Walker v Ariyathas

[2012] NZHC 1648

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-1894 [2012] NZHC 1648

UNDER  the Companies Act 1993

IN THE MATTER OF     ARIYA NEW ZEALAND LIMITED (IN LIQUIDATION)

BETWEEN  ROBERT BRUCE WALKER Plaintiff

ANDSELVATHAS ARIYATHAS Defendant

Hearing:         9 July 2012

Counsel:         N H Malarao and K L Wendt for the Plaintiff

No appearance by or on behalf of the Defendant

Judgment:      9 July 2012

ORAL JUDGMENT OF VENNING J

Solicitors:      Meredith Connell, PO Box 2213, Auckland 1140

Copy To:       Mr S Ariyathas, 29 Marion Avenue, Mt Roskill, Auckland 1041

WALKER V ARIYATHAS HC AK CIV-2011-404-1894 [9 July 2012]

Introduction

[1]      In  this  proceeding the plaintiff, Mr Walker,  the liquidator of Ariya New Zealand Limited (the company) seeks orders against the defendant, Mr Ariyathas, a director of the company.  The liquidator seeks orders under s 300 of the Companies Act 1993 and in particular a declaration that the defendant is personally liable for the debts of the company.

[2]      The company was incorporated on 17 September 2001.  It had two directors and two shareholders.   Since 10 February 2005 the defendant has been the sole director and since 24 March 2008 the sole shareholder of the company.

[3]      The company was placed into liquidation for failure to pay a debt owing to

New Zealand Customs. The liquidation took effect on 9 September 2009.

Procedural matters

[4]      The proceedings were commenced in March 2011. The defendant was initially represented and filed a statement of defence.  However, the defendant’s solicitor formally sought leave to withdraw, which was granted on 25 May 2012 by Judge Bell.

[5]      In a minute on that date the Judge confirmed the liquidator’s application was set down for a hearing for five days to commence on 9 July. The matter was before the Associate Judge again on 11 June. The Judge noted counsel for the liquidator’s advice that the defendant had failed to serve any evidence in response. The Judge directed that the case would proceed on 9 and 10 July estimating no more than two days would be required to deal with the matter.

[6]      The defendant did not take part in that conference or in the previous conference on 25 May but he is clearly aware of the proceedings.  On 25 May he had faxed a communication to the Court seeking a one month extension from 25 May to find the money for a lawyer.

[7]      When the matter was called this morning there was no appearance of or for the defendant at 10 am. As matters eventuated, there was a previous matter the Court had to deal with at 10 am. This matter could not start until approximately

10.40 am. The defendant was again called and there was no appearance of or for the defendant. The hearing proceeded in the absence of the defendant.

[8]      I accept that, on the basis of the statement of defence before the Court, the obligation remains on the plaintiff liquidator to satisfy the Court that the orders sought are appropriate both as to liability and as to quantum on the balance of probabilities.

[9]      There were three other procedural matters. The first is that the defendant’s

forename is recorded incorrectly on the papers.  It should be ‘Selvathas’ rather than

‘Sevathas’.  On counsel’s application, leave is granted to amend the name of the

defendant accordingly.

[10]     The next matter is that in his communication with the Court the defendant suggested that he needed an interpreter as he does not know English. That matter is not of any moment as the defendant did not appear.  But in any event, I note that the liquidator, Mr Walker confirmed that in his dealings with the defendant, which were all in English, he was satisfied the defendant was aware of his obligations and what was required from him.  I also note that the fax sent to the Court and apparently authored by the defendant, is in English and is perfectly adequate to convey the message that he wished to convey to the Court.

[11]     Finally, the amount sought by the liquidator differs from that in the statement of claim. That again is however of no moment as the amount sought in the statement of claim at $1,640,587 is more than the amount now sought by the liquidator of

$998,505.

Background

[12]     The company traded under the name A & T Budget Goods.  Its principal business appears to have been the importation of goods from overseas which were

sold either through a network of wholesale customers or in a retail shop known as the Mt Roskill Dairy at Sandringham Road.

