Vance v Jefferys
[2014] NZHC 1932
•15 August 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-2546 [2014] NZHC 1932
IN THE MATTER OF An application under section 136 and 301
of the Companies Act 1993
BETWEEN
DAVID STUART VANCE AND COLIN DAVID OWENS
Plaintiffs
AND
NEVILLE WARREN JEFFERYS Defendant
Hearing: 17 June 2014 Counsel:
J Grant for Plaintiffs
A Isac for DefendantJudgment:
15 August 2014
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] Brooklyn Rise Limited (Brooklyn) was incorporated on 7 February 2012. The defendant, Neville Jefferys, was the sole director.
[2] Brooklyn’s only activity appears to have been the purchase and subsequent sale of five completed or nearly completed townhouses at Tiketike Way, Brooklyn, Wellington. Brooklyn bought the five townhouses a few days after it was incorporated, from a company called Spinnaker Investments No. 1 Limited (Spinnaker). The sale by Spinnaker was made in the exercise of its rights as mortgagee under a mortgage or mortgages given by an earlier developer, Gordon Place Development Limited (Gordon Place).
[3] Brooklyn agreed to pay Spinnaker $1,950,000 plus GST for the five townhouses. That was the amount then owing by Gordon Place to Spinnaker.
DAVID STUART VANCE AND COLIN DAVID OWENS v NEVILLE WARREN JEFFERYS [2014] NZHC
1932 [15 August 2014]
[4] An unusual feature of the transaction was that Brooklyn put no money into the purchase. Spinnaker provided vendor finance for the full $1,950,000 plus GST, and also agreed to provide a $250,000 development facility so that Brooklyn could complete certain work, including the erection of a new retaining wall, which had to be built before code compliance certificates could be obtained for the townhouses. There were also brokerage and facility fees of $44,000 which Spinnaker agreed to fund.
[5] Spinnaker did not require any personal guarantee from Mr Jefferys.
[6] The term of the loan was four months from the date of the initial advance, which was expected to be on 16 February 2012. Interest over the term of the loan (estimated to be $70,000) was to be capitalised monthly in arrears.
[7] In total, Spinnaker agreed to fund a total of $2,314,000 for the acquisition and development of the townhouses by Brooklyn.
[8] One of the townhouses (number 77 Tiketike Way – “No. 77”) was already subject to a sale agreement entered into by Gordon Place. This agreement was adopted by Brooklyn as part of the agreement it made with Spinnaker. Brooklyn completed the work on the townhouses, and over the period between February and 6
May 2012, it entered into agreements to sell the four unsold townhouses.
[9] Another unusual feature of the arrangements between Spinnaker and Brooklyn was that Spinnaker exercised direct control over the development work. It decided which contractors were to be engaged, and all contractors’ accounts, although addressed to Brooklyn, were emailed to Spinnaker for payment direct to the contractor. As Mr Jefferys put it in his evidence, Spinnaker “micro-managed” the project, making unilateral decisions as to who would get paid, how much, and when.
[10] Brooklyn was liable for GST output tax on each of the five sales. But when the sales were settled Brooklyn had insufficient cash to pay its net GST liabilities. The proceeds of sale, after agents’ commissions and legal costs, all went to repay Spinnaker’s loan. Spinnaker did not pay the GST either.
[11] Brooklyn was put into liquidation on the application of the Commissioner of Inland Revenue, in July 2013. Mr Vance and Mr Owens (the liquidators) were appointed joint liquidators. At the date of the liquidation, Brooklyn owed a total of
$253,908.12 for GST payable in respect of the periods within which the sales of the townhouses were settled (the GST liability).
[12] Under the Companies Act 1993 (the Act), a director of a company must not agree to the company incurring an obligation unless the director has reasonable grounds to believe that the company will be able to perform the obligation when it is required to do so.1 In this case, the liquidators say that when Mr Jefferys caused Brooklyn to adopt the existing sale agreement for No. 77 and sell the other four townhouses, he did not have reasonable grounds to believe that, allowing for output tax on the sale prices of the townhouses, Brooklyn would be able to pay, on time, the GST which would be payable for its taxable activities in the periods within which the
sales were settled.
