Sentry Hill Winery (2006) Limited (in liquidation) v Parkes
[2018] NZHC 2223
•28 August 2018
IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA NGĀMOTU ROHE
CIV-2016-443-070
[2018] NZHC 2223
UNDER the Companies Act 1993 BETWEEN
SENTRY HILL WINERY (2006) LIMITED
(in liquidation) First plaintiff
VIVIAN JUDITH FATUPAITO and ANDREW JOHN HAWKES
Second plaintiffs
AND
STEPHEN JOHN PARKES
Defendant
Hearing: 15 August 2018 Appearances:
Mr J C Caird and Ms N M Thompson for plaintiffs No appearance by or for defendant
Judgment:
28 August 2018
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] On 26 April 2016 this Court made an order winding up the first plaintiff, Sentry Hill Winery (2006) Ltd (in liquidation), and appointing the second plaintiffs, Vivian Fatupaito and Andrew Hawkes, as its liquidators.
[2] In this proceeding Sentry Hill Winery and the liquidators sue the company’s former shareholder and director, the defendant, Stephen Parkes.
[3]There are two limbs to the claim:
SENTRY HILL WINERY (2006) LIMITED (in liq) v PARKES [2018] NZHC 2223 [28 August 2018]
(a)first, the plaintiffs seek to recover the debit balance of the defendant’s shareholder current account as at the date of liquidation;
(b)second, they allege the defendant breached his obligations under ss 135, 136 and 137 of the Companies Act 1993 and seek to recover damages in respect of those alleged breaches.
[4] Initially, the claim was defended and the defendant engaged solicitors and counsel to act for him. The defendant subsequently dismissed his advisers and began acting for himself as he is perfectly entitled to do. However, he has persistently failed to comply with the Court’s directions. On 28 February 2018 Associate Judge Smith made an order that the defendant file and serve a compliant affidavit of documents by 28 March 2018. That order was made on an “unless” basis, that is to say on the basis that, unless the defendant complied, his defence would be struck out.
[5] The defendant did not comply. The plaintiffs’ solicitors wrote to him on 6 April 2018 warning him that if he did not comply they would have no option but to seek an order striking out his defence. He ignored them.
[6] On 7 June 2018 the plaintiffs’ solicitors filed and served a memorandum setting the position out.
[7] On 13 June 2018 I issued a minute in which I said that in light of the defendant’s failure to comply with Associate Judge Smith’s order I was striking out his defence. But I gave the defendant one last opportunity to comply. I suspended my order for 10 working days. The defendant did not file a compliant affidavit of documents within that time. Accordingly, my order striking out the defence came into force on 27 June 2018.
[8] After that date the defendant filed and served a document attached to which was some contemporaneous material. It was not, and the defendant has never filed and served, a compliant affidavit of documents.
[9]As a result, the case came on for a formal proof hearing on 15 August 2018.
[10] As I understand it the Registrar offered the defendant an opportunity to observe the hearing but he declined to do so.
[11] He did send an email to the Registrar on the morning of the hearing in which he asked the Court to have regard to certain material. At the commencement of the hearing I alerted Mr Caird to this email. He submitted that, the order striking out the defence having been made, it would be inappropriate for the Court to take the material the defendant wished to put before the Court into account. He mentioned that in any event the email had not been sent to the plaintiffs’ advisers.
[12] I accept Mr Caird’s submission that in the circumstances I cannot have regard to the defendant’s email.
Evidence
[13] Prior to the hearing the plaintiffs filed an affidavit sworn by the first-named second plaintiff, Ms Fatupaito. This extended to three large volumes (though two of these consisted of bank statements).
[14] Given that this is a formal proof hearing I do not propose to deliver a full judgment. However, it is appropriate to outline the bases for the plaintiffs’ claims and the nature of the evidence before the Court supporting these.
The claim based on the defendant’s current account
[15]As Mr Caird submits, the debit balance of a shareholder’s current account:
… represents funds paid from the company to a shareholder or for a shareholder’s benefit, which constitutes a debt owed by the shareholder to the company.
