Official Assignee v Harman
[2019] NZHC 101
•7 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-0095
[2019] NZHC 101
UNDER s 252 of the Insolvency Act 2006 IN THE MATTER
of the bankruptcy of Edward Harman
BETWEEN
OFFICIAL ASSIGNEE in the bankruptcy of the property of EDWARD HARMAN Applicant
Defendant
Hearing: On the papers Counsel:
G Neil for the Official Assignee
J Lethbridge for Grant Robert Graham and Brendon James Gibson, as liquidators of Fairthorne Investments NZ Ltd (In Liquidation) and other companies in liquidation
Judgment:
7 February 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 7 February 2019 at 3.30pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Meredith Connell, Auckland Lowndes, Auckland
OFFICIAL ASSIGNEE v HARMAN [2019] NZHC 101 [7 February 2019]
Introduction
[1] Under ss 251 and 252 of the Insolvency Act 2006 (the Act), the Official Assignee (the Assignee) may estimate the amount for which a creditor's claim in a bankrupt's estate will be admitted if the claim is for damages, or is for some other reason uncertain (s 251). Alternatively, the Assignee may elect to apply to the Court to determine the amount of the uncertain creditor's claim (s 252).
[2] In this case, the Assignee of the estate of Edward John Harman (Mr Harman) elected to apply to the Court under s 252 for an order determining the amount of the claims made by the liquidators of a group of companies in liquidation of which Mr Harman had previously been a director.
[3] An affidavit was filed in support of the Assignee's application by Anthony Stephen Pullan, a Deputy Assignee who has been responsible since March 2016 for the administration of Mr Harman's bankrupt estate. Affidavits in support of the liquidators' claim have been filed by one of the liquidators, Mr Graham. Mr Pullan provided an affidavit in reply.
[4] There has been no issue over liability; the only issue has been the amount for which the liquidators should be entitled to prove in Mr Harman's estate.
[5] On 8 March 2018 the Court directed the parties to engage and agree on as many issues as possible, and to file a memorandum setting out the areas of agreement and any resulting agreed orders, with each party recording any consequential amendments to the approach taken in their earlier submissions. The parties subsequently engaged in negotiations and agreed on a quantum figure to jointly recommend to the Court for its consideration in fixing the amount of the liquidators' claim. The amount recommended by the Assignee and the liquidators in counsel's joint memorandum (the joint memorandum) was $7,127,278.70. They invited the Court to determine the amount of the claim accordingly.
[6]I now give judgment on the Assignee's application under s 252 of the Act.
Background
[7] Mr Harman was adjudicated bankrupt on 26 February 2009.1 He was discharged from bankruptcy on 26 October 2012, but his discharge does not affect the matters to be decided in this judgment.
[8] Mr Harman had been a director of a number of companies which were put into voluntary liquidation by their shareholders on 2 and 3 July 2008. The companies were:
(i)Fairthorne Investments (NZ) Ltd (FIL);
(ii)Fairthorne Trading Ltd (Trading);
(iii)Fairthorne Ventures Ltd (Ventures);
(iv)Paeroa Investments Ltd (Paeroa); and
(v)Wake Investments Ltd (Wake).
[9] Grant Robert Graham and Brendon James Gibson, Insolvency Practitioners of KordaMentha (the liquidators), were appointed liquidators of each of the companies.
[10] On 7 December 2009 the Court approved an application for the pooling of the five companies in liquidation, under s 271(1)(b) of the Companies Act 1993 (the Companies Act). For convenience, I will refer to the five companies in liquidation collectively as "the pooled companies".
[11] Following Mr Harman's adjudication in bankruptcy, the liquidators filed a proof of debt in his bankruptcy, claiming a sum of approximately $22 million said to be owing by Mr Harman as a result of breaches by him of his obligations as a director of the pooled companies. The Assignee has disputed the amount of this claim.
1 Mr Harman was discharged from bankruptcy on 26 October 2012.
The pooled companies
[12] FIL was the holding company for interests associated with Mr Harman's wider family (including his parents John Harman and Gillian Harman, and his siblings). FIL was incorporated on 9 August 1991.
[13] Mr Harman was a director of FIL from 28 January 1993 to the date of his bankruptcy.
[14] The shares in FIL were owned by a nominee company, Stapway Nominees Ltd (Stapway), associated with the chartered accounting firm Staples Rodway. Stapway held the shares on behalf of entities associated with the Harman family.
[15] Soon after its incorporation, FIL incorporated a company called NZ Marine Industries Ltd, and through that company, FIL owned 50 per cent of a company called Maxwell Winches Ltd. The Harman family interests acquired the balance of the shares in Maxwell Winches Ltd in late 1994.
[16] Mr Harman told the liquidators that FIL sold its interest in Maxwell Winches in 2001, and at that time it resolved to undertake further investments. He said that friends and associates later became aware of the investments he was undertaking through FIL, and they agreed to provide capital to him to enable further investments to be made through the companies he was involved with.
[17] Trading was incorporated on 25 March 1993. Mr Harman was a director from then until the date of his bankruptcy, and Mr John Harman was a director from the date of incorporation through to 28 May 2008. Trading is a wholly-owned subsidiary of FIL, and it was incorporated to undertake share and currency trading, and to provide short term loans. It undertook investments in both listed and unlisted companies over the years.
[18] Ventures was incorporated on 29 January 1993 as a venture capital company, and it undertook various investments. It either purchased shareholdings in other companies or made advances to other businesses. Mr Harman was one of the initial directors, and he remained a director up to the date of his bankruptcy. The other
director, from incorporation to 28 May 2008, was Mr John Harman. Ventures has been a wholly-owned subsidiary of FIL since its incorporation.
[19] Paeroa was incorporated on 19 October 1992. It was a personal investment company for Mr Harman, rather than for his wider family interests. He would often procure both Paeroa and one of the Fairthorne companies to invest in the same business. Mr Harman was a director at all material times through to the date of his bankruptcy.
[20] Wake was incorporated on 8 April 2002. It was primarily an investment company for Mr Harman personally. Mr Harman was a director at all material times. Wake has been wholly owned by Mr Harman since incorporation.