What Mr Jefferys says
[13] Mr Jefferys says that he never intended that Brooklyn would make any money out of the development and sale of the five townhouses. The return was expected to come from Brooklyn entering into a further transaction with Spinnaker, under which it would acquire from Spinnaker 1.6 hectares of land in the vicinity of the five townhouses, and build up to fifteen more dwellings on the land (stage 2 of the development). Mr Jefferys says he had an informal arrangement with Spinnaker to acquire the additional 1.6 hectares for $600,000, and that Spinnaker would fund the completion of the additional fifteen townhouses. Stage 2 of the development was expected to be worth more than $3 million, with secured debt of only approximately
$400,000. The profit was expected to be substantial.
[14] However Brooklyn never had a firm commitment from Spinnaker on stage 2 of the development, and it came to nothing. A conditional contract for the acquisition of the land was completed by another company in which Mr Jefferys has
an interest, National Auto Wholesalers Limited, but Spinnaker never made a binding
1 Companies Act 1993, s 136.
commitment to fund stage 2 of the development and it eventually declined to do so. National Auto Wholesalers Limited was unable to secure alternative funding, and Spinnaker eventually sold the stage 2 land to another party.
[15] On the question of the unpaid GST, Mr Jefferys accepts that Brooklyn never had enough money in its bank accounts to pay the GST, which it knew would be payable following settlement of the sales of each of the townhouses. He relies on what he says was an assurance given to him by Spinnaker before Brooklyn entered into the sale agreements (or in the case of No. 77, took over the existing sale agreement), that Spinnaker would cover the output tax liability from the proceeds of each of the sales. With that assurance from Spinnaker, Mr Jefferys says that he had reasonable grounds to believe Brooklyn would be able to pay the GST liability.
[16] Mr Jefferys also points to unforeseen cost overruns and delays in finishing the work on the townhouses, which resulted in Spinnaker being required to fund more than the $250,000, which had been allowed for the construction of the retaining wall and securing the code compliance certificates. Those cost overruns and delays also resulted in Brooklyn being obliged to pay additional interest to Spinnaker, at a default rate of approximately 20 per cent per annum. The combined effect of the cost overruns and delays was that there was considerably less cash available from the proceeds of sale to go towards the GST liability than Mr Jefferys had expected.
[17] Mr Jefferys was unable to produce any document supporting his claim that Spinnaker promised to pay the output tax on the sales. Nor could he produce any document in which Brooklyn asked Spinnaker to pay the output tax. The liquidators have been unable to find any such documents among Brooklyn’s papers, and no affidavit supporting Mr Jefferys’ claim has been provided by any representative of Spinnaker.
The liquidators’ rejoinder
[18] The liquidators say that Mr Jefferys’ uncorroborated claim that Spinnaker agreed to pay the output tax is implausible, and that it should be rejected on the basis of the affidavit evidence, without the need for any further enquiry. Alternatively,
they say that if Spinnaker did give any informal oral assurance of the kind for which
Mr Jefferys contends, it was not reasonable for him to have relied upon it.
[19] Nor was it reasonable for Mr Jeffreys to rely on funds becoming available from stage 2 of the development: Brooklyn never had any guarantee that it would get the stage 2 land, or that Spinnaker would fund its development. And even if it had those guarantees, it could not reasonably have believed that funds from the stage 2 development would become available in time for it to pay the GST liability on the dates it fell due for payment.
[20] The liquidators apply for an order under s 301 of the Act requiring Mr Jefferys to pay the GST liability to Brooklyn.2 In the alternative, the liquidators ask that Mr Jefferys be ordered to contribute such sum of money to Brooklyn’s assets as the court may think just. The liquidators also ask for an award of interest, and costs.
[21] The liquidators contend that Mr Jefferys has no reasonably arguable defence, and that their claim is therefore suitable for the summary judgment procedure set out in Part 12 of the High Court Rules. Under Part 12, a plaintiff may apply for an early judgment on its claims where it believes that the defendant has no reasonably arguable defence. The evidence on summary judgment applications is provided by affidavit only, and there is not normally any cross-examination of witnesses. The parties do not normally have full access to the documents possessed by the other side.
