Taj Construction Ltd (in liq) v Singh
[2016] NZHC 584
•7 April 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2015-485-1058 [2016] NZHC 584
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of Taj Construction
Limited (In liquidation)BETWEEN
TAJ CONSTRUCTION LIMITED (IN LIQUIDATION)
First Plaintiff
AND
COLIN DAVID OWENS AND DAVID STUART VANCE, AS LIQUIDATORS OF TAJ CONSTRUCTION LIMITED (IN LIQUIDATION)
Second Plaintiffs
AND
SANJIT SINGH Defendant
Hearing: 5 April 2016 Counsel:
K C Francis and S K Shaw for Plaintiffs
No appearance for DefendantJudgment:
7 April 2016
JUDGMENT OF BROWN J
Introduction
[1] Taj Construction Ltd was incorporated on 16 July 2010 and carried on the business of supplying building and construction services. The company ceased trading in around May 2014 and was placed into liquidation on 5 May 2015 on the application of the Inland Revenue. The second plaintiffs were appointed as liquidators. The liquidators received creditors’ claims in the liquidation totalling
$137,964.99.
TAJ CONSTRUCTION LTD (IN LIQUIDATION) v OWENS AND VANCE, AS LIQUIDATORS OF TAJ CONSTRUCTION LTD (IN LIQUIDATION) [2016] NZHC 584 [7 April 2016]
[2] The plaintiffs filed the current proceeding on 21 December 2015. The proceeding was personally served on the defendant on 19 January 2016 but the defendant failed to file a statement of defence by the required date of
24 February 2016. Accordingly the hearing proceeded by way of formal proof pursuant to r 15.9 of the High Court Rules.
[3] In the proceeding:
(a) the first plaintiff claimed in the first cause of action that the defendant had an overdrawn shareholder’s current account of $262,318.87 which he had an obligation to repay to the first plaintiff;
(b)the first and second plaintiffs seek to recover in a second cause of action under s 301 of the Companies Act 1993 (the Act) compensation from the defendant for various breaches of duty imposed on him as a director under the Act, namely ss 131(1), 133 to 137 (inclusive) and
194;
(c) in a third cause of action the first plaintiff alleged that the defendant had misapplied company funds in making certain mortgage payments on his family home, which payments were alleged to have been made in breach of the defendant’s fiduciary duties as a director of the first plaintiff. A declaration is sought that the first plaintiff is entitled to trace those mortgage payments into, and has an equitable proprietary interest in, the property in the sum of $20,828.04.
[4] In compliance with r 15.9(4) the plaintiffs filed in support of the claim an affidavit of Colin David Owens, one of the second plaintiffs. Although the cover sheet and all the exhibit notes to the affidavit recorded that the affidavit was affirmed on 1 April 2016, that date was omitted from the jurat at the conclusion of the affidavit. As the date of execution of the affidavit was readily apparent, I received the affidavit for use in the formal proof hearing despite the absence of the date in the jurat. I direct under r 9.79 that a note be made on the affidavit that it has been so received.
First cause of action: overdrawn shareholder’s current account
[5] Mr Owens explained in his affidavit that following the liquidators’ appointment they commenced investigations into the financial affairs and dealings of the first plaintiff in accordance with their duties under s 253 of the Act. They were advised by the defendant that no financial accounts had been prepared for the company while it was trading.
[6] The liquidators therefore undertook a reconstruction of the shareholders’ current account from the date of incorporation on 16 July 2010 to the date of liquidation on 5 May 2015 by reference to the bank statements relating to the two bank accounts which the first plaintiff had maintained with ANZ and BNZ.
[7] In the period from 16 July 2010 to 5 May 2015 those bank statements recorded transactions in the total amount of $432,261.90 which the liquidators identified as personal drawings by the defendant. Annexed to Mr Owens’ affidavit and to the statement of claim was a schedule which analysed those drawings into the following categories and subtotals:
Lifestyle/health/sports 1,761.01 Alcohol 5,317.05 Bill payments 5,547.96 Books 68.97 Cash withdrawals 356,770.97 Dining 3,406.28 Duty free 165.38 Electronics 3,111.00 Entertainment 1,609.45 Fines 107.67 Gambling 110.98 Groceries 7,067.71 Home electricity 2,543.87 Household items 2,951.39 Internet 691.11 IRD payment 586.06 Rates 4,863.37 The Warehouse 1,607.69
UDC Finance Payments 8,280.48 School fees 4,883.55 Mortgage payments 20,828.04
[8] Mr Owens deposed that he had seen no evidence to suggest that any of those payments related to the business of the first plaintiff. Rather they appeared to be personal payments for the benefit of the defendant which were inconsistent with the business expenditure of the first plaintiff.
