Toilolo
[2019] NZHC 1090
•17 May 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-002328
[2019] NZHC 1090
IN THE MATTER OF A decision of the Registrar of Companies under s 385 of the Companies Act 1993 AND
IN THE MATTER OF
An appeal by Timothy Toilolo
Hearing: 27 March 2019 Appearances:
R B Hucker and D L Lang Siu for Appellant
S Connolly and T Witten-Sage for Registrar of Companies
Judgment:
17 May 2019
JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie On 17 May 2019 at 11.30am
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
Solicitors/counsel:
Hucker & Associates, Auckland Crown Law, Wellington
TOILOLO v REGISTRAR OF COMPANIES [2019] NZHC [1090] [17 May 2019]
Introduction
[1] The appellant, Timothy Toilolo, appeals a decision given by Peter Barker, a Deputy Registrar of Companies (“the Deputy Registrar”), under s 385 of the Companies Act 1993 (“the Act”). The decision disqualified Mr Toilolo from being a director or promoter of a company, or from being concerned with, or taking part, whether directly or indirectly, in the management of a company, for a period of two years and six months.1
[2] The decision was made following the liquidation of a company controlled by Mr Toilolo – Toilolo & Co Accountants Ltd (“the company”). He was its sole director and shareholder.
[3] The Registrar of Companies (“the Registrar”) was initially named as the respondent to these proceedings. This was contrary to r 20.9(2) of the High Court Rules and, by minute dated 26 February 2019, Jagose J removed the Registrar as a respondent. The Judge recorded that the Registrar nevertheless wished to appear and be heard pursuant to r 20.17, and submissions were made to me on behalf of the Registrar to assist me in dealing with the matter. The Registrar did not take part in the hearing as a party and Mr Connolly, for the Registrar, was careful to take a neutral role.
Factual background
[4] Mr Toilolo was, at all relevant times, a chartered accountant. He incorporated the company on 25 November 2011.
[5] The company was incorporated one week after another company – Professional Accounting & Taxation Ltd – which was also owned and controlled by Mr Toilolo, was placed into liquidation by the Inland Revenue Department (the “IRD”) due to unpaid GST and PAYE. Professional Accounting & Taxation Ltd had carried on business as a provider of accountancy services. Mr Toilolo purchased the business
1 Final minute – Section 385 Companies Act 1993 – Salamasina Faleilua Timothy Toilolo – Minute of Deputy Registrar of Companies, dated 24 September 2018.
from Professional Accounting & Taxation Ltd with the consent of the liquidator of that company,2 and the business was transferred to the company.
[6] The company’s share capital was $100. I do not know whether it was called up but, in any event, the company needed additional funds. It obtained a $14,000 overdraft facility from Westpac Banking Corporation Ltd (“Westpac”) in February 2012. To support the overdraft, Mr Toilolo and the company entered into cross guarantees in favour of Westpac. The cross guarantees secured not only the overdraft but also Mr Toilolo’s personal indebtedness to Westpac. At the time this indebtedness amounted to approximately $400,000. Mr Toilolo had a term deposit with Westpac of
$35,000 which partially offset this and the bank had security as well. It had two home loan agreements with Mr Toilolo and it held a mortgage over his residential property. To support the cross-guarantee, Westpac took further security by way of a general security agreement over the assets of the company.
[7] The company, through Mr Toilolo, traded as a provider of accountancy services. It traded poorly from the outset and Mr Toilolo was experiencing personal financial problems as well. Difficulties soon emerged.
(a)Mr Toilolo defaulted in his mortgage repayments due under the home loan agreements with Westpac. As a result, in late May 2012, Westpac served notices under s 119 of the Property Law Act 2007 on both Mr Toilolo and the company. Those notices required Mr Toilolo and the company to remedy the defaults under the home loan agreements. At that stage the arrears owing to Westpac amounted to $12,500. The notices expired, unremedied, on 8 July 2012.
(b)In early August 2012, Westpac uplifted the monies held on term deposit and applied them to clear the arrears and reduce the principle owing under the home loan agreements.
2 There were difficulties in completing the purchase. Mr Toilolo defaulted in paying part of the purchase price but the liquidator did not seek recovery. The liquidator considered that it was uneconomical to pursue Mr Toilolo.
(c)There were further defaults and, on 1 March 2013, Westpac issued letters of demand on Mr Toilolo and the company. The demands required Mr Toilolo, and the company as guarantor, to pay arrears of principle and interest totalling $4,495.70 no later than 7 March 2013. The demand issued against the company advised that failure to remedy the default might result in cancellation of the overdraft facility. The default was not remedied and Westpac cancelled the overdraft facility and called up the amount then outstanding.
(d)The further defaults prompted Westpac to issue fresh Property Law Act notices. They were dated 3 April 2013 and they were served on Mr Toilolo and the company. The amount outstanding under the company’s overdraft facility formed part of the amount claimed under the notices. The notices expired, again unremedied, on 15 May 2013 and Westpac then proceeded to take the necessary steps to exercise the power of sale under the mortgage.
(e)The company began to accrue PAYE arrears as from May 2013 and then GST arrears as from July 2013.
[8] The mortgagee’s sale of Mr Toilolo’s residential property under the direction of Westpac was scheduled to proceed by way of an auction on 26 June 2013. On 21 June 2013, Mr Toilolo applied for an interim injunction to stop the auction. That application was dismissed.3 The auction proceeded and the property was sold. There were substantial arrears outstanding following the sale and Westpac then obtained summary judgment against Mr Toilolo for those arrears in the sum of $159,111.51, together with interest and costs of $20,113.34.4 The judgment debt was not met and Westpac obtained an order bankrupting Mr Toilolo on 7 July 2014.5
[9] The company was placed into liquidation at the suit of Westpac on 5 September 2014. At the time of the liquidation, the company had outstanding debts of
3 Toilolo v Westpac New Zealand Ltd [2013] NZHC 1517.
4 Toilolo v Westpac New Zealand Ltd [2013] NZHC 3423.
5 Westpac New Zealand Ltd v Toilolo [2014] NZHC 1623.
$245,897.03 owing to Westpac under the cross-guarantee and $42,058.24 (comprising unpaid PAYE and GST) owing to the IRD. There were also two relatively small trade creditors.
[10] The liquidator’s final report for the company was released on 28 September 2015 and the company was removed from the Companies’ Register on 4 November 2015.
[11] On 9 June 2016, the Official Assignee sent a letter to the Registrar noting that Mr Toilolo had been adjudicated bankrupt, and recording the Official Assignee’s view that Mr Toilolo “may be a candidate for being prohibited from being a director or concerned in the management of a company under s 385 of the Act for a period longer than three years”.
[12] On 13 June 2016, the Registrar wrote to the liquidator of the company, seeking information in relation to Mr Toilolo and the company. The liquidator did not respond promptly. After various chase ups, the requested information was finally provided by the liquidator to the Registrar on 6 December 2016.
[13] On 26 April 2017, two years and seven months after the company had gone into liquidation, the Registrar signed a notice pursuant to s 385(5) of the Act, advising that he was considering exercising his powers under s 385(3). That notice was served on Mr Toilolo on 16 May 2017. Mr Toilolo responded to the notice on 30 June 2017. A further letter was sent to him on 5 July 2017 by the Registrar and Mr Toilolo responded to this letter on 21 July 2017.
[14]On 22 August 2017, Mr Toilolo was discharged from bankruptcy.
[15] On 9 January 2018, some three years and four months after the company had gone into liquidation, the Registrar wrote to the Deputy Registrar seeking a decision under s 385 of the Act.
[16] On 8 February 2018, the Deputy Registrar issued an interim minute setting out his preliminary views in relation to whether Mr Toilolo should be prohibited under
s 385 of the Act.6 On 4 May 2018, Mr Toilolo sent submissions to the Deputy Registrar in relation to the interim minute.