[22] The question on a plaintiff’s summary judgment application is always whether the plaintiff has shown that the defendant has no reasonably arguable defence. That is the question I have to decide in this case. If the plaintiff is unable to do that, the application will be dismissed and the case will proceed to trial in the ordinary way.
[23] The following principles applicable to summary judgment applications have been established:3
2 Under s 301 the court has a discretion to order a director of a company in liquidation who has breached his or her duties under the Act to pay compensation to the company.
3 Pemberton v Chappell [1987] 1 NZLR 1; Grant v New Zealand Motor Corporation Ltd [1989] 1
(1)The plaintiff must satisfy the court that the defendant has no arguable defence to the claim brought against it. The issue is whether there is a real question to be tried.
(2)It is generally not possible to determine disputed issues of fact based on affidavit evidence alone, particularly when issues of credibility arise.
(3)However the court should adopt a robust approach, and the court is not bound to accept uncritically as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements made by the same deponent, or inherently improbable in itself it may be.
(4)Issues of law, even though they may be complex, can, however, be determined in an application for summary judgment.
The issues in this case
[24] The following issues fall to be determined:
(1)Is the summary judgment procedure appropriate to a statutory cause of action such as that provided for in s 301 of the Act, where the granting of relief is in the discretion of the court, and broad questions of causation and the degree of a director’s culpability for the company’s loss must be considered?
(2)Is there a tenable argument for Mr Jefferys that he did not “agree” to Brooklyn incurring a GST liability in respect of the sale of No. 77 (because No. 77 was the subject of an existing legal obligation of
sale which Brooklyn could not avoid)?
NZLR 8; Westpac Banking Corporation v MM Kembla New Zealand Ltd [2001] 2 NZLR 298;
Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC).
(3)When did Brooklyn incur the relevant obligations for the purposes of s 136 of the Act? (Was it the dates on which each of the agreements for sale and purchase for the five townhouses were signed, the dates they became unconditional, or the dates when GST was recorded in relevant returns and thereafter became due?)
(4)Have the liquidators proved that, on each of the relevant dates, Mr Jefferys had no reasonable grounds to believe that Brooklyn would be able to meet its net GST liability for the period within which the sale of the particular townhouse was settled?
(5)Does Mr Jefferys have a reasonable argument that Spinnaker acted as a shadow director in the completion and sale of the five townhouses, and was the party primarily responsible for the failure to account for the GST?
(6)If so, can a compensation order properly be made against Mr Jefferys without also considering the responsibility and culpability (if any) of Spinnaker?
(7)Should the claim have been brought under s 136 of the Act, or should it have been brought under s 135? (In broad terms, s 135 states that a company director must not cause or allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors).
[25] I will consider each of those issues in turn.
Issue (1) – is summary judgment appropriate for claims under s 301?
[26] The grant of compensation under s 301 of the Act is discretionary. The standard approach is to begin by looking at the deterioration of the company’s financial position between the dates of the breach and the date of liquidation. Once
that figure has been established, then three factors – causation, culpability and the duration of the trading are relevant to the exercise of the courts’ discretion.4
[27] In Vance v Smith Mallon J noted that the liquidators had failed to establish that the defendants had no defence on the issue of liability under s 135 and/or 194 of the Act.5 However, her Honour went on to say that, if she had found that liability had been made out, the assessment of compensation under s 301 would not have been a matter which could appropriately have been determined on the affidavit evidence. There were issues over the date or dates on which the trading became reckless, and the precise amount owing to the Inland Revenue at particular times was in dispute. Mallon J considered that those and all other matters which would be
relevant to determining the compensation should be assessed in the context of a trial and after full discovery.
