Walker v Allen HC Nelson CP 13/00

[2001] NZHC 829

IN THE HIGH COURT OF NEW ZEALAND
NELSON REGISTRY CP 13/00

UNDER the Companies Act 1993

IN THE MATTER of CELLAR HOUSE LIMITED (in liquidation)

BETWEEN ROBERT BRUCE WALKER as liquidator of CELLAR HOUSE LIMITED (in liquidation)
Plaintiff

AND DONALD WINTON ALLEN
First Defendant

AND BEVAN JOHN INGLIS
Second Defendant

AND PETER GEOFFREY INGLIS
Third Defendant

AND TIMOTHY GERALD WASHBOURN GOULTER
Fourth Defendant

Hearing: 19 July 2001

Counsel: D J Friar and K F Quinn for the Plaintiff
C R Carruthers QC and D Holloway for the Second and Third Defendants

Judgment: 6 September 2001

JUDGMENT OF WILD J

Solicitors:
KPMG Legal, Wellington for the Plaintiff
Hunter Ralfe, Nelson for the Second and Third Defendants

Introduction

[1] The issue on this application is the scope of s 300 Companies Act 1993 (“the 1993 Act”), in particular whether it encompasses breaches of directors’ duties contained in the now repealed Companies Act 1955 (“the 1955 Act”).

[2] This issue arises on the second and third defendants’ application for review of a reasoned, reserved decision given by Master Venning on 23 April 2001, following a defended hearing on 4 April. The Master dismissed the defendants’ application to strike out the plaintiff’s amended statement of claim against them.

[3] The defendants’ application for review is out of time. They need and seek an enlargement of time for their review application.

Enlargement of time

[4] The 7 day time period for review is deliberately tight, so that a proceeding can move smoothly and rapidly through its interlocutory stages toward substantive determination.

[5] The Master’s decision was given on 23 April, but was not received by the defendants until 30 April. The 7 day period thus expired on 7 May. But the defendants say they could not obtain counsel’s advice until 21 May. Even allowing for that, the review period expired on 28 May, and this application was only filed 2 days later.

[6] The application is out of time, and the defendants’ explanations for the delay in bringing it exhaust themselves before the application was filed on 30 May.

[7] If the plaintiff could point to any specific prejudice resulting from the delay e.g. some change in the Company’s position, then I would not enlarge time. But the plaintiff can point only to the general slippage of time. I therefore enlarge time for the making of the application and deal with it on its merit. That approach ought not to be interpreted as endorsing any relaxation in a strict approach to compliance with the 7 day time period for review applications.

Approach on review

[8] As the Master’s decision under review is a fully reasoned one following a defended hearing, this review proceeds as an appeal by way of rehearing: r 61C(4). As the issues are purely legal, nothing turns on this.

Background

[9] Cellar House Limited (“the Company”) was incorporated under a different name in 1985. Audits carried out by Customs in 1992 and again in 1997 revealed errors in its record keeping, resulting in substantial under-statement of its declared liability for excise duty. A judgment of $5.8 million was entered against it on 19 May 1999 in favour of the Collector and a further $140,000 of excise duty was found to be owing in 1997.

[10] Under that crushing weight of debt, the Company was placed in liquidation by order of the High Court at Wellington on 16 December 1999 on the grounds that it was unable to pay its debts. The plaintiff was appointed its liquidator on 23 December 1999.

[11] The different times during which the defendants have been directors are best shown on the diagram attached to this judgment. Significant points are:

[a] The second defendant resigned as a director on 28 July 1994 shortly after relevant amendments to the 1955 Act came into force on 1 July 1994, and long before the Company became subject to the 1993 Act, upon re-registering under that Act on 27 June 1997.

[b] The third defendant was a director from 28 July 1994 until 20 July 1997, less than a month after the Company re-registered under the 1993 Act.

[12] This proceeding was filed on 8 August 2000. The original statement of claim alleged against all directors:

[a] Failure to keep proper accounting records in the years ended 31 March 1992 through 1998 (s 194 of the 1993 Act; s 10 Financial Reporting Act 1993). Relief was sought under s 300 of the 1993 Act.

[b] Reckless trading from April 1992 to the date of liquidation (s 135 of the 1993 Act). Relief was sought under s 301 of the 1993 Act.

[c] Failure to act in good faith and in the best interests of the Company (s 131 of the 1993 Act). Again, relief was sought under s 301 of the 1993 Act.

