Syntax Holdings (Auckland) Ltd (in liq) v Bishop
[2013] NZHC 2171
•26 August 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2013-404-2633 [2013] NZHC 2171
UNDER the Companies Act 1993 BETWEEN
SYNTAX HOLDINGS (AUCKLAND) LTD (IN LIQUIDATION)
First Plaintiff
VIVIEN JUDITH MADSEN-RIES and HENRY DAVID LEVIN, as liquidators of SYNTAX HOLDINGS (AUCKLAND) LTD (IN LIQUIDATION)
Second Plaintiff
AND
FLORENCE GALE BISHOP First Defendant
DONALD PATRICK BISHOP Second Defendant
Hearing: 26 August 2013 Counsel:
K M Wakelin for Plaintiffs
No appearance by, or on behalf of DefendantsJudgment:
26 August 2013
(ORAL) JUDGMENT OF HEATH J
Solicitors:
Meredith Connell, Auckland
SYNTAX HOLDINGS (AUCKLAND) LTD (IN LIQUIDATION) v BISHOP [2013] NZHC 2171 [26 August
2013]
Introduction
[1] Syntax Holdings (Auckland) Ltd (Syntax) operated a franchised cafe, known as “BB’s Coffee Shop”, in the Dressmart Shopping Centre in Onehunga. Mr and Mrs Bishop were shareholders and directors of the company. On 2 September 2011, through the appointment of Ms Madsen-Ries and Mr Levin as liquidators, this Court made an order putting Syntax into liquidation.
[2] Claims made by unsecured creditors in the liquidation total $412,407.14. Of that sum, a preferential debt of $165,312.15 is owed to the Commissioner of Inland Revenue, the creditor who brought the liquidation proceeding. That relates to outstanding PAYE and GST. There is a further preferential debt, owed to former employees, in the sum of $21,774.58. The remainder are unsecured trade creditors.
[3] In October 2012, the liquidators obtained judgment against Mr and Mrs Bishop in the sum of $52,587.12, plus interest and costs. That judgment recovered preferential payments made to the shareholders at a time when the company was insolvent.
[4] In this proceeding, the liquidators seek judgment against Mr and Mrs Bishop in the sum of $328,000. The claim is based on their alleged breaches of duties to the company (and its creditors) under the Companies Act 1993 (the Act). Various provisions are relied upon to establish liability, and an order restoring the amount fixed is sought under s 301 of the Act.
[5] I am satisfied that Mr and Mrs Bishop have been served with the proceeding. They have taken no steps. They were also advised of today’s hearing, by the Registrar. No appearance was entered. The proceeding was called before me today, for formal proof.
The case for the liquidators
[6] Affidavit evidence in support of the proceeding has been given by one of the liquidators, Mr Levin. He is an experienced insolvency practitioner and well qualified to give forensic accounting evidence of this type. However, I exercise
some caution in determining the time at which any breaches of duty occurred and the quantum of any loss involved. There is an absence of primary evidence from witnesses to whom Mr and Mrs Bishop spoke after the liquidation. Although transcripts of the discussions have been produced, Mr Levin is not in a position to verify their accuracy.
[7] Mr Levin’s financial analysis of the company’s affairs demonstrate a decline in its fortunes from the year ended 31 March 2005. At the end of that year there was a net operating loss of $336 and net assets (inclusive of goodwill) of $9,066. By 31
March 2011, the operating loss had become $158,165 and the net liabilities
$627,268. The bulk of the decline stems from events after 1 April 2008. The accounts for the 31 March 2008 financial year show a nil operating profit/loss and net assets of $8,583. In contrast, as at 31 March 2009, there was a net loss of
$56,509 and net liabilities of $60,867.
[8] The calculation of assets against which the net asset/liability position was assessed must, in cases such as this, be approached cautiously. In a business of this type, the “goodwill” of the business was likely to be of minimal value, if not worthless.
[9] The financial statements of Syntax record the following level of accounts payable during the period from 31 March 2005 until 31 March 2011. They are:
(a) 31 March 2005: $26,683; (b) 31 March 2006: $24,636; (c) 31 March 2007: $25,620; (d) 31 March 2008: $20,350;
(e) 31 March 2009: $43,210;1
1 Compare with paras [7] above and [11] below.
(f) 31 March 2010: $137,972; and
(g) 31 March 2011: $280,513.