[17] The final minute and notice of prohibition, were dated 24 September 2018, and they were served on Mr Toilolo on 26 September 2018. This was four years after the company had been placed into liquidation. The two year six month prohibition period ran from the date of the notice pursuant to s 385(3).
The Deputy Registrar’s decision
[18] The Deputy Registrar’s decision is contained in the final minute dated 24 September 2018. The final minute makes a number of references to the interim minute as well.
[19] The Deputy Registrar started by outlining the background to the decision he had been asked to make. He recorded his view that there were a number of factors that had led to the failure of the company; he was prepared to assume that relevant factors were that Westpac called up the cross-guarantee it held from the company and that, as asserted by Mr Toilolo, his residential property had declined in value. He considered that these matters however did not, of themselves, mean that Mr Toilolo should not be considered as a candidate for prohibition under s 385. Rather, he said that if he were to be satisfied that one or more of the allegations of mismanagement made by Ministry of Business, Innovation and Employment (“MBIE”) was made out and was at least partly responsible for the company becoming insolvent, then he had the power to prohibit Mr Toilolo.7
[20] The Deputy Registrar went on to record that he was satisfied that there were multiple incidents of mismanagement by Mr Toilolo, which were at least a partial reason for the failure of the company. He held that the fact that Westpac exercised its right to sell the security it held was a consequence of Mr Toilolo’s mismanagement
6 Interim minute – Section 385 Companies Act 1993 – Salamasina Faleilua Timothy Toilolo – Minute of Deputy Registrar, dated 7 February 2018.
7 Final minute, above n 1, paras [4.1]-[4.4].
and the failure by the company and Mr Toilolo to meet their obligations to Westpac, but that it was not the sole cause.8
[21] The Deputy Registrar set out the materials on which he had relied in reaching his conclusions, including information MBIE had obtained from the liquidator, information derived from the various judgments referred to above,9 and the submissions which had been filed by Mr Toilolo and MBIE. He observed that the information that had been provided to him had to be “sufficient and of sufficient quality to meet a minimum threshold” before he could consider the allegations made by MBIE.10 He was so satisfied in most, but not all, instances.
[22] Dealing with the various allegations of mismanagement made by MBIE, the Deputy Registrar turned first to consider whether or not Mr Toilolo had been involved in reckless trading, contrary to s 135 of the Act.
(a)He summarised various relevant authorities and the submissions he had received, and expressed the view that once a company falls into arrears with its tax payments, it is insolvent, or at the least, solvency becomes an issue. He expressed the view that once a company cannot meet it debts when they fall due, a director should immediately conduct a “sober headed” assessment of the company’s position.11
(b)He noted that the company was incorporated in November 2011, and that between that date and 31 May 2013, it traded at a loss. He considered that the company was insolvent once it failed to make payment to the IRD when its tax debts fell due, and that occurred on 31 May 2013. He recorded that there was no indication that Mr Toilolo undertook any assessment of the company’s solvency, or that if he did, he put a coherent plan in place to deal with it. He was satisfied that the sober headed assessment required could have been completed quickly, because the company’s business was simple. He noted that each month
8 At [4.5].
9 See above, ns 3, 4 and 5,
10 Final minute, above n 1 at [5.2].
11 At [8.33].
that the IRD arrears were unpaid, the debt continued to increase, and the position of the company continued to deteriorate. There was no prospect of the company increasing its income sufficient to meet the arrears and fresh IRD debt, and that the indications were that the business of the company was being scaled back, rather than increasing.12
(c)The Deputy Registrar recorded that he had come to his conclusion on reckless trading without reference to the moneys the company owed to Westpac under the cross guarantee, but that the company’s liability for the total debt was another reason why a sober headed assessment should have resulted in the company ceasing to trade. The Deputy Registrar held that this should have happened by at least May 2012, when Westpac issued the notices against Mr Toilolo and the company under s 119 of the Property Law Act. He noted that those notices expired unremedied on 8 July 2012, that there was then an event of default and that the contingent liability under the cross guarantee then became an actual liability. From that point on, the company was in default to Westpac for a sum in excess of $400,000 and it was “hopelessly insolvent”. The Deputy Registrar considered that it should have ceased trading in mid-2012, and that if this had happened, the IRD would never have ended up as a creditor. The Deputy Registrar expressed the view that if Mr Toilolo could not recognise the implications for the company of Westpac’s actions from May 2012 onwards, then he was doing no more than applying a “Nelsonian eye” to the situation.13
(d)The Deputy Registrar then turned to consider causation. He noted that s 385(4) of the Act applies if mismanagement was at least partly responsible for the company coming within one or more of the categories set out in s 385(1). While he was satisfied that non-payment of the PAYE and GST due was mismanagement, he was less certain as to whether this mismanagement was partly responsible for the failure
12 At [8.34]-[8.41].
13 At [8.43]-[8.45].
of the company. He was inclined to the view that it was, but left the point open because of the conclusions he reached elsewhere in his final minute.14
(e)When regard was had to the Westpac debt, the Deputy Registrar was satisfied that the company was insolvent by at least July 2012, and that the company should have ceased to trade at that time. He was satisfied that the failure to cease trading at that point was mismanagement, and was at least a partial reason for the failure of the company, and that the position continued to be increasingly clear cut from 2012 and at the latest by March 2013. He recorded his view that the mismanagement was serious.15
[23] Secondly, the Deputy Registrar considered the allegation that Mr Toilolo had failed to keep proper accounting and company records. Again, he recorded MBIE’s allegations, and Mr Toilolo’s response. He referred to ss 189 and 194 of the Act, and to relevant Court decisions. He was satisfied that the company did not comply with those sections, and that such records if any that the company had, had not been kept at its registered office. He considered that it was Mr Toilolo’s responsibility to maintain a satisfactory system of control over the company’s records, and that his explanation as to why some records were not available was unsatisfactory. He noted that Mr Toilolo was an accountant, who knew or should have known of the statutory requirements. The Deputy Registrar expressed the view that this was a core competency component for an accountant, and that Mr Toilolo was in clear breach of s 189 by not having a complete set of the documents that the company was required to keep at its registered office. The Deputy Registrar was satisfied that the inadequate records were at least a partial reason for the insolvency of the company, noting that, without accurate financial information, a director cannot ascertain the financial position of the company at any given point in time, and that if a director cannot do so, the director is more likely to make poor or flawed decisions.16
14 At [8.54] and [8.57].
15 At [8.53], [8.56] and [8.58].
16 At [9.1]-[9.28].
[24] Thirdly, the Deputy Registrar considered the allegation that Mr Toilolo had failed to act in good faith and in the best interests of the company. Again, the Deputy Registrar recorded the competing submissions, and the relevant law. He was not satisfied that some of the allegations made by MBIE were made out, and considered that others were not mismanagement by Mr Toilolo in his capacity as a director of the company.17 He did not however consider that the entry into the cross guarantee by the company was fair to the company. He noted that there was no evidence that the company agreed to guarantee the personal liabilities of Mr Toilolo, or that s 161 was complied with. He then said that even if the required resolution was passed, the execution of the cross guarantee was not fair to the company. The maximum benefit the company could receive under the cross guarantee was $14,000, but in exchange, the company took on a liability of at least $400,000 at the time the cross guarantee was executed. He considered that this mismanagement was directly linked to the company’s failure, because it meant that the company had become contingently liable for approximately $400,000 of Mr Toilolo’s personal debt.18
[25] Fourthly, the Deputy Registrar briefly considered whether or not Mr Toilolo had breached his duties by allowing a related company – a company involved with his daughter’s accountancy practice – to take over some of the company’s assets. The Deputy Registrar considered that there were questions around the value of the company’s business and what had happened to it, but declined to make any finding in this regard; he considered that to go further would be speculation.19
[26] Next, the Deputy Registrar considered whether or not Mr Toilolo was actively involved in the management of the company at relevant times. He concluded that Mr Toilolo was involved for a prolonged period undertaking a course of study at Auckland University, and that that study had distracted him from managing the affairs of the company. The Deputy Registrar considered that Mr Toilolo did not meet the standard required, that this was another aspect of reckless trading and that Mr Toilolo’s failure to sufficiently monitor the management of the company was at least a partial reason for the company’s failure.20