[13] The first, second and third defendants applied on 11 September (second and third defendants) and 2 October (first defendant) to strike out the statement of claim. One of the grounds of application was that the duties in the 1993 Act were not imposed on the directors until the Company re-registered under that Act on 27 June 1997, and the directors therefore could not be liable for any pre-27 June 1997 breach of those 1993 Act duties. The Master upheld that ground:

“[25] The provisions of the Companies Act 1993 cannot apply to the actions of the directors prior to the re-registration of the Company on 27 June 1997.”

[14] The Master also held, on the authority of Re Network Agencies International Ltd [1992] 3 NZLR 325, that the cause of action under s 300 only accrued on the winding up of the Company.

[15] The Master considered that some parts of the statement of claim might be capable of repair, and directed that an amended statement of claim was to be filed and served by 9 February this year, reserving leave to the defendants to apply by 28 February to strike out that amended claim.

[16] The second and third defendants applied on 13 March for an order striking out the amended claim, insofar as it related to them.

[17] The grounds were essentially that the Master’s first decision had held that the second defendant could not be liable to the plaintiff for any pre-27 June 1997 breaches of directors’ duties, and therefore could not be liable at all (he had ceased his directorship in 1994), and the third defendant could only be liable for such breaches occurring between 27 June 1997 and his resignation as a director less than a month later, on 20 July 1997.

Master’s decision under review

[18] The relevant parts of the Master’s second decision, which I am asked to review, can be summarised thus:

[a] Second defendant

It notes that the one cause of action against the second defendant is now that he failed to ensure the Company kept proper accounting records in breach of s 151 of the 1955 Act during the period 1 April 1992 to 30 June 1994, and from 1 to 28 July 1994 in breach of s 151 of the 1955 Act (as amended). Relief against the second defendant is now sought under s 300 of the 1993 Act, as opposed to its antecedent, s 319 of the 1955 Act (as amended), because the right to relief under s 300 only accrued on the date of liquidation, 16 December 1999.

[b] Third defendant

It records that the third defendant now faces four causes of action:

[i] First: failure to keep proper accounting records

Breach of s 151 of the 1955 Act (as amended) from 28 July 1994 (third defendant’s appointment as director) until 26 June 1997 (last day before Company re-registered under the 1993 Act), and under s 194 of the 1993 Act and s 10 Financial Reporting Act 1993 from 27 June to 20 July 1997 (third defendant’s resignation as a director). Relief is sought under s 300 of the 1993 Act.

[ii] Second: reckless trading

From 4 August 1994 to 26 June 1997 in breach of s 189 of the 1955 Act (as amended), with relief sought under s 275 of the same Act, and from 27 June to 20 July 1997 in breach of s 135 of the 1993 Act, with relief sought under s 301 of the 1993 Act.

[iii] Third: breach of good faith

Breach of his duty to act in good faith and in the best interests of the Company from 4 August 1994 to 26 June 1997 (s 185 of the 1955 Act (as amended)), with relief under s 275 of that Act) and from 27 June to 20 July 1997 (breach of s 131 of the 1993 Act) with relief sought under s 301 of that Act.

[iv] Fourth: failure to exercise reasonable directorial care

From 4 August 1994 to 26 June 1997, failure to exercise the care, diligence and skill that a reasonable director would exercise, in breach s 191 of the 1955 Act (as amended), with relief under s 275 of that Act, and from 4 August 1994 to 26 June 1997 (in breach of s 137 of the 1993 Act) with relief under s 301 of that Act.

[c] First decision

The Master reiterates the distinction drawn in his first decision between the alleged breaches of ss 194, 131 and 135, and the relief claimed in respect of them under ss 300 and 301, of the 1993 Act. He summarises the effect of his first decision thus:

[i] Any claim against the second defendant for relief under s 301 was statute barred (and implicitly was to be struck out).

[ii] No claims against any of the defendants for breaches of ss 194, 135 and 131 of the 1993 Act for their actions prior to re-registration of the Company on 27 June 1997 could be maintained, as those provisions had no application to the Company or its directors prior to that date.

[d] Claim for relief under s 301

It notes that the amended claim now seeks no relief against the second defendant under s 301, and seeks relief under s 301 against the third defendant only for the period of less than a month from the Company’s re-registration on 27 June to the third defendant’s resignation as a director on 20 July 1997.

[e] Claim for relief under  s 300

The relief claimed under s 300 in respect of breaches prior to the Company’s re-registration on 27 June 1997 now relies on breaches of provisions of the 1955 Act (including as it was amended from 1 July 1994).

[f] Reliance on 1955 Act

Holds that the plaintiff can rely on the repealed provisions of the 1955 Act (including as it was amended): ss 17(1)(b) and 18 Interpretation Act 1999, Re Hilltop Group Ltd (in liquidation), Laurence v Jacobson 2.2.01, Potter J, HC Auckland M1393/98, where the point was assumed, rather than argued and determined.

