Grant v Keighley [2014] NZHC 3296 (17 December 2014)

	Home \| Databases \| WorldLII \| Search \| Feedback High Court of New Zealand Decisions

UNDER	The Companies Act 1993
IN THE MATTER OF	the liquidation of Timberline Helicopters Limited (in Liquidation)
BETWEEN	DAMIEN GRANT and STEVEN KHOV, as liquidators of Timberline Helicopters Limited (In Liquidation) Plaintiffs
AND	CRAIG WILLIAM ANDREW KEIGHLEY _Defendant

Hearing:	15 December 2014
Appearances:	J K Boparoy for plaintiffs No appearance for defendant
_Judgment:	_{17 December 2014}

This judgment was delivered by me on 17 December 2014 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.

[1] This proceeding concerns a company called Timberline Helicopters Limited. Timberline was placed in liquidation on 9 September 2009. The plaintiffs are Timberline’s liquidators.

28 December 2007 when he acquired the shares in Timberline from its original owner. Timberline was originally called Columbia Helicopters New Zealand Ltd. It had been carrying on business since 2003 providing a wide range of helicopter services. These included heavy lifting, logging, firefighting and construction services.

[3] The liquidators contend that Timberline failed to keep proper accounting records as required by s 194 of the Companies Act 1993 (the Act) from the point at which Mr Keighley became its director until the date upon which it was placed in liquidation. They also say that the company failed to comply with its obligation under s 10 of the Financial Reporting Act 1993 to prepare financial statements during the same period.¹

[4] The liquidators submit that these failures have created substantial uncertainty regarding Timberline’s assets and liabilities, and have also substantially impeded the orderly liquidation of the company. The liquidators have therefore asked the Court to make a declaration under s 300 of the Act that Mr Keighley is responsible for all of the debts and liabilities that the company incurred during the period that Mr Keighley was a director. The proofs of debt that have been filed by creditors establish that these total $354,891.89.

[5] Mr Keighley was served with the proceeding on 31 July 2014 by way of substituted service. He has taken no steps to defend the liquidators’ claim. It is

_{therefore to be determined by way of formal proof, with the liquidators
relying upon}

¹The Financial Reporting Act 1993 was repealed by the Financial Reporting Act 2013, s 54.

However, a failure to comply with the duty under s 10 of the 1993 Act may found a claim under Companies Act 1993, s 300. See Walker v Allen [2001] NZHC 829; [2002] 1 NZLR 278 (HC), and Financial Reporting (Amendments to Other Enactments) Act 2013, s 44.

the material contained in an affidavit sworn by a member of their staff, Mr Kieran

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

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

(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 1 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) 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.

[7] The jurisdiction to make a declaration under s 300 arises where a company is in liquidation and is unable to pay its debts. Those prerequisites are obviously satisfied in the present case. The Court may make such a declaration where the company has failed to comply with its obligations under s 194 of the Act to keep proper accounting records. Alternatively, it may do so where the company has failed to comply with its obligations under s 10 of the Financial Reporting Act 1993 to prepare financial statements or any other enactment that requires the preparation of financial statments. It can only do so, however, where the failure has had one of the effects set out in s 300(1)(b).

(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.

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

(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.

(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).

[9] The courts in New Zealand have adopted a consistent approach in relation to the manner in which s 194 and its predecessor, s 151 of the Companies Act 1955, are to be applied. A company must keep such records as may be necessary and in whatever form as may be necessary to achieve the objectives set out in s 194(1).³

The obligation to keep such records includes an obligation to ensure the records are

Did Timberline fail to keep and/or prepare proper accounting records as required by s 194 of the Act and financial statements as required by s 10 of the Financial Reporting Act 1993?

[10] When the liquidators assumed control of the company they were able to gain access to its bank statements, but were unable to locate any other financial or accounting records. In particular, they were not able to obtain a list of the company’s assets and liabilities, and they were unable to locate documentary records relating to

³_{Maloc Construction Ltd (in liq) v Chadwick [1986] NZHC 102; (1986) 3
NZCLC 99,794 (HC) at 99,802.}

[11] The liquidators also discovered that no financial statements had ever been prepared for the company in respect of the 2007, 2008 and 2009 years. Mr Keighley ultimately acknowledged this fact in an email he sent to the liquidators on 6 August

[12] The last financial statements for the company were prepared for the year ending 31 December 2006, prior to the point at which Mr Keighley became the company’s director. These showed that the company’s liabilities exceeded its assets as at 31 December 2006 by the sum of $4,981,448.00. It had also incurred a trading loss during that year in the sum of $1,558,887.

[13] The liquidators endeavoured to obtain Mr Keighley’s assistance in locating the accounting records. He did not cooperate, and the liquidators were therefore obliged to report him to the regulatory authorities.