17 At [10.1]-[10.17].
18 At [11.1]-[11.21].
19 At [12.1]-[12.8].
20 At [13.1]-[13.9].
[27] The Deputy Registrar summarised his overall conclusions as to the allegations of mismanagement. He stated as follows:
14.4The Company was put into liquidation on the petition presented by Westpac to the court. The basis of Westpac’s petition was because the debt owed by the Company to Westpac, which was due and owing, was not paid. The reason it was not paid was because the Company had insufficient funds to pay Westpac. That was not surprising. It had been unable to pay the IRD what was due and owing by it. The IRD continued to remain unpaid, while further debt became owing, until the Company was wound up approximately a year later.
14.5There were several reasons why the Company had insufficient funds to pay Westpac:
(a)Because the Company was trading while insolvent;
(b)Because of the cross guarantee;
(c)Because the Company’s director did not know the Company’s financial position;
(d)Because the Company’s director was not actively involved in its management.
[28] Finally, the Deputy Registrar considered the exercise of the discretion vested in him by s 385(4) of the Act. He was satisfied that the mismanagement was at the higher end of the scale, and that Mr Toilolo was responsible for it; it was accordingly not appropriate to exercise his discretion not to prohibit Mr Toilolo. The Deputy Registrar discussed the term of any prohibition, setting out the main factors that he took into account – namely the risk to the public, personal factors, the consequence of prohibition on Mr Toilolo’s future work prospects, the intention of the Act, the setting of standards and deterrence, Mr Toilolo’s bankruptcy and the maximum period of prohibition. He expressed the view that the loss suffered by the creditors was at the lower end of the scale, but that the level and the nature of the mismanagement was at the higher end of the scale. He considered that Mr Toilolo showed little insight into his mismanagement, and that he had no proper appreciation of his duties and responsibilities as a director. He took the view that Mr Toilolo represented a significant risk to the public, and that unless there was a period of prohibition imposed, there would be nothing to prevent Mr Toilolo from becoming a director or manager of a company. Balancing all of these various factors, he directed that Mr Toilolo be prohibited for a term of two years and six months from being a director or promotor
of a company, or of being concerned in, or taking part, whether directly or indirectly, in the management of a company.21
The appeal
[29] The appeal is brought pursuant to s 370 of the Act. That section provides a right of appeal, and further provides that, on hearing any appeal, this Court may approve the Registrar’s decision, or give such directions or make such determination in the matter as the Court thinks fit.
[30] The section gives a general and unrestricted right of appeal, which proceeds de novo.
[31] Section 385 requires the decision-maker to be satisfied as to a number of threshold issues; if he or she is satisfied, the section then confers a discretion to prohibit. The authorities suggest as follows:
(a)In regard to the factual findings required before the discretion can arise, the Court must consider the merits of the case afresh. The weight given to the reasoning of the Deputy Registrar is a matter for the Court’s assessment.22 The appellant, bears the onus of satisfying this Court that it should differ from the decision of the Deputy Registrar, and it is only if this Court considers that the decision is wrong that it is justified in interfering with it.23
(b)In regard to the exercise of the discretion, in the event the decision- maker is satisfied as to the factual matters specified, the threshold for a successful appeal is more limited. An appellant has to demonstrate an error of law or principle, or that an irrelevant consideration was taken
21 At [15.1]-[16.41].
22 Austin Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]-[5]; Mani v Registrar of Companies [2016] NZHC 3002 at [5]; Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [84]; Brand v Registrar of Companies [2018] NZHC 3148 at [33].
23 Austin Nichols & Co v Stichting Lodestar, above n 22 at [4]; Brand v Registrar of Companies, above n 22 at [33].
into account, or that a relevant consideration was overlooked, or that the decision was plainly wrong.24
Neither Mr Tucker, for Mr Toilolo, nor Mr Connolly took issue with this hybrid approach and I adopt it.
The notice of appeal
[32] The notice of appeal is a lengthy document. It alleges that the Deputy Registrar erred in prohibiting Mr Toilolo from being a director of a company or involved in the management of a company for a period of two years and six months. More specifically, it is asserted that:
(a)the Deputy Registrar failed to observe the rules of natural justice. Various particulars were set out in support of this assertion;
(b)the Deputy Registrar erred in relying on conduct that related to, or occurred, during a period more than five years prior to the date of the Deputy Registrar’s decision;
(c)there were various errors in fact and in law. Twenty one particulars were set out in this regard;
(d)the Deputy Registrar failed to give any reasons for deciding to exercise his discretion to disqualify Mr Toilolo;
(e)the Deputy Registrar erred in holding that the maximum period of disqualification that was in force at the time of the impugned conduct should not be a factor to be taken into account when assessing the length of disqualification; and
24 Brand v Registrar of Companies, above n 22 at [37]; Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1 at [32].
(f)the Deputy Registrar did not provide any or sufficient reasons for the period of disqualification imposed, nor apply the principle of proportionality.
Analysis
Section 385
[33]Relevantly, s 385 of the Act provides as follows:
385 Registrar … may prohibit persons from managing companies
(1)This section applies in relation to a company—
(a)that has been put into liquidation because of its inability to pay its debts as and when they became due:
…
(3)The Registrar … may, by notice in writing given to a person, prohibit that person from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of, a company during such period not exceeding 10 years after the date of the notice as is specified in the notice. …
(4)The power conferred by subsection (3) may be exercised in relation to—
(a)any person who the Registrar … is satisfied was, within a period of 5 years before a notice was given to that person under subsection (5) (whether that period commenced before or after the commencement of this section), a director of, or concerned in, or a person who took part in, the management of, a company in relation to which this section applies if the Registrar … is also satisfied that the manner in which the affairs of it were managed was wholly or partly responsible for the company being a company in relation to which this section applies; or
…
(5)The Registrar … must not exercise the power conferred by subsection
(3) unless—
(a)not less than 10 working days’ notice of the fact that the Registrar … intends to consider the exercise of it is given to the person; and
(b)the Registrar … considers any representations made by the person.
(6)No person to whom a notice under subsection (3) applies shall be a director or promoter of a company, or be concerned or take part (whether directly or indirectly) in the management of a company.
[34] The power to disqualify a person from being a director is both protective and penal in nature. Prohibition is aimed not at remedying wrongs done to shareholders and creditors, but rather at protecting the public from unscrupulous or incompetent directors in the future, deterring others and setting appropriate standards of behaviour. At the same time, it is recognised that any given director or manager inevitably experiences prohibition as a punishment.25
[35] Section 385 was first introduced in 1988 by way of amendment to the now repealed Companies Act 1955. An extensive analysis of the section was undertaken in Miller J in the first case under the provision to come before this Court – Davidson v Registrar of Companies.26 Relevantly, he there stated as follows:
[94] Section 385 applies to a company that is unable to pay its debts as they fall due, or on which execution has been returned unsatisfied, or which has been put into receivership, or which has entered into a compromise with its creditors, or which is in voluntary administration. The theme is business failure, evidenced by insolvency.
[95] Prohibition may follow where the qualifying company’s plight resulted wholly or in part from the manner in which its affairs were managed. (I put the onus to one side for the moment.) So the legislation requires a causal relationship between management of the company’s affairs and its qualifying circumstances.