[28] In Richard Geewiz Gee Consultants Ltd (in liq) v Gee, Katz J was not persuaded on the facts of the case that the first defendant had no arguable defences to the liquidators’ claim for summary judgment on the basis of alleged breaches of director’s duties. 6 The Judge went on to say:
In addition, I am not satisfied that determining appropriate compensation for any breach of directors’ duties (assuming such a breach could be established) would be an appropriate matter for summary determination on the particular facts of this case.
[29] For the liquidators in this case, Mr Grant referred to a judgment of Associate Judge Matthews in Fisk v Fawcet.7 That was a case where breach of the director’s duty under s 131 of the Act (to act in good faith and in the best interests of the company) was alleged. The liquidators sought summary judgment. The Associate Judge concluded on the facts that Mr Fawcet had breached his duty under s 131(1), and went on to enter summary judgment against him. The judgment does not contain any discussion of whether the summary judgment procedure is generally
appropriate for claims to relief under s 301 of the Act, and it makes no reference to
4 Mason v Lewis [2006] 3 NZLR 225 (CA) at [110].
5 Vance v Smith, HC Wellington CIV-2005-485-24, 5 June 2008, Mallon J.
6 Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2013] NZHC 620 at [43].
7 Fisk v Fawcet [2013] NZHC 2811.
the judgments of Mallon and Katz J. J. in Vance & Palmer v Smith & Ors and Gee & Ors v Gee.
[30] There may be some cases where the evidence is sufficiently clear that a court is able to exercise its discretion in a s 301 application at summary judgment stage, without the benefit of the detailed consideration of the facts which is possible following a full trial, but I expect that such cases are likely to be few.8 In my view, a liquidator’s claims are likely to be better left for trial if there are any significant questions over the extent of the defendant’s culpability (including the extent to
which others may have been culpable), or over the extent to which the defendant’s actions have contributed to the company’s loss.
Issue (2) – did Mr Jefferys “agree” to Brooklyn incurring an obligation for
No. 77?
[31] The answer to this question must be “no”, at least on the evidence produced for the summary judgment application. Brooklyn did not have to acquire No. 77, or indeed any of the other four townhouses, and Mr Jefferys knew when Brooklyn acquired No. 77 that Brooklyn was assuming responsibility to meet the liability for output tax which would arise on settlement of the sale. When Mr Jefferys caused Brooklyn to take over the existing sale agreement on No. 77, he agreed to Brooklyn incurring the obligation to pay output tax on the sale.
Issue (3) – when did Brooklyn incur the relevant obligations?
[32] Section 136 of the Act states:
Duty in relation to obligations
A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
[33] There can be no question that, whenever Brooklyn incurred the relevant GST
obligations in this case, Mr Jefferys agreed to Brooklyn doing so. He was the only registered director of Brooklyn, and Brooklyn acted through his agency. What
8 For example, Cool Cars (Wholesale) Ltd (in liq) v Sharma (aka Kumar) [2014] NZHC 256.
matters under s 136 is whether Mr Jefferys believed at the time Brooklyn incurred the relevant GST obligations that Brooklyn could discharge those obligations, and if so whether he had reasonable grounds for that belief. Identifying the point at which Brooklyn incurred the GST obligations is obviously critical in forming a view on those questions.
[34] In the end, there was no significant difference between counsel on the point. Brooklyn incurred the GST obligations on the dates on which it agreed to sell the five townhouses (or in the case of No. 77, the date on which it agreed to step into Gordon Place’s shoes as vendor).
[35] No other dates were seriously suggested. Conditions in the agreements for the benefit of the purchaser would not have called for any decision from Brooklyn to incur the output tax obligation, and it was not argued that any of the agreements contained a condition which was solely for the benefit of Brooklyn, which would have given it a second opportunity to decide whether to incur the output tax obligation. Nor could the dates on which the output tax was recorded in Brooklyn’s GST returns be relevant. The inclusion of the output tax in the returns for the appropriate periods was a matter of statutory obligation, and not something Brooklyn had any power to decide.
[36] The answer, then, is that Brooklyn incurred the relevant obligations for the purposes of s 136 of the Act when it agreed to adopt the existing sale agreement in respect of No. 77 and when it entered into the sale agreements for the other four townhouses.
