O'Neill Earthworks Ltd (in liq) v O'Neill
[2017] NZHC 989
•15 May 2017
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
CIV-2016-476-000062 [2017] NZHC 989
BETWEEN OʼNEILL EARTHWORKS LIMITED (IN
LIQUIDATION) First Plaintiff
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN
Second Plaintiffs
AND
DANIEL JOHN OʼNEILL
First DefendantANNA CATHERINE BAKER Second Defendant - Discontinued
Hearing: 12 May 2017 Appearances:
S W Shin and S P Farnell for Plaintiffs
No Appearance for DefendantsJudgment:
15 May 2017
Reissued:
16 May 2017
JUDGMENT OF GENDALL J
Introduction
[1] In this proceeding the first plaintiff, O’Neill Earthworks Limited (In Liquidation) (“the company”) and its liquidators the second plaintiffs, Vivien Judith Madsen-Ries and Henry David Levin (“the liquidators”), seek judgment by way of formal proof pursuant to r 15.9 High Court Rules against the first defendant, Daniel John O’Neill (Mr O’Neill).
[2] The company was placed into liquidation on 1 August 2016 and the liquidators were appointed.
OʼNEILL EARTHWORKS LTD (IN LIQ) v OʼNEILL [2017] NZHC 989 [15 May 2017]
[3] Mr O’Neill was involved with the company from its outset and from
30 September 2010 was its sole director.
[4] The company and the liquidators seek compensation from Mr O’Neill in his capacity as the sole director of the company under s 301(1)(b)(ii) of the Companies Act 1993 (the Act) for alleged breaches of duties imposed on him as a director as follows:
(a) Section 131(1) – a failure to act in good faith and in the best interests of the company;
(b)Section 135 – a failure to ensure the business of the company was not carried on in a manner that created a substantial risk of serious loss to its creditors, and in particular the Commissioner of Inland Revenue (the CIR);
(c) Section 136 – causing the company to continue to trade notwithstanding that no reasonable ground existed to believe that the company would be able to meet its obligations when required, and in particular the CIR; and
(d)Section 137 – a failure to exercise the care, diligence and skill expected of a reasonable director in the same circumstances.
[5] In addition, the company seeks restoration of $9487.50 in respect of a payment due to the company and made by a debtor of the company, Seaforth Farms Limited (Seaforth), direct to Mr O’Neill’s personal bank account.
Procedural history
[6] These proceedings were issued against Mr O’Neill and the named second defendant, Anna Catherine Baker (Ms Baker) on 8 November 2016. They were served on:
(a) Mr O’Neill on 20 December 2016; and
(b) Ms Baker on 30 November 2016.
[7] Ms Baker, who defended the proceeding, and the plaintiffs reached a settlement. A discontinuance against Ms Baker has been filed.
[8] Mr O’Neill’s statement of defence was due to be filed by around 16 February
2017. No defence was filed by or on behalf of Mr O’Neill, nor has he made contact
with the liquidators concerning this proceeding.
[9] The company and the liquidators now seek judgment against Mr O’Neill, as I
note, by way of formal proof pursuant to r 15.9 High Court Rules. Rule 15.9 states:
15.9 Formal proof for other claims
(1) This rule applies if, or to the extent that, the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the plaintiff seeks judgment by default for other than a liquidated demand.
(2) The proceeding must be listed for formal proof [[and no notice is required to be given to the defendant]].
(3) After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.
(4) The plaintiff must, before or at the formal proof hearing, file affidavit evidence establishing, to a Judge's satisfaction, each cause of action relied on and, if damages are sought, providing sufficient information to enable the Judge to calculate and fix the damages.
(5) If the Judge before or at the formal proof hearing considers that any deponent of an affidavit filed under subclause (4) should attend to give additional evidence, the Judge may direct accordingly and adjourn the hearing for that purpose
[10] In terms of the requirements outlined in r 15.9(4), the plaintiffs here are required to file affidavit evidence to establish to the Court’s satisfaction the causes of action pleaded and their damages calculation. The onus is on the plaintiffs’ throughout to convince this Court that judgment should be entered against Mr O’Neill.
