Richard Geewiz Gee Consultants Limited (in liquidation) v Gee

[2013] NZHC 620

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-2456 [2013] NZHC 620

BETWEEN  RICHARD GEEWIZ GEE CONSULTANTS LIMITED (IN LIQUIDATION)

First Plaintiff

ANDHENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES

Second Plaintiffs

ANDRICHARD PETER GEE First Defendant

ANDJUDITH GEE Second Defendant

Hearing:         12 November 2012

Counsel:         J R Sumner for Plaintiffs

P V Shackleton for Defendants

Judgment:      27 March 2013

JUDGMENT OF KATZ J

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment with a delivery time of 4.30 p.m. on 27 March 2013.

Solicitors:           Ford Sumner, Wellington –  [email protected]

Simpson Grierson, Auckland –  [email protected]

RICHARD GEEWIZ GEE CONSULTANTS LIMITED (IN LIQUIDATION) V GEE HC AK CIV-2012-404-

2456 [27 March 2013]

Introduction

[1]      Mr Richard Gee was the sole director of Richard Geewiz Gee Consultants Limited (“Gee Consultants”).  Mr Gee and his wife, Judith Gee, were each 50 per cent  shareholders  in  Gee  Consultants,  which  was  placed  into  liquidation  on  31

October 2008.

[2]      Henry Levin and Vivien Madsen-Ries are the liquidators of Gee Consultants. The liquidators, together with the company, seek summary judgment:

(a)      Against Mr Gee for $34,591 in respect of salary credited to Mr Gee for the year ending 31 March 2007 (“2007 salary”) which the liquidators allege was unauthorised and not fair to Gee Consultants.

(b)Against Mr and Mrs Gee for an alleged overdrawn current account in the sum of $22,487.

(c)       Against Mr Gee for $90,342.58 in relation to alleged breaches of

director’s duties under ss 131 and 135 to 137 of the Companies Act

1993 (“Act”).  This sum includes liquidators’ fees and disbursements of $36,308.83 and IRD penalties and interest of $16,990.47.

[3]      Mr and Mrs Gee oppose the liquidators’ application for summary judgment.

They say that they have arguable defences to the liquidators’ claims on the basis that:

(a)      Mr Gee complied with s 161 of the Act when authorising payment of his 2007 salary.  In any event, the payment of his 2007 salary was fair.

(b)They do not have an overdrawn current account.   Alternatively, if there is an overdrawn current account, Mrs Gee is not liable for that debt.

(c)      Mr Gee did not breach his duties as a director under ss 131, 135, 136 and 137 of the Act.

[4]      I will address each issue in turn.

Legal principles - summary judgment

[5]      The principles relating to summary judgment are well established and were summarised in Jowada Holdings Limited v Cullen Investments Limited and Pacific Retail Group where the Court of Appeal stated: 1

In essence, the Court must be persuaded that on the material before the Court the plaintiff has established the necessary facts and legal basis for its claim and that there is no reasonably arguable defence available to the defendant.

[6]      As to how far disputes of fact may preclude summary judgment the Court said:2

…  where,  despite  differences  on  factual  matters,  the  lack  of  a  tenable defence to a cause of action is plain on the material before the Court, and the Court is sure on that point, summary judgment will normally be entered.

[7]      In Kipling v Van Kan3  the Court of Appeal recently endorsed its own earlier summary in Krukziener v Hanover Finance Limited of the principles relevant to determining whether a matter was suitable for summary judgment:4

The principles are well settled.   The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappel [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated; MacLean v Stewart (1997) 11 PRNZ 66 (CA).  The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents.   But it need not accept uncritically evidence that is inherently lacking in credibility, as for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponents,  or  is  inherently  improbable:  Eng  Mee Yong  v  Letchumanam [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence was a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Limited v Patel (1987) 1 PRNZ 84 (CA).

1      Jowada Holdings Limited v Cullen Investments Limited and Pacific Retail Group CA248/02, 5

June 2003 at [28].