Issue (4) – on the dates Brooklyn incurred the GST output tax obligations, did Mr Jefferys believe on reasonable grounds that Brooklyn would be able to meet its GST payment obligations?
[37] Relevant details of the sale agreements for the five townhouses are as follows:
No. in Tiketike Way
Date of Sale
Agreement
Sale Price
Settlement Date
73 15 February 2012
$495,000
4 May 2012
56
7 March 2012
$575,000
16 March 2012
75
11 March 2012
$500,000
4 May 2012
71
6 May 2012
$502,000
20 July 2012
77
24 May 2010
$440,000
15 June 2012
[38] It is not clear from the evidence precisely when Brooklyn agreed to take over Gordon Place’s obligations as vendor in respect of No. 77, but as the sale agreement was already in existence I will take the date of Brooklyn’s commitment as the date on which it agreed to buy the other four townhouses from Spinnaker
[39] Brooklyn was filing its GST returns on a two monthly basis. The relevant two-monthly periods for the purposes of the liquidators’ claim were those ending 31
March 2012, 31 May 2012, and 31 July 2012. Brooklyn’s GST returns for those
periods, and payment of any GST to pay, were respectively due on 7 May 2012, 28
June 2012, and 28 August 2012.
[40] The GST returns were prepared and filed by Brooklyn’s chartered accountant Mr Newson, who worked on information provided to him by Mr Jefferys. Mr Newson prepared and filed Brooklyn’s GST returns for the relevant periods on the basis that the relevant taxable supplies occurred when the sales of the five townhouses were settled. The liquidators, while noting that the relevant supplies may have occurred earlier, did not propose any alternative dates. In those circumstances I will accept that the taxable supply dates used by Mr Newson were correct.
[41] On that basis:
(1)output tax on the sale of No. 56 (settled 16 March 2012) was properly included in the return for the period ending 31 March 2012.
The GST return, and payment of GST for the period, were due on 7
May 2012.
(2) output tax on the sales of Nos. 73 and 75 (both settled on 4 May
2012) was properly included in the return for the period ending 31
May 2012. The GST return, and the payment of GST for the period, were due on 28 June 2012.
(3)output tax on the sales of No. 71 and 77 were properly included in the return covering the period ending 31 July 2012. The GST return, and payment of GST for the period, were due on 28 August 2012.
[42] The evidence that Spinnaker told Mr Jefferys that it would cover the output tax on the sales consists only of Mr Jefferys’ uncorroborated statement that such an assurance was given. No document has been produced to support that statement.
[43] If Spinnaker had promised to cover the output tax as Mr Jefferys contends, one would have expected a prudent director in his position to have recorded the arrangement in writing. He was, after all, in the position where he knew that Brooklyn would be incurring liabilities for output tax on the sales of the five townhouses, in substantial amounts9, and he knew that Brooklyn would be dependent on Spinnaker to meet its GST obligations.
[44] And when it became clear that Spinnaker would not release any sale proceeds to assist Brooklyn in meeting its GST obligations, which could not have been later than 4 May 2012 when the first settlements occurred, one would have expected to see Mr Jefferys complaining strongly, and in writing, that Spinnaker was reneging on the assurance it had given him. There is no evidence of any such complaints having been made. On the contrary, there appears to have been an acceptance by Mr Jefferys that Brooklyn had the responsibility to pay the GST. Mr Newson sent Mr Jefferys an email on 7 May 2012 advising that the GST due (for the period ended
31 March 2012) was $44,711.62, and saying: “details you will need for the payment
are…” Mr Newson does not appear to have expected that Spinnaker would make the
9 Mr Vance says that total output tax on the five sales was $329,282.46.
payment, and Mr Jefferys later signed a GST return for the period on Brooklyn’s behalf in which the net amount payable for GST was precisely the same sum as that advised by Mr Newson in the 7 May 2012 email.