[13]     The liquidator’s claim against the defendant is based on s 300 of the

Companies Act 1993:

300 Liability if proper accounting records not kept

(1)      Subject to subsection (2) of this section, if—

(a)        A company that is in liquidation and is unable to pay all its debts has failed to comply with—

(i)        Section 194 of this Act (which relates to the keeping of accounting records); or

(ii)      Section  10  of  the  Financial  Reporting  Act  1993 (which relates to the preparation of financial statements); and

(b)      The Court considers that—

(i)        The   failure   to   comply   has   contributed   to   the company's  inability  to  pay  all  its  debts,  or  has resulted in substantial uncertainty as to the assets and liabilities of the company, or has substantially impeded the orderly liquidation; or

(ii)      For  any  other  reason  it  is  proper  to  make  a declaration under this section,—

the Court, on the application of the liquidator, may, if it thinks it proper to do so, declare that any one or more of the directors and former directors of the company is, or are, personally responsible, without limitation of liability, for all or any part of the debts and other liabilities of the company as the Court may direct.

(2)       The Court must not make a declaration under subsection (1) of this section  in  relation  to  a  person  if  the  Court  considers  that  the person—

(a)       Took  all  reasonable  steps  to  secure  compliance  by  the company with the applicable provision referred to in paragraph (a) of that subsection; or

(b)       Had reasonable grounds to believe and did believe that a competent and reliable person was charged with the duty of seeing that that provision was complied with and was in a position to discharge that duty.

(3)      The Court may give any direction it thinks fit for the purpose of giving effect to the declaration.

(4)      The Court may make a declaration under this section even though the person concerned is liable to be convicted of an offence.

(5)      An order under this section is deemed to be a final judgment within the meaning of [section 17(1)(a) of the Insolvency Act 2006].

[14]     Section 300(1)(a) incorporates the alternative requirements of s 194 of the

Act or s 10 of the Financial Reporting Act 1993.  Section 194 itself provides:

194     Accounting records to be kept

(1)      The board of a company must cause accounting records to be kept that—

(a)       Correctly   record   and   explain   the   transactions   of   the company; and

(b)       Will at any time enable the financial position of the company to be determined with reasonable accuracy; and

(c)       Will  enable  the  directors  to  ensure  that  the  financial statements of the company comply with section 10 of the Financial Reporting Act 1993 and any group financial statements comply with section 13 of that Act; and

(d)       Will enable the financial statements of the company to be readily and properly audited.

(2)      Without  limiting  subsection  (1)  of  this  section,  the  accounting records must contain—

(a)       Entries  of  money  received  and  spent  each  day  and  the matters to which it relates:

(b)      A record of the assets and liabilities of the company: (c)     If the company's business involves dealing in goods—

(i)        A record of goods bought and sold, except goods sold for cash in the ordinary course of carrying on a retail  business, that  identifies  both  the  goods  and buyers and sellers and relevant invoices:

(ii)      A record of stock held at the end of the financial year  together  with  records  of  any  stocktakings during the year:

(d)       If  the  company's  business  involves  providing  services,  a record of services provided and relevant invoices.

(3)      The accounting records must be kept—

(a)      In written form and in English; or

(b)      In a form or manner in which they are easily accessible and convertible into written form in English.

(4)       If the board of a company fails to comply with the requirements of this section, every director of the company commits an offence and is liable on conviction to the penalty set out in section 374(2) of this Act.

[15]     In relation to that section I note, and with respect agree with, the findings of Tompkins J in Maloc Construction Ltd (In liq) v Chadwick[1]  that the word ‘kept’ is not  limited  to  retaining  or  storing  such  records  as  happen  to  come  into  the possession.   It imports as well the obligation to create such records necessary to conform to the description in the subsection.

[1] Maloc Construction Ltd (In liq) v Chadwick HC New Plymouth M13/83, 11 June 1986; (1986)

3 NZCLC 99,794.

[16]     Section 10 of the Financial Reporting Act, in the alternative, provides for an obligation  in  relation  to  the  preparation  of  a  financial  statement  as  opposed  to keeping accounting records.

