services” to PPL, and PPL paying the Company for those services. But PPL did not actually pay the Company. The plaintiffs say Mr Little must account for the money that should have gone to the Company
[93]Mr Mason assessed the nature of the transactions as follows:
(a)The “purchase orders” appear to be invoices recording the engagement of “NZ Natural Therapy Trust Inc” by PPL to provide management services.
(b)A monthly fee was charged for the management services.
(c)The Trust was not providing the services itself as management services require human involvement; Mr Little was providing the services on behalf of the Trust.
(d)PPL’s financial statements record that a total of $166,191 plus GST (for a total of $191,119) was charged in management fees for FYE 2014 and FYE 2015 combined.
(e)As at 31 March 2015, the sum of $56,090 was recorded as unpaid but owing by PPL.
(f)GST was payable by the Trust on these management fee services.
(g)The Company did not receive any funds.
[94] The plaintiffs say Mr Little recorded the income arising from those transactions as income of the Trust for tax purposes, but did not provide the income to the Company/Trust. The returns record income for various periods ending between FYE 2014 and FYE 2015 totalling $187,345.
[95] The plaintiffs only learned of this income when Inland Revenue filed a claim in the Company’s liquidation for the sum of $5,515.60 relating to the Trust’s GST liabilities for the period 30 November 2013 to 31 March 2016. An amended claim was filed by Inland Revenue the morning of trial, increasing this amount to $5,947.48.
[96] In his amended statement of defence, Mr Little says the Post Liquidation Sales were put in place to secure tax benefits for PPL. He says he was acting on the advice of an accountant, and they were not “sales” but rather “purchase orders”. Aside from this, he did not shed any light on the Post Liquidation Sales or the management services provided.
[97] I am satisfied, on the balance of probabilities, that the liquidators have established this part of their claim as set out in [91]. This because of six reasons. Some overlap.
[98] First, all the records show the transactions took place. PPL, accordingly, incurred obligations to pay the Trust for the services. There is nothing to show that management services were not provided. It follows, on the records, the Company/Trust is entitled to the payments made for those services. The records show:
(a)There are invoices (called purchase orders) for management services being provided by the Trust/Company to PPL.
(b)PPL claimed deductions for the management fees in its financial statements.
(c)The Trust reported income to Inland Revenue that matched the deductions in PPL’s financial statements in 2014.
(d)GST was paid to Inland Revenue in relation to the management services.
[99] Second, I am satisfied the money exited PPL. These transactions were not just “book entries”. Mr Mason considers this is “reasonably clear from Mr Hussey’s reports”. PPL had income – money flowed in. PPL reported sales of $536,356 in 2014, and a total income of $302,609 in the same year after cost of sales had been deducted and sundry income added. The purpose of engaging these management services appears to have been to incur expenses to deduct from that income. The 2014 financial statements show the management services as an expense in that regard for
$70,000. Expenses totalled $231,004 that year. This arrangement would not make sense if the money recorded as having been paid for management fees stayed with PPL. The money had to go somewhere. Mr Mason said:
3.6…Instead, it appears likely such was paid to Mr Little (or another bank account under his control or for his benefit) directly.
…
3.8…The fact that the cash has not flowed to the NZ Natural Therapy Trust (but rather likely to the benefit of Mr Little or his interests) merely reinforces this.
[131]I decline to make directions. This cause of action does not succeed.
Affirmative defences
[132] Mr Little advanced affirmative defences. I have largely dealt with them by implication in my Judgment to this point. But, I will now discuss them separately.
Reliance on advice
[133] Mr Little pleaded that he relied on accounting and legal advice at all material times. In particular, he says at no time was he advised the Company and the Trust were insolvent, that he should cease trading or that the creditors were at risk. He says he relied on advice from Mark Salmon, Accent Accounting and Nicholas Bell-Booth.