[11] In Tech Voice Limited (In Liquidation) v Ovenden1 Davidson J noted in a similar formal proof hearing that:
…The plaintiffs’ submissions and evidence are therefore untested and, given the immediate and wider implications of judgment, the Court in the circumstances must be careful in reaching conclusions.
Factual background
[12] The company was originally incorporated on 10 April 2003 and traded as an earthmoving business. It ceased trading at Christmas 2015. Mr O’Neill is a
50 per cent shareholder in the company and, as I have noted, was its sole director from 30 September 2010 up to the date the company was placed into liquidation some six years later. Prior to its liquidation the company had incurred significant debts to the CIR and other creditors that remained unpaid. The CIR's claim now totals $343,428. This is made up of preferential claims (essentially for outstanding GST, PAYE, Kiwisaver and child support payments) of $224,989, and a non- preferential claim of $118,439. A separate claim for court ordered liquidation costs has been filed by the CIR, this amounting to $3606.
[13] Other outstanding creditors who have filed claims in the company’s liquidation total $100,021. These generally relate to debts incurred by the company dating back to about October 2013.
[14] At the date of liquidation the company also owed its secured creditor, Heartland Bank Limited (Heartland) $119,993. Heartland held a general security agreement over the assets of the company. Those assets it seems have a recorded book value of $151,373. The liquidators take the view however that once realised, Heartland will be almost if not entirely repaid from the proceeds of sale of these assets which it holds as security which is occurring now, but there will be no surplus. The claims in the company’s liquidation therefore do not include anything at this point for the Heartland debt.
[15] Soon after the CIR applied to this Court to place the company into
liquidation, this occurring on 7 April 2016, it seems that Mr O’Neill requested
1 Tech Voice Limited (In Liquidation) v Ovenden [2015] NZHC 2766 at [2].
Seaforth as a debtor of the company to pay monies due to the company to Mr O’Neill’s personal bank account instead of to the account of the company. As a result, the $9487.50 of company funds noted at [5] above were transferred and diverted to Mr O’Neill personally. This has not been rectified to date.
[16] So far as the CIR debt is concerned, this includes an amount of approximately $52,000 for outstanding GST unpaid in relation to certain asset sales by the company. Investigations by the liquidators relating to this issue have revealed that shortly prior to the company being placed into liquidation, but after the application to the Court to do so had been filed, Mr O’Neill sold a range of company assets but did not account to the CIR for the GST payable on those sales. Nor, it seems, did he cause the company to file any GST returns for that period. Instead he allowed the GST portion of the sale proceeds to be paid principally to Heartland to reduce the company’s debt to it with a small amount paid to certain other creditors. The Heartland debt which was secured was also the subject of personal guarantees given by Mr O’Neill, his father and a family trust. It seems clear that in making these decisions Mr O’Neill was acting in his own interests (given his potential personal guarantee liability to Heartland) in diverting this GST to that company instead of properly accounting for it to the CIR.
[17] The liquidators confirm that there are effectively no other assets of the company remaining available to the unsecured creditors here.
Formal proof
[18] As I have noted, the company and the liquidators seek judgment by default in this proceeding against Mr O’Neill pursuant to r 15.9 High Court Rules outlined at [9] above.
[19] Given the requirements of r 15.9(4) for affidavit evidence to be provided by the plaintiff, to this end, affidavit evidence has been filed in this proceeding as follows:
(a) Affidavit from Henry David Levin dated 3 May 2017;
(b) Supplementary affidavit from Henry David Levin dated 5 May 2017; (c) Affidavit from Charles Edward Graham dated 5 May 2017;
(d) Affidavit as to service from Ryna Lezlyn Ali dated 24 February 2017.
General summary of claims against Mr O’Neill
[20] As a general overview here, the company and the liquidators attribute the losses suffered in this case generally to Mr O’Neill’s failure to properly discharge his responsibilities as a director of the company. In particular, the plaintiffs’ case outlined in their pleadings and supported broadly by the affidavit evidence which has been filed here, is that Mr O’Neill acted in breach of his duties to the company by:
(a) Allowing the company to continue to trade despite its insolvency and increasing debts to CIR and other creditors;
(b)Causing the company to incur but failing to meet its tax obligations to CIR which consequently caused the company to incur additional liabilities to CIR in penalties and interest;
(c) Permitting the company to act in breach of trust by failing to cause it to pay PAYE tax to CIR;
(d)Failing to ensure the company had sufficient funds to pay debts as they fell due;
(e) Causing the company to sell assets (after the liquidation application was filed) and failing to cause the company to file GST returns in relation to the sale of these assets;
(f) Failing to cause the company to retain and pay the GST component on the sale of these assets;
(g)Instructing Seaforth to pay funds due to the company into his personal bank account; and
(h)Taking drawings under his shareholder current account, thereby reducing the amount owed to him by the company and, as such, preferring his interests over those of the company and its creditors.