[16] Mr Caird referred me to the recent decision of Palmer J in East Coast Aluminium Ltd (in liquidation) v Perry1 where his Honour said:
It is well established that advances made by a company to its shareholders are debts owed to the company by the shareholders, which are (absent a company resolution to the contrary) repayable on demand. The liquidators are entitled
1 East Coast Aluminium Ltd (in liquidation) v Perry [2018] NZHC 317. See n 1 at [19].
to rely on the company’s records. Insofar as a company’s records, from which its financial statements are derived, are deficient, the directors must accept responsibility.
[17] Ms Fatupaito’s evidence is that, as at the date of liquidation, the account kept by the company for the defendant was overdrawn in the amount of $35,383.43. Her evidence went further and established not only that the defendant had never questioned that indebtedness but that in fact he had assisted the liquidators in arriving at that figure.
[18] I am satisfied on the evidence that the company is entitled to recover this amount.
The claims based on breaches of duties
[19]Ms Fatupaito’s evidence established the following:
(a)from a balance sheet perspective, the company was insolvent (its assets were exceeded by it liabilities) from 1 April 2012 at the latest. This never changed. Indeed, the figures indicate that between that date and the date on which the liquidators were appointed the position deteriorated materially;
(b)from a cash flow perspective the company was insolvent (unable to pay its debts as they fell due) from 31 July 2012 at the latest. From that date, the figures show a steadily deteriorating position. It is fair to mention that in the FYE’s 31 March 2014, 2015 and 2016 the company made small profits. But those profits were never even remotely capable of retrieving the position so as to render the company solvent from a cash flow perspective;
(c)so, in broad summary, the evidence is that from 31 July 2012 at the latest, the company was insolvent as that term is defined in s 4 of the Act.
[20] The plaintiffs say that against that background the defendant breached three discrete duties to the company.
[21] Section 135 of the Act prohibits a director from agreeing to the company carrying on business in a manner likely to create substantial risk of serious loss to the company’s creditors or causing or allowing the company’s business to be carried on in a manner likely to do so.
[22] As Mr Caird submits, s 135 requires the Court to apply an objective test of whether the company’s business was in fact carried on in a manner which created a substantial risk to creditors. Having regard to the company’s deepening financial difficulties from 31 July 2012 down to the date of liquidation I am left in no doubt that Sentry Hill Wineries’ continuation in business presented a serious risk to creditors. During that time it accumulated debts of well over $300,000 (including to the New Zealand Customs Service which is the largest single creditor and owed over
$280,000).
[23] Section 136 prohibits a director from agreeing to a company incurring obligations unless he or she believes on reasonable grounds that it will be able to perform those obligations when required to do so.
[24] This provision has both an objective and a subjective component. The director must be demonstrated not to have believed on reasonable grounds that the company would be able to perform the obligation or obligations when required to do so. There is next to no evidence as to the defendant’s actual belief. Nevertheless, I am satisfied on Ms Fatupaito’s evidence that, even if the defendant honestly believed that the company was somehow capable of trading out of the financial difficulties that it found itself in, any such belief was not based on reasonable grounds.
[25] Section 137 requires a director to exercise the care, diligence and skill that a reasonable director would exercise having regard to the nature of the company, the nature of the decision or decisions involved and the nature of the responsibilities undertaken by him or her.
[26] The test is an objective one, the director having to meet the standard of a reasonable director. Whilst there are examples of cases in which this assessment has required a detailed analysis of the factual background to particular decisions, this is a case in which the sole shareholder and director decided that the company should continue to trade in the face of the company’s rapidly deteriorating financial position. I have no doubt on the basis of the evidence that the defendant’s decision, or ongoing determination, to allow this company to trade was not one which a reasonable director in his position would have made and that the plaintiffs have made out their allegations of a breach of s 137.
Relief
[27]Section 301(1)(b)(ii) of the Act provides:
(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,—
…
(b) order that person—
…
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
…
[28] Obviously, any such order must reflect the loss which the company has suffered as a result of the director’s breach or breaches of duty. In this case, the plaintiffs contend that the defendant’s breaches began before 1 January 2013 and they therefore take that date as being the starting point for calculating an appropriate amount of damages.
[29]Mr Caird put the plaintiffs’ case in this way:
In light of the company’s financial difficulties in 2012, and its obvious insolvency by 31 July 2012, Mr Parkes was required [in order to discharge his duties to the company and others] to take a sober assessment of the company’s future and prospects and act accordingly.
