TGM Trading Limited (in liquidation) v Drever

[2018] NZHC 1788

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-800

[2018] NZHC 1788

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of TGM Trading Limited (in liquidation)

BETWEEN

TGM TRADING LIMITED (IN LIQUIDATION)

First Plaintiff

DAMIEN GRANT
Second Plaintiff

AND

AARON CARL DREVER

Defendant

Hearing:	18 July 2018
Counsel:	J Wong for Plaintiffs
Judgment:	18 July 2018

ORAL JUDGMENT OF CHURCHMAN J

[1]                  This is an application under s 194(1) and s 300 of the Companies Act 1993 (the Act). Its intent is to make the director of a company, Mr Drever, liable for the debts of the company now in liquidation.

Obligation to keep records

[2]                  Section 194(1) of the Act requires the board of a company to keep at all times accounting records that correctly record the transactions of the company, that will enable the company to ensure that its financial statements comply with generally

TGM TRADING LIMITED (IN LIQUIDATION) & ANOR v DREVER [2018] NZHC 1788 [18 July 2018]

accepted accounting practice, and that will enable those statements to be readily and properly audited.

[3]                  The requirement that accounting records be “kept” was examined by the Court of Appeal under the predecessor provision s 151 of the Companies Act 1955 in R v Bennett. The Court there said:1

… the word “kept” in subs (1) in the phrase “(e)very company shall cause to be kept accounting records … ” is not, as was contended for the applicants, limited to retaining or storing such records … as happen to come into possession. It imports as well the obligation to create those records necessary to conform to the descriptions in subs (1) and (2) which are not already in existence and retained.

[4]                  The High Court in Maloc Construction Limited (in liq) v Chadwick held that a company’s accounting records are required to “speak for themselves”.2 While they do not have to show the financial position of the company, they must be such that will enable that position to be determined at any time and with reasonable accuracy.3

Liability for failing to maintain proper accounting records

[5]                  Under s 300 of the Act, when accounting records are not adequately kept, the Court may, if it thinks it proper to do so, declare that any one or more of the directors is, or are, personally responsible for all or any of the debts or other liabilities of the company as the Court may direct.4 However, such a declaration must not be made if the Court considers that the director:

(a)took all reasonable steps to secure compliance by the company to keep adequate accounting records; or

(b)had reasonable grounds to believe and did believe that a competent and reliable person was complying with that duty.5

1      R v Bennett (1985) 2 NZCLC 99,279 (CA). This interpretation of “kept” has been applied in a number of later decisions, including under the current version of s 194 of the Companies Act, see Commissioner of Inland Revenue v Jackson Property Group Ltd [2017] NZHC 1014.

2      Maloc Construction Limited (in liq) v Chadwick (1986) 3 NZCLC 99,794 at 22.

3      At 23.

4      Companies Act 1993, s 300(1).

5      Section 300(2).

[6]                  In Network Agencies International Ltd (in liq), Justice Fisher identified four elements that had to be satisfied before liability could be imposed on a director under s 319 of the then current Act, the predecessor to s 300.6 These elements are:7

·     that the company is in liquidation;

·     the company is unable to pay its debts;

·     the company has failed to comply with the obligations imposed upon it as to the keeping of accounting records;

·     the failure has contributed to the company’s insolvency or created substantial uncertainty over the company’s assets and liabilities or substantially impeded the orderly winding up or for any other reason warranted the remedy under the section.

[7]                  Three factors relevant to whether an order should be made under s 300 were identified by Justice Tompkins in Maloc Construction, namely, causation, culpability and duration.8 In terms of causation, there must be a causative connection between the failure and the substantial uncertainty as to the assets and liabilities or the substantial impediment to the winding up of the company.9 As to culpability, this refers to the extent to which the failure was caused by the actions or inactions of the director, or whether the Court needs to consider including a punitive element in the amount awarded.10 Duration concerns the period of time during which the director was responsible for the failure to keep adequate financial records and whether the losses were incurred as a result of actions taken during this period.11

[8]                  All three elements are satisfied in the present case. Mr Drever’s actions or inactions caused the uncertainty; he was personally responsible for those actions/that inaction and his default occurred throughout the duration of the company’s relatively short life.

6      Network Agencies International Ltd (in liq) [1992] 3 NZLR 325.

7      As summarised in Walker v Ariyathas [2012] NZHC 1648 at [18].

8      Maloc Construction, above n 2, at 43.

9      At 43.

10     At 46.

11     At 46-47.

Liquidator costs

[9]                  Mr Wong, counsel for the applicant, has also included in the claim, a claim for liquidator’s costs.

[10]               In the case of Richard Geewiz  Gee  Consultants  Ltd  (in  liq)  v  Gee,  Justice Brown found that it was appropriate that the director in breach of his duties be made liable to pay compensation for the costs and disbursements incurred in the liquidation apart from work undertaken in connection to an unsuccessful summary judgment application.12

[11]               A director should not, however, be made liable for the general costs involved in a liquidation “unless there is a link between the incurring of those costs and the director’s conduct”.13 Where such a link is found, it may be appropriate to require that a director be responsible for meeting some or all of the costs.