[9] Mr Owens further deposed that the first plaintiff’s bank statements recorded that the defendant made personal cash deposits into the first plaintiff’s account in the sum of $19,943.03. In addition the defendant deposited into the first plaintiff’s account funds in a sum of $150,000 received from refinancing the defendant’s family home.
[10] The current account calculation was recorded in Mr Owens’ affidavit in the following form:
Current Account Balance (16 July 2010)
($)
0.00
Add:
Mortgage Loan Drawdown – Family Home
150,000.00
19,943.03
169,943.03 CR
Less:
Personal Drawings
Current Account Balance (5 May 2015)(432,261.90) (262,318.87) DR
[11] Mr Owens explained that at a meeting on 7 May 2015 following the liquidators’ appointment the defendant was asked about the drawings. The defendant responded that they were taken “sometimes as and when needed”.
[12] Mr Owens’ affidavit proceeded to explain why he considered the personal
payments were personal drawings:
5.11 In a letter delivered to my staff on 21 September 2015 together with an unsworn statement of financial means, the defendant indicated that he had evidence that the drawings taken from the company constitute a shareholder’s salary which the defendant was entitled to receive. By email sent on 28 September 2015 my staff asked the
defendant to provide this evidence – such as extracts of the income tax returns the defendant had filed for the period 31 March 2012,
2013 and 2014. No reply was ever provided by the defendant. …
5.13I have not identified any documents (such as agreements, resolutions, certificates or minutes) that record or reference the payments as being legitimate business expenses of the Company and/or identify the reasons why the Company was making the payments. As far as I am aware, no dividend was paid or payable to the defendant at the date of liquidation, or at the time of the payments.
5.14The appropriate accounting treatment for such drawings would accordingly be for them to be recorded as personal payments and debited against the current account.
[13] It is a well-settled principle that advances made on a shareholder’s current account are a due debt owed by the shareholder to the company repayable on demand.
[14] The principles were recently summarised by Muir J in Mizeen Painters Ltd
(in liq) v Tapusoa:1
Generally, advances made by a company to its shareholders are debts owed by the shareholders to the company and repayable on demand.
In the absence of an explanation, drawings must be treated as advances from the company to the shareholders that are repayable on demand. They remain as repayable advances unless and until a company resolution classifies them otherwise. When the company’s accounting records provide no explanation for the drawings in the shareholders current account, they must be treated as advances from the company to the shareholders. The onus is on the defendants as directors and fiduciaries of the company to account to it for funds and establish the legitimacy of any funds taken from the company; in other words, to explain what has become of company property in their hands.
[15] The evidence of Mr Owens establishes that between 16 July 2010 and
5 May 2015, the first plaintiff’s bank accounts recorded $432,261.90 in transactions that were personal drawings. In the same period, the bank accounts record the defendant made personal cash deposits into the first plaintiff’s account in the sum of
$19,943.03. The defendant also deposited funds received from refinancing the
defendant’s family home into the first plaintiff’s account in the sum of $150,000.00, comprising payments of $60,000 on 14 September 2012 and $90,000 on
1 Mizeen Painters Ltd (in liq) v Tapusoa [2015] NZHC 826 at [24] and [25].
13 March 2014. Consequently, as at 5 May 2015, the defendant owed the first plaintiff a debt of $262,318.87 in drawings from the shareholder’s current account.
[16] I agree with Mr Francis’s observation that this case appears to have some similarities with Mizeen Painters, where Muir J commented that:
It is clear from the schedules that [the liquidator] annexes [to his affidavit] that the defendants simply regarded the company’s account as their personal account, using it for almost every conceivable type of personal expenditure.
[17] The plaintiffs made demand on the defendant for repayment of the debt but the debt has not been paid and remains due and owing. The defendant has failed to provide any explanation as to why this expenditure should not be repaid by him to the first plaintiff.
[18] Consequently the first plaintiff is entitled to judgment in the sum of
$262,318.87 against the defendant, together with interest.
