Sion Consultants Limited (in liqidation) v Bason

[2015] NZHC 645

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-419-0109 [2015] NZHC 645

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of Sion Consultants
Limited (In Liquidation)

BETWEEN

SION CONSULTANTS LIMITED (IN LIQUIDATION)

First Plaintiff

VIVIEN JUDITH MADSEN-RIES and HENRY DAVID LEVIN as liquidators of SION CONSULTANTS LIMITED (IN LIQUIDATION)

Second Plaintiff

AND

HEMA BAU BASON Defendant

Hearing:	26 March 2015
Appearances:	P C Murray and R N Thompson for Plaintiffs No appearance for Defendant
Judgment:	1 April 2015

JUDGMENT OF M PETERS J

This judgment was delivered by Justice M Peters on 1 April 2015 at 4.45 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors:           Meredith Connell, Auckland

SION CONSULTANTS LIMITED (IN LIQUIDATION) v BASON [2015] NZHC 645 [1 April 2015]

[1]      The Plaintiffs,  Sion  Consultants  Limited  (in  liquidation)  (“Sion”) and  its liquidators, seek formal proof of causes of action pleaded in their statement of claim dated 13 March 2014.

[2]     Sion was incorporated on 27 June 2008 and provided contract drilling consultancy services.   On 22 May 2013 the Commissioner of Inland Revenue (“Commissioner”) served a statutory demand on Sion for sums due in respect of GST.    Sion  failed  to  meet  the  demand  and  the  Commissioner  applied  for  and obtained an order that the company be wound up, with the Second Plaintiffs being appointed liquidators.

[3]      Mr  Henry  Levin,  one  of  the  liquidators,  has  sworn  an  affidavit  giving evidence as to the matters on which judgment is sought.1

[4]      The Defendant, Mr Bason, was/is the sole director and shareholder of Sion.

Background

[5]      The important points arising from Mr Levin’s evidence are as follows.

[6]     First, although Sion traded and supplied services from the time of its incorporation, with the apparent exception of $9.58 in the period to September 2009, Sion did not account to the Inland Revenue Department (“IRD”) for GST or income tax.  Sion failed to pay GST that was due of $209,580.18 plus accrued interest and penalties of $84,361.41.  Sion also failed to file any income tax returns, causing it to incur penalties of $200.

[7]      Secondly, the liquidators have reviewed statements on Sion’s bank accounts,

02-0454-0028040-083 and 02-0454-0028040-097, for the period from February 2011 to the date of winding up.  Mr Levin’s evidence is that, between 1 March 2011 and

16 September 2013, $797,841.04 of Sion’s funds was paid from the bank accounts to which I have referred and applied either to personal expenses of Mr Bason and his wife or otherwise to matters that were not company expenses.  The breakdown of the

sum and how it appears to have been applied is at [7.3] of Mr Levin’s affidavit.  The

1      Affidavit of H D Levin sworn 23 October 2014.

Plaintiffs submit that Mr Bason’s withdrawal of these funds and his failure to repay them, or at least to retain/repay sufficient to meet Sion’s GST obligations to the IRD, constituted a breach of several duties imposed on him as a director by the Companies Act 1993 (“Act”).

[8]      Thirdly, Mr Levin’s evidence is that on liquidation Sion’s only assets were the current account debt owed by Mr Bason, which was or at least appeared to be, incapable of recovery; $19,049.68 in cash at bank; and debtors and legal claims.  The liquidators recovered debts of $41,475 plus GST.  Mr Levin does not expect there to be any surplus after payment of the costs of the liquidation and of this proceeding.

First cause of action

[9]      Sion seeks judgment for $797,841.04, being the drawings taken by Mr Bason between 1 March 2011 and 16 September 2013.  I accept counsel’s submission that there is a debt due from Mr Bason to Sion in this amount, and that Sion is entitled to judgment in this amount, plus interest and costs.

[10]     It is unnecessary to consider the second and third causes of action as they are alternative to the first.

Fourth cause of action

[11]     The fourth cause of action concerns transfers from Sion’s accounts to Mr and Mrs Bason’s account 03-1558-0107944-00 (“current account”) and from there transfers to their loan accounts being account numbers 03-1558-0107944-91 and 92 (“loan accounts”).

[12]     Of the payments made by Sion to the current account, some $5,139 was paid to the loan accounts, thereby funding the acquisition, at least in part, of a property situated at 724 Te Kowhai Road, Te Kowhai, being the land contained and described in  certificate  of  title  SA16D/279  (“property”).    Mr Bason  and  his  wife  are  the registered proprietors of the property.

[13]     I add that in [15] of the statement of claim the Plaintiffs contend that $29,269 of funds deriving from Sion were applied to repay Mr Bason’s personal mortgage of the property.   On examination of the evidence, and in particular, the bank records included as exhibits, only $5,139 is able to be substantiated.2

[14]     Sion  seeks  a  declaration  that  it  is  entitled  to  “trace”  that  sum  into  the property,  that  it  has  an  equitable  proprietary  interest  in  the  property,  and  that Mr Bason is a trustee of the equity that he holds in the property, if any, on trust for Sion in that amount.