2 At [29].

3      Kipling v Van Kan [2012] NZCA 163 at [29].

4      Krukziener v Hanover Finance Limited [2008] NZCA 187 at [26].

Claim against Mr Gee for reimbursement of 2007 salary

Directors’ remuneration – legal requirements

[8]      The directors of a company may authorise directors’ remuneration.   The directors must be satisfied that any decision is fair to the company and certify accordingly. Any decision must also be entered in the company’s interests’ register.5

[9]      If the statutory requirements are not complied with, or if reasonable grounds did not exist for the directors’ opinion, the company may recover the benefit or its value.    In  such  circumstances  the  director  to  whom  the  payment  is  made  is personally liable to the company for the amount of the payment, except to the extent to which he or she proves that the payment was fair to the company at the time it was made.6

Was the 2007 salary unauthorised?

[10]     For the year ending 31 March 2007 Mr Gee was paid a salary of $34,591. The liquidators seek repayment of this salary on the basis that it was not properly certified by the Board.  However, Mr Gee has put in evidence a copy of a resolution (incorporating  a  directors’  certificate)  dated  1  February  2008  authorising  the payment of his 2007 salary.   He also annexed the relevant extract from Gee Consultant’s interests’ register.   Mr Gee deposed that, as far as he is aware, the resolution was included in documents provided to the liquidators in both November

2008  and  February 2010.    Mr  Gee  also  believes  the  register  would  have  been included in documents provided to the liquidators by his accountant.

[11]     The  liquidators  acknowledged  that,  prior  to  the  swearing  of  Mr  Gee’s affidavit on 6 July 2012 (which annexed the relevant director’s certificate), they were in receipt of directors’ certificates for the year ending 31 March 2007, 31 March

2008 and the six months to 30 September 2008, together with an unsigned fair value

certificate for the period ending 31 March 2007.   Their evidence was that interest

5      Companies Act 1993, s 161(1) and (4).

6      Ibid, s 161(5).

register certificates were first submitted as exhibits to Mr Gee’s affidavit. Nevertheless, the liquidators questioned the validity of the documents relied on by Mr Gee (in particular the fair value and interest register certificates).

[12]     I am effectively being asked to find, in the context of a summary judgment application, that Mr Gee (or someone associated with him) has falsified documents. There is no direct evidence to justify such a finding and it is not appropriate for me to draw such an inference in the context of a summary judgment claim.   Mr Gee strenuously disputes the assertion.   The relevant evidence will need to be tested through cross-examination at trial.  Accordingly, I assume for present purposes that payment of Mr Gee’s 2007 salary was authorised.

Was the 2007 salary unfair to Gee Consultants?

[13]     In the alternative, the liquidators submitted that reasonable grounds did not exist for Mr Gee’s opinion at the relevant time (or indeed now) that the salary was fair to Gee Consultants.   The liquidators relied on Kiwibilt Engineering Ltd (In Liquidation) v Pavlovich:7

However, the solvency of the company must be relevant in deciding whether to continue to keep the company going and draw wages … Is it fair to the company (including its creditors) to draw wages to keep a company going if the prospects are just greater losses?  I would say not …

[14]     The liquidators submitted that Mr Gee’s salary of $34,591 for the year ending

31 March 2007 was not fair to the company.  Nor was it received in good faith as Mr Gee did not have reasonable grounds for believing that  Gee Consultants would satisfy the solvency test at the relevant time.  The liquidators noted that Mr Gee had sole responsibility for managing the company’s business and finances and would therefore have been aware at the relevant time that Gee Consultants failed to satisfy the solvency test.   Indeed his accountant had drawn the company’s apparent insolvency to his attention.

[15]     Mr Gee submitted on the other hand that payment of the 2007 salary was fair to Gee Consultants, including its creditors.  In particular he submitted that:

7      Kiwibilt Engineering Ltd (In Liquidation) v Pavlovich [2004] DCR 193 at [64].

(a)      Sales for the year ending 31 March 2007 were $235,094. This was up from $211,957 in 2006.   At the same time, there had been a small reduction in total expenses from $212,880 to $207,495.  Net income before tax had improved slightly.

(b)The 2007 salary was only 14.7 per cent of total sales.  This was more than fair given the fact that all the company’s sales (and accordingly all funds subsequently paid to creditors) were generated by Mr Gee providing consultancy services and training seminars.   In providing these services, Mr Gee relied on his 40  years’ experience and he worked 70-80 hours a week including weekends to satisfy client demands.