[96] There is a sense in which failure always results from management, for a company must act through human agency. However, … the section’s purpose is that of disqualifying directors and managers who are not fit and proper persons to act in those capacities; it is aimed at mismanagement. …
[97] … the section is aimed at those who through some want of integrity, skill, judgment or industry are not suitable directors or managers. They may well have behaved in ways that breach a director’s duties and standard of care under ss 131–137, … But ss 131–137 address an individual director’s accountability to shareholders and creditors of a company which the director has already served, while s 385 is protective and forward-looking. The Registrar’s inquiry is addressed initially to mismanagement of the company’s affairs and its causal connection to insolvency, not the behaviour of individual directors. Such mismanagement having been identified, all of the company’s directors and managers are eligible for prohibition. The power to prohibit them is broad and discretionary in nature. When exercising it the Registrar is not
25 Davidson v Registrar of Companies, above n 22 at [91], citing First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 (HC).
26 Above n 22.
confined to conduct that caused the company’s insolvency; all of the individual director’s attributes and conduct in office may be taken into account.
…
[100] Of course the Registrar does not wield the power against a board and management team collectively; rather, each respondent must be examined individually in all the circumstances of the case. The power is discretionary; s 385(3) and (4) both provide that the Registrar “may” exercise it. Like any other discretionary power, it must be exercised for the statutory purpose, that of excluding from company management those who are unsuited to it.
…
[103] By way of summary, the Registrar’s inquiry should follow the following steps:
(a)Does the company, … qualify under subs (1)?
(b)Was the respondent a director or manager of the company … within the 5 years preceding the Registrar’s notice?
(c)Where there is one qualifying company:
(i)was the manner in which the company’s affairs were managed a contributing cause of its qualifying status; and, if so,
(ii)ought the Registrar exercise the discretion to prohibit the respondent in all the circumstances?
…
(e)Where prohibition is appropriate, what is the appropriate term?27
[36] These observations have been cited with approval in the limited number of subsequent authorities dealing with the section.28 I agree with and adopt them.
[37] Against this background, I turn to consider the various matters raised in the notice of appeal and advanced at the hearing. Many of the matters overlap and others either lack detail or were not separately advanced at the hearing. I have endeavoured to avoid making this judgment too lengthy by dealing with some matters globally.
27 This approach was endorsed in Brand v Registrar of Companies, above n 22 at [45].
28 Mani v Registrar of Companies, above n 22; Brand v Registrar of Companies, above n 22; Clarke v Registrar of Companies [2018] NZHC 1608.
Did the Deputy Registrar fail to observe the rules of natural justice?
[38] I deal with the primary allegation – namely, that the Deputy Registrar failed to observe the principles of natural justice – and then with a number of the other issues which were also raised under this head.
[39] Miller J dealt with natural justice issues in the context of s 385 in Davidson. He noted that the legislation says very little about process, but that, in the course of argument before him, the Registrar acknowledged an obligation to observe the principles of natural justice in exercising his powers under s 385. The Judge recorded the practice that had then been adopted – namely that the National Enforcement Unit of the Companies Office prepares a report and recommendations, that the report is given to the respondent with the notice required under s 385, that communications can ensue between the respondent and the Unit, and that if the Unit maintains that prohibition is warranted, the report and the respondent’s representations are submitted to a specially appointed Deputy Registrar of Company for decision. The Judge noted that s 385 does not preclude additional requirements, and he expressed the view that the Registrar is a public authority under s 27(1) of the New Zealand Bill of Rights Act 1990, given that decisions under s 385 affect the rights, obligations and interests of, inter alia, respondent directors and managers.29 The Judge stated as follows:
[107] Accordingly, the Registrar must give the respondent reasonable notice of the case he or she is to meet. In circumstances where the respondent normally knows much more about the company’s management than does the Registrar, that requirement is unlikely to be onerous; it may suffice that the respondent knows the general nature of the allegations. But as a practical matter, some investigation must normally precede the Registrar’s notice; except in the simplest of cases, the Registrar could scarcely act without first inquiring into the company’s circumstances, That investigation is likely to isolate instances of company mismanagement or features of the director’s conduct or qualifications which should be identified when notice is given if they are to inform the Registrar’s decision.
[40] Natural justice issues have also been considered in other cases dealing with the section:
29 Davidson v Registrar of Companies, above n 22 at [104]-[106].
(a)In Mani v Registrar of Companies,30 Thomas J discussed the relevant principles by reference to the decision of the Privy Council in Re Erebus Royal Commission.31 She cited the observations by Miller J in Davidson, and adopted those observations. She noted that the Registrar must give a respondent reasonable notice of the case he or she has to meet, and that instances of company mismanagement or features of the director’s conduct which are of concern should be identified. She commented as follows:
While identification of specific events is not essential, as a matter of fairness, as much specificity as possible should be given to the person under investigation to provide him or her with a meaningful opportunity to make representations to the Registrar.32
(b)Similar observations were made by van Bohemen J in Clarke v Registrar of Companies.33 He considered that the Deputy Registrar in that case had followed proper process. The process followed was that discussed by Miller J in Davidson.
[41] In the present case, the process discussed and approved in the authorities I have set out was followed. I note as follows:
(a)After it had undertaken preliminary investigations and sourced relevant materials, MBIE sent a detailed letter to Mr Toilolo on 27 April 2017. The letter attached the notice required by s 385(5) of the Act. It enclosed the materials which had been obtained by it (and that which were ultimately submitted to the Deputy Registrar). It identified the incidences of mismanagement which MBIE was asserting were attributable to Mr Toilolo and which were said to have wholly or partly led to the failure of the company. It particularised reckless trading, trading while insolvent, failing to keep proper accounting and company records, and failing to act in good faith and in the best interests of the
30 Mani v Registrar of Companies, above n 22.
31 Re Erebus Royal Commission; Air New Zealand v Mahon [1983] NZLR 662 (PC).
32 Mani v Registrar of Companies, above n 22 at [30].
33 Clarke v Registrar of Companies, above n 28.
company. It invited Mr Toilolo to make representations on these issues and as to why he should not be prohibited, and asked him to ensure that any representations made by him included all matters that he considered the Registrar should take into account, as well as any supporting documentation.
(b)Mr Toilolo responded on 30 June 2017. Detailed submissions were filed on his behalf. Those submissions were prepared by Mr Toilolo’s legal advisors. They were thorough, running to some 11 pages.
(c)A further letter was sent to Mr Toilolo on 4 July 2017. It dealt with the issue of onus and gave Mr Toilolo a further 20 working days to respond in this regard.
(d)A submission was filed on Mr Toilolo’s behalf in regard to onus on 21 July 2017.
(e)MBIE responded by email on 21 July 2017, accepting the submission as to onus made by Mr Toilolo.
(f)A further letter and the interim minute prepared by the Deputy Registrar were sent to Mr Toilolo on 8 February 2018. The interim minute raised three further potential acts of mismanagement that the Deputy Registrar thought might be attributable to Mr Toilolo. Mr Toilolo was invited to make submissions on the interim minute.
(g)Further submissions were made by Mr Toilolo in response to the interim minute on 4 May 2018. Again, those submissions were made by Mr Toilolo’s legal advisors, and again they were thorough.
The final minute then issued, setting out the Deputy Registrar’s decision and giving detailed reasons for that decision. The Deputy Registrar itemised the materials he took into account in reaching his decision. There is nothing to suggest that any further
materials were taken into account by the Deputy Registrar which Mr Toilolo had not seen or not had the opportunity to comment on.