[10] Mr Levin has not undertaken any particular analysis of the company’s liquidity position during the relevant period. Rather, he has focused on the increase in the outstanding tax obligations, particularly those in relation to GST and PAYE, and the actual increases in the unsecured debt in the period leading up to liquidation.
[11] In addition to the sum of $43,210 identified as owing as at 31 March 2009, core debts for PAYE and GST liabilities as at that date need to be added. The core debt for PAYE was $6,999.69 and the sum for GST was $10,330.31. That made a total amount for PAYE and GST of $17,330.27 bringing the total amount of unsecured debt at that date up to $60,540.
[12] I accept Mr Levin’s evidence that “a failure to pay GST and PAYE on a regular basis is a sure sign of a company in trouble” because “these funds are only ever meant to be held” by a company “for a short period of time prior to payment to” the Commissioner of Inland Revenue. The funds have a quasi-trust character to them.
[13] Mr Levin gave evidence that Syntax began missing GST payments in September 2008 and PAYE payments in October 2008. He analysed the nature of the outstanding tax obligations as follows:
4.10It is also useful to look at how the company managed its tax liabilities through this time According to the Commissioner’s unsecured creditor’s claim (which forms part of exhibit “C”), the company began incurring the following tax debts, which remain outstanding to date:
(a) From the period ending 30 September 2008, the Company began to accrue penalties and interest on its Goods and Services Tax (GST) obligations, and the core debt for GST remains unpaid for the period ending 30 November 2008 and all subsequent periods.
(b) From the period ending 31 October 2008, the Company began to accrue penalties and interest on its PAYE obligations, and the core debt for PAYE remains unpaid for
the period ending 31 December 2008 and all subsequent periods.
(c) From the period ending 31 December 2008, the Company began to accrue penalties and interest on its Kiwisaver Employee Deductions (KSE) obligations and the core debt for KSE remains unpaid for the period ending 31 December
2008 and all subsequent periods.
(d) The Commissioner’s core debt for Kiwisaver Employer
Contributions (KSR) remains unpaid for the period ending
31 January 2009 ad all subsequent periods.
(e) The Commissioner’s core debt for Student Loans Employer (SLE) remains unpaid for the period ending 31 July 2009 and all subsequent periods.
4.11 Therefore, from at the latest 30 November 2008 and thereafter to the date of liquidation, the Company was unable to pay its debts as they became due in the ordinary course of business in that, inter alia, it failed to pay its tax obligations as those payments became legally due.
[14] The core debt for PAYE, as at 31 December 2008, remains unpaid. So too does the core debt for GST, though that is from 30 November 2008. Those debts for which the Commissioner has proved, rank as preferential and total $165,312.15; or, about 40% of the total company debt.
[15] Between 1 April 2009 and 31 March 2011, Mr and Mrs Bishop received payments totalling $55,530 from the company, with the effect that they were preferred over other creditors. All but $2,942.88 of that sum has been recovered through the voidable transaction provisions of the Act. That amount was out of time and could not be pursued.
Submissions
[16] Ms Wakelin, for the liquidators, submits that the evidence demonstrates:
(a) That Mr and Mrs Bishop agreed or allowed to carry on the business of the company in a manner likely to create a substantial risk of serious
loss to the company’s creditors,2
2 Companies Act 1993, s 135.
(b) Incurred obligations without believing, on reasonable grounds, that the company could perform them,3 and (c)
Fell well below the standard of care, diligence and skill expected by law from directors.4
[17]
She
submits that an award representing 80% of the total loss (calculated by
reference to the total value of proved claims)5 is an appropriate amount to mark Mr and Mrs Bishop’s breaches of duty. She seeks an order under s 301 of the Act in the sum of $328,000, which makes allowance for the amount for which judgment has already been entered against Mr and Mrs Bishop on the voidable transaction claims.
Analysis
(a) Liability
[18] I deal first with the question of liability. As the Court of Appeal made clear in Mason v Lewis,6 it is important to address separately questions of liability and quantum.
[19] Sections 135(b) and 136 of the Act state:
135 Reckless trading
A director of a company must not—
...
(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.
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.