[21] Mr Harman has explained that there were five investments that ultimately had a considerable impact on the financial position of the pooled companies. The companies in which the five investments were made were:
(i)Escalator Advertising Ltd (Escalator);
(ii)Insignia International Ltd (Insignia);
(iii)Versamount Holdings Ltd (Versamount);
(iv)Cosignia Ltd (Cosignia); and
(v)Obsidium Holdings Ltd (Obsidium).
[22] Mr Harman continued to collect funds from third party investors, in the total amount of approximately $25.6 million, after 31 March 2006 (the date by which the liquidators later contended that the pooled companies had become insolvent).
Recoveries and interim distributions made by the liquidators
[23] The only substantive recoveries in the liquidations of the pooled companies have been moneys obtained from a settlement with other directors of the pooled companies ($3 million), and $641,000 in the liquidation of Escalator.
[24] On 26 April 2012 the liquidators made an interim distribution to the creditors of the pooled companies. The total of the claims of the participating creditors of the pooled companies was said to be $26,215,099.40, including principal and interest calculated to 2 July 2008. The total amount distributed by the liquidators was
$2,260,046.13. Further distributions totalling $343,365.96, were made between 2 July 2012 and 1 January 2013.
The financial position of Mr Harman's bankrupt estate
[25] The Assignee has admitted creditor claims totalling $19,394,993.97. The only claims remaining undetermined are the liquidators' present claim, and a claim by Wake for $100,000. The Assignee holds $4,033,559.36 in the Assignee's trust account, and those moneys will be available for distribution to Mr Harman's creditors following deduction of the Assignee's fees and unpaid expenses.
[26] The Assignee has also filed claims on behalf of Mr Harman's estate in the liquidation of the pooled companies, totalling $2,782,843.56.
[27] On the basis of those assets and liabilities (and assuming that Mr Harman's proof of debt lodged with the liquidators would be rejected), the Assignee calculated that creditors of Mr Harman would be likely to receive a distribution of around
$0.1977 in the dollar. If the liquidators' claim of approximately $22.1 million were accepted in its entirety, that distribution would be reduced to approximately $0.0924 in the dollar.
Liability: the liquidators' initial claims and the Assignee's response
[28] The liquidators alleged that Mr Harman breached his duties owed as a director of the pooled companies, under ss 131, 133, 134, 135, 136, 137, 194 and 300 of the Companies Act by:
(i)continuing to trade the pooled companies while they were insolvent (from, at latest, 31 March 2006);2
(ii)failing to keep adequate records for the pooled companies, contrary to ss 194 and 300 of the Companies Act; and
(iii)failing to recognise and respect the separate corporate identities of each of the pooled companies.
[29] Sections 131(1), 133, 134, 135, 136, 137, and 194 materially provide:
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.
…
133Powers to be exercised for proper purpose
A director must exercise a power for a proper purpose.
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.
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.
2 The liquidators did not rely on any breach of his duties as a director alleged to have been committed by Mr Harman before 31 March 2006.
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.
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.
194 Accounting records must be kept
(1)The board of a company must ensure that there are kept at all times accounting records that—
(a)correctly record the transactions of the company; and
(b)will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and
(c)will enable the financial statements or group financial statements of the company to be readily and properly audited (if those statements are required to be audited).
…
(2)The board of a company must establish and maintain a satisfactory system of control of its accounting records.
(3)The accounting records must be kept—
(a)in written form in English; or
(b)in a form or manner in which they are easily accessible and convertible into written form in English.
(4)If the board of a company fails to comply with the requirements of this section, every director of the company commits an offence and is liable on conviction to the penalty set out in section 374(3).
[30] The Assignee accepted that Mr Harman breached his duties owed to the pooled companies under ss 131(1), 133, 135, 136 and 137. However the Assignee submitted that the claim under s 134 was superfluous, and there is insufficient proof of the claims under s 194.
[31] On the s 134 claim, Mr Neil referred to Willburn Furniture & Restorations Ltd (In liquidation) v Gledhill, in which the plaintiff liquidators submitted that the defendant's breaches of his duties as a director under ss 131, 133, 135, and 137 constituted an independent breach of s 134 of the Companies Act. The Court rejected that approach, stating:3
As this alleged breach relies on a finding that the director has breached [the Companies Act] in some other way, it duplicates the other heads of claim under s 301 and is, in my view, superfluous.
[32] The liquidators have accepted that there is no need to consider their claim under s 134, and I accept that that is the appropriate position. There is accordingly no need to consider the claim under s 134 any further.
[33] Turning to the other head of claim which was disputed by the Assignee, being the claim under s 194 of the Companies Act, the Assignee referred to the judgment of Associate Judge Sargisson in H Investments Ltd v Official Assignee, a case where the plaintiff liquidators failed to establish their claim under s 194.4 The Associate Judge referred to the liquidators' "rather perfunctory investigation", and found that it had not been sufficiently proved that the bankrupt director had failed to keep proper accounting records. Her Honour noted that it was for the liquidators to enquire into and to prove that the director had failed to keep the records, and there was insufficient evidence of the nature and extent of the liquidators' enquiries. (There was no suggestion that the liquidators had used their formal statutory powers to examine the director or the company's accountant, or to require them to produce the company's records. And the mere fact that the director apparently referred the liquidators to the company's accountants, who produced its financial statements, was not considered determinative. Her Honour considered that there would almost certainly have been bank accounts and bank statements, receipts, copies of invoices, and the like, but the liquidators had not mentioned such documents in their evidence. Her Honour noted that it was to be expected that the liquidators would provide a schedule of the company records they had obtained, and those that were possibly missing, together with an
3 Willburn Furniture and Restorations Ltd (In liq) v Gledhill [2016] NZHC 331 at [58].
4 H Investments Ltd v Official Assignee [2017] NZHC 996 at [70] – [75].
explanation of how the missing records contributed in a meaningful way to the alleged breach).
[34] In this case, the Assignee pointed out that, despite some clear deficiencies, there is evidence that some accounting records were kept for the pooled companies. In an affidavit sworn by Mr Harman in the application for an order pooling the pooled companies (a copy of which was produced by Mr Graham with one of his affidavits filed in this proceeding), Mr Harman referred to inter-company advances between the pooled companies being reflected in the financial statements that were prepared. He also referred to "accounting records" that recorded the transfer of funds, and said that he would personally prepare the primary accounting records for the companies. Staples Rodway then prepared the annual accounts for each of the companies.