[45] There are further matters casting doubt on Mr Jefferys’ evidence of the assurance from Spinnaker that it would release funds to Brooklyn to assist it to pay the GST. The first is that, although Mr Jefferys says that the profit for Brooklyn in the venture was expected to come from stage 2 of the development (and impliedly that Brooklyn would then have funds to meet its GST obligations, albeit well after payments were due), it was not Brooklyn which signed the conditional agreement with Spinnaker to purchase the stage 2 land. It was National Auto Wholesalers Limited. If it had really been Mr Jefferys intention that funds to cover Brooklyn’s GST obligations would be available from the stage 2 development, the fact that Brooklyn was not going to be the owner of the stage 2 land (and presumably would not be the party entitled to receive any profits) called for a clear explanation. Mr Jefferys provided no explanation.
[46] Mr Jefferys also elected not to respond to a letter sent to him by the liquidators following their appointment, in which they set out their claims substantially as they have been articulated in this proceeding. If Spinnaker had given Mr Jefferys the assurance which he says he was given, one would have expected him to have drawn that to the liquidators’ attention. He did not.
[47] In those circumstances, I accept the liquidators’ submission that Mr Jefferys’ claim that Spinnaker gave him an assurance that it would cover the output tax is implausible, at least on the evidence which has been produced on the summary judgment application. But that is not necessarily the end of the matter.
[48] Mr Jefferys says that there were unforeseen cost overruns with the construction work, and that delays resulted in increased interest. While it is not clear that Brooklyn had to pay more interest than the $70,000 contemplated in the loan agreement with Spinnaker, it is clear that the construction costs did run well over the
$250,000 which had been allowed for in the loan facility. By the liquidators’
calculation, a total of $426,250.69 was paid by Spinnaker to third parties and debited
to Brooklyn’s account. Additionally, there was a total of approximately $20,000 in legal costs and drawdown fees and costs which may or may not have been allowed for in the original funding.
[49] The cost overruns directly affected the amounts which could have been available to Brooklyn from the proceeds of selling the townhouses, as the full amount funded by Spinnaker appears to have been taken from those proceeds (i.e. including the amount of the cost overruns).
[50] It is not clear on the evidence when Mr Jefferys should first have been aware that the $250,000 allowed for the construction work was inadequate. He would presumably have been aware of it by the time of the last sale on 6 May 2012, but there is no basis for me to confidently say that he would or should have been aware of the cost overruns when Brooklyn agreed in February 2012 to take over the sale agreement for No. 77, and entered into the sale agreements for Nos. 73, 56 and 75 on
15 February, 7 March, and 11 March 2012.
[51] Another matter which is not clear on the evidence, is whether, when Brooklyn took over the sale agreement on No. 77 and agreed on 15 February 2012 to sell No. 73, it might not have believed that it would achieve better prices on the subsequent sales than were realised.
[52] The cost overruns and any uncertainty over likely future sale prices favour Mr Jefferys on the summary judgment application, but in my view they are likely to go only to the extent to which he should have appreciated that there would be a GST shortfall. In February 2012 he must have had a reasonably good general appreciation of what each of the townhouses was likely to sell for, so if he did expect that higher prices could be achieved, the difference between his sale price expectations and the actual sale prices is unlikely to be great. And it is not a point he placed reliance on in his evidence.
[53] On completion of the loan facility agreement with Spinnaker, Mr Jefferys knew that Brooklyn would have to repay approximately $2,314,000. The total of the sale prices for the five townhouses was $2,512,000, and the output tax liability on
that total figure was approximately $329,000. Allowing for land agents’ commissions on the sales and legal costs (approximately $80,000 in total), there would have been a shortfall of somewhere in the vicinity of $300,000 before Brooklyn credited back the appropriate amounts for input tax (unknown) and any higher sale prices which might have been achieved.
[54] On the evidence as it stands, it appears that there was almost certain to be a significant shortfall in the funds Brooklyn would have to meet its GST liabilities, even without the cost overruns. What is not clear is the extent of the GST shortfall which Mr Jefferys should have anticipated on each of the dates on which Brooklyn incurred the output tax obligations.