[15]     A company director is a trustee of funds that belong to the company but which are under his control.3    Mr Bason paid amounts away in breach of trust.  To the extent to which I have referred I am satisfied that I should make a declaration that Mr Bason holds the equity in the property, up to $5,139, on trust for Sion.  I add the amount is included in the sum sought in the first cause of action and there must be no double counting of the same.

Fifth to ninth causes of action

[16]     In the fifth to ninth causes of action, the Plaintiffs seek relief pursuant to s 301 of the Act for breach by Mr Bason of duties that he owed to Sion in his capacity as a director of the company.   In particular, the Plaintiffs contend that Mr Bason:

(a)      failed to exercise the care, diligence and skill expected of a reasonable director in the same circumstances – s 137 of the Act;

(b)caused or allowed Sion’s business to be carried on in a manner likely to create a substantial risk of serious loss to its creditors – s 135 of the Act;

(c)       agreed  to  Sion  incurring  an  obligation  to  the  Inland  Revenue

Department  in  respect  of  GST,  without  believing  on  reasonable

2      Memorandum of counsel dated 27 March 2015.

3      Selangor United Rubber Estates Ltd v Craddock (No. 3) [1968] 1 WLR 1555 at 1577.

grounds  that  Sion  would  be  able  to  perform  the  obligation  when required to do so – s 136 of the Act;

(d)      failed to exercise his powers for a proper purpose – s 133 of the Act;

and

(e)       failed to act in good faith and in the best interests of Sion – s 131 of the Act.

[17]     Section 301 of the Act permits the Court to order a director to repay or restore money or property or any part of it with interest at a rate the Court thinks just or to contribute such sum to the assets of the company by way of compensation as the Court thinks just.4    The order sought by the Plaintiffs is that Mr Bason should be required to repay or restore or contribute $213,488.35.

Failure to exercise care, diligence and skill

[18]     Section 137 of the Act provides:

137      Director’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.

[19]     The Plaintiffs allege Mr Bason breached this duty by drawing or diverting all of Sion’s funds and/or in failing to repay sufficient funds to meet the company’s accumulating liabilities to the IRD.  The Plaintiffs contend these actions caused the company to be insolvent but Sion continued to trade regardless.  The Plaintiffs also rely on Mr Bason’s failure to keep proper accounting records.  Mr Bason informed

Mr Levin  or  his  staff that  no  financial  statements  for Sion  were ever prepared.

4      Section 301(1)(b).

Accordingly, the Plaintiffs contend that Mr Bason failed to conduct himself with the care, diligence and skill expected of a reasonable director in the same circumstances. I accept that submission.

Reckless trading

[20]     Section 135 of the Act provides:

135      Reckless 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.

[21]     As I have said Sion did not at any time after incorporation account to the IRD for GST.  Having regard to the balances recorded in the bank statements on Sion’s accounts  which  are in  evidence,  Mr Bason’s  practice of drawing  funds  with  no ability to repay them, and Mr Levin’s evidence as to the lack of any realisable assets capable of meeting the liabilities to the IRD, I am satisfied that a breach of s 135 is proved.

Duty in relation to obligations

[22]     Section 136 of the Act provides:

136      Duty 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.

[23]     The Plaintiffs submit that Mr Bason breached this duty by “agreeing” to Sion incurring obligations to pay GST in the absence of a belief at the relevant time, on reasonable grounds, that Sion would be able to meet its obligations when required to do so.

[24]     For myself, I am not satisfied that a director of a company can be said to “agree” to the company incurring an obligation to pay GST.   The obligation is imposed by law on the occurrence of certain events.  I am not satisfied that a breach of this provision is made out and dismiss this cause of action.

Powers to be exercised for proper purpose

[25]     Section 133 of the Act provides:

133     Powers to be exercised for proper purpose

A director must exercise a power for a proper purpose.

[26]     The Plaintiffs submit that Mr Bason breached the duty imposed by s 133 by withdrawing the vast majority of Sion’s funds and thereby depriving Sion of the means to meet its obligations to the IRD.  The Plaintiffs submit and I accept that a proper exercise of his powers would have required Mr Bason to ensure Sion retained sufficient funds to meet those obligations.

Duty of director to act in good faith

[27]     Section 131(1) of the Act provides:

131Duty 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.

[28]     The Plaintiffs submit that Mr Bason failed to act in good faith and in the best interests of the company by depleting Sion’s funds as he did.  The Plaintiffs submit and I accept that Mr Bason must have known that he was failing to act in good faith and must have known that he was acting contrary to Sion’s best interests when he acted so as to deprive Sion of the means of meeting its obligations to the IRD.

Quantum

[29]     I am satisfied that the Plaintiffs have established a breach of ss 137, 135, 133 and 131.

[30]     Turning to s 301 of the Act, the Plaintiffs seek an award equivalent to the sum due to the IRD, being $213,488.35.  The Plaintiffs submit that the loss suffered by the IRD is directly attributable to Mr Bason’s decision to withdraw funds that would otherwise have been available to Sion to meet its liabilities.

[31]     I accept this submission, hence the order made below.

Result

[32]     I enter judgment:

(a)       for the First Plaintiff on the first cause of action; and

(b)for the First and Second Plaintiffs on the fourth to sixth, eighth and ninth causes of action.

[33]     I order:

(a)       the Defendant to repay or restore or contribute $213,488.35 to Sion;

and

(b)      to pay costs on a 2B basis together with disbursements.

..................................................................

M Peters J