[g] Availability of relief under s 300 for breaches of 1955 Act

Decides that the plaintiff can seek relief under s 300 of the 1993 Act for breaches of s 151 of the 1955 Act (as amended), as s 300(1)(a)(i) should be read as referring to “s 194 of this Act and its antecedents”:

[i] Because the cause of action under s 300 arose only on the date of liquidation of the Company: Re Network Agencies.

[ii] Such an interpretation avoided the anomaly that, where a Company which had failed to keep proper accounting records was put into liquidation one day after re-registering under the 1993 Act, the liquidator would be left without remedy against the directors.

[iii] Such a purposive interpretation was supported by:

• s 5(1) Interpretation Act 1999;

• the approach taken by Doogue J in Natural Gas Corporation Holdings Ltd v Infratil 1998 Ltd (2000) 8 NZCLC 262,302 at 262,312;

• the Minister’s comments recorded in Hansard upon the introduction of the amendments to the 1955 Act;

• the fact that s 300(1)(a)(ii) exactly replicated s 274(l)(a)(ii) of the amended 1955 Act. It would be anomalous if the provisions of s 300(1)(a)(i) did not apply;

• the interpretation approach adopted by the Court of Appeal in Northland Milk Vendors Association v Northern Milk [1998] 1 NZLR 530 per Cooke P at 538;

• the pointlessness of the requirement in s 189 of the 1993 Act for a company to keep company records for the preceding 7 years, if there existed no remedy for a failure to do so.

The legislation

[19] Relevant are the 1955 Act, the amended 1955 Act and the 1993 Act. The amendments to the 1955 Act applied from 1 July 1994. I accept the plaintiff’s submission that those amendments were intended to ensure that a consistent regime applied during the three year transition period until the 1993 Act applied to all companies. That transition period ran from 1 July 1994, when both the 1993 Act and the amendments to the 1955 Act came into force, until 1 July 1997, when any company which had not earlier re-registered under the 1993 Act was deemed to be re-registered (Companies Re-registration Act 1993). The amended 1955 Act was repealed from 1 July 1997 (Companies Act Repeal Act 1993).

[20] Broadly consistent statutory requirements can be traced through the three Acts, and it is convenient to trace them in relation to the duties invoked in this proceeding, and the relief claimed for alleged breach of them:

[a] Company’s duty to keep accounting records

The duty existed under s 151 of the 1955 Act, s 151 of the amended 1955 Act and is contained in s 194 of the 1993 Act. The only change in the amended 1955 Act was to replace, in subsection (1), the reference to financial statements complying with s 153 of the 1955 Act with a reference to financial statements complying with the Financial Reporting Act 1993. Both s 153 and the Financial Reporting Act require the financial statements to give a true and fair view of the company.

[b] Remedy against a director for a company’s failure to keep accounting records

Section 319 of the 1955 Act, s 274 of the amended 1955 Act and s 300 of the 1993 Act consistently provide that, when a company is put into liquidation and has failed to keep proper accounting records, and where that failure contributed to the company’s inability to pay its debts, a liquidator could apply to the Court for a declaration making one or more officers of the company personally liable for any of the debts or liabilities of the company.

[c] Director’s duty to act in good faith, and in the best interests of the company, not to trade recklessly, and to exercise reasonable care, skill and diligence

These duties in ss 185, 189 and 191 of the amended 1955 Act have identical counterparts in s 131, 135 and 137 of the 1993 Act.

[d] Remedy

The remedy for breach of these sections is an order for a director to repay. It was provided in s 275 of the amended 1955 Act and has an identical counterpart in s 301 of the 1993 Act.

[21] The plaintiff’s submission that the transition from the old to the new statutory regime was intended by Parliament to be “seamless” (to adopt the modern cliché) is supported by the comments by the Minister of Justice upon the second reading of the Companies (Ancillary Provisions) Bill on 10 August 1993:

“It would be anomalous and confusing to have [different] rules applying in like situations just because one company was a 1955 Act company and another was a 1993 Act company. (Hansard, p 17329)”

Applicants’ argument on review

[22] The applicants challenge the Master’s decision firstly on what their submissions termed the “existing duty” ground and, secondly, as a matter of statutory interpretation.

Existing duty

[23] The argument under this head can be summarised in six propositions:

[a] No right of action accrued under s 300 until liquidation.

[b] If at liquidation there had been a failure by the Company since it re-registered on 27 June 1997 to comply with s 194 of the 1993 Act or s 10 Financial Reporting Act, the liquidator could apply.

