G & S Enterprises (2006) Limited v Sweetman [2014] NZHC 1762 (28 July 2014)

Last Updated: 14 August 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-004943 [2014] NZHC 1762

BETWEEN	G & S ENTERPRISES (2006) (IN LIQUIDATION) First Plaintiff
AND	HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES (AS LIQUIDATORS Second Plaintiffs
AND	NEVILLE ROBERT SWEETMAN First Defendant
AND	JEFFREY DOUGLAS GRIFFIN Second Defendant
AND

Hearing:	24 July 2014
Appearances:	J M Blythe for Plaintiffs No appearance by or on behalf of the Defendants
Judgment:	28 July 2014

_{JUDGMENT OF KEANE J}

This judgment was delivered by me on 28 July 2014 at 2.30 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Meredith Connell, Auckland for Plaintiffs

G & S ENTERPRISES (2006) (IN LIQUIDATION) v LEVIN AND ORS [2014] NZHC 1762 [28 July 2014]

[1] G & S Enterprises (2006) Limited was incorporated on 14 February 2006. It first traded as an espresso bar outlet, ‘Pumped Café’ in Glen Eden, a business it sold in October 2008. It opened a second outlet, ‘Grind Espresso Bar’, in central Auckland, in March 2007. It ceased trading in October 2010. It was placed in liquidation by order of this Court on 27 July 2011.

[2] As at the date of liquidation the company owed to unsecured creditors

$316,945.73. It owed the Commissioner of Inland Revenue, on whose initiative it was placed in liquidation, $145,310.81 including penalties and interest. It owed the Bank of New Zealand $164,685.58, a liability met by guarantors on 23 March 2012, who retained the ability to enforce the Bank’s claim by subrogation, but have so far shown no sign of doing so. It owed a small amount to the Accident Compensation Commission. There was one other claim that the liquidators disallowed.

[3] The liquidators now seek a compensatory order against Mr Sweetman and Mr Griffin, the two directors and shareholders, under s 301(1)(b)(ii) of the Companies Act 1993, obliging them to pay at least 80 per cent of the sum owing to creditors at liquidation, on the grounds that:

(a) The two directors breached their duty to exercise the care, diligence and skill expected of a reasonable director; caused the company to incur debts it did not pay; allowed the company to trade when its liabilities exceeded its assets, preferred Mr Sweetman’s interests over creditors, failed to ensure sufficient funds were retained to meet debts, and did not act in good faith (s 137).

(b) The directors breached their duties to the company not to cause or allow its business to be carried on in a manner likely to cause serious loss to creditors (s 135).

(c) The directors breached their duty to the company not to agree to it incurring any obligation unless they believed on reasonable grounds that it was able to meet that obligation (s 136).

(d) The directors breached their duty to act in good faith in what they believed to be the best interests of the company (s 131(1)).

As a fifth cause of action, against Mr Sweetman alone, they pursue his drawings as at the date of liquidation, $20,216.03.

[4] Neither Mr Sweetman nor Mr Griffin has filed a statement of defence and the liquidators seek judgment, on behalf of the company, by way of formal proof, relying principally on the evidence of one of the liquidators, Mr Levin.

Service issue

[5] The liquidators may seek judgment on formal proof against Mr Sweetman, who was served personally with the statement of claim and notice of proceeding on 1

March 2014 at his Hamilton home. However, Mr Griffin was not served personally, because the liquidators’ solicitors have dealt throughout with two firms of Hamilton solicitors acting on his behalf.

[6] On 4 February 2014 the first Hamilton solicitors, who acted for Mr Griffin, said they had instructions to accept service of the statement of claim and notice of proceeding, and were served by courier. Later in February, when asked to accept initial disclosure, they said they no longer had instructions. In February 2014 also the second firm said that they about to receive instructions, but were authorised to receive initial disclosure. Thus the liquidators deemed service on Mr Griffin personally to be unnecessary.

[7] A statement of claim and notice of proceeding must, however, be served on a defendant, and served personally, unless another method of service is permitted by statute, or by the rules, or is authorised by a prior order of this Court;¹ or another

form of service has been agreed;² or this Court dispenses with service altogether.³

_{None of those exceptions apply or have come into play. Moreover, neither Hamilton}

¹ _{HCR 5.70, 5.71.}

² _{Rule 6.7.}

³ Rule 6.8.

firm has ever had the status of solicitors on the record; a status which can only be accorded by a defendant after due service.

[8] That said, Mr Griffin clearly knows of this action. I am told, and I accept, that the second Hamilton firm continues to act for him. In all likelihood he has had a copy of the statement of claim and notice of defence since it was accepted on his behalf by the first firm of Hamilton solicitors. In reality he is indistinguishable from Mr Sweetman.

[9] Unless then Mr Griffin files a memorandum, putting service in issue, within seven working days of the date of this decision, I will dispense with service on him personally, rendering him liable to judgment by default.

Early insolvency

[10] The four breaches of duty on which the liquidators found their claim on behalf of the company for a s 301 compensation order depend on Mr Levin’s analysis of the company’s financial state from its inception and until the date of liquidation. I accept his analysis.