[42] I cannot see that there has been any departure from the requirements of natural justice applicable in cases of this kind. Rather, Mr Toilolo was given multiple opportunities to make submissions on the relevant materials and on the Deputy Registrar’s preliminary assessment. He took full advantage of those opportunities and the Deputy Registrar in his decision expressly took into account the submissions which Mr Toilolo had made throughout the process. The assertion that the Deputy Registrar in some way breached the rules of natural justice, in my judgment, has no foundation in this case.
[43]I now turn to some of the other issues raised under the rubric of natural justice.
(i)Onus
[44] It was common ground that Mr Toilolo’s conduct fell for consideration under s 385(4)(a) of the Act.
[45] Mr Hucker submitted that, where only one company is liquidated, the onus is on the Registrar to make out the mismanagement alleged. In this regard, he referred to the letter of 4 July 2017 sent by the Prohibitions Unit at MBIE, and to the further email also sent by MBIE to Mr Toilolo dated 21 July 2017, both referred to above.
[46] Despite the correspondence from MBIE, the Deputy Registrar does not seem to have been unduly concerned about where the onus lay. Rather, he focused on the materials before him and whether they were sufficient to establish the matters the section required him to be satisfied about.34
[47] The law is clear, and again it was succinctly stated by Miller J in Davidson. Under s 384(4)(a), there is no onus and indeed no prosecutor on whom any onus falls. The subsection simply requires that the Registrar be satisfied, having given the
34 See above at [21].
respondent notice and having considered any representations that he or she may make, that prohibition is appropriate.35
[48]I am not persuaded that the Deputy Registrar erred in the approach he took.
(ii)Standard of proof
[49] Mr Hucker went on to argue that the Deputy Registrar erred by failing to apply the correct standard of proof. He submitted that a higher degree of probability than the civil standard of proof on the balance of probabilities was required.36
[50] In his interim decision, the Deputy Registrar noted that the statutory requirement was for him to be satisfied, and that in terms of being satisfied, he had to make up his mind. He went on to say that in making up his mind, he had to consider all of the information before him which he itemised. He specifically referred to a paragraph in his interim decision where he acknowledged that “higher quality evidence [might] be necessary … in order to be satisfied in terms of s 385(4)”.37 He noted in the final minute that the information provided to him supporting the allegations had to be “sufficient and of sufficient quality to meet a minimum threshold” before he could consider the allegations, and he expressly reaffirmed the observations he had made in the interim decision that higher quality evidence might be required.38
[51] As Miller J noted in Davidson,39 and as Thomas J noted in Mani,40 the wording in s 385(4)(a) is plain. In order to exercise the power of prohibition the Deputy Registrar as the decision-maker has to be “satisfied” as to the matters set out in the subsection.
[52] In Z v Dental Complaints Assessment Committee,41 the Supreme Court considered the term “satisfied” in a similar context – the disciplining of a dentist – and
35 Davidson v Registrar of Companies, above n 22 at [102].
36 Referring to First City Corporation Ltd v Downsview Nominees Ltd, above n 25.
37 Interim minute, above n 6, paras [3.22] and [5.3].
38 Final minute, above n 1, paras [5.1]-[5.2].
39 Davidson v Registrar of Companies, above n 22 at [102].
40 Mani v Registrar of Companies, above n 22 at [14].
41 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR at [96].
its relationship to the standard of proof required in the circumstances of that case. The Court commented as follows:42
Before it is able to exercise its powers to impose penalties, the Tribunal must in the present case be “satisfied” that a practitioner is guilty of detrimental acts or omissions, or of professional misconduct. Being “satisfied” in this context simply means that the Tribunal has made up its mind that is the case. The term “satisfied” does not require that the Tribunal should reach its judgment having been satisfied that the underlying facts have been proved to any particular standard. Nor does the Act or any applicable procedural rule stipulate a standard of proof which the Tribunal must apply. That question must accordingly be decided on general principles having regard to the statutory context.
The Supreme Court noted that the common law recognises only two standards of proof that the balance of probabilities standard generally applies in civil proceedings, and that there is no intermediate standard between the criminal and civil standards in this country. It did note that the civil standard is flexibly applied, and that there is a natural tendency to require stronger evidence before being satisfied to the balance of probability standard in cases where the allegations are serious.43
[53]The Supreme Court’s observations are apposite in this case.
[54] The Deputy Registrar was clearly alive to these matters, when he held that the information provided to him to support the allegations had to be not only sufficient but also of sufficient quality to meet a minimum threshold before he could consider the allegations.44 The language he used does not follow that used in Z, but it is to a similar end. The Deputy Registrar set out the material he had regard to, and he considered not only the volume but also the quality of that material. In some situations, he declined to find mismanagement on the materials before him. In other situations, he found mismanagement.
[55] I do not consider that there is anything in the criticisms levelled at the Deputy Registrar in this regard.
42 At [17].
43 At [102].
44 Final minute, above n 1, at [5.2].
(iii)Quality of evidence
[56]In the notice of appeal, it was asserted:
(a)that there was no material of probative value on which the Deputy Registrar could properly base his decision and his conclusions;
(b)that the Deputy Registrar relied upon statements that lacked specificity detail and particularity, and which were conclusory in nature;
(c)that the Deputy Registrar wrongly relied on his own assessments of credibility on the basis of written documentation before him when it was unsafe to do so, and that he did not properly test the generalised nature of the allegations against Mr Toilolo;
(d)that the Deputy Registrar wrongly relied on hearsay evidence without properly testing the same;
(e)that the Deputy Registrar erred in holding that a bare denial by Mr Toilolo could not stand against an assertion by the liquidator;
(f)that the Deputy Registrar failed to make an assessment of primary facts and instead relied on opinion evidence; and
(g)that the Deputy Registrar made findings of credibility based upon written materials without the benefit of cross-examination, and without taking any steps to make an assessment of the reliability of the evidence.
[57] The difficulty with these various assertions is that they were not referenced to relevant paragraphs in the Deputy Registrar’s final minute, and Mr Hucker did not provide further detail in his submissions.
[58]Some of the criticisms can be readily dealt with.
(a)There were many materials before the Deputy Registrar. He set them out in his final minute. Mr Toilolo had had the opportunity to comment on them. The Deputy Registrar was entitled to consider them and to draw inferences from them. That is part of the fact finding process he was required to undertake in fulfilling his statutory mandate.
(b)There is no prohibition of the admissibility of hearsay.
(c)There is no provision for a hearing. Rather, Parliament has established a summary process, under which a decision can be made within 10 days of notification.
(d)There is nothing to preclude the Deputy Registrar from taking into account hearsay, generalised statements or even statements which have been received from others but which are conclusory. Rather, it is a matter of assessing the probative value of the evidence and the weight to be attributed to it. These matters are for the Deputy Registrar as the decision-maker to evaluate.45
[59] Without further detail, it is difficult to take the general criticisms levelled against the Deputy Registrar’s decision any further.
The period of five years specified in s 385(4)(a)
[60] It was alleged in the notice of appeal, and in oral argument, that the Deputy Registrar made an error of law by relying on conduct that occurred more than five years before the date on which the Deputy Registrar was considering Mr Toilolo’s conduct, and which fell outside the period which could properly consider under s 385(4)(a).
[61] With respect to Mr Hucker, the subsection did not preclude the Deputy Registrar from considering conduct outside a five year period. Rather, s 385(4)(a) provides that the power conferred by the section may be exercised in relation to a
45 Mani v Registrar of Companies, above n 22 at [32]-[34].
person who is a director of, or concerned, or who took part in the management of the company, within a period of five years before notice was given under s 385(5). It is clear that Mr Toilolo was a director and the manager of the company during that five year period. There is nothing in this ground of appeal.
Alleged errors of fact and law
[62] In his written submissions, Mr Hucker argued that first the liquidator, and then the Deputy Registrar, fell into error, because they assessed Mr Toilolo’s duties as a director against the interests of one creditor only, the IRD.