[35] Mr Neil submitted that there were shortcomings in the liquidators' evidence on the s 194 claim, similar to the shortcomings discussed by Associate Judge Sargisson in H Investments Ltd. Specially, no evidence had been produced in this case as to whether statutory information gathering powers were exercised by the liquidators, and there was little mention of the maintenance of source documents, such as bank statements, receipts, copies of invoices and the like, for the pooled companies. Nor were the financial statements for the year to 31 March 2005 prepared by Staples Rodway, or any draft accounts for the year to 31 March 2006, produced by the liquidators.
[36] In the end, the liquidators have elected not to pursue the claim under s 194. For the reasons identified by Mr Neil in his submissions, I am satisfied that the liquidators were correct in their decision not to pursue the s 194 claims.
[37] I therefore accept the parties' joint recommendation in so far as it submits that Mr Harman's liability need be considered only under ss 131(1), 133, 135, 136, and 137 of the Companies Act.
The Assignee's challenges to the quantum of the liquidators' claims
[38] The liquidators' initial contention was that the loss to third party investors who invested funds after 31 March 2006 was approximately $22 million (allowing credit
for the $3 million paid by the other family directors and the recovery from Escalator, less liquidators' costs). In Mr Graham's first affidavit, that amount was increased to
$25,215,971.26; it included principal and interest calculated to 2 July 2008.
[39] The Assignee took the view that the claim was overstated. First, it included two claims totalling $145,000 which were owed by Mr Harman personally, and not by one or more of the pooled companies. The liquidators have not disputed this contention. With those two claims excluded, the liquidators' adjusted claim figure would be $25,070,971.26.
[40] Secondly, the Assignee noted that the liquidators' interim distribution schedule did not record any payment to a number of creditors, whose debts totalled
$5,042,176.65. Mr Pullan inferred that the liquidators must have rejected the claims of those creditors. That inference has not been challenged by the liquidators. Deducting the $5,042,176.65 from the Assignee's (adjusted) claim figure of
$25,070,971.26 would reduce the liquidators' claim figure to $20,028,794.97.
[41] Thirdly, the Assignee noted that the creditors whose claims have been accepted by the liquidators have received some of their money back in the interim distributions made by the liquidators. The Assignee contended that the sum of $1,726,714.81 would have to be deducted from the claim figure on that account. Again, that contention does not appear to have been disputed by the liquidators. With that further deduction, the (adjusted) claims figure would be $18,302,080.16.
[42] Further deductions were proposed by the Assignee, the most significant of them relating to the date on which the pooled companies became insolvent. The Assignee submitted that the evidence was insufficient to establish any insolvency date earlier than 31 March 2007, and that the Court should adopt that date as the date on which the pooled companies became insolvent. That position has now been accepted by the liquidators, who have also accepted that the evidence is insufficient to establish breach of duty by Mr Harman (causing loss to the pooled companies) before the pooled companies became insolvent.
[43] On the Assignee's calculations, taking the date on which the pooled companies first became insolvent as 31 March 2007 would have the effect of further reducing the liquidators' claim to $10,853,548.15, being loans advanced by creditors (whose claims have been accepted by the liquidators) to one or more of the pooled companies after 31 March 2017 ($11,877,529.15), less interim distributions made to those creditors ($1,023,981).
[44] The Assignee also raised a "double recovery" issue relating to creditors whose claims have been accepted by both the liquidators and the Assignee.5 Based on the date of the pooled companies' insolvency being 31 March 2007, the Assignee calculated the total of these "mutual creditors" at $5,492,407.44 (being the figure for claims admitted in Mr Harman's bankruptcy). The corresponding figure for claims made in the liquidation of the pooled companies (in respect of creditors' advances made after 31 March 2007) was $4,780,297.94.
The Courts' approach to assessing compensation under s 301 of the Companies Act - legal considerations
[45] Although I am concerned with determining under the Act the amount for which the liquidators' claims should be admitted in Mr Harman's bankrupt estate, I accept that the claim should be treated as if it were a claim under s 301 of the Companies Act against Mr Harman as a former director of the pooled companies.6
[46]Section 301 of the Companies Act materially provides:
301 Power of court to require persons to repay money or return property
(1)If, in the course of the liquidation of a company, it appears to the court that a 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,—
5 Mr Harman had given personal guarantees for many of the advances to the pooled companies which are the subject of the liquidators' present claims, and the Assignee has accepted claims in Mr Harman's estate representing roughly 48 per cent of claims that have been accepted by the liquidators.
6 The approach followed by Associate Judge Sargisson in H Investments Ltd v Official Assignee, above n 4.
(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
…
[47] In Mason v Lewis the Court of Appeal made the following observations on the principles to be applied under s 301:7
[108] The general issue is the amount (if any) which [the directors of the company in liquidation] should be required to contribute towards the assets of the company (under s 301), or ...
[109] The standard approach has been to begin by looking to the deterioration in the company's financial position between the date inadequate corporate governance became evident (really the "breach" date), and the date of liquidation.
[110] Once that figure has been ascertained, New Zealand courts have seen three factors - causation, culpability, and the duration of the trading - as being distinctly relevant to the exercise of the Court's discretion
…
[118] Finally, claims of this character necessarily have to be approached in a relatively broad-brush way. The jurisdiction to order recompense is of an "equitable" character.
[48] In Robb v Sojourner the Court of Appeal held that compensation may be awarded on a restitutionary basis in circumstances where the duty that is breached is fiduciary in nature.8 However, if the breach is of a general duty of care, akin to one arising in common law rather than equity, then the less onerous orthodox or standard principles of causation apply, placing the onus throughout on the plaintiff to prove the necessary causal nexus or link or, in other words, that the claimed loss is attributable to the director's breach.9
7 Mason v Lewis [2006] 3 NZLR 225 (CA) at [108] - [110], and [118].
8 Robb v Sojourner [2008] 1 NZLR 751 (CA) at [53].
9 FXHT Fund Managers Ltd (In liquidation) v Oberholster [2010] NZCA 197 at [28]. See also
Morgenstern v Jeffreys [2014] NZCA 449 at [99].