(c)      The 2007 salary was less than that previously approved by the Court in another case, in which the Court approved a salary of $52,000 to a director in circumstances where the company was insolvent and the director was largely winding down the company.8

(d)Mr Gee did not take the 2007 salary in  addition to drawings  (as suggested by the liquidators).  The 2007 salary was shown as a credit against drawings in calculating the shareholders’ current account in the financial statements for the year ended 31 March 2007.

(e)      The salary paid to Mr Gee was substantially below advice Mr Gee had received as to what he could command in the open market.   Mr Livingstone, Mr Gee’s accountant, advised Mr Gee that he could earn a salary of $100,000-$150,000.   This was consistent with figures in the Hayes Salary Survey for 2012 which recorded a possible salary of

$150,000-$200,000 for equivalent work.

(f)      Leaving aside the positive current account balance of $16,508 which was a debt payable by the company to Mr and Mrs Gee (and which

they controlled when or if it was to be repaid by the company), the

8      National Trade Manuals (In Liquidation) v Watson (2006) 9 NZCLC 264,163.

company’s  liabilities  exceeded  its  assets  by only $1,343  as  at  31

March 2007.

(g)The letter from Mr Gee’s accountant, relied on by the liquidators, needs to be read in this context.   In addition, the letter records that “this note is produced automatically when the company books show more liabilities than assets.  It may be that despite the financial result the company is not insolvent for a variety of reasons”.

(h)Given the increasing sales, continued reduction in expenses and an improving balance sheet position, there was no credible evidence to suggest the company would not be able to pay its creditors going forward as at 31 March 2007.   Mr Gee was in fact confident they would be paid.

[16]     In my view Mr Gee has established that it is at least arguable that his 2007 salary was fair to Gee Consultants, given the various matters outlined above.  The issue will need to be tested fully at trial.   Accordingly the liquidator’s claim for summary judgment in relation to this issue must fail.

Overdrawn current account

[17]     An  overdrawn  shareholders’ current  account  is  a  debt  repayable  to  the company on demand.  The liquidators allege that, as at the date of liquidation, Mr and Mrs Gee’s current account balance was $22,487.  Demand has been made for that sum, but no payment has been made.

[18]     The liquidators submitted that they and the Court are entitled to rely on accounts prepared under the direction of Mr Gee as director of the company, particularly where those accounts had been approved and confirmed as correct by the director.9     Those accounts show drawings between 1 April 2007 and 30 September

2008 of $22,487.  The liquidators submitted that, absent any proper explanation for

9      Re  Samarang Developments Ltd  (In  Liquidation) HC Christchurch CIV-2003-409-2094, 30

September 2004.

those drawings or a valid resolution classifying the drawings in some other way, such as distributions or salary, drawings remain as advances repayable upon demand.

[19]     No accounts were completed for the year ending 31 March 2008.  Mr Gee’s evidence was that the company’s accounts were usually completed in November of each year.  The only reason accounts were not prepared for the year ended 31 March

2008 was that Gee Consultants was liquidated.  However, records were kept using

the company’s accounting software.

[20]     Mr Gee’s evidence was that the bankbook cash flow statements showed that sales for the year ending 31 March 2008 had increased from $235,094 in 2007 to approximately $246,501 in 2008.  Leaving aside drawings, total expenses had fallen from $161,335 in 2007 to $147,634 in 2008.

[21]     Mr Gee’s minimum salary for the year ending 31 March 2008 and 31 March

2009 was set in a resolution (incorrectly) dated 1 February 2007 (executed on or about 1 February 2008). At this time, negotiations with the IRD were on-going.

[22]     On 30 August 2008, the company resolved that Mr Gee’s actual salary for the year ending 31 March 2008 would be $57,532.  Mr Gee certified that the payment was fair to the company.   The salary of $57,532 was entered in the company’s interests’ register.  Subsequently, on 27 October 2008, Gee Consultants resolved that Mr Gee’s salary for the period to 30 September 2008 would be $31,684.  The salary of $31,684 was also entered in the company’s interests’ register.   The company’s resolutions recorded that all drawings taken by Mr Gee would be in part-payment of his salary/remuneration.