[21] Essentially, it is suggested that the company became insolvent in April 2011 and, notwithstanding this, Mr O’Neill caused it to continue to trade for over another four years, incurring significant debts to creditors. Thus Mr O’Neill caused the company to incur significant liabilities that it had no ability to repay and, in addition, ultimately he preferred his own interests and those of his family members over interests of the company and its creditors.
Financial position of the company
[22] From all the evidence which is before the Court, I am satisfied that in terms of the solvency test outlined in s 4 of the Companies Act 1993 (the Act) (both on the basis of the company’s inability to pay its debts as they become due in the normal course of business and the value of its liabilities exceeding the value of its assets – the solvency test) the company was effectively insolvent from 1 April 2011 at the very latest. This was confirmed in the affidavit evidence of Mr Levin, an experienced insolvency specialist based on an analysis of the company’s financial position and the nature of its debts and obligations. In this respect, Mr Levin in his affidavit sworn 3 May 2017 deposed:
8.2 From FYE (Financial Year Ending) 2011, the company was operating with significant and worsening reported working capital deficit. The company was also operating with material and worsening external working capital deficits from FYE 2012. These financial measures indicate that the company was unable to pay its debts as they became due in the normal course of business.
8.3 Further, the company was operating with significant and worsening net liabilities from FYE 2011. The company was also operating with material and worsening external net liabilities from FYE 2011. Thus, the value of the company’s liabilities exceeded the value of its assets (both on its reported position, and on an external assets and liabilities analysis).
…
8.8 As a result of the matters discussed above, I am of the view that the company was insolvent from 31 March 2011 at the latest. This is on the basis of both the company’s working capital deficit and net liabilities as reported in the financial statements from FYE 2011 onward. I have not received financial statements for earlier years.
8.9 Further, it is my view that the company was certainly unable to pay its debts as they became due by 30 September 2014, which was the earliest date for which tax remained outstanding at liquidation.
[23] Given these uncontradicted comments and on the basis of all the material which has been filed before the Court in this proceeding, I am satisfied that the company was insolvent by 1 April 2011 at the latest here.
Causes of action against Mr O’Neill
(a) Section 301 Companies Act
[24] The claims in this proceeding for compensation brought against Mr O’Neill are advanced on the basis that he has breached his duties to the company under the procedural mechanism which is provided for in s 301 of the Act.
[25] Section 301 provides:
301Power 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 person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or 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 promoter, director, manager, administrator, liquidator, or receiver; and
(b) order that person—
(i) to repay or restore the money or property or any part of it with interest at a rate 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
(c) where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
(2) This section has effect even though the conduct may constitute an offence.
(3) An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.
(4) In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.
[26] From the Court of Appeal decision in Lower v Traveller2 it is clear the principal purpose of s 301 is to compensate those who have suffered loss as a result of illegitimate trading. The Court of Appeal also has described s 301 as being analogous to a derivative type of action and in the decision in Sojourner v Robb3 as:
A procedural shortcut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against…[its] directors.
[27] Section 301 has been said also to provide a means of enforcement against directors who have “been guilty of negligence, default, or breach of duty or trust in relation to the company” – Peace and Glory Society Ltd (In Liquidation) v Samsa.4
[28] Claims brought under s 301 involve a two stage evaluation:
(a) Has there been a breach of duty owed by a director to the company?
(b)If so, to what extent should the director contribute to the losses of the company?
[29] The claims advanced here against Mr O’Neill by the company and the liquidator under s 301 are for breach of his duties as the sole director of the company
during the relevant period from about late September 2010 to the date of the
2 Lower v Traveller [2005] 3 NZLR 479 (CA).
3 Sojourner v Robb [2008] 1 NZLR 751 (CA) at [15].
4 Peace and Glory Society Ltd (In Liquidation) v Samsa [2010] 2 NZLR 57 (CA) at [47].
company’s liquidation. It is useful now to turn to consider the specific breaches alleged against Mr O’Neill. These relate to ss 131(1), 135, 136 and 137 of the Act. I will now briefly address each of these in turn.