[49] In this case, the liquidators have characterised the essential claim against Mr Harman as a reckless trading claim under s 135 of the Companies Act. They have not suggested that equitable principles of compensation should apply, with the onus of proof of causation reversed.
[50] On the question of causation, the Court of Appeal has explained that the element of causation is concerned with the link between carrying on 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. An assessment is required of how much the liabilities of the company were increased because of the illegitimate delay in the company ceasing to trade, and the Court is required to identify a point in time when the director knew that continuing to trade would be reckless. The resulting figure, although no more than a relevant consideration for the Court in the overall assessment of the director's liability, nevertheless sets a ceiling for the amount claimed against the director for reckless trading:10
[51]On the issue of culpability, the Court of Appeal in Lӧwer v Traveller said:11
The relevance 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 muddleheadedness, 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.
[52] As to the duration of the wrongful trading, in Lӧwer v Traveller the Court of Appeal described a period of three years and ten months as "lengthy", in circumstances where the company had traded for approximately six years before being placed in liquidation.12
[53] On the "broad-brush" approach taken by the Courts to compensation under s 301, the Court of Appeal noted in Mason v Lewis the "equitable" character of claims under s 301, and the necessity to approach them in a relatively broad-brush way.13 The
10 Lӧwer v Traveller [2005] 3 NZLR 479 (CA), at [79].
11 At [83].
12 Lӧwer v Traveller, above n 10, at [86].
13 Mason v Lewis, above n 7 at [118].
learned authors of Heath and Whale on Insolvency say that the "broad-brush" approach reflects the generalised nature of a discretionary power under s 301 to do what is just and fair, that is, to view the claim broadly once jurisdiction is established and the qualifying elements of causation, culpability and duration of trading are considered.14
[54] The broad-brush approach is also required in circumstances where there is uncertainty in the calculations. A conservative approach is required to the extent that the calculations of the deficiency caused are uncertain.15
The joint memorandum
[55] In the joint memorandum, counsel noted that a major impediment for the liquidators generally was Mr Harman's failure to recognise the separate corporate nature of each of the pooled companies, in circumstances where the state of the accounting records for the pooled companies was poor.
[56] Counsel advised that the liquidators' stance on the insolvency date issue, and in particular their belief in their ability to establish that the pooled companies were insolvent as early as 31 March 2006, was also affected by the judgment of Associate Judge Bell in a related case, New Zealand Lifecare Ltd v Official Assignee.16 In that case, New Zealand Lifecare Ltd (NZ Lifecare) applied under s 239 of the Act for an order reversing the decision of the Official Assignee to reject a claim it had made in Mr Harman's estate for $4,880,980.25. NZ Lifecare contended that Mr Harman had guaranteed repayment by Trading and Wake, of loans NZ Lifecare had made to those companies. Mr Harman accepted that he had guaranteed those advances, but the Assignee argued on a number of grounds that any guarantee given by Mr Harman was either not sufficiently proved or was not enforceable. Judgment in the case was given on 25 January 2018.
[57] In his judgment, Associate Judge Bell noted that Mr Harman's affairs "were complex and difficult to recall". He declined to rely on financial statements for Trading or Wake (which showed some creditors as guaranteed by Mr Harman, but did
14 Heath and Whale on Insolvency (on loose-leaf ed LexisNexis) at [23.12 (c)].
15 Lӧwer v Traveller, above n 10 at [80].
16 New Zealand Lifecare Ltd v Official Assignee [2018] NZHC 17.
not show NZ Lifecare as a guaranteed creditor). The oral guarantee given by Mr Harman was not held to be enforceable as it was not in writing.
[58] In their review of the claim in this proceeding, the liquidators took into account what they viewed as the unreliable nature of the financial records of the pooled companies, and accepted that the lack of relevant documentation would make it difficult for them to prove the full extent of the claims. In so doing, they took into account the "broad approach" to claims against directors of insolvent companies referred to in Lӧwer v Traveller, where the Court of Appeal said:17
The mere fact that the claims are not all proven can be accommodated within a broad approach to the sum that is to be paid. In this case the discount for uncertainties achieve that.
[59] Given the difficulties of proof, the liquidators' accepted that taking 31 March 2007 as the insolvency date would strike a fair balance between the parties' competing views.
[60] Counsel for the liquidators accepted the Assignee's calculation of the deterioration in the financial position of the pooled companies, in the sum of
$10,853,548.15.18 They agreed that that should be the starting point for the assessment of compensation.
[61] On the question of causation, the liquidators accepted the Assignee's position, which was essentially that Mr Harman had controlled the pooled companies. He had raised substantial sums for investment that were ultimately lost, taking in creditor advances of $11,877,529.15 on or following 31 March 2007 while the pooled companies were insolvent. While the pooled companies have received interim distributions totalling $1,023,981, Mr Harman's conduct was substantially causative of the balance of $10,853,548.15.
[62] Counsel agreed, however, that the fact the Mr Harman gave personal guarantees to a large proportion of the creditors whose debts made up the
$10,853,548.15 (i.e. the mutual creditors), operated to reduce the loss that would
17 Lӧwer v Traveller [2005] 3 NZLR 479 at [81].
18 The sum referred to in [43] of this judgment.
otherwise have been caused by him – the mutual creditors will receive a distribution in Mr Harman's personal bankruptcy by virtue of his liability as guarantor. Counsel assessed that likely distribution at $0.1268, although allowance then had to be made for further administration costs to be incurred in finalising the bankruptcy. They agreed that a realistic distribution would be in the order of $0.1223 in the dollar, suggesting an appropriate discount for the distributions to be received by the mutual creditors from Mr Harman's bankrupt estate of $671,721.43. Deducting that figure from the creditor advances made since 31 March 2007 of $11,877,529.15, less the interim distributions of $1,023,981, produced an upper limit for a compensation award of $10,181,826.72.