[17]     In this case the liquidator accepts the company is an exempt company but nevertheless it is the liquidator’s case that even the financial statements required to be kept by an exempt company have not been kept.

[18]     In  Network  Agencies  International  Ltd  (in  liq)[2]   Fisher  J  identified  four elements the Court had to be satisfied on before liability could be imposed upon a director under s 319 of the Companies Act 1955, the predecessor to s 300.  Those

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

four requirements are:

That the company is in liquidation;

The company is unable to pay its debts;

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

The failure has contributed to the company’s insolvency or created substantial uncertainty over the company’s assets and liabilities or substantially impeded the orderly winding up or for any other reason

warranted the remedy under the section.

[19]     In the present case there is no issue that the company is in liquidation and nor, on the basis of Mr Walker’s evidence and indeed the liquidation itself, can there be any issue about the fact the company is unable to pay all its debts.

[20]     The focus of this morning’s hearing and Mr Walker’s evidence has been on the issue of whether the company had failed to comply with its obligations, the effect of that failure and the defendant’s responsibility for that.  In relation to that last issue, the defendant’s responsibility and the consequences on a director in Maloc Construction Tompkins J identified that three factors were relevant to whether or not an order should be made under s 300, namely causation, culpability and duration, matters to which I shall return.

[21]     Finally by way of background, I note that in Re Rex Wood Service Centre Ltd (In liq)[3]  Doogue J accepted in an appropriate case the Court could make an order holding the director responsible for the full amount of the proved debts together with interest from the date of winding up.

The records kept by the company in this case

[3] Re Rex Wood Service Centre Ltd (In liq) HC Hamilton, M369/85, 8 June 1987; (1987) 2 NZCLC

100,199.

[22]     Mr Walker is an experienced chartered accountant and liquidator.   In his evidence he said he would have expected the following records to be maintained as a

minimum to meet the statutory requirements:

Financial statements setting out in a summarised form the assets and

liabilities and income and expenses of the business;

Accounting  recordings  comprising  both  a  general  and  subsidiary ledgers and registers together with supporting documents.

[23]     The general ledger is used to prepare a trial balance, which is a summary of outstanding account balances which provide a basis for the preparation of accurate financial statements.  The subsidiary ledgers are subsets of the general ledger.  They include payables and receivables, inventory of stock and property plant and equipment ledgers where appropriate.

[24]     In relation to source documentation and particularly source documentation for the type of business operated by the company, documents such as purchase and sales invoices, till records and contracts relating to leases and bank records such as bank statements would be required.  As Mr Walker observed till records or till tapes (as they are known), are extremely important records for a retail business of this nature.

[25]     Mr Walker’s evidence is that, despite his dealings with the defendant, he was only able to obtain a limited number of relevant documents in relation to the accounting records that the company should have held.   While some financial statements were presented to him, he does not accept those financial statements satisfied the requirements of either s 194 or the Financial Reporting Act.

[26]     Following his appointment as liquidator on 9 September, Mr Walker wrote to the defendant on 14 September giving him notice of his appointment and seeking all business records and information in respect of the company.   No response was received.   He then met with the defendant on 18 September.   On that date the defendant showed Mr Walker a small pile of papers (mostly ACC documents) and two pre-paid printed invoice books that contained invoices to a number of wholesale customers.  The defendant explained that although he knew what the marks in the invoice books recorded, there was no central record of debtors and creditors linked to a general ledger.

[27]     At this point I note the Act requires that the records be kept in written form and  in  English  or  in  a  formal  manner  in  which  they are  easily  accessible  and converted into a written form in English.

[28]     Again,  Mr  Walker  told  the  defendant  of  his  obligation  to  provide  all accounting records and financial statements relating to the company to him as liquidator.