[23]     The liquidators submitted that, as at the date of entry on the interests’ register and resolutions, there could not be reasonable grounds for the alleged opinion that the payments were fair to the company.  It was further submitted that Mr and Mrs Gee have failed to provide satisfactory evidence which supports their contention that the status of the drawings was salary.

[24]     In calculating the current account debt, it appears that the liquidators:

(a)       Started with the positive current account balance of $16,508 as at 31

March 2007.

(b)      Deducted “Drawings” of $86,264 and “Donations and School Fees”

of $400.

(c)       Allowed for salary to Mrs Gee of $30,511, funds introduced to the

company of $15,549, “Donations” of $300 and “House Charges” of

$1,309.

(d)      Did not allow for any salary to Mr Gee.

[25]     Mr and Mrs Gee accepted that the starting point, being the positive current account balance of $16,508, was correct.  However, Mr and Mrs Gee submitted that all “Drawings” identified by the liquidators from the year ending 31 March 2007 were in part-payment of Mr Gee’s director’s salary/remuneration being $57,532 for the year ending 31 March 2008 and $31,684 for the period ending 30 September

2008.   Mr and Mrs Gee submitted that the liquidators had failed to take this salary/remuneration  into  account  when  calculating  the  current  account  balance. When taken into account, there is no overdrawn shareholder’s current account.

[26]     Mr and Mrs Gee further submitted that the salary/remuneration paid to Mr Gee from 31 March 2007 was fair.  Sales for the year ending 31 March 2008 had increased from $235,094 in 2007 to approximately $246,501.   Mr Gee’s evidence was that his salary was only 25.5 per cent of these total sales.   His salary for the period ending 30 September 2008 was only 33 per cent of total sales of $93,559.

[27]   It was noted that the salary for the year ending 31 March 2008 was approximately the same as the salary approved  by the Court in  National Trade Manuals of $52,000.   The salary for the period ending 30 September 2008 was below the approved salary.  All revenue for this period (and accordingly funds paid to creditors) was generated by Mr Gee’s efforts.   It was submitted that Mr Gee’s salary for both periods was below what he could earn on the open market for the same services.

[28]     In my view Mr and Mrs Gee have established, based on the evidence before the Court, that they have an arguable defence that there is no outstanding current account balance.   The evidence in relation to this issue will have to be properly tested through cross-examination at trial before a final view can be reached. Accordingly this limb of the summary judgment application must also fail.

Directors’ duties

Duties allegedly breached

[29]     The liquidators allege that Mr Gee has breached his following duties as a director:

(a)      Section  131: The  duty  to  act  in  good  faith  and  in  what  Mr  Gee believed to be the best interests of Gee Consultants;

(b)Section 135: The duty not to cause or allow Gee Consultants’ business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

(c)      Section  136:  The  duty  not  to  incur  an  obligation  unless  Mr  Gee believed  on  reasonable  grounds  at  the  time  that  Gee  Consultants would be able to perform the obligation when required.

(d)Section 137: The duty to exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by him or her.

Compensation

[30]     The liquidators seek recovery of the loss suffered to Gee Consultants as a

result  of  Mr  Gee’s  alleged  breaches  of  directors’ duties,  being  $57,033.75  (the

amount owing to Gee Consultants’ creditors, primarily IRD) and $36,308.83 (the costs of liquidation).  Mr Gee on the other hand submitted that, if the Court was to find that he had breached his duties as director, any compensation he should be required to pay should be minimal.

[31]     Remedies for breaches of directors’ duties are set out in s 301 of the Act. The approach  to  relief  under  s  301  has  been  confirmed  by the  Court  of Appeal  in Mason v  Lewis.10    The  award  of  compensation  is  discretionary.    The  standard approach is to begin by looking at the deterioration of the company’s  financial position between the dates of the breach and the date of liquidation.  Once that figure has been established, then three factors – causation, culpability and the duration of the trading are relevant  to the exercise of the Court’s discretion.11    It has been recognised that determining compensation under s 301 of the Act may be inappropriate for summary judgment.12

Discussion

[32]     The issue at this summary judgment stage is simply whether Mr Gee has reasonably arguable defences to the alleged breaches of director duties.  “The Court must be left without any real doubt or uncertainty.”13

[33]     Mr Gee strenuously denied any breaches  of  directors’ duties.    While he accepted that Gee Consultants was slow in meeting its IRD obligations, he says he believed on reasonable grounds that the company was trading out of its then difficulties.