[55] In summary on this issue, I conclude that the liquidators have proved that, on each of the relevant dates, Mr Jefferys had no reasonable grounds to believe that Brooklyn would be able to meet its net GST liabilities for the periods within which the sales of particular townhouses were settled, in full. The extent of the shortfall which he should have anticipated, and the extent of his culpability for the shortfall which eventually resulted, have not been established.
Issue (5) and (6) – was Spinnaker a shadow director of Brooklyn? If so, should a compensation order against Mr Jefferys be considered without also considering Spinnaker’s role?
[56] It will be convenient to consider these issues together.
[57] Under s 126 of the Act, the term “director” includes (for the purposes of a
number of sections of the Act, including s 136 and s 301) –
(1) A person in accordance with whose directions or instructions a
[named director] may be required or is accustomed to act.
In this case, Mr Jefferys says that Spinnaker was a shadow director in accordance with that definition, and that it should bear all or part of the responsibility for the GST shortfall.
[58] In Re Hydrodam (Corby) Limited Millet J said: 10
A shadow director…does not claim or purport to act as a director. On the contrary, he claims not to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as director by the company. To establish that a defendant is a shadow director of a company it is necessary to allege and prove:
1) who are the directors of the company, whether de facto or de jure;
2) that the defendant directed those directors how to act in relation to the company or that he was one of the persons who did so.
3) that those directors acted in accordance with such directors; and
4) that they were accustomed so to act.
What is needed is, first, a board of directors claiming and purporting to act as such; and, secondly, a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the directions of others.
[59] The decision in Hydrodam was followed in New Zealand by Mackenzie J in
Vance v Lamb.11
[60] A case with some similarities to the present, where a funder was alleged to be a shadow director, is the decision of Stevens J in Krtolica v Westpac Banking Corporation.12 Stevens J noted that there was then no direct case law in New Zealand dealing with shadow directorship. The learned Judge said: 13
It has been suggested that, depending upon the facts of a particular case, it is possible for a creditor bank to act as a shadow director. This is argued, for example, in Markovic, “Banks and Shadow Directorships: Not An ‘Almost Entirely Imaginary’ Risk in Australia” Journal of Banking & Finance Law & Practice 9(4) Dec 1998:284-303. Whilst is undoubtedly possible for liability to be imposed on a bank under s 126(1)(b) of [the Act], it will all depend upon the facts of the case.
[61] On the particular facts in Krtolica, the Judge found that there was no suggestion that Mr Krtolica, as director, was taking directions or instructions from
Westpac. The Judge noted that such evidence as there was concerning the actions of
10 Re Hydrodam (Corby) Limited [1994] 2 BCLC 108 (Ch) at [183].
11 Vance v Lamb [2009] 10 NZCLC 264,498 (HC).
12 Krtolika v Westpac Banking Corporation [2008] NZCCLR 24 (HC).
Mr Krtolica indicated that he exercised his own independent judgment in all areas of the business.14 The Judge found that Westpac’s officers had been acting in defence of Westpac’s interests, and not as directors of the company.15
[62] The s 126 issue in this case is whether Spinnaker was acting purely in its own interests as funder, or whether it can be said that Mr Jefferys was required or accustomed to act in accordance with Spinnaker’s directions or instructions in the conduct of Brooklyn affairs, so that Spinnaker became a shadow director.
[63] It appears that Spinnaker did exercise substantial control over Brooklyn following Brooklyn’s acquisition of the five townhouses. Mr Jefferys’ evidence that Spinnaker directed which contractors were to be hired, and which of them was to be paid and when, was not contested by the liquidators. Nor was it contested that, when an invoice from a contractor or supplier came in, Brooklyn would simply forward the invoice to Spinnaker for approval and payment, apparently without further reference to Brooklyn. The loan facility agreement provided for Spinnaker representatives and their consultants to have “unfettered access to the site at all times”.
[64] The loan provided for drawdowns of funds to meet the construction costs, to be paid progressively against appropriate certification from a quantity surveyor. But it appears that this was not the ordinary situation where the quantity surveyor provides a certificate valuing the work undertaken to date, and the principal (in this case Spinnaker) pays the contractor (Brooklyn) the amount certified. It appears that Mr Jefferys did not see any such certificates, and had no control over the payments which Spinnaker elected to make direct to his contractors and suppliers. In addition, Mr Jefferys says that a project manager representing Spinnaker charged $2,000 per month for administration fees on the contract, something which Mr Jefferys says he had not agreed to before Brooklyn acquired the townhouses.