[30]Mr Caird quoted Ms Fatupaito’s evidence which was in these terms:
… A realistic assessment of the company future and prospects would have led to the conclusion that, in the absence of a significant injection of shareholder capital, and/or some compromise from the company’s creditors in relation to the company’s mounting debts, and/or a new major supplier agreement, the company should not continue trading. However, none of those materialised:
(a)Mr Parkes did not provide any further capital/equity injections in to the company. (Any payments made to the company were in part payment of his overdrawn shareholders current account. However, he in fact withdrew funds from the company in excess of funds he paid to the company);
(b)no settlement agreement was ever reached with New Zealand Customs or Inland Revenue; and
(c)there were no major supply agreements being negotiated and none were identified.
Any attempt to trade out of insolvency was not reasonable in the circumstances.
[31]Mr Caird continued his submission:
Though arguments could be made that Mr Parkes ought to have realised even earlier, by 1 January 2013 it was clear that there was no realistic prospect that the company could trade out of its difficulties. At that point, the company owed New Zealand Customs $29,479.39 in excise duties and additional duties. Additional duties continued to accrue on the outstanding excise duties. The December 2012 return was due to be paid by the end of the month. The company’s bank balance was -$2,955.53. Notwithstanding this, Mr Parkes continued to trade the company for over three more years. In doing so, Mr Parkes caused the company to incur significant excise and additional duty as well as liabilities to other creditors when there was no way for the company to meet these liabilities.
[32] On those bases, which Mr Caird outlined in more detail than I have found it necessary to do in this judgment, the plaintiffs submit that the defendant was in breach of his duties from at least 1 January 2013 and that it would be just for the Court to order Mr Parkes to compensate the company for losses incurred between 1 January 2013 and the date of liquidation, which, the evidence established, total $345,305.41.
[33]Mr Caird summarised the plaintiffs’ case in the following way:
By 1 January 2013 the company was clearly insolvent, and had been for some time. The company had been balance sheet insolvent from 31 March 2012 and cash flow insolvent from 31 July 2012. Mr Parkes was aware of the company’s insolvency. If Mr Parkes had undertaken a realistic assessment of the company’s prospects, he would have concluded that the company would not be able to meet its present liabilities, let alone any future liabilities it incurred. By 1 January 2013 Mr Parkes had had 9 months since the company was balance sheet insolvent and 5 months since the company was cash flow insolvent to undertake a realistic assessment of the company’s future. There was more than sufficient time to undertake such an assessment. Ms Fatupaito’s evidence is that the only appropriate cause of action at this time was that the company to cease trading, and that it was entirely inappropriate for the company to continue trading and incurring further liabilities when it had no means of meeting those liabilities or its outstanding liabilities.
Mr Parkes’ decision to continue to trade the company in these circumstances was not reasonable and caused the company to incur liabilities that it could not meet. Mr Parkes is directly responsible for the losses the company ultimately suffered as a result of its inability to meet its liabilities to the creditors. It is therefore just that Mr Parkes would bear the consequences for the fact that he caused the company to suffer loss because the company continued to trade after 1 January 2013 when it should not have done so.
[34] I agree. On the evidence I am satisfied that the plaintiffs have made out their allegations of breach of duty and that it is just, having regard to the interests of the creditors involved, to order that Mr Parkes compensate the company for the losses arising from those breaches. I accept Mr Caird’s submission that in the circumstances of this case the proper measure of that is the losses incurred by the company between 1 January 2013 and the date of liquidation on the basis that prior to that date Mr Parkes had ample opportunity to make a responsible decision that the company should cease trading and that his failure to do so caused the losses referred to.
Conclusion
[35]I enter judgment for the plaintiffs against the defendant in the sums of:
(a)$35,383.43 in respect of the defendant’s overdrawn shareholders current account; and
(b)$345,305.41 in respect of the defendant’s breaches of his duties owed to the company under ss 135, 136 and 137 of the Act.
[36] The plaintiffs are entitled to interest on the above sums at the rate of 5% from the date of liquidation (26 April 2016) down to the date of judgment.
[37] The plaintiffs are also entitled to their costs on a 2B basis together with disbursements which may be fixed by the Registrar.
Associate Judge Johnston
Solicitors:
Simpson Grierson, Auckland for plaintiffs
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