[34]     Mr Gee’s evidence was that he regularly turned his mind to the company’s performance.  His counsel noted that the Court has previously held (in a number of cases) that a company does not need to stop trading as soon as there are financial

difficulties or even where it has been operating at a loss for some time.  The mere

10     Mason v Lewis [2006] 3 NZLR 225 at [110].

11     Ibid.

12     Vance v Smith HC Wellington, CIV-2005-485-24, 5 June 2006 at [89].

13     Krukziener v Hanover Finance Limited [2008] NZCA 187 at [26].

fact that there were ongoing defaults to the IRD is not enough to establish a breach of directors’ duties.

[35]     It was noted that Gee Consultants’ total creditors at the date of liquidation

was $54,033.75, which was submitted to be a “relatively small” sum.   Of this,

$43,683.46 was owed to the IRD (including $16,990.47 for penalties and interest). Gee Consultants’ performance would only need to improve marginally, all things being equal, for all creditors to be paid.

[36]     Further, Mr Gee tried to negotiate a repayment proposal with the IRD and believed he had made significant progress on that front.  He was confident a payment plan could be reached and that all creditors would be paid.  If a payment plan had been reached, it was submitted, there is no credible evidence that Gee Consultants could not trade out of its difficulties. The non-IRD creditors were de minimis.

[37]     Mr Gee also took comfort from the fact that a number of the company’s key indicators were improving.   In addition, aside from one drawing of $1,161 in September 2008, Mr Gee ceased taking any drawings in part payment of his salary from when it became clear that a deal with the IRD was unlikely.   In contrast, he introduced funds of $15,549.

[38]     Further, if there has been a breach, it was submitted that the start date should be significantly after the July 2006 date suggested by the liquidators.   Gee Consultants was essentially balance sheet solvent as at 31 March 2007 and a number of key indicators  were  improving.    Up to  mid-2008,  Mr Gee was  confident  of reaching an agreement with the IRD and paying all creditors.  Taking these factors into account, the duration of any “insolvent trading” would be minimal.

[39]     Counsel noted that this is not a case involving dishonesty.  In continuing to trade the company, one of the factors Mr Gee took into account was the increasing sales figures.  The economic downturn began to hit the company’s revenue in mid-

2008.   This was a factor outside Mr Gee’s control.   Having failed to reach an agreement with the IRD and having assessed the downturn in revenue, Mr Gee made the responsible decision to cease trading.

[40]     In relation to the quantum of any compensation,  Mr Gee challenged the liquidators’ fees and disbursements of $36,308.83 which are 67 per cent of the total value of creditors at the date of liquidation.  Mr Gee regards these as excessive given the level of co-operation he says he has provided to the liquidators.   Mr Gee also relied on the Court of Appeal’s decision in Peace and Glory Society Limited (In Liq) v Samsa14  is support of the proposition that the IRD’s full penalties and interest will not always be payable.

[41]     Mr Gee submitted that, as in Vance v Smith, assessing compensation in this matter is inappropriate for summary judgment, even if I were satisfied that he had no arguable defence in relation to one or more of the alleged breaches of directors’ duties.

[42] I have carefully considered all the evidence before the Court, including in particular that of Mr Gee. As outlined at [5]-[7] above, the question on a summary judgment application is whether the defendant has no defence to the claim. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents.

[43]     Applying this approach to the facts of this case, I have not been persuaded that Mr Gee has no arguable defences to the allegations of breaches of directors’ duties.  In my view his affidavit evidence, which I have summarised above, raises arguable defences which need to be tested at trial.  In addition, I am not satisfied that determining appropriate compensation for any breach of directors’ duties (assuming such a breach could be established) would be an appropriate matter for summary determination on the particular facts of this case.

Result

[44]     The plaintiffs’ application for summary judgment is dismissed.

14     Peace and Glory Society Limited (In Liq) v Samsa [2010] 2 NZLR 57.

[45]     Leave is reserved to file memoranda on costs.

Katz J