[63] With respect to Mr Hucker, the Deputy Registrar did not confine his analysis only to the IRD. He did consider the company’s failure to pay GST and PAYE to the IRD but he went further and expressly took into account the company’s obligations to Westpac.
[64] Next it was argued that the Deputy Registrar had erred because there had been no “aging” of the creditors and debtors in assessing the extent to which there was reckless trading, and that the Deputy Registrar had failed to consider whether allowing the IRD debt to accrue was in fact the incurring of an obligation by the company.
[65] In my view, the Deputy Registrar was not required to consider issues such as the aging of debts or whether allowing IRD debt to accrue was the incurring of an obligation.
[66] The Deputy Registrar’s role was relatively straightforward. Relevantly, he was required to be satisfied, first, that the company had been put into liquidation because of its inability to pay its debts as and when they became due. Secondly, the Deputy Registrar was required to determine whether or not Mr Toilolo was a director or manager of the company within the five years preceding the notice given under s 385(5)(a). Thirdly, the Deputy Registrar was required to consider whether the way in which the company’s affairs were managed was a contributing cause to it being placed into liquidation.46
46 Davidson v Registrar of Companies, above n 22 at [103], cited in [35] above.
[67] The Deputy Registrar confined himself to these issues and in my judgment, he did not err in so doing.
[68] There can be no dispute that the company qualified under s 385(1). It was put into liquidation on 5 September 2014.
[69] Similarly, and as noted in [61], there can be no dispute that Mr Toilolo was a director of the company within the period of five years prior to the notice being given under s 385(5). The notice was dated 26 April 2017 and it was given to Mr Toilolo on or before 16 May 2017. He was a director of the company from the date of its incorporation on 25 November 2011 until it was removed from the Register on 4 November 2015. Accordingly, Mr Toilolo’s management of the company fell for consideration under s 385(4)(a).
[70] The Deputy Registrar’s approach was first to consider why the company was put into liquidation, then to determine whether or not there were instances of mismanagement, and then, to consider whether one or more of the identified instances of mismanagement was a contributing cause to the company going into liquidation.
[71] The Deputy Registrar was prepared to assume that the calling up of the cross- guarantee by Westpac, and declining property values, were relevant factors in the company being placed into liquidation.47 What was at issue was whether the way in which Mr Toilolo managed the company was a contributing cause to it being placed into liquidation. As the Deputy Registrar acknowledged, the test set out in s 385(4)(a) is met if the decision-maker is satisfied that the manner in which the affairs of the company were managed was wholly or partly responsible for the company becoming a qualifying company under s 385(1).
[72] The submission was made for Mr Toilolo, that the liquidation of the company was caused not by any mismanagement that can be attributed to Mr Toilolo, but rather because Westpac proceeded against the company under the cross-guarantee. It was argued that if Westpac had not decided to enforce the cross-guarantee, the company would not have been liquidated.
47 Final minute, n 1 at [4.3].
[73] To my mind this argument misses the point. There can be no doubt that the immediate reason the company was placed into liquidation was because Westpac took steps to liquidate it. For my part, I discount the suggestion that declining property values played a part. There was no evidence to support that assertion made by Mr Toilolo and it seems to me to be an ex post facto rationalisation designed to distract from his management of the company. This aside, the Deputy Registrar was endeavouring to determine why the company got itself into a situation where Westpac could place it in liquidation and whether it got itself into that situation as a result of mismanagement by Mr Toilolo.48 On the facts of this case, this was clearly the correct approach. The rather blunt analysis suggested for Mr Toilolo has a distinct air of unreality. Mismanagement by directors would never fall for analysis under s 385 if attention is directed only to the immediate trigger for the liquidation.
[74] I start by analysing the Deputy Registrar’s decision in relation to the fact that the company entered into the cross-guarantee in favour of Westpac. Chronologically this seems to me to be the best place to start.
[75] On 14 February 2012, Mr Toilolo is in his personal capacity, and the company for itself, entered into cross-guarantees in favour of Westpac. Under the cross- guarantees Mr Toilolo personally guaranteed the debts of the company and the company guaranteed the personal debts of Mr Toilolo. At the time the guarantee was entered into, Mr Toilolo personally owed Westpac approximately $400,000 under a home loan facility. The company did not owe anything to Westpac, but it was seeking banking accommodation up to a maximum sum of $14,000. Under the cross-guarantee it became contingently liable, not only for the $14,000 it needed to borrow, but also for Mr Toilolo’s personal indebtedness of $400,000, together with any further moneys that might become owing by Mr Toilolo to Westpac.
[76] In considering whether Mr Toilolo’s actions in allowing the company to enter into the cross-guarantee were mismanagement, the Deputy Registrar had regard to ss 131 and 161 of the Act. Broadly, s 131 requires a director to act in good faith in what the director believes to be the best interests of the company, and s 161 contains
48 At [4.4]-[4.5].
specific requirements that must be satisfied where a company proposes entering into a transaction of this type. First, the Board may only authorise entering such a transaction if it is satisfied that to do so is fair to the company. Secondly, the particulars of the transaction must be entered in the interests register. Thirdly, the directors voting in favour of authorising the transaction must sign certificates stating that, in their opinion, the transaction is fair to the company and the grounds for that opinion.
[77] As the Deputy Registrar noted, there was nothing to suggest that Mr Toilolo caused a resolution under s 161 to be passed.49 The Deputy Registrar further considered that even if a resolution had been passed, the cross-guarantee was nevertheless unfair to the company, because the maximum benefit available to the company under the cross-guarantee was $14,000, but in exchange it took on a liability of at least $400,000.50
[78] The Deputy Registrar in his final minute addressed submissions made on behalf of Mr Toilolo, and repeated in the hearing before me, namely:
(a)that the transaction enabled the company to increase its assets, and that an improving property market would have resulted in a greater return to the company; and
(b)that the transaction was standard practice.
[79] The Deputy Registrar rejected these submissions. In my view, he was correct to do so.
(a)In regard to the first argument, there was no evidence as to whether the property market was declining or improving. More importantly, the company did not increase its assets by entering into the cross-guarantee. It did not at any stage acquire an interest in Mr Toilolo’s home or in the term deposit. The only thing that increased was the company’s liability.
49 At [11.9].
50 At [11.10].
Initially it was a contingent liability. When default occurred it became an actual liability.
(b)As to whether or not the transaction was standard practice, the Deputy Registrar considered that the more usual practice would have been for Mr Toilolo to personally guarantee the indebtedness of the company, including if necessary by offering security. Such transactions are commonplace and, in my view, the Deputy Registrar was right in this observation. He went onto say that there was a different dimension when the company was required to guarantee the existing personal indebtedness of its director. 51 I agree.
[80] The Deputy Registrar concluded that the entry into the cross-guarantee by the company was not fair to it, and was in breach of ss 131 and 161. He considered that Mr Toilolo’s actions in causing the company to enter into the cross-guarantee constituted mismanagement. Further, the he concluded that this mismanagement was directly linked to the company’s failure. He observed as follows:
11.18Irrespective of whether the Company was solvent or not at the time it executed the Cross Guarantee, there was mismanagement because the transaction was unfair to the Company and in breach of s 161. That mismanagement is directly linked to the Company’s failure. It meant that the Company became contingently liable for approximately
$400,000 of Mr Toilolo’s personal indebtedness.
11.19It was certain that if the contingent liability became an actual liability the Company was never in a position to be able to satisfy that debt and the Company would be wound up as a result. Because the guarantee also operated as an indemnity Westpac was not required to seek recovery from Mr Toilolo first and then get the balance from Mr Toilolo. Westpac could seek recovery of the full debt owed under the Cross Guarantee from the Company, or from the Company and Mr Toilolo at the same time. And in fact demands were made by Westpac on the Company and Mr Toilolo contemporaneously. The failure to meet the demands ultimately resulted in the Company being wound up.