[63] The parties were initially apart on the extent to which Mr Harman should be regarded as having been culpable for the deterioration of $10,181,826.72 in the position of the pooled companies. In his written submissions, Mr Neil had acknowledged that Mr Harman's culpability was at the higher end of the spectrum, submitting that his position was similar to that of Mr Lӧwer in Lӧwer v Traveller (Mr Lӧwer had been the director primarily responsible for the company's decisions, and he had a serious conflict of interest, putting his own substantial extraneous interests ahead of those of the secured creditors). But he submitted that the creditors of the pooled companies had accepted significant trade risks with their investments, reflected in the relatively high lending fees and high rates of returns that the pooled companies offered. The high rates of return signalled, or ought to have signalled, a higher level of investment risk.
[64] Mr Neil had also suggested that the global financial crisis may have had some impact on the pooled companies' losses.
[65] While acknowledging that the case involved a high degree of culpability on Mr Harman's part, Mr Neil had also submitted that there was no need to serve the penal aspect of s 301 by making an award that would be punitive as well as compensatory (that would be pointless – it would penalise the creditors of Mr Harman's bankrupt estate, not Mr Harman).
[66] Having regard to those considerations, Mr Neil had originally proposed a discount to reflect those matters in the order of 30 per cent to 40 per cent, producing a net claim figure for the liquidators in the range between $7,127,278.70 and
$6,109,096.03
[67] In the joint memorandum, Mr Neil and Ms Lethbridge agreed that Mr Harman's culpability was in fact slightly higher than that of Mr Lӧwer in Lӧwer v Traveller. Mr Neil accepted that, as in Lӧwer v Traveller, a punitive award should follow in cases where the Court has found that there was a high degree of culpability.
[68] Counsel agreed to recommend a discount of 30 per cent to the $10,181,826.72, to reflect the following factors:
(i)the uncertainties in the calculations; and
(ii)the general investment risk that the creditors took.
[69] Counsel agreed that no further discount was required to reflect the impact of the global financial crisis, or the duration of the trading.
[70] Applying the recommended 30 per cent discount to the $10,181,826.72 referred to in paragraph [68] above produced counsel's recommended claim admission figure of $7,127,278.70.
[71] The Assignee's acceptance that the discount should be at the lower end of the 30 per cent to 40 per cent range proposed in Mr Neil's original submissions was explained in the joint memorandum as follows. First, the Assignee accepted that there was insufficient evidence in the affidavits from which the Court could properly find that the global financial crisis had impacted on the losses suffered by the creditors: it alone could not justify any discount to the claimed figure. Second, the Assignee and the liquidators agreed that a 30 per cent discount would appropriately recognise the uncertainties in the calculations, and the risk that the creditors took investing in the pooled companies. It would also better reflect the slightly increased culpability of Mr Harman compared to that of Mr Lӧwer in Lӧwer v Traveller.
[72]Counsel advised that the costs of the proceeding should lie where they fall.
The issues to be decided
[73]The following issues fall to be decided:
(1)Does the evidence show that the pooled companies became insolvent before 31 March 2007, or should that date (now accepted by the liquidators) be accepted as the insolvency date?
(2)By what amount did the financial positions of the pooled companies deteriorate between their insolvency dates and their liquidation dates?
(3)What proportion of the deterioration was caused by reckless trading (or other breaches of the Companies Act sections relied upon by the liquidators) by Mr Harman?
(4)What proportion of the deterioration caused by Mr Harman's breaches appropriately reflects his culpability and the duration of the insolvent trading?
Discussion and conclusions
Issue One – Does the evidence show that the pooled companies became insolvent before 31 March 2007, or should that date (now accepted by the liquidators) be accepted as the insolvency date?
[74] Both parties accepted that the date of breach of his duties by Mr Harman in respect of each claim should be regarded as the date of insolvency: it was not submitted by either party that Mr Harman breached his duties to the pooled companies before they became insolvent. Nor did either party suggest that Mr Harman might not have appreciated that it would be reckless to continue trading the pooled companies after the date (whatever it might be) they became insolvent. In those circumstances, the starting point for assessing Mr Harman's liability to repay the pooled companies must begin with a determination of the insolvency date or dates.
[75] Section 4 of the Companies Act sets out a solvency test which addresses both the company's ability to pay its debts as they fall due, and the extent by which its assets exceed (or fall short of) its liabilities. Section 4 materially provides:
4 Meaning of solvency test
(1)For the purposes of this Act, a company satisfies the solvency test if—
(a)the company is able to pay its debts as they become due in the normal course of business; and
(b)the value of the company's assets is greater than the value of its liabilities, including contingent liabilities.
(2)Without limiting sections 52 and 55(3), in determining for the purposes of this Act (other than sections 221 and 222 which relate to amalgamations) whether the value of a company's assets is greater than the value of its liabilities, including contingent liabilities, the directors—
(a)must have regard to—
(i)the most recent financial statements of the company that are prepared under this Act or any other enactment (if any); and
(ia) the accounting records of the company; and
(ii)all other circumstances that the directors know or ought to know affect, or may affect, the value of the company's assets and the value of the company's liabilities, including its contingent liabilities:
(b)may rely on valuations of assets or estimates of liabilities that are reasonable in the circumstances.
…
(4)In determining, for the purposes of this section, the value of a contingent liability, account may be taken of—
(a)the likelihood of the contingency occurring; and
(b)any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability.
[76] In his original submissions, Mr Neil noted that the liquidators did not provide any evidence of the balance sheets for the pooled companies as at 31 March 2006. Nor did the liquidators provide particulars of assets and liabilities, including contingent liabilities, as at 31 March 2006, from which an assessment of the balance sheet
position could be made. There was apparently no attempt to reconstruct the balance sheets as at 31 March 2006. It is true that each loan to a pooled company raised a corresponding asset in the balance sheet of that company, but details of where the loans were ultimately invested would have been required to assess their corresponding values as assets on the balance sheets (face value or otherwise).
[77] The liquidators did provide asset details in pro-forma balance sheets as at 18 June 2008,19 but Mr Graham said in his affidavit that the stated values were "completely inaccurate and over-optimistic". The companies' positions may have been quite different back on 31 March 2006. Reported assets may have had a realisable value at the earlier date that would have been sufficient to render the pooled companies solvent on a balance sheet test.
[78] Further, while Mr Graham referred in his first affidavit to Staples Rodway having prepared financial statements for the year ended 31 March 2006, and draft financial statements for the year ended 31 March 2007, the liquidators did not put those financial statements before the Court.