[29]     Mr Walker’s initial view was that it would be in the interests of creditors to allow the defendant to continue trading the company to enable it to be sold as a going concern, provided that the defendant complied with a number of obligations including the provisions of daily reports, the financial records that had been sought, and  that  the  defendant  was  not  to  write  cheques  over  $2,000  on  the  company account.

[30]     However, unbeknown to Mr Walker, on 7 October 2009, the defendant drew two cheques, one in excess of $31,000 and one for $5,900.  Those cheques took the company’s bank account over its overdraft limited of $30,000.  When that came to Mr Walker’s attention, he took possession of the dairy.

[31]     When he received no adequate response from the defendant in relation to the provision of records, Mr Walker pursued the matter with a number of accountants (or parties purporting to be accountants) who had prepared statements on behalf of the company.  Mr Walker was told that a Mr Muhammed Ali had prepared statements for the company for the period 2004 to 2007.   Mr Ali, however, advised that he had returned all documents that he had back to the defendant.  While Mr Ali purported to prepare statements for the period 2004 to 2008, all were apparently dated between October and November 2009.  Further, in the disclaimer in relation to each of them Mr Ali  had  stated  that  he had  filed the statements  on  the basis  of information supplied by the defendant.   Mr Walker identified a number of problems with the statements and raised those issues with Mr Ali.  He never received any supporting documentation to support the statements.

[32]     Mr Walker also dealt with a Mr Sharma who had prepared statements on behalf of the company and had, during the course of the liquidation, prepared a statement of assets and liabilities as at 30 September 2009 for the company.  Again I interpolate here, that was prepared in support of an application by the defendant to terminate the liquidation.  Three such applications were made to the Court.  They were all ultimately withdrawn or dismissed.

[33]     In  a  conversation  between  Mr Walker  and  Mr  Sharma,  Mr  Sharma  told Mr Walker  that  despite  what  he  had  said  in  his  affidavit,  he  had  no  personal knowledge  of  preparation  of  the  financial  statements  or  supporting  documents. Again Mr Walker’s further inquiries of Mr Sharma were not responded to.

[34]     Through his communications with Mr Sharma, Mr Walker discovered that Mr Sharma had been subcontracting the preparation of some accounts to Accounting House NZ Limited, a Mr Jamaldeen.  Mr Jamaldeen refused to provide documents to Mr Walker when he contacted him initially.  On 2 November 2009 some documents were made available from Accounting House, Mr Jamaldeen.   The documents included tax returns for the years 2005 to 2007 and again appeared to have been filed on 24 October 2009 after the date of liquidation.  The returns were accompanied by financial statements prepared by Mr Ali.

[35]     On  further  investigation  by  Mr  Walker  it  appeared  that  the  statements prepared by Mr Jamaldeen had been prepared solely on the basis of bank statements and with no reference to other records.  Mr Jamaldeen was not aware where the Mt Roskill Dairy’s till tapes may have been.

[36]     There was yet another entity involved in the preparation of accounts for the company, Smythe & Associates.  Mr Smythe had prepared financial statements for the company and the defendant for the purposes of an application for financial accommodation from ASB Bank. To support such application, accounts for the years ended 30 March 2006 to 2008 had been prepared by an entity identified as Smythe & Associates.  Mr Walker’s investigations disclosed that Smythe & Associates was in fact a Mr Syd also known as Mr Selvanayakam.  Of concern, the statements prepared by Smythe and Associates showed a retained profit of some $320,000 which was in

stark contrast to the financial statements for the same relevant financial periods which had been submitted to the Inland Revenue for tax purposes.

[37]     Against that background, Mr Walker then had a further meeting with the defendant.  Mr Walker again requested till tapes from the defendant because when he had visited the business of the Mt Roskill dairy on previous occasions, he had noticed that when goods were sold they were entered into the till, generating a record on the till tape.  The defendant told Mr Walker that he had destroyed the till tapes. He was unable to offer any explanation for such an extraordinary act on his part. Mr Walker reiterated that he required further records, including sales invoice books, list of creditors, cheque books and the till tapes.  The defendant suggested he had provided them to Mr Jamaldeen.  However, by this stage Mr Jamaldeen had provided Mr Walker  with  all  of  the  limited  information  and  records  that  they  had  been provided with from the defendant.