Section 131(1) – Not acting in good faith and in the best interests of the company
[30] Section 131(1) of the Act provides that 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.
[31] This duty imposed by s 131(1) is a subjective one. In a situation however where it is simply inconceivable that a director with any appreciation of his fiduciary responsibilities could cause a company to take a particularly dangerous or foolish course of action or enter into an entirely unwise transaction, generally a director will be regarded as breaching this duty, regardless of the subjective belief he may have held.
[32] In addition, once a company is considered to be of doubtful solvency, the duty in s 131(1) is also a duty owed to its creditors – Nicholson v Permakraft (NZ) Ltd.5
[33] Usefully in Sojourner v Robb6 Fogarty J said at [102]:
In this context, the standard in s 131 is an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criterion as to whether the directors have done what they honestly believed to be right. The standard does not allow a director to discharge the duty by acting with a belief that what he is doing is in the best interests of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company…Creditors are persons to whom the company has ongoing obligations. The best interests of the company include the obligation to discharge those obligations before rewarding the shareholders.
[34] Turning to the present case, it is my view that the evidence before the Court
clearly establishes that Mr O’Neill here acted in his own interests and those of his
5 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA).
6 Sojourner v Robb, above n 3.
own family at the expense of the company. If not for these actions, the company would have had:
(a) $9487.50 being the amount of the Seaforth payment;
(b)$135,132 being the amount that was withdrawn by Mr O’Neill under his shareholder’s current account and would otherwise have been available to the company to meet its debts as they fell due; and
(c) $52,303 being a lowered preferential debt to CIR because GST on asset sales would have been properly paid.
[35] It is significant too that the majority of the company’s debts that remained outstanding at liquidation were incurred after the financial year ending 2014 which was over three years after the company had reported its initial financial difficulty. Mr O’Neill first, caused the company to continue to trade, notwithstanding that it was clearly not performing in any sense, and secondly, to sell assets without making arrangements for the GST part of the sale price to be paid to the CIR.
[36] On all the evidence before the Court I am satisfied it has been established here that Mr O’Neill as the sole director of the company did not act in good faith and what any director in his position might have thought was in the best interests of the company in the following respects:
(a) He continued to trade the company as long as it did, in large measure preferring his own interests, in a situation where it was increasingly likely that the company would be unable to pay its debts as they fell due and especially after 1 April 2011 when the company had become insolvent.
(b)Mr O’Neill continued to take drawings from the company, preferring his own interests when the company was insolvent and/or when its financial position was deteriorating.
(c) Mr O’Neill instructed a creditor to pay funds into his personal bank account, being the Seaforth payment, that ought to have gone to the company.
(d)Mr O’Neill caused the company to continue to trade and to sell assets without making proper arrangements for the GST portion of the sale price to be paid to the CIR.
Section 135 – Reckless trading
[37] Section 135 of the Act provides that a director must not agree to, cause or allow the business of a company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
[38] The essential pillars of a claim under s 135 were set out by the Court of
Appeal in Mason v Lewis7 as follows:
1.The section 135 duty imposed is one owed by directors to the company rather than to any particular creditors;
2. The test is an objective one;
3.The focus is not on a director’s belief but rather on the manner in which a company’s business is carried on and whether that modus operandi creates a substantial risk of serious loss; and
4.What is required when the company enters troubled financial waters is what is accurately described as a “sober assessment” by the directors of an ongoing character, as to the company’s likely future income and prospects.
[39] This section 135 duty was recognised in Sojourner v Robb8 to reflect a director’s fundamental duty to protect the interests of creditors when the company approaches insolvency.
[40] As I have noted above, from the evidence before the Court in the present case, and in particular that of Mr Levin, the company was insolvent from 1 April
2011 at the latest. And of interest too was evidence before the Court of an admission
7 Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].
8 Sojourner v Robb, above n 3.
Mr O’Neill had made himself that the company’s insolvency was due to “negligence on his part” and his “not being fully aware of tax debts”.