[c] Upon the Company’s liquidation there could be no breach of s 151 of the 1955 Act (as amended) and therefore no cause of action under s 274 of that Act against the Company’s directors in respect of breaches of s 151, since ss 151 and 274 were repealed as from 30 June 1997. Upon the Company’s liquidation, its directors were not under “an existing duty” to the Company.

[d] The Master’s reliance on Re Hilltop Group Ltd cannot be sustained. Although Potter J found liability under s 275 of the amended 1955 Act - by then repealed - the very fact that the issue was not referred to in the judgment supports the conclusion that it was not considered.

[e] The justification for this analysis is that s 300 creates “a special procedure”.

[f] The liquidator thus has:

[i] No claim against the second defendant.

[ii] A claim under s 300 against the third defendant, but only in respect of any breaches of his duties committed between 27 June and 20 July 1997.

[g] The liquidator is not left without a remedy against the defendants in respect of any breaches of duty to the Company pre-27 June 1997: he may sue them at common law.

Statutory interpretation

[24] This second aspect of the applicants’ argument again lends itself to summary:

[a] To interpret s 300 as encompassing failures to comply with s 151 of the 1955 Act in addition to s 194 of the 1993 Act is not supported by any principle of statutory interpretation.

[b] Such an interpretation is unnecessary. As soon as the Company’s obligations ceased under the 1955 Act (as amended), they commenced under the 1993 Act. The directors at and from that time assumed exposure under s 300, and their s 194 obligation was a continuing one, a fresh cause of action for breach of it accruing the day before the Company was wound up: Re Network Agencies at 333.

[c] The interpretative approach taken in Northland Milk Vendors and Infratil does not assist here. It applies only where there is an hiatus in legislation and there is no hiatus here. The 1993 Act works on its own, unsupported by the earlier and now repealed companies legislation.

[d] Neither s 194 nor s 300 of the 1993 Act have retrospective effect: s 7 Interpretation Act 1999; Re Network Agencies at 334. The transitional arrangements in the companies legislation are careful and comprehensive and if Parliament had intended them to have retrospective effect it could easily have said so.

[e] The requirements in s 189 to keep company records do not support the Master’s decision. The section has a number of purposes apart from claims under s 300. This is a neutral factor.

Decision

[25] Section 300 creates a statutory cause of action. If its requirements are met, it enables the Court to make a director personally liable for the debts or liabilities of the company. In Re Network Agencies the issue was whether the liquidator’s proceeding was statute barred. Fisher J had to decide when the cause of action arose. I respectfully agree with His Honour that it arises only upon liquidation: the several requirements of s 300 make that clear.

[26] In this case the focus is on the nature of the s 300 cause of action. In particular, whether it encompasses not only breach of s 194 of the 1993 Act and/or s 10 Financial Reporting Act, which are expressly referred to, but also the antecedents of s 194.

[27] The duties under ss 194 and 10 existed at the date of liquidation, as they had continuously since the Company re-registered on 27 June 1997. Every time those sections were breached, a fresh cause of action accrued. That was Fisher J’s analysis in Re Network Agencies and I respectfully endorse it. All breaches within the six year limitation period (s 4(1)(d) Limitation Act 1950) may be relied upon to found a cause of action under s 300 provided these other requirements of that section are met:

[a] The company is in liquidation, and

[b] Is unable to pay its debts, and

[c] That inability results from the company’s breaches of ss 194 and/or 10.

[28] In my view the Master was correct to hold that s 300 should be interpreted as encompassing also breaches of the antecedents of s 194 - s 151 of the 1955 Act as originally enacted and as amended from 1 July 1994. There are several reasons for this.

[29] First, the repeal of s 151 from 1 July 1994 did not affect the consequences of anything done or suffered under s 151 or the ability to bring a proceeding for a breach of s 151 committed while it was in force: ss 17(1)(a) and 18(1) and (2) Interpretation Act 1999. In short, accrued liability for any breach of the s 151 duty was not extinguished, nor the ability to bring a proceeding in respect of it terminated, by repeal of the 1955 Act from 1 July 1997. 1 think it more accurate to refer to a “continuing liability” than to an “existing duty”, but the concept is essentially the same.

[30] I accept Mr Carruther’s submission that Re Hilltop Group is not particularly persuasive authority, because the Court’s ability to hold the director liable under s 275 of the 1955 Act was assumed, rather than argued and decided. I think the Master viewed Re Hilltop in that way. The company there had been placed in voluntary liquidation on 19 June 1997. The liquidators had issued their proceeding in August 1998, in respect of breaches by the director during 1996 of duties to the company imposed on him by ss 185, 189, 190 and 191 of the amended 1955 Act. I can find no reference in the judgment as to whether the company had re-registered under the 1993 Act. The point is that Potter J had no hesitation in holding the director liable under s 275, although that section and the four sections the director had breached had long since been repealed.