[11] Mr Levin rests his analysis firstly and primarily on the company’s financial statements in the years 2006 – 2008, which are the only financial statements there are. None were prepared afterwards and those for 2008 remained in draft until July

2011, when the company went into liquidation.

[12] In those three years the company’s liabilities invariably exceeded its assets. In the year ended 31 March 2006 its net loss was $5,701.21, its working capital deficit was $66,345, and its net liabilities were $5,725. In the year ended 31 March

2007 its net loss increased to $25,861, its working capital deficit to $88,278, and its net liabilities to $33,198. In the year ended 31 March 2008, its net loss became

$83,152, its working capital deficit $166,884 and its net liabilities $116,350.

[13] Mr Levin also rightly puts in issue whether during those years the extent to which the company’s liabilities exceeded its assets was understated. In each of those years the company attributed a significant value to goodwill, which did not have any

realisable worth, given its chronic indebtedness: in 2006 $59,279, in 2007, $191,161 and in 2008 $107,998. If that goodwill is set to one side, as I agree they must be, the company’s liabilities exceeded its assets in 2006 by $65,022, in 2007, by $224,359, and by $324,348 in 2008.

[14] The very significant increase in the company’s deficit in 2007, which grew larger in 2008, Mr Levin says and I accept, is attributable to the purchase of the Grind Espresso Bar in March 2007 for $130,000 - $140,000. That purchase price included a significant goodwill payment, which has never been recovered, and the company took on new debt funding, which by the date of liquidation stood at

$164,685.

[15] It is also apparent that throughout its life the company failed to meet its liabilities to tax; principally its PAYE obligation as from 31 March 2006, its GST obligations as from February 2007, its income tax penalty obligations between August 2009 – February 2010. A further indicator of chronic indebtedness is that when in October 2008 the Pumped Café was sold and the company received a net payment of $96,313, it applied half to reduce term debt, and the remaining half to meet overdue PAYE, to cover operating expenses and for creditor and personal drawings.

[16] I am satisfied, on the basis of Mr Levin’s analysis, that as at March 2007, the date of the Grind Espresso Bar purchase, the company was already insolvent and that, then and later, the directors elected to trade to the prejudice of creditors. I accept equally that the directors are liable in each of the four ways identified.

Section 301 compensation award

[17] In their four causes of action the liquidators seek on behalf of the company an order under s 301(1)(b)(ii) requiring the directors each to contribute to the assets of the company such sum by way of compensation as is just, having regard to the debt at liquidation, $316,945.73. They seek an 80 per cent award, $253,556.58.

[18] I am satisfied that this claim for compensation is fully justifiable subject to this reservation. The calculation assumes that the debt to the BNZ remains extant,

despite the fact that it was satisfied by guarantors within six months of the company going into liquidation. I have no concern that the guarantors are entitled to claim as creditors. Under s 85 of the Judicature Act 2008 they are entitled to stand in the place of the BNZ, as long as they indemnify it. They may prove in the bankruptcy, under s 272(3) of the Insolvency Act 2006, because the BNZ has submitted a creditor’s claim.

[19] The difficulty is that the only information the liquidators have comes from the BNZ in an email. It says that it made a housing loan on 30 March 2007, presumably to enable the purchase of the Grind Espresso Bar, which was secured by an unsupported guarantee from Mr Sweetman and Mr Griffin, and also by an apparent relative of Mr Sweetman, and a woman, which was supported by

‘property’. The BNZ does not say whether all four or less than four met the debt.

[20] My first concern is that the guarantors have not, since they met the BNZ debt in March 2012, in excess of two years ago, ever attempted to claim in the liquidation. My second is that, while they might stand in the shoes of the BNZ, it is not clear which of them is entitled to do so and in what amount. My third is that if Mr Griffin or Mr Sweetman met the debt under their guarantee, and became creditors, an order requiring them to compensate the company for 80 per cent of the debt at liquidation, including the BNZ liability, would notionally reimpose the debt.

[21] Despite these reservations I have decided to accede to the liquidators’ application. I will grant the order they seek leaving to them to resolve with any guarantors, who do stand as creditors what the actual debt is. In that way, if Mr Sweetman and Mr Griffin have met the BNZ debt in whole or part, they will be able to claim the benefit.

Sweetman debts

[22] Between 13 March 2008 and the date of liquidation, 2011, Mr Sweetman made cash withdrawals totalling $17,140, internet transfers to his personal account totalling $13,513.33, and personal insurance payments totalling $1,446.70, in all

$32,103. As at liquidation he was owed $11,884. There is no sign that he was an

employee of the company, and the liquidators looked to him in debt for the balance owing, $20,216.03.

[23] When Mr Sweetman made those drawings in 2008 he clearly did so for his own purposes and, I accept, he must have known that this was not in the best interests of the company. That Mr Griffin allowed him to make those drawings means that he must share the responsibility, but Mr Sweetman is independently liable in debt.

Conclusions

[24] In the result I make an order against Mr Sweetman and Mr Griffin under s 301(1)(b)(ii) of the Companies Act 1993 under which they are each liable to pay to the company in liquidation $253,556.58. I also give judgment against Mr Sweetman in debt for his drawings, $20,216.03. The liquidators are entitled to costs at scale 2B

_{and disbursements as fixed by the Registrar.}

P.J. Keane J