[12]               This was the approach followed in Grant v Guo where a director, whose poor record keeping resulted in her not knowing the company’s actual financial position early enough so as to avoid the company going into liquidation, and who then failed to co-operate with the liquidators, was found to have breached s 300 and held personally liable for all of the liquidation costs.14

[13]               The facts of the present case indicate that Mr Drever failed to comply in any respect with the obligation on him to keep proper accounting records. It is clear that not only were proper records not kept, that in fact bank accounts were intermingled and monies that were the assets of one entity were in fact paid into the bank accounts of another entity.

[14]               The trading account of the company known as Grocers Markets Limited was used as the trading account for the company that is the subject of these proceedings. The savings account for Grocers Markets was used for Grocers Markets and not this

12     Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [125].

13     Madsen-Ries v Petera [2015] NZHC 538 at [112].

14     Grant v Guo [2015] NZHC 2480 at [54].

company. This intermingling of funds in the accounts of that company was described as an accounting oversight. That is an understatement.

[15]               The defendant in these proceedings, Mr Drever, was the sole director of the company. That means that he bears responsibility for the conduct of the affairs of the company and its compliance with the compulsory requirements of the Companies Act.

[16]               As I have mentioned, there are a number of requirements that are to be satisfied pursuant to s 300. The first three of those requirements are clear on their face. The company is in liquidation. It is unable to pay its debts, and it has failed to comply with s 194.

[17]               However, the further requirement is that at least one of a number of alternatives are met. The first one is that the failure has resulted in a substantial uncertainty as to the assets and liabilities of the company. That criteria has been met in this case as, given the hopeless state of the accounting records, the exact position of assets and liabilities is unclear.

[18]               The second alternative was that the failure to keep proper records has resulted in the liquidation being substantially impeded. Again, the absence of records and the intermingling of the company’s funds establishes that ground is met.

[19]               The third alternative ground is that the absence of the records is causally linked to the company’s insolvency. In his submissions on behalf of the plaintiffs, Mr Wong has conceded that given the relatively short trading life of the company (some five months) that there is insufficient evidence to conclusively establish that. However, it is not a cumulative requirement.

[20]               What is sufficient, in terms of s 300, is that at least one of the relevant elements is satisfied. I am satisfied that the two elements referred to above have been met in this case.

[21]               In terms of the three requirements of duration, causation and culpability which were set out in the decision of Justice Tompkins in the Maloc Construction Limited case, as already mentioned, I am satisfied that they have been met.

[22]               The question of litigators’ fees is a matter that was discussed with counsel. It is clear that it is appropriate, other than in respect of costs of litigation, for the liquidator’s fees to be added to the debtors’ pool and available to be recovered from the director responsible for the failure to keep suitable accounting records. In this case, the figure initially claimed was inclusive of the net director’s costs (the information disclosed that some $20,303.90 worth of assets was realised to defray the director’s costs). The costs were $45,155.01. When that figure is added to the debtors’ pool of $444,574.33, a total sum of $489,729.34 is obtained. Mr Wong amended the amount sought so that it equated to that figure.

[23]               The Court is also required to consider the question of what possible defences might have been available. In this case, that was made difficult by Mr Drever’s non- attendance at Court and non-instruction of counsel. However, Mr Wong appropriately averted to the possible defences. The only potentially available defence would appear to be that Mr Drever took all reasonable steps to secure compliance with s 194 and had reasonable grounds to believe, and did believe, that a competent and reliable person was charged with duty of seeing that s 194 was complied with, and was in a position to discharge that duty.

[24]               It appears that Ms Debbie Harlow was tasked with the preparation of GST returns.   On the basis of the information provided to the Court, it appears that      Ms Harlow’s occupation was that of Property Manager, and that she had no qualifications or experience as an accountant. In those circumstances, she would not meet the criteria of being a competent and reliable person capable of overseeing the duty of preparing financial records under s 194. She is certainly not someone who appears to have the experience or ability to prepare accounting records such as accounts and statements, or track the day to day transactions of the company. Therefore, I am satisfied that there are no possible defences that Mr Drever could have raised had he appeared in person.

[25]               For the reasons set out above, I am satisfied in this case that Mr Drever failed egregiously to comply with his obligations under s 194, and that the grounds have been made out under s 300 for him to be made liable for the debts of the company, inclusive of the net liquidator’s costs. I make an order accordingly in the sum of

$489,729.34.

[26]               Mr Wong also seeks costs on a 2B basis and the disbursements of the proceedings. I confirm that 2B costs are appropriate and invite Mr Wong to submit a draft order including details of the disbursements.

Churchman J

Solicitors:
Adam Stevenson Botterill for Plaintiffs