[38]     The defendant was only able to provide a partially used cheque book for the business account and a stock count for September 2009 to Mr Walker.  Mr Walker’s subsequent stock take disclosed significant disparity from the purported stock take records provided by the defendant.   Even taking account of the difference in the dates on which the stock takes were undertaken the disparity was marked and unexpected.

[39]     Mr  Walker  made  further  inquiries  from  the  defendant  and,  after  further extensive inquiries obtained some till tapes from the defendant.  However, those till tapes only contained a record of 11 days.  Mr Walker was also able to obtain a few purchase invoices and some exercise books containing handwritten figures which appeared to be a record of receivables.  The records were, however, not in any form which would enable a liquidator or any other independent person to take steps to recover the sums set out in those books.

[40]     In Mr Walker’s opinion the financial statements that were prepared were substantially defective.   None of them contained accounting policies or notes to enable any reader to understand how they had been compiled.  Nor did they provide information in relation to contingencies and securities over assets as required.  More

importantly, in relation to the various statements Mr Ali was not able to provide any supporting  working papers or  general  ledgers  to  support  or  verify the  financial statements he prepared other than a spreadsheet which appears to have relied entirely on bank statements.

[41]     The Accounting House financial statements again were prepared on the basis of bank statements.   The Smythe financial statements were, as noted, apparently prepared  for  a  completely  different  purpose  and  disclosed  completely  different figures to the Ali statements.   For the financial year ended 31 March 2007 the difference in the accounts are marked.  The Ali statements show a net asset position of $142,000 whereas the Smythe accounts show a net asset position of $328,000, a difference of approximately $186,000.   The differences principally stem from amounts which could not be ascertained from bank statements and primarily relate to differences in the shareholder’s current account entries.

[42]     There were also a number of issues with the Sharma balance sheets.  Notably, they omitted the debt owing to New Zealand Customs which in fact  led to the liquidation of the company in the first place.

[43]     As to the general accounting records, Mr Walker has never seen or been provided with  a general  ledger for the  company.    He has  never seen  nor been provided with any payables and receivables ledgers for the company.  The only stock list was the one provided by the defendant as at 9 September 2009 which, as noted, differed significantly from the independent stock take undertaken by Mr Walker as liquidator.  While some documents were received from Accounting House, they were completely inadequate and did not enable Mr Walker to verify the defendant company’s revenue and/or financial position.  Significantly, the till tapes that were provided for the 11 day period post-liquidation, revealed large discrepancies between what was banked and recorded in the bank statements by the company and the company’s actual takings for the particular period.

[44]   Mr Walker concludes that cash takings were not banked and non-cash transactions that were recorded on the till fell well short of the amounts that were banked.   Further, there seem to be periods of time when the business was open,

particularly late in the evening, but the till tapes do not record any transactions during those time periods.   Mr Walker considers that the company’s revenue had been significantly understated for tax purposes.

[45]    There are other issues of concern which I refer to briefly.   There were unidentified deposits from overseas sources including Switzerland and the United Kingdom without any explanation as to how those deposits could have related to the business  of the  company.   There were also  regular  payments  apparently of  the defendant’s personal mortgage commitments made out of the business account.

[46]     As a result of his reconciliation, Mr Walker has been able to update the position of the creditors of the company as at the date of liquidation.  They fall into

three principal categories:

New Zealand Custom Service            $29,223, the Inland Revenue Department  $768,114

general creditors  $201,168

Total:  $998, 505

[47]     The evidence of Mr Walker satisfies me beyond any doubt, rather than on the balance of probabilities, that the company failed to comply with s 194 and also further failed to comply with s 10 of the Financial Reporting Act.  Its performance in terms of record keeping was woeful and inadequate at best and at worst was deliberately designed to mislead both the Inland Revenue Department and the ASB Bank, quite apart from its own creditors.  The few records that Mr Walker was able to  locate  fell  well  short  of  the  statutory requirements  on  the  company  and  the defendant as director.