[79] In those circumstances, Mr Neil submitted that the liquidators had failed to put forward sufficient for the Court to conclude that the pooled companies were insolvent on a balance sheet basis as at 31 March 2006.
[80] The Assignee also submitted that the liquidators had failed to show that the pooled companies were insolvent on a cash flow basis at 31 March 2006. In Mr Graham's first affidavit, he said:
Given that the companies had no independent cash flow at all material times and were dependent on securing new investment funds to repay existing liabilities such as interest or to continue to fund the investments, it is arguable that the companies (as a group) were always insolvent on a cashflow basis.
[81] The Assignee took the view that the liquidators' evidence was insufficient to discharge their onus of establishing that the pooled companies were cashflow insolvent from 31 March 2006. First, there is no evidence identifying debts legally due by the pooled companies as at 31 March 2006. A distribution schedule produced by the
19 Produced by Mr Graham in his second affidavit.
liquidators described advances made to the pooled companies prior to 31 March 2006, and described the advances as either "on demand", "rolling", or falling due on a specified date (being a date after 31 March 2007), but there was nothing to show whether the pooled companies and the relevant creditors may have made a forbearance agreement.
[82] The Assignee also submitted that the liquidators' failure to put before the Court any details of the asset position of the pooled companies as at 31 March 2006 precludes a finding of insolvency as at that date on the cashflow test. Details of assets and liabilities would have been necessary to assess the ability of the pooled companies to pay any legally due debts as at 31 March 2006 from cash assets or, alternatively, by converting any non-cash assets.
[83] For those reasons, the Assignee contended that the date of insolvency of the pooled companies should be taken as 31 March 2007.
[84] The liquidators elected not to contest those submissions, and on the state of the evidence produced I consider that they were correct in coming to that view. Absent any evidence about assets (including liquid assets that might have been realised to meet current liabilities), or long term credit lines the pooled companies might have had available as at 31 March 2006, I do not think it can safely be said that the pooled companies or any of them were insolvent as at 31 March 2006. For example, I do not think I can disregard Mr Harman's evidence (in his affidavit sworn on 26 September 2008 in the pooling application) that in 2005 he had a very successful year with currency trading activities conducted through Trading, making revenue of approximately $5 million. While he said that in subsequent years Trading suffered considerable losses, I do not think the Court can assume that none of the benefits of the substantial 2005 currency trading successes would have been (positively) reflected in Trading's balance sheet as at 31 March 2006.
[85] There is insufficient evidence to determine that the pooled companies became insolvent at any particular time in the course of the March 2007 financial year, but Mr Harman's evidence (read with Mr Graham's evidence to the effect that Mr Harman began "robbing Peter to pay Paul", using new investment money to meet the pooled
companies' immediate liabilities) satisfies me that the pooled companies were probably insolvent not later than 31 March 2007. In those circumstances I accept counsel's joint recommendation that the pooled companies should be regarded as having first become insolvent on 31 March 2007.
Issue Two – By what amount did the financial positions of the pooled companies deteriorate between their insolvency dates and their liquidation dates?
[86]Counsel submit that the appropriate amount to assess under this head is
$10,853,548.15. That figure represents the full amount of the loans made after 31 March 2007, less the distributions made in reduction of those advances.
[87] The Assignee calculated the combined balance sheets position of the pooled companies at the date of their liquidations at ($23,822,553.96), representing the difference (deficit) between assets of $2,247,545.44 and accepted liabilities of
$26,070,099.40.
[88] Given the lack of evidence of the financial position of the pooled companies when they became insolvent on 31 March 2007, it is not an easy task to assess the extent of the deterioration in their position after that date.
[89] A starting point is that there is evidence that the liabilities of the pooled companies were likely in the vicinity of $14,192,570.25 as at 31 March 2007. That figure represents the total of the advances made to the pooled companies prior to 31 March 2007 that have been admitted by the liquidators. There is no evidence before the Court of what additional liabilities there may have been as at 31 March 2007.
[90] The higher the liabilities may have been at 31 March 2007, the lower the net assets figure would have been at that date. And the lower the net assets position was at 31 March 2007, the lower the deterioration in the financial positions of the pooled companies would have been between then and the date of the liquidations.
[91] It seems likely that there would have been at least some additional liabilities (i.e. additional to the debts owed to those who had made advances to the pooled companies), if only for matters such as office expenses, insurances and the like. But
it seems unlikely that the additional liabilities of the pooled companies as at 31 March 2007 would have been significant in the overall picture (measured against debts of
$14,192,570.25 owed to those who had made advances to the pooled companies). I think the best the Court can do in those circumstances is conclude that the liabilities of the pooled companies as at 31 March 2007 must have been in excess of the
$14,192,570.25 figure adopted by the Assignee, but maybe not substantially so.
[92] Similarly, there is very little reliable evidence on which the Court can assess the asset positions of the pooled companies as at 31 March 2007. Pro forma balance sheets were produced as at 18 June 2008, but Mr Graham's evidence was that the asset figures included in these balance sheets turned out to be completely inaccurate and overly optimistic. He said that Mr Harman and the other investors appear to have had little regard for the actual values of the investments made by the pooled companies – the financial statements of the pooled companies largely continued to value assets and investments at cost or at the face values of the advances made.
[93] Mr Graham's evidence was that that practice did not meet the relevant provision of the New Zealand Society of Accountants' Reporting Standard 4, "Accounting for Inventories", under which the cost of an asset was required to be written down when its cost exceeded its net realisable value.
[94] As for the net realisable values, the only recovery of any consequence from the investments made by the pooled companies appears to have been the $641,000 recovered in the liquidation of Escalator.
[95] Mr Graham's evidence was that at all material times Escalator, Versamount, Insignia, Cosignia and Obsidium operated at a loss, and that the advances to them were often informal, without security or provision for interest. He described the investments in these companies as speculative, and in the case of two of the companies, he assessed their prospects of future success as non-existent. Mr Graham referred by way of example to Ventures' advances of $5,898,000 to Versamount. Versamount had no underlying assets of any value, and the relevant patent was not
owned by it but by a third party trust associated with the Harman family. He considered that Versamount had no valuable intellectual property rights.20
[96] Mr Neil acknowledged that the assets of the pooled companies probably did have a realisable value as at 31 March 2007. I think that must be so, and it may be that the value would have been somewhat higher than the figure(s) as at the liquidation dates. In the end, in arriving at his "net deterioration" figure Mr Neil proceeded on the assumption that the distributions made by the liquidators would also have reflected assets in existence and owned by the pooled companies as at 31 March 2007.