[65] There are a number of features of the relationship between Spinnaker and
Brooklyn which lead me to conclude that, on the evidence produced, it is at least
14 At [192].
arguable that Spinnaker was “a person in accordance with whose directions or instructions Mr Jefferys was required to act”, and was thus a shadow director under s 126(1)(b)(i). The fact that Spinnaker sold the land to Brooklyn for the precise amount for which Gordon Place was indebted to Spinnaker, without requiring any personal guarantee from Mr Jefferys, and then directly controlled the engagement of contractors and suppliers, selecting who was to be engaged, and who was to be paid and when, arguably takes Spinnaker beyond the ordinary role of a financier, whose actions are designed to protect its own interests, and not to control the activities of the client company. I conclude that the claim that Spinnaker acted as a shadow director, is arguable.
[66] Turning to the question of whether a compensation order against Mr Jefferys should be made without considering whether Spinnaker may also have some responsibility, I note first that in Walker v Allen,16 Ellen France J considered a number of factors which reduced the quantum of the award against the director under s 301, including failings in the actions of other parties, and circumstances beyond the director’s control. And in Vinyl Processors (New Zealand) Ltd (in liq) v Cant,17 judgment was entered against a number of directors on a several basis, so that no director was obliged to pay more than his or her share of the total amount payable to the liquidator.
[67] On the authority of those two cases, I do not think it would be appropriate to assess Mr Jefferys’ culpability under s 301 without also considering the culpability (if any) of Spinnaker.
[68] In Lower v Traveller,18 the Court of Appeal observed that joint and several liability is more usually imposed on directors, but the type of liability that is appropriate depends on the particular circumstances of each case. (In that case the only director found liable for reckless trading had derived substantial personal benefits from the reckless trading, which benefits had not been derived by his co- directors. The Court of Appeal considered in those circumstances that a finding of
several liability of that director was appropriate.)
16 Walker v Allen HC Nelson CP13/00, 18 March 2004.
17 Vinyl Processors (New Zealand) Ltd (in liq) v Cant [1991] 2 NZLR 416 (HC).
18 Lower v Traveller [2005] 3 NZLR 479 (CA).
[69] In this case, I do not think it appropriate at summary judgment stage to assess Mr Jefferys’ responsibility on a several basis. It may be that in the end he will be the party with sole responsibility for at least part of the GST shortfall (if not all of it), but I do not think that is a determination that can or should be made at summary judgment stage, when the court has heard no evidence from Spinnaker, and is unable to form any reliable view on the role it played in the relevant events.
[70] In the end, I conclude that the case is unsuitable for summary judgment for the following reasons:
(1)part of Brooklyn’s eventual loss may have been caused by the unforeseen cost overruns, and it is not possible on the evidence to assess how much; and
(2)on the evidence which has been produced, it is arguable for Mr Jefferys that Spinnaker acted as a shadow director of Brooklyn, and may be found to have some responsibility for the eventual shortfall. In those circumstances it would not be appropriate to assess compensation, on a several basis, against Mr Jefferys alone.
[71] It is not necessary for me to consider the remaining issue which Mr Isac raised, namely whether this case should properly have been brought as a reckless trading case under s 135 of the Act. Nor is it necessary for me to address a procedural issue which I raised in the course of the hearing, namely whether the liquidators’ failure to attest to their belief that Mr Jefferys has no defence to the claim was fatal to the summary judgment application. Mr Grant sought leave orally at the hearing to file a supplementary affidavit addressing the point, but having regard to my conclusions as set out above there is no need to deal with that application.
Orders
(1) The application for summary judgment is refused. (2) The costs of the application are reserved
Associate Judge Smith
Solicitors:
JT Law, Wellington for Plaintiffs
Fitzherbert Rowe, Palmerston North for Defendant
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