[48]     I have no doubt that the company’s failure to comply with its requirements in relation to records not only contributed to the company’s inability to pay its debts, but also resulted in substantial uncertainty as to its assets and liabilities position and substantially impeded Mr Walker’s early liquidation of the company.

[49]     I am satisfied that the elements identified by Fisher J in the Network Agencies

case are met in this case.

[50]     That leaves the issue of the amount of the company’s debts as at liquidation and the extent to which the defendant should be declared personally responsible for those debts.  As noted, Mr Walker has carried out a reconciliation of the debts as at the date of liquidation which I accept as accurate for present purposes.  I also accept Ms Wendt’s submission for Mr Walker that there is a clear causative link between the defendant’s failure as a director to ensure the proper financial statements were prepared and that adequate accounting records were kept, and the failure of the company and the ultimate loss suffered by all creditors.

[51]     Prima facie, it is appropriate that there be a declaration the defendant be personally liable for the debts of the company as at liquidation date.  The statement of defence filed on behalf of the defendant challenges the quantum of debts.  For the reasons given above, I do not accept the challenge to the quantum of the debt.   I accept it is proved in the figure I have referred to.

[52]     Next,  the  statement  of  defence  pleads  the  company  is  effectively  not insolvent and that the defendant took all reasonable steps to ensure compliance and keep all records as may have been necessary.  For the reasons given above, I reject both of those suggestions from the statement of defence.  The company was clearly insolvent for some time and for the reasons given the defendant failed woefully to comply with his obligations as a director to ensure adequate records were kept for the company.

[53]     The defendant also seeks to rely on the financial statements prepared by the four accountants.  Again, for the reasons given above, neither the defendant nor the company is entitled to rely on those documentary statements which, on Mr Walker’s investigation, were clearly prepared on the basis of the information provided by the defendant to the accounting entities and at most, limited to reliance on bank statements.

[54]     The grounds of defence set out in the statement of defence are, to a degree, repetitive but I reject them.  They do not stand against the evidence of Mr Walker which is supported not only by Mr Walker’s general experience in liquidations but also by the documentary records Mr Walker has obtained and the reconciliation that he prepared on the basis of the information he was able to obtain.

[55]     I am aware that there are statutory defences under s 300(2) but in this case it could not possibly be said the defendant took reasonable steps to secure compliance, nor that he had reasonable grounds to believe that a competent person was in charge of overseeing compliance.  This is not a case where the defendant was a member of a Board of Directors who had appointed executives to carry out the tasks related to the compilation of financial records and statements.  The defendant was responsible for operating the business.   The only third parties he involved in the operation of the business were apparently the accounting entities and they were, in turn, entirely dependent on the information provided by him for the statements they prepared on his instructions.

[56]     The defendant was a director of the company from the outset.  The defendant has, on the evidence before this Court, failed to keep records and in some cases has deliberately destroyed relevant records or, in any event, has deliberately failed, for whatever  reason,  to  provide  records  to  the  liquidator  Mr  Walker.     Despite Mr Walker’s  numerous  inquiries  which  provided  the  defendant  with  numerous opportunities to provide the relevant information, that was never attended to by the defendant.

[57]     In terms of culpability, I consider that there is support for the submission by Ms Wendt that the defendant behaved dishonestly in destroying till tapes (as he admitted to Mr Walker) and that he was instrumental in the preparation of divergent financial statements for the same period for the purpose of obtaining bank credit facilities and for tax purposes.

[58]     There is no basis for this Court to exercise any discretion to grant relief to the defendant in this case.

Result

[59]     There will be a declaration pursuant to s 300 of the Companies Act 1993 that the defendant is to pay $998,505 to the liquidator, together with interest at the judicature rate from the date of liquidation of 9 September 2009 on that sum.

[60]     The plaintiff liquidator is also to have costs on this proceeding on a 2B basis together with disbursements as fixed by the Registrar.

Venning J