[97] I think there are difficulties with that assumption. One of them is that I do not think I can assume that the $3 million received from the other directors of the pooled companies in settlement of the claims against them (which appears to have provided the bulk of the funds from which the liquidators made distributions), was a contingent asset of the pooled companies as at 31 March 2007. (If the parties accept that Mr Harman was not in breach of his duties to the pooled companies as at that date, it is not clear what basis there is for the Court to infer that the other directors were then in breach of their duties).
[98] So it appears that the liabilities of the pooled companies would probably have been greater than the $14,192,570.25 adopted by Mr Neil, while the assets could well have been lower than his figure of $1,601,200.97. It is impossible to be precise, but my impression on such limited evidence as is available, is that the deficit between the financial positions of the pooled companies as at 31 March 2007 and as at the liquidation dates, might have been higher than the $10,853,548.15 proposed by Mr Neil and adopted in the joint memorandum. However, I think the onus was on the liquidators to prove that that was the case (if it was), and they have not done that. I therefore accept the figure of $10,853,548.15 proposed in the joint memorandum as the amount by which the financial position of the pooled companies deteriorated between their insolvency dates and their liquidation dates. In accordance with the authorities,21 that figure, reduced by any sum the Court may consider necessary to
20 In his September 2008 affidavit, Mr Harman acknowledged that Escalator, Insignia and Versamount had all operated at a loss since the 1990s, but his belief was that those companies held intellectual property that would grow and that could be sold overseas.
21 Lӧwer v Traveller, above n 10, at [79].
reflect the extent to which Mr Harman may not have caused the deterioration in the financial positions of the pooled companies, will be the starting point in assessing the extent to which Mr Harman should compensate the pooled companies. The extent of any such reduction is considered under Issue (3) below.
Issue (3) – What proportion of the deterioration was caused by reckless trading (or other breaches of the Companies Act sections relied upon by the liquidators) by Mr Harman?
[99] First, I accept counsel's view that there is insufficient evidence for the Court to conclude that the claims made by the liquidators under ss 131(1), 133, 136 or 137 would produce any higher determination than the reckless trading claim under s 135, which the liquidators identified as their principal claim. I will proceed on that basis.
[100] Counsel agree that the net deterioration of $10,853,548.15 should be reduced by $671,721.43 to reflect the notional distribution the mutual creditors of the pooled companies and Mr Harman will receive through the liquidators' claim in the bankruptcy of Mr Harman.
[101] I think that must be correct. If the liquidators' claim were admitted in Mr Harman's bankruptcy in the sum of $10,853,548.15, the Assignee reckons that, allowing for further administration costs likely to be incurred in finalising the bankruptcy, it would be possible to make a distribution to all of Mr Harman's creditors in the sum of $0.1223 in the dollar. The mutual claims admitted in Mr Harman's bankruptcy total $5,492,407.44, and if a distribution at the rate of $0.1223 in the dollar is made to those mutual creditors, they will receive total distributions in Mr Harman's bankrupt state of $671,721.43. The creditors' claims against the pooled companies would necessarily then be reduced by the same sum, $671,721.43, effectively improving the net assets position of the pooled companies by the same amount. If that is correct, the $671,721.43 in distributions could not be part of any net deterioration figure caused by breaches of duty on Mr Harman's part. I accept counsel's submission that the "net deterioration" figure should be reduced accordingly, from $10,853,548.15 to $10,181,826.72.
[102] Is there any other basis on which the "net deterioration" figure should be reduced on account of factors other than reckless trading on the part of Mr Harman? First, there can be no doubt that Mr Harman was the person primarily responsible for the deterioration. In his September 2008 affidavit he said:
[22]Over the last 6 to 7 years, I have effectively controlled [FIL, Trading, Ventures, Wake, and Paeroa]. While there were other directors, including my father, I was responsible for virtually all investment decisions. … I did not consult with the other directors. Given my position in the companies I considered I could make these decisions on my own. …
[23]I largely operated the companies and their subsidiaries effectively as one group and on an informal basis. I was seeking to grow the asset base of the group as a whole, rather than considering the interests of one particular company. For example, if funding was needed by one company, I would simply transfer funds from another company as the need arose.
[103] Mr Harman said that from about 2003 to 2004 friends and associates began to invest with him, predominantly through Paeroa. He said that he treated all the money coming in as "effectively coming into one pot". He said that the arrangements were informal, and that it was generally he who made the decision as to where the investment funds would physically be directed. There were no formal loan documents for the inter-company advances.
[104] Mr Harman acknowledged that in the period between 2006 and April 2008 investors continued to invest, notwithstanding that liquidity was tight because Trading was suffering currency trading losses. He said that, in retrospect, he did not fully appreciate the significant levels of debt, and that he had assumed that the companies still had significant assets.
[105] In his affidavit sworn on 2 November 2009 in the pooling application, Mr Graham said that Mr Harman had acknowledged that investors' funds continued to be used to fund the companies' investments, and that new investor funds were required to fund interest payments and repayments of principal to earlier investors. And in his affidavit of 13 June 2017, filed in this proceeding, Mr Graham noted Mr Harman's failure to respect the separate identifies of the companies, and referred to evidence that repayments to investors could only have been sourced from new advances. He noted
that there were no directors' meetings, and that in some cases where loans had been received from third parties, interest was not mentioned. Apart from those loans personally guaranteed by Mr Harman, investors had no security.
[106] Mr Graham also referred to certain representations made by Mr Harman to investors as to the nature of their investments (for example, reference in correspondence with one investor to "proposed investments", when no such investments were specifically made on behalf of the investor). Mr Graham also said that Mr Harman made reference to "balance invested in liquid assets", when the companies had no "liquid assets" as such, other than new investor money being invested into the group.