[134]Section 138 of the Act provides:
138 Use of information and advice
(1)Subject to subsection (2), a director of a company, when exercising powers or performing duties as a director, may rely on reports, statements, and financial data and other information prepared or supplied, and on professional or expert advice given, by any of the following persons:
(a)an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned:
(b)a professional adviser or expert in relation to matters which the director believes on reasonable grounds to be within the person’s professional or expert competence:
(c)any other director or committee of directors upon which the director did not serve in relation to matters within the director’s or committee’s designated authority.
(2)Subsection (1) applies to a director only if the director—
(a)acts in good faith; and
(b)makes proper inquiry where the need for inquiry is indicated by the circumstances; and
(c)has no knowledge that such reliance is unwarranted.
[135]And s 300(2) provides:
300 Liability of proper accounting records not kept
…
(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 by the company 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.
[136]In Morgenstern v Jeffreys, the Court of Appeal said:
[77] A director who does not adduce direct evidence from the relevant professional advisers is unlikely to be able to establish the defence solely on the basis of his or her own evidence. As this Court pointed out in Mason v Lewis, little, if any, weight could appropriately be given to a director’s
suggestion in evidence that he had been reassured as to his company’s prospects by his accountant, who was not called.
[78] Furthermore, failure to adduce evidence from the relevant professional advisers would support the inference that their evidence would not assist the director when the director would be expected to call them as witnesses, their evidence would explain or elucidate their advice and their absence is unexplained. …
[137] Mr Little bears the onus to establish this defence. I consider he has failed to discharge it, on the evidence, because of three key reasons.
[138] First, Mr Little has not established that he specifically requested or obtained advice. His assertions are generally vague and inconsistent on this ground. He did not provide specific evidence in respect of Mr Bell-Booth and he did not call him as a witness. As regards Mr Salmon, he said:
I do not recall any discussion in our meetings with Mr Salmon or his staff about the issue of distributions or the distinction between a distribution to beneficiaries and drawings. The main focus of our meetings was on the financial accounts of the business rather than the Trust. I do not think I ever asked Mr Salmon for that kind of advice but if I had I believe I would have followed it.
[139] Mr Salmon gave evidence that their engagement was “doing a compliance role” and that every year the records would be delivered to Ascent’s office to prepare the accounts based on the information provided. Ascent would then return all of the records they were provided. The responsibility to keep proper records remained with Mr Little. There is no evidence of a wider engagement. Where advice was provided, it was based on information from Mr Little.
[140] Second, Mr Little has not produced any evidence of the advice in the form of reports, statements or financial data.
[141] Third, Mr Little’s evidence indicates he did not receive advice in respect of key aspects of the Company’s affairs. The following passages are illustrative:
(a)In relation to the transfer of funds between the Trust and the Woodside Trust, in his brief of evidence, he said “I admit that I did not take legal
advice on how these transfers would be treated from a legal perspective”.
(b)In his second witness statement, he said “I did not consider at any stage either I, Deidre or Oscar were borrowing money from the trust. I do not recall ever taking or receiving any advice on that subject”.
(c)When I questioned him regarding his understanding of directors’ duties, he explained no-one had given him advice on these.
Liquidators’ costs
[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.
(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 from this proceeding would be the liquidators and their solicitors.
[143] This defence goes hand-in-hand with the other questions I have reserved. The reasons are explained at [113]–[114]. I reserve judgment on this defence accordingly.
Outcome
[144]The decisions I have reached are:
(a)On the first cause of action, I enter judgment for the plaintiffs against Mr Little in the sum of $323,148.
(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.
(d)On the fifth cause of action, I find for the defendants.
[145] I award interest as claimed on the first cause of action. Interest on any sums that might later be awarded on the third and/or fourth causes of action will be for determination in the hearing awarding such sums.
Costs
[146] The plaintiffs are entitled to costs in this proceeding. Their memorandum is to be filed and served within 15 working days of the date of delivery of this Judgment. The defendants’ memoranda are to be filed and served within 15 working days after service of the plaintiffs’ memorandum.
Brewer J
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