Accordingly, the Deputy Registrar concluded that the causation requirement in s 385(4)(a) was satisfied in relation to this aspect of mismanagement.
51 At [11.11]-[11.15].
[81] I cannot see any basis on which to criticise the Deputy Registrar’s decision in this regard. It is clear that Mr Toilolo was involved in the management of the company. The company was what is commonly known as a one-man company. Mr Toilolo was involved in all its policy and decision-making in relation to its business affairs.52 He was its driving force, and he was directly responsible for it entering into the cross- guarantee with Westpac. He was also responsible for ensuring that it complied with its obligations contained in ss 131 and 161. On the evidence, he failed to do so. There was nothing to suggest that entering into the cross-guarantee was fair to the company.
[82] The evidence before the Deputy Registrar was, in my judgment, more than sufficient to allow him to be satisfied that Mr Toilolo was responsible for the management of the company, that his management of the company, by causing it to enter into the cross-guarantee, was mismanagement, and that that mismanagement was wholly or partly responsible for the company ultimately being liquidated. Mr Toilolo bears the onus of persuading me that the Deputy Registrar was wrong, and that I should differ from his decision. He has failed to discharge that onus.
[83] The Deputy Registrar also dealt with the fact that PAYE and GST were accruing to the IRD as from May 2013 and July 2013 respectively. Thereafter the company made no GST payments and only nominal PAYE payments.
[84] The Deputy Registrar’s decision in this regard is – to my mind – slightly confusing – perhaps because he considered the tax defaults before he considered the Westpac debt. The Westpac debt preceded the tax defaults and logically it fell to be considered first. Nevertheless, and this aside, the Deputy Registrar concluded that the non-payment of GST and PAYE was serious mismanagement, noting that the nature of GST and PAYE is such that there is a degree of trust involved, because the amounts are only ever intended to be held by a company for a short term before being accounted for to the IRD. Nevertheless, he stated as follows:
8.57… It is less clear as to whether this mismanagement was at least partly responsible for the failure of the Company. I am inclined to the view
52 Commission of Corporate Affairs (Vic) v Bracht (1988) 14 ACLR 78 (VSC) at 733 to 734 and 736; Thompson v District Court at Christchurch [2002] 9 NZCLC 262,824 (HC); Mani v Registrar of Companies, above n 22 at [85]-[94].
that it does. Because of the conclusions I have reached elsewhere I have decided to leave that point open. …
[85] I am not persuaded by the Deputy Registrar’s decision in this regard. I accept that the IRD was not the petitioning creditor. Nevertheless, in my view, non-payment of the PAYE and GST indicated that the company was in even more trouble than it was as a result of the Westpac default. The inability to pay raised yet again the red flag of insolvency.53 I agree with the Deputy Registrar that non-payment of the PAYE and GST was serious mismanagement. The tax owing to the IRD was a debt owing by the company. The company was placed into liquidation because it was unable to pay its debts. The accrued debt to Westpac was the trigger, but the company’s inability to comply with its tax obligations was part of the problem as well. The company was equally unable to pay the debt owing from its compliance with those obligations.
[86]This leads into the issue of reckless and insolvent trading.
[87] MBIE was alleging a breach of s 135 of the Act. Broadly, it provides that a director of a company must not agree or cause to 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.
[88] Here, the Deputy Registrar commented that the solvency of the company should have been under consideration before the company got into difficulty with the IRD. I agree.
[89] It is clear from the factual material that the company traded at a loss from the outset. It may or may not have been insolvent when it entered into the cross-guarantee. It was certainly insolvent once the contingent liability under the cross-guarantee became an actual liability in July 2012, when the notices issued by Westpac under s 119 of the Property Law Act expired unremedied. There was then an event of default under the loan documents. From that point onwards, the company was indebted to Westpac for a sum in excess of $400,000. It was, as the Deputy Registrar noted,
53 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171 at [12]; Whisk Deli Co Ltd (in liq) v Williams [2016] NZHC 2345; Superior Blocklayers Ltd (in liq) v Bacon [2016] NZHC 2601, (2016) 14 TCLR 425 at [42]-[48]; Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [111]; Clarke v Registrar of Companies, above n 28 at [14]-[15].
hopelessly insolvent and it should have ceased trading. There was no evidence to suggest that Mr Toilolo gave any consideration to the situation. Rather, he allowed the company to continue trading, and thereafter, the IRD obligations started to accrue. Mr Toilolo breached s 135.
[90] Had Mr Toilolo carried out the sober headed assessment referred to by the Deputy Registrar, he must have appreciated from an early stage and at the latest by July 2012, that the company’s position was going from bad to worse. If he had acted in accordance with his obligations as a responsible director, he would have caused the company to cease trading. His failure to do anything about the company’s mounting indebtedness was, in my view, a factor which led to the company’s liquidation. Mr Toilolo allowed the company to continue trading when it was insolvent. This was serious mismanagement. I agree with the Deputy Registrar’s decision in this regard, and again Mr Toilolo has not persuaded me that the Deputy Registrar’s decision was wrong.
[91] The failure to keep proper accounting and company records was also mismanagement.
[92] In this regard, the Deputy Registrar referred to ss 189 and 194 of the Act, which require various documents to be created and kept at the registered office of the company, and also that various accounting records be kept by the company.
[93] The liquidator was unable to find many of the documents which should have been kept by the company. Mr Toilolo asserted that he had some of them at his private home, but he was unable to produce them.54
[94] The Deputy Registrar was, in my judgment, entitled to infer that the documents did not exist. He was also entitled to find that they had not been kept as required by the Act. As the Deputy Registrar observed, the keeping of accurate records is a core competency issue for an accountant, and as noted Mr Toilolo was an accountant.55
54 At [9.1]-[9.8].
55 At [9.19].
[95] In my judgment, the evidence before the Deputy Registrar was sufficient to enable him to be satisfied that Mr Toilolo’s failure to keep, and/or to keep in the proper place, the proper company records was at least a partial reason for the insolvency. I agree with the Deputy Registrar when he noted:
9.23I am satisfied that inadequate records is at least a partial reason for the insolvency of the Company. Without having accurate financial information on a regular and up to date basis, a director cannot ascertain the financial position of a company at any given point in time. If a director cannot properly assess the financial position a director is more likely to make poor or flawed decisions. Once that happens it is likely those poor decisions will impact on the financial performance of a company and that will in turn adversely affect its continued existence. It is similar to a ship’s captain having to navigate reef infested waters without accurate charts.
Again, Mr Toilolo has failed to persuade me that the Deputy Registrar erred in his decision in this regard.
[96] Finally, in this regard, the Deputy Registrar determined that another instance of mismanagement was that Mr Toilolo did not sufficiently monitor the management of the company, and that this was at least a partial reason for the company’s failure. He referred to a statement which Mr Toilolo made to the liquidator – namely that he undertook further study at Auckland University, and that this distracted him from managing the affairs of the company. It has not been suggested that this statement was not made, or that it was recorded inaccurately by the liquidator.
[97] It was argued for Mr Toilolo that the Deputy Registrar did not “demonstrate” (by which I assume was meant consider and find) any causal link between Mr Toilolo’s attendance at Auckland University, and the losses suffered by the company. With respect, that submission again misses the point. What was at issue was whether or not Mr Toilolo “took his eye off the ball”, and whether the fact that he did so, assuming that the Deputy Registrar was to so find, was wholly or partly responsible for the company being put into liquidation.