[41] I am satisfied it is highly likely that at the operative time Mr O’Neill was aware of the deteriorating financial position of the company but in any event, even if he could claim ignorance to some extent he should have known of the company’s unpaid tax and other debts as they were accruing. Even if he may claim to have been unaware of that position, this lack of knowledge would itself provide evidence of his choosing to trade the company in what could only be seen as a reckless manner.
[42] I am satisfied that the evidence which is before the Court has established that by continuing to trade the company whilst insolvent, Mr O’Neill not only created a serious risk of loss to the company’s creditors, but in fact he caused that loss to the creditors and, in particular, the substantial loss to the CIR. This was exacerbated by Mr O’Neill’s decision to continue to take drawings under his shareholder’s current account, thus reducing the company’s debt to him instead of reducing the company’s debts owed to the CIR and other external creditors whose debts were increasing. In addition, his instruction to Seaforth to pay funds owed to the company into his personal account removed what would have been cash available to the company and its creditors. His further decision to sell company assets and to fail to account to the CIR for GST or to file GST returns was wrong. Finally, his choice on his own admission to take a “gamble” to expand the company when it was struggling and needed careful consolidation was also unwise in the extreme.
[43] If Mr O’Neill had undertaken a “sober assessment” of the company’s prospects at any time after 1 April 2011, there can be no doubt that the company would have ceased trading much earlier than it did, and it would not have the level of unpaid debts built up which in fact occurred.
[44] For all these reasons I find that Mr O’Neill breached his obligation to avoid reckless trading under s 135. Clearly, on all the unchallenged evidence before the Court, he caused the business of the company to be carried on at the times in question in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Section 136 – causing obligations to be incurred without reasonably believing the company could perform them
[45] Section 136 of the Act provides that a director must not agree to the company incurring an obligation unless the director honestly believes on reasonable grounds, that the company will be able to perform the obligation when required to do so.
[46] These section 136 obligations very much overlap with s 135, especially in a situation such as the present where a company is approaching insolvency. Notwithstanding this, from Fatupaito v Bates,9 O’Regan J held that to establish a breach of s 136 a plaintiff must show that the defendant agreed to the company incurring an obligation at a time when he or she did not believe (a subjective test) on reasonable grounds (an objective test) that the company would be able to perform that obligation when required to do so.
[47] In the present case there is no question that Mr O’Neill was the sole director of the company at the operative time and that he arranged for the company to incur significant obligations. The third requirement of s 136, however, needs consideration here. This is the requirement that at the time of incurring those obligations, it must be shown that the defendant concerned did not himself honestly believe on reasonable grounds considered objectively that the company would be able to perform the obligation when it was required to do so.
[48] In the present case it has been made clear that no evidence was found by the liquidators to suggest Mr O’Neill had prepared a business plan, budgets, cash flow projections or had taken any other steps to assess the company’s financial future at the operative times. Given that, and my conclusion noted earlier that the company was insolvent from 1 April 2011, there can have been no reasonable grounds in existence for Mr O’Neill to believe that the company would have been able to meet its debts owed to its creditors, including additional debts it was incurring, when they became due after 1 April 2011. On all the evidence which is before the Court, I am satisfied that, by allowing the company to continue to trade after 1 April 2011, and particularly after 30 September 2014 when substantial additional debts and tax
liability were incurred, Mr O’Neill also breached his duties under s 136 of the Act.
9 Fatupaito v Bates [2001] 3 NZLR 386.
Section 137 – failure to exercise care, diligence and skill
[49] Section 137 of the Act provides that a director must exercise the care, diligence and skill of a reasonable director acting in the same circumstances. The test under this section is an objective one based on the standard of a reasonable director – Morgenstern v Jeffreys.10
[50] Again, there is a significant overlap in this case between the allegations relating to s 137 of the Act with the position under ss 131, 135 and 136.
[51] The test under s 137 is an objective one based on the standard of a reasonable director – Morgenstern v Jeffreys.11 Although a director’s personal knowledge and experience is not relevant, the position of the particular director must be taken into account. In the present case this is “someone assuming responsibilities as…director of a relatively small trading business, without the opportunity for detached guidance from a board. – Boutique Tanneries Ltd (In Liquidation) v Handley.12
[52] In the present case, in my view, there is little doubt that s 137 is engaged. On all the uncontradicted evidence which is before the Court I find that a reasonable director in the position of Mr O’Neill here would not have:
(a) Allowed the company to continue to trade for four years after 1 April
2011 despite its insolvency, and at the same time increased debts to
CIR and other creditors.