[107] Mr Graham also described the terms on which particular investors advanced funds to Mr Harman or his companies as not being consistent. For example, interest rates offered by Mr Harman varied between investors, and he appeared to have offered personal guarantees to some investors as pressure was placed on him, or alternatively purported to pledge particular assets in the companies in favour of particular creditors. He also procured the companies to actually pay interest and sometimes repay principal, to particular creditors.
[108] Mr Graham also said that Mr Harman "generally promised higher than normal rates of interest to the parties that invested with him and his companies".
[109] I am satisfied that the pooled companies should have ceased trading from 31 March 2007 at latest, and Mr Harman should have been aware of that fact. It is apparent that Mr Harman was personally responsible for all of the material decisions of the pooled companies made after 31 March 2007, and that those decisions were the greatest single cause of the deterioration in the financial positions of the pooled companies over the period between 31 March 2007 and the dates of the pooled companies' liquidations.
[110] I do not consider that the liquidators' recovery of $3 million in the settlement with Mr Harman's co-directors calls for any deduction from the figure of
$10,181,826.72 referred to above. That $3 million is already reflected (as part of the
assets at the dates of the liquidations) in the net deterioration figure of $10,853,548.15, and while the other directors must have contributed to the overall losses,22 I do not have sufficient before me to determine whether any breaches of duty on their part contributed to the net deterioration in the financial positions of the pooled companies to an extent that is not already reflected in the amount paid by them to settle the claims against them.
[111] But I think the uncertainty over that issue, the uncertainties over the correct assets and liabilities of the pooled companies as at 31 March 2007, and the possibility that there may be other factors (eg market factors contributing to the failures of Escalator, Insignia, Versamount, Cosignia and Obsidium) that should be brought to account in considering the causation issue, are such that some further reduction is necessary.
[112] In Lӧwer v Traveller, William Young J reduced his "net determination" figure by a full third (from $18 million to $12 million) to reflect the uncertainties in the calculations, but that was a case where the reckless trading extended over a period of nearly four years, in a case involving a shipping operation carried out in a number of different jurisdictions, and with some adverse market changes adversely affecting the company's position.23 In my view the scope for uncertainty affecting the assessment was far greater in Lӧwer v Traveller than it is in the present case, and the reduction for uncertainties should be significantly less than William Young J's 33 per cent. In the end, the right figure can only be a matter of impression, and "broad brush strokes" are required. Taking the cautious approach required by the authorities I assess the appropriate deduction for uncertainties to be $1 million. On that basis, the proportion of the deterioration caused by Mr Harman's breaches of duty is $9,181,826.72.
22 Even if only through apparently inadequate oversight of Mr Harman's activities.
23 For example, the widespread "cross-trading" that developed during 1997 and 1998, that marked the end of the longstanding dedicated trans-Tasman ship operations (Lӧwer v Traveller, above n 10, at [9]).
Issue (4) – What proportion of the deterioration caused by Mr Harman's breaches appropriately reflects his culpability and the duration of the insolvent trading?
[113] Mr Neil originally submitted that the proportion should be 60 per cent. The liquidators took the view that the percentage should be 70 per cent. In the joint memorandum, the Assignee accepted the higher percentage.
[114] The Assignee and the liquidators submitted that a 30 per cent discount would appropriately recognise the uncertainties in the calculations, the risk that the creditors took investing in the pooled companies, and what they saw as the slightly increased culpability of Mr Harman when compared to that of Mr Lӧwer in Lӧwer v Traveller.
[115]The net figure for which judgment was given against Mr Lӧwer was
$8.4 million, and the judgment was upheld on both liability and quantum in the Court of Appeal. However, the Court of Appeal did note that it was somewhat difficult to see the justification for the discount the trial Judge allowed to reflect ordinary trade risks.24
[116] I have already made a reduction to reflect the uncertainties in the calculations, and I am not sure that the factors which persuaded William Young J to take into account ordinary trade risks should be applied, at least to the same extent, in this case. In Lӧwer v Traveller, William Young J considered that suppliers and others dealing with the company would have factored a risk of loss into the prices charged for their goods and services, and that was a factor that should be reflected in a lower assessment of Mr Lӧwer's culpability than would otherwise have been the case. There is insufficient evidence for me to say that the same considerations apply here, where the majority of the investors appear to have been friends or associates of Mr Harman or his family members. Certainly they put their money into what they thought would be relatively high return investments, and thus may be considered to have expected there would be a higher element of risk, but it is not established how many of them were professional investors, and how many were making one-off investments and would not necessarily have factored in any risk of loss.
24 At [82].
[117] That said, I agree that Mr Harman's level of culpability should be assessed at the higher end of the scale, and I consider that the amount determined should reflect an element of deterrence to other directors. I come to that view for the reasons set out in my discussion and conclusions on Issue (3) above. As for the precise level, I think there are some relevant differences between the position of Mr Harman in this case and that of Mr Lӧwer in Lӧwer v Traveller. In Lӧwer v Traveller the proved insolvent trading was carried on for a considerably longer period, and there was evidence that Mr Lӧwer had a serious conflict of interest. Mr Harman's period of trading while the pooled companies were insolvent was approximately 15 months, and the extent to which he might have put his own (conflicting) personal interests before those of the pooled companies is not as clear as it was in Lӧwer v Traveller. Against those considerations, I have not been persuaded that the "ordinary trade risks" factor which William Young J took into account in assessing his "culpability discount" at 30 per cent is appropriate in this case, and the decision needs to reflect a substantial deterrent element. While I come to the figure for somewhat different reasons, I think counsel's culpability/duration assessment of 70 per cent is appropriate.
[118] The result is that Mr Harman's responsibility for the net deterioration in the pooled companies' financial positions between 31 March 2007 and the dates for their liquidations will be assessed at $6,427,000, representing approximately 70 per cent of the $9,181,826.72 which I have assessed as the amount of the deteriorations in the pooled companies' financial positions caused by Mr Harman's breaches of duty over the relevant period.
Result
[119] For the foregoing reasons, I determine (pursuant to s 252 of the Act) the amount of the claim made jointly by the pooled companies and/or the liquidators in Mr Harman's bankrupt estate, at $6,427,000. In accordance with counsel's submissions, I make no order for costs.
Associate Judge Smith
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