[98] Here, the evidence from Mr Toilolo, was that he undertook a prolonged period of study at Auckland University, and that that period of study distracted him from managing the affairs of the company. Mr Toilolo was solely responsible for the
management of the company. There was no-one else looking after its affairs in his absence. The company’s affairs were in a dire state. The Deputy Registrar was entitled to conclude that Mr Toilolo did not sufficiently monitor and manage the company, that this was mismanagement and that this was a partial reason for the company’s failure. Again, Mr Toilolo has not persuaded me that the Deputy Registrar erred, or that I should differ from his decision in this regard.
[99] In summary, I am not persuaded that the Deputy Registrar’s factual analysis or factual findings were wrong. I now turn to the exercise of the discretion.
Discretion
[100] The discretionary powers conferred on the Deputy Registrar, fall to be exercised for their statutory purpose – namely to exclude from company management those who are unsuited to it.56
[101] Here, the Deputy Registrar broke his consideration of the discretion down into two parts – first, whether or not he should impose a prohibition at all, and secondly, what the term of any prohibition should be. In both contexts, the Deputy Registrar said that there was no limit to the factors he could take into account.
[102] The Deputy Registrar can take a wide range of factors into account in exercising his discretion whether or not to prohibit. As long as the consideration is confined to the statutory purpose, all of the director’s attributes and conduct in office can be taken into account.57
[103] The Deputy Registrar’s assertion that there was no limit to the factors he could take into account in deciding whether to prohibit Mr Toilolo cannot be correct. It is only those matters which are relevant to the statutory purpose which can be taken into account. The statutory purpose is wide. It allows for a number of matters to be taken into consideration. The Deputy Registrar was not confined to the conduct that resulted in the company’s insolvency; he was entitled to take into account all of Mr Toilolo’s attributes and his conduct in office.
56 See Davidson v Registrar of Companies, above n 22 at [91], [97] and [100].
57 At [97].
[104] Unfortunately, the Deputy Registrar, after stating that there was no limit to the factors he could take into account, did not elaborate. Rather, he said that “many” of the factors he took into account were set out “in the paragraph below”.58 The paragraph below itemised as factors the nature of the mismanagement (which the Deputy Registrar concluded was at the higher end of the scale), and that Mr Toilolo was responsible for it. It also referred to the risk to the public, deterrence and standard setting.59 It would have been more helpful if the Deputy Registrar had set out all factors that he took into account, but I do not consider that exception can be taken to those factors he did identify.
[105] The Deputy Registrar repeated his mistake when he turned to consider the term of the prohibition he had decided to impose. Again, he stated that there was no limit to the factors he could take into account.60 For the reasons I have set out above, in my judgment, that statement was in error. The discretion has to be exercised in accordance with the purpose set out in the Act. Again, the range of matters that might be relevant to the term of a prohibition order is wide-ranging. In my judgment, relevant factors can go beyond conduct in office. For example in this case, in my view, in considering the term of any prohibition, the Deputy Registrar could properly consider Mr Toilolo’s previous business failures, his financial competence in business matters, his bankruptcy and the like. All of these matters go to what period of prohibition was appropriate in fulfilling the statutory purpose.
[106] In my view, there can be no criticism of the factors set out by the Deputy Registrar in his decision in this regard – namely risk to the public, the consequences for Mr Toilolo, the purpose of the Act, the setting of standards, deterrence, the loss to creditors, Mr Toilolo’s bankruptcy and the maximum period of prohibition permitted.
[107] I do however consider that the Deputy Registrar erred in some significant respects.
58 At [15.9].
59 At [15.10].
60 At [16.1].
[108] First, the Deputy Registrar said that he did not see any lack of timeliness in imposing the prohibition as being relevant.61 I disagree. As I noted above at [13]- [17], there was considerable delay in bringing the proposed prohibition before the Deputy Registrar for consideration. The company was placed into liquidation in September 2014. At that point the company qualified under s 385(1) and Mr Toilolo’s management of the company became open for investigation under s 385. The liquidator’s final report was released on 28 September 2015, and the company was removed from the register on 4 November 2015. This notwithstanding, nothing then happened for seven months. The liquidator delayed, but the Registrar then delayed further in signing and serving on Mr Toilolo the notice pursuant to s 385(5) of the Act. Only in January 2018 did the Registrar write to the Deputy Registrar seeking his decision. The Deputy Registrar responded promptly, but that does not cure the earlier delays. The final minute was only issued some four years after the company was placed into liquidation. There is no explanation for these delays, and to my mind, they tell against any argument that risk to the public, deterrence and standard setting were particularly important factors in this case. If these had been important matters, the proposed prohibition should have been pushed on for determination much more quickly.
[109] Secondly, in my view, the Deputy Registrar erred in law in his consideration of the fact that Mr Toilolo was prohibited from being a director of a company while he was a bankrupt. The Deputy Registrar noted that the control of bankrupts and the control of persons prohibited under s 385 is under different legislation with different purposes. That is undoubtedly correct, but the reality remains that Mr Toilolo was prohibited from being a director while he was bankrupt.62 As was noted by the Official Assignee in the letter which started the s 385 enquiry, the intention at the outset seems to have been to increase the period of prohibition beyond the three years covered by the bankruptcy – see above at [11]. It was only after Mr Toilolo was discharged from bankruptcy that he was required to face a further investigation, arising out of the same company collapse. As a result of that further investigation he has been prohibited from being a director for a further two and a half years. The Deputy Registrar did say that the “period of bankruptcy” was relevant and that it should be taken in to account, but
61 At [16.17].
62 Companies Act 1993, s 151(2).
he did not elaborate further.63 In my view, it was an important factor in this case, and it is not obvious that the Deputy Registrar made any allowance for it.
[110] Finally, in my view, the Deputy Registrar erred in his consideration of the maximum permitted period of prohibition. He stated that the maximum period of prohibition he could impose was one of 10 years.64 Mr Toilolo’s conduct in managing the company occurred over the period November 2011 through until September 2014. For almost all of that period, the maximum period of prohibition available under s 385 was five years. The maximum was only increased to 10 years as from 1 April 2014 by the Financial Markets (Repeals and Amendments) Act 2013. The Deputy Registrar seems to have been aware of the issue. He stated that even if the maximum period of prohibition available had been only five years, that would only have had relevance if he had wished to impose a penalty of a period of prohibition exceeding five years. He seems to have considered that the change in the legislation was irrelevant, because he was proposing a period of prohibition of less than five years. I do not follow this logic. In determining what period of prohibition was appropriate, it was, in my view, necessary to consider what was the maximum available at the time of the mismanagement, and then determine to what extent the mismanagement found required prohibition, within the ceiling then imposed by the legislation. In my judgment, the Deputy Registrar should have taken into account the fact that most, if not all, of Mr Toilolo’s conduct occurred when the maximum permitted period of prohibition was five years, and he should have approached the exercise of his discretion as to term by reference to that five year limit. He should also have acknowledged that Mr Toilolo had been precluded from being a director of a company while he was a bankrupt, and that the additional prohibition of two and a half years that he proposed would, in effect, result in a total period of prohibition of some five and a half years. He did not so, and in my judgment, he erred in law in this regard.
[111] Taking these various matters into account, I am not persuaded that any further period of prohibition beyond that consequent on the bankruptcy was required. Mr Toilolo was prohibited from directing a company while he was bankrupt. His bankruptcy lasted for three years. The maximum permitted period when most, or if
63 At [16.40].
64 At [16.18].
not all, of the acts of mismanagement occurred was one five years. The Registrar was guilty of considerable delay in putting the matter before the Deputy Registrar for decision, and to my mind, that undermines any argument that there was a risk to the public, that deterrence was required, or that further prohibition was relevant to standard setting in this case.
Result
[112] The appeal is allowed in part. The period of prohibition of two and half years put in place by the Deputy Registrar is set aside.
[113] Issues as to costs do not arise. As noted above, the Registrar did not appear as a party. There is no order as to costs.
Wylie J
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