(b)Caused the company to fail to meet its GST and other tax obligations which consequently caused it to incur additional liabilities in penalties and interest.
(c) Both permitted the company to act in breach of trust by failing to cause it to pay its PAYE obligations to CIR and also, failed to ensure
the company had sufficient funds to pay all its debts as they fell due.
10 Morgenstern v Jeffreys [2014] NZCLC 98/024 (CA).
11 Morgenstern v Jeffreys, above n 10.
12 Boutique Tanneries Ltd (In Liquidation) v Handley (HC) Auckland, CIV-2006-404-2713, 24 July
2008 at [31].
(d)Caused the company as an acknowledged “gamble” to borrow further funds, thereby increasing its liabilities to creditors, to purchase additional fixed assets when the company was insolvent.
(e) Instructed a company debtor, Seaforth, to pay funds into Mr O’Neill’s
personal account.
(f) Taken personal drawings for the financial years ending 2011 up to
2015 under his shareholder’s current account, thereby reducing the amount owed to him by the company and thus preferring his interests over those of the company and its creditors.
(g)After a liquidation application was filed caused the company to sell assets and then failed to both file GST returns and account to the CIR for GST received from the sale of those assets.
[53] Acknowledging too that Mr O’Neill himself in the evidence before the Court is said to have admitted (during an interview with staff members of the liquidators) that the company became insolvent at least partly because of negligence on his part, for all the reasons I have noted above I am satisfied that Mr O’Neill failed to exercise the care, diligence and skill expected of a reasonable director in all the circumstances here in breach of his obligations under s 137.
Quantum of relief sought
[54] As to the quantum of relief sought here, before me the plaintiff submitted that the company is entitled to an award against Mr O’Neill of $456,542.50 comprising:
(a) $9487.50 being the amount of the Seaforth payment; and
(b) $447,055 being the creditor claims in the liquidation.
[55] In Mako Holdings Ltd (In Liquidation) v Crimp13 William Young J ordered the defendants to pay a sum that would mean all creditors in the liquidation were paid in full and at [75] noted:
I appreciate that Messrs Crimp and Carswell may feel somewhat aggrieved at my willingness, subject to any further argument as to costs, to require them to pay the costs of this litigation on what will, in substance, be a solicitor and own client basis…Unless full costs are awarded the creditors will not get paid and, unless Judges take a firm line with those who choose to act in this way, we will wind up creating incentives for directors to strip their companies on the basis that they can argue about it later.
(emphasis added)
[56] In the present case, however, the plaintiffs state that they do not seek to recover the costs of the liquidation. Rather, they seek first, compensation for the loss the company and its creditors have suffered and secondly, restoration of the Seaforth payment that was wrongly transferred to Mr O’Neill’s personal bank account.
[57] In doing this, the plaintiffs say the overall effect of the orders sought would be to shift the financial consequences of Mr O’Neill’s breaches of duty from the company’s creditors to Mr O’Neill himself where it should properly lie.
[58] The standard approach to awarding relief in cases such as the present is to assess the extent of the deterioration in the company’s financial position between the date of breach and the date of liquidation. Mason v Lewis14 is authority for this proposition. In that case three factors were deemed to be relevant to this issue of the quantum of compensation relating to s 301, these being causation, culpability and the duration of the trading.
[59] In Lower v Traveller15 the Court of Appeal discussed these three factors as follows:
(a) The element of causation is concerned with the link between the carrying on of the company’s business recklessly, to the knowledge of the impugned director, and the indebtedness of the company for which it is sought to impose personal liability.
13 Mako Holdings Ltd (In Liquidation) v Crimp (HC) Invercargill CP23/99, 28 November 2000.
14 Mason v Lewis, above n 7.
15 Lower v Traveller, above n 2.
(b) The element of culpability is linked to the deterrent purpose of the provision. This factor calls for an assessment of the blameworthiness of the director’s conduct, bearing in mind that at one end of the range the nature of a director’s involvement will be blind faith or muddle-headedness, while at the other end there will be actions or instances of inaction which are plainly dishonest. The deterrent purpose of the section is served in cases involving a high degree of culpability by orders which are punitive as well as compensatory.