3 Ibid, s 136.
4 Ibid, s 137.
5 See para [2] above.
6 Mason v Lewis [2006] 3 NZLR 225 (CA) at para [52].
[20] In my view, Mr and Mrs Bishop can properly be said either to have allowed the business of the company to be carried on from 1 April 2009 in a manner likely to create a substantial risk of serious loss to the company’s creditors,7 or have agreed to the company incurring obligations without holding a belief on reasonable grounds that the company would be able to perform the obligations when required to do so.8
[21] In this case Mr and Mrs Bishop were the sole directors. They must take full responsibility for the inability of the company to meet its debts, as at liquidation. While there were external forces at play, in the form of the recession, they had the ability to arrest further indebtedness through making an assessment of the business prospects that they failed to do. By giving the period of grace until April 2009, any blame that could attach solely to the recession is overcome.
[22] It appears from Mr Levin’s affidavit that the decline began sometime in late
2007–2008. That would be based on the statement of financial performance for the year ended 31 March 2008 which shows a reduction in the amount of sales, though also corresponding reduction of a lower amount in expenditure. However, the figures for the operating profit or loss during that year do not necessarily reflect a company that is unable to meet all creditors as they fall due.
[23] In the absence of any analysis of the financial position in relation to each type of creditor for the period between 1 April 2008 and 1 April 2009, I consider that the appropriate course is to take the latter date as the starting point for an assessment of Mr and Mrs Bishop’s liability. I am satisfied that as at that date they ought to have known that the tax debts which were effectively being used as the company’s bank, could not be paid. Other creditors would be unpaid too, once the business ceased. It was only the identity of such creditors that would remain unclear.
[24] Taking the date of 1 April 2009 is also consistent with the intervention of the recession from about September/October 2008. Allowing a period of some six
months for the directors to take stock of the situation and to perform what Mr Levin
7 Companies Act 1993, s 135(b).
8 Ibid, s 136.
has referred to as a “sober assessment”9 of their business prospects, gives a period of grace to the directors during this period.
(b) Quantum
[25] In assessing the amount for which judgment should be entered there are generally three controlling factors:10
(a) The first is the culpability of directors;
(b) The second is the duration for which they were in breach of duty;
(c) The third is the causal link between their failures and the indebtedness.
[26] The duration of the culpability was from 1 April 2009 to the date of liquidation, which was 2 September 2011. The company continued to incur debt up to the time at which it ceased trading. No attempts were made to meet taxation debts, so interest and penalties continued to accrue.11 In effect, that has also prejudiced unsecured creditors as the Commissioner has a priority in respect of her debt.
[27] As at 1 April 2009, the total creditors, including core tax, was $60,540. Deducting that sum from the outstanding amount of unsecured creditors at the date of liquidation, $412,407, leaves a figure of $351,867 which I round to $350,000. I make an allowance of $50,000 to reflect what was recovered by way of voidable transactions. That leaves a total of $300,000. I make a further allowance for the benefit of the directors of 20%. That means that judgment should be entered for an
amount equating to 80% of $300,000, namely $240,000.
9 An expression taken from Mason v Lewis [2006] 3 NZLR 225 (CA) at para [51].
10 Re Bennett, Keane & White Ltd (In Liq) (No 2) (1988) 4 NZCLC 64,317 (HC), endorsed in
Löwer v Traveller [2005] 3 NZLR 479 (CA) at [78]. See also, Mason v Lewis [2005] 3 NZLR
225 (CA) at para [110].
11 See para [21] above.
[28] I am satisfied that, for the purposes of s 301 of the Act, that is a fair sum for which the directors ought to restore funds to the company.
Result
[29] I enter judgment in favour of Ms Madsen-Ries and Mr Levin, in their capacity as liquidators of Syntax, against Mr and Mrs Bishop in the sum of $240,000 on a joint and several basis. Interest shall run on that sum from the date of liquidation to September 2011 at the rate prescribed from time to time by s 87 of the Judicature Act 1908.
[30] The liquidators are also entitled to costs on a 2B basis, together with reasonable disbursements. Both costs and disbursements shall be fixed by the Registrar.
[31] I thank Ms Wakelin for the excellent way in which she has prepared and presented the proceeding to the Court today. That has made it possible for an oral
judgment to be given.
P R Heath J
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