[31] The second reason is the several indications that Parliament intended that, post 1 July 1994 and/or 1 July 1997, there would continue to be statutory liability for breach of s 151:

[a] The relevant duty and relief provisions in the 1955 Act were replicated in the 1993 Act. This indicates to me that Parliament intended there to be continuing ability to seek relief for breach of the duty which had existed, virtually unaltered, throughout.

[b] Similarly, s 189(1) of the 1993 Act requires a company to keep the accounting records required by s 194 for the current and previous seven accounting periods. Notwithstanding Mr Carruther’s urging that this was a neutral factor, I regard it as unlikely that Parliament would have imposed this requirement if there was no remedy for the Company’s failure (under s 194) to create the records in the first place.

[c] The replication or continuity of provisions indicates that Parliament intended duties and relief for breach of them to be matters of statute law. That result accords with the aim of the legislation as outlined by the Minister in the passage cited in paragraph [21] above. I am unable to accept Mr Carruther’s submission that the liquidator in this - or any similar - case must partly resort to remedies at common law.

[32] Thirdly, the construction of s 300 favoured by the Master - reading s 300 (1)(a)(i) as referring to “s 194 of this Act and its antecedents” is the appropriate and necessary one, and for the reasons given by the Master. I have set those reasons out in paragraph [18][g][iii] above. I need add only three comments:

[a] The purpose of s 300 is to provide a remedy against directors past or present for breach of the company’s statutory duties to keep proper accounting records. When those duties have existed consistently throughout, that purpose is defeated rather than achieved by not extending s 194 to its antecedent.

[b] Contrary to Mr Carruther’s submission, I consider the interpretative approach taken by the Court of Appeal in Northland Milk Vendors is applicable here. Parliament intended that the relevant duty and relief provisions continue without a break (“seamlessly”), but omitted to include s 151 (original and as amended) in s 300(1)(a). Thus, the Master’s interpretation is an instance “(of filling a gap) in an Act but only in order to make the Act work as Parliament must have intended” (per Cooke P in Northland at 538).

[c] The consequences of not adopting the Master’s interpretation would be illogicality. Several examples were given in the course of argument. First, if the Company had re-registered three years earlier on 27 July 1994, s 300 literally interpreted would give the liquidator three additional years of “claim period”. Can Parliament have intended liability under s 300 to depend on the date of re-registration? Secondly, a literal interpretation would leave a liquidator without remedy against the directors under s 300 where a company re-registered on 1 July 1994 but went into liquidation the following day. Lastly, take a company which re-registered under the 1993 Act on 1 July 1997 and went into liquidation the following day. The liquidator would have a statutory remedy against the directors under s 300 in respect of only one day’s breaches of s 194, even though those breaches might have continued for several years.

[33] In paragraphs [75] and [76] of his decision under review, the Master noted that the gravamen of the plaintiff’s complaint is the defendants’ failure to ensure that the Company kept proper accounting records, in particular in relation to its excise returns, and paid the excise duty and tax properly due. He commented that the other causes of action pleaded seemed to add nothing, but, as they were arguable, he left them standing. I am not required to comment on those other causes of action, and therefore do not do so.

Result

[34] Having reviewed the Master’s decision of 23 April 2001, I uphold it. I consider the Master’s interpretation of s 300 of the 1993 Act to be correct.

Costs

[35] The plaintiff is entitled to his costs as against the two applicant defendants. I allow these on a category 2 time band B basis, with reasonable travelling expenses and allowance for second counsel.

CHRONOLOGY: CELLAR HOUSE LIMITED

Companies Act 1955 (unamended) Companies Act 1955 (amended) Companies Act 1993

Duty: Remedy: Duty: Remedy: Duty: Remedy:

ss 151 and 153 S 319 (on liquidation) ss 151 & FRA s 274 (on liquidation) ss 194 & FRA s 300 (on liquidation)

Ss 185, 189, 191 s 275 ss 131, 135, 137 s 301

1992 1993 1994 1995 1996 1997 1998 1999

Amendments to Company re-registered 1955 Act repealed

1955 Act come 27.6.97 1.7.97

into force 1.7.97

First Defendant

Second Defendant resigned 28.7.94

Third Defendant appointed 28.7.94 resigned 20.7.97

Fourth Defendant resigned 20.7.97

(Acknowledgements to Plaintiff’s counsel)