(c) As to the element of duration of the wrongful trading, the Court of Appeal found in that case that a duration of two years and 10 months as “lengthy”.
[60] In Lower v Traveller the Court of Appeal upheld the Trial Judge’s finding of
100 per cent liability for loss during the relevant period. The director was found to have been unreasonably optimistic and put his own interests ahead of other unsecured creditors over an extended period. Other cases in which 100 per cent liability for creditor losses represented by claims in the liquidation have been
ordered include Morgenstern v Jeffreys,16 Lakeside Ventures 2010 Ltd (In Liq) v
Burrows,17 Bay Kiwifruit Contractors Ltd (In Liq) v Ladher18 and Bay Metal
Fabricators Ltd (In Liq) v Steenson.19
[61] Turning first to consider the causation issue, I am satisfied on all the evidence before the Court that Mr O’Neill caused the company’s losses here as he had sole responsibility for the management of the company as its sole director from
30 September 2010. I reach this conclusion given that the company, as I have noted above, became insolvent from 1 April 2011 at the latest and the bulk or all of the outstanding debt at issue here was incurred after that date.
[62] If Mr O’Neill had ceased trading shortly after the company became insolvent its outstanding debts to creditors, including the CIR, would have been significantly less. In addition, the Seaforth payment which Mr O’Neill diverted would have passed to the company. If he too had not taken personal drawings of $135,132 during the period from 2011 to 2015 these amounts would have been available to
contribute towards the company’s debts.
16 Morgenstern v Jeffreys, above n 10.
17 Lakeside Ventures 2010 Ltd (In Liq) v Burrows [2014] NZHC 1048.
18 Bay Kiwifruit Contractors Ltd (In Liq) v Ladher [2015] NZHC 63.
19 Bay Metal Fabricators Ltd (In Liq) v Steenson [2016] NZHC 1634.
[63] All of the unpaid debts owing to CIR that were outstanding as at the date of liquidation were incurred on or after 30 September 2014 and all of the unpaid debts owed to the company’s creditors at that time were incurred on or after 10 October
2013. Mr O’Neill could have avoided these debts had he caused the company to cease trading earlier. I conclude that a reasonable argument exists here that Mr O’Neill directly caused this further debt to be incurred by his actions.
[64] I turn now to the second matter for consideration being culpability. Taking a global approach here, there is no doubt from the uncontradicted evidence before the Court that Mr O’Neill’s conduct in this case fell well below the standard of care required of a director to properly discharge his duties under the Act. And specifically, his actions in diverting the $9487.50 Seaforth payment to his personal account and in extracting personal drawings of $135,132 at a time when the company’s outside indebtedness was substantially increasing, can scarcely be seen as muddlement but rather must border on dishonesty. Details of all this have been outlined above.
[65] Next, I turn to duration. The company having been incorporated in 2003 continued to trade whilst insolvent from, at the latest, 1 April 2011 for a period in excessive of four years. This is clearly a lengthy period. During this time the company caused significant losses to creditors represented by the total claims in the liquidation of $447,055.
Result
[66] For all the reasons outlined above, the plaintiffs’ application for judgment in this matter by way of formal proof succeeds. The company is entitled to judgment and an award against Mr O’Neill as its sole director is to follow. This is to amount to $456,542.50 plus interest comprising:
(a) $9487.50 being the amount of the Seaforth payment;
(b) $447,055 being the creditor claims in the company’s liquidation;
(c) Interest on these amounts.
Orders
[67] Orders are now made pursuant to s 301(1) Companies Act 1993 requiring
Mr O’Neill to pay to the company and the liquidators:
(a) The sum of $456,542.50 outlined at para [66] above.
(b) Interest on this sum from the date of the company’s liquidation
1 August 2016 down to the date of final payment, this interest to be at the Judicature Act rate of 5 per cent per annum.
Costs
[68] As to costs, these are awarded to the plaintiffs on a category 2B basis together with disbursements as approved by the Registrar.
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Gendall J
Solicitors:
Meredith Connell, Auckland
Copy to Defendants
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