Third cause of action: constructive trust
[19] From a LINZ title report annexed to Mr Owens’ affidavit it appears that the defendant is a joint registered proprietor, together with Vikashni Devi Singh, of a property at 12 Owen Street, Belmont, Lower Hutt 5010 (the Property) having title number WN248/50.
[20] From 2 August 2011 ANZ National Bank Ltd had a registered mortgage over the Property with the following number: 8809683.6 (the ANZ Mortgage). The ANZ Mortgage was discharged on 14 October 2014.
[21] Mr Owens deposed that in the period from October 2012 to May 2015 statements for the first plaintiff’s bank account (account number 06-0545-0344508-
00) record payments being made from the first plaintiff to ANZ National Bank Limited totalling $20,828.04 with the narration “Loan Payment 00859297621001” (the Mortgage Payments). He concluded that the Mortgage Payments were used to repay the defendant’s personal mortgage debts, secured by the ANZ Mortgage.
[22] He stated:
I consider these payments were inconsistent with the business expenditure of the [first plaintiff]. The Mortgage Payments appear to have been for the benefit of the defendant, and to the detriment of the [first plaintiff]. The Mortgage Payments increased the amount of the defendant’s equity in the Property by $20,828.04.
[23] Mr Francis submitted and I accept that a company director, in consequence of the fiduciary nature of the duties which he or she owes to the company, is treated as if he or she were the trustee of the company’s property under his or her control. Therefore a breach of a director’s fiduciary duty is considered to be the equivalent to a breach of trust.
[24] It was further submitted that a fiduciary is accountable for any benefit or gain acquired through breach of his or her duty and that in most cases it will also be appropriate for the Court to declare that the ill-gotten gains are held subject to a constructive trust for the principal. A recent example is Torbay Holdings Ltd v Napier2 where Torbay Holdings alleged that, unauthorised cheques having been used to pay for goods and services necessary to build a new house, that gave rise to a constructive trust over the property to the value of the payments. It was also contended that funds from Torbay Rest Home were used to service the Napiers’ mortgage on the property, thereby giving rise to an equitable interest in the property
to the extent of the contribution to the mortgage principal and interest.
[25] Woolford J there observed:
[202] Constructive trusts arise over property where the legal owner is required to account to another person in equity for that property. For example, where a fiduciary or knowing recipient obtains an improper profit or other property from his or her fiduciary position, it is well-established that a constructive trust arises over that profit or property in favour of the principal. The principal has an equitable proprietary interest in the property, which is not extinguished when the property is exchanged or transferred for new property.
2 Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839.
[26] With reference to the claim to a constructive trust in respect of contributions made by the Torbay companies to the loans which the Napiers took out to facilitate the purchase and construction of their new house, Woolford J concluded:
[230] … Republic of Brazil v Durant clearly endorses the ability to claim property rights in the property obtained using loans which were financed by misappropriated money, as occurred here. This is supported by New Zealand case law. This reflects that paying down the loan allowed the defendants to acquire a significant, valuable asset with less debt encumbrance. This is an increase in the value of the house to the Napiers.
[27] I accept that the mortgage payments in the sum of $20,828.04 constituted a misapplication of the first plaintiff’s funds in breach of the defendant’s fiduciary duties as a director of the first plaintiff. Furthermore as a result of the breach of the defendant’s fiduciary duties in making those payments, the payments were subject to a constructive trust in favour of the first plaintiff. The first plaintiff is entitled to a declaration accordingly.
The second cause of action: claim for compensation under s 301 for breach of
director’s duties
[28] In a memorandum filed in advance of the hearing Ms Shaw advised that the primary focus of the plaintiffs’ claim was on the first cause of action and that the second cause of action would arise for consideration only if the plaintiffs were not successful on the first. Mr Francis confirmed that position at the beginning of the hearing.
[29] Accordingly, having found in favour of the first plaintiff on the first and third causes of action, it is unnecessary to proceed to address the second cause of action which is for a lesser amount than the amount of the judgment on the first cause of action.
Disposition
[30] Judgment is entered for the first plaintiff as follows:
(a) judgment on the first cause of action in the sum of $262,318.87; (b) interest at the prescribed rate under the Judicature Act 1908;
(c) a declaration that the first plaintiff is entitled to trace the mortgage payments into, and has an equitable proprietary interest in, the property at 12 Owen Street, Belmont, Lower Hutt and that the defendant holds that property on trust for the first plaintiff to the sum of $20,828.04;
(d) costs on a 2B basis.
Brown J
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