[14] On 21 April 2010, the liquidators interviewed Mr Keighley using their powers under s 261 of the Act. During the interview Mr Keighley said that Timberline’s bank account was also used by its shareholder, a company by the name of Helico New Zealand Limited. Mr Keighley is also the sole director of that company. Mr Keighley also told the liquidators that Timberline had ceased to trade during the period in which he was the sole director. From that point on only Helico had used Timberline’s bank account.

[15] Mr Keighley’s assertion that Timberline had stopped trading during this period was not supported by other evidence the liquidators obtained. In particular, they received proofs of debts from many creditors who had provided goods or services to Timberline during the period after which Mr Keighley had become the company’s sole director. The liquidators ultimately concluded that Timberline continued to trade during the 2007, 2008 and 2009 years. They have found no evidence to support Mr Keighley’s claim that it had stopped trading during that period.

[16] Despite their best efforts, the liquidators have not yet found any accounting

records beyond the company’s bank statements. The evidence therefore establishes

beyond any doubt both that Timberline failed to keep proper accounting records in terms of s 194 of the Act, and that it failed to prepare financial statements for the

2007, 2008 and 2009 years as required by s 10 of the Financial Reporting Act 1993.

Did these failures result in substantial uncertainty as to the assets and liabilities of the company or substantially impede the orderly liquidation?

[17] The lack of records meant that the liquidators had no clear idea of the assets and liabilities of the company. This meant that they could not take steps to secure the company’s physical assets, and/or to collect receivables that were owing to the company as at the date of liquidation. The complete lack of primary records means that the liquidators have been unable to consider whether they should challenge payments made to the company’s creditors prior to liquidation on the basis that they are voidable dispositions.

[18] Although the company’s bank statements enabled the liquidators to ascertain the company’s cash position at any given time, the bank statements did not assist them to determine the position in relation to the company’s assets and liabilities. The liquidators were therefore reliant on the proofs of debts filed by creditors to assess the level of the company’s indebtedness.

[19] The liquidators also encountered significant difficulties distinguishing between transactions in the bank statements that related to Helico and those that related to Timberline. The bank statements did not distinguish between payments and deposits made on behalf of either company.

[20] The liquidators also discovered that Mr Keighley had used the company’s bank account to pay for items for his personal benefit. These include payments made to meet personal mortgage commitments and grocery bills. He has also paid for hotel and motel accommodation, and spent money at restaurants and bars. He has also purchased luxury items overseas. Mr Keighley acknowledged during the interview that these forms of expenditure would ordinarily be debited against his current account. In the absence of any evidence as to the balance of his current account, however, the liquidators have not been able to seek reimbursement of these items.

[21] Mr Keighley told the liquidators during the interview that Timberline’s transactions were included in Helico’s financial statements. However, Helico’s financial statements make no distinction between transactions of Helico and those of Timberline. In addition, the liquidators have now obtained confirmation that Helico’s financial statements do not relate in any way to Timberline’s operations. The accountants who prepared the financial statements for Helico have confirmed that they were concerned only with the financial affairs of that company. They have told the liquidators that Helico’s financial statements are not affected in any way by Timberline’s operations during the 2007, 2008 and 2009 years.

[22] For these reasons it is plain that the lack of accounting records and financial statements has resulted in substantial uncertainty as to Timberline’s assets and liabilities, and has also substantially impeded the orderly liquidation of the company. Jurisdiction therefore exists to make an order under s 300.

To what extent should Mr Keighley be declared responsible for Timberline’s debts

[23] In considering the issue of remedy in this area the courts have traditionally had regard to three factors – causation, duration and culpability.⁵In the present case, all of those factors point firmly in favour of the declaration that the liquidators seek. There can be no doubt that virtually all of obstacles that the liquidators have encountered were caused by the complete lack of contemporaneous records. Mr Keighley’s lack of cooperation after the company was placed in liquidation has been another contributing factor, but that does not in any way reduce the significance of his initial failure to ensure that proper accounting records and financial statements

were created and kept. The lack of records is also likely to have played a role in the ultimate demise of the company, although the extent to which this is so is a matter of conjecture.

[24] The failure to keep records and prepare financial statements continued for the

⁵Maloc Construction Ltd (in liq) v Chadwick above n 4 at 99,809; Re Bennett, Keane & White Ltd

(in liq) (No 2) (1988) 4 NZCLC 64,317 (HC) at 64,329-64,330; Mason v Lewis [2006] 3 NZLR

225 (CA) at [109]-[110]; Löwer v Traveller [2005] NZCA 187; [2005] 3 NZLR 479 (CA) at [78].

considerable degree of culpability on Mr Keighley’s part because of the extent of the failure to keep records. A declaration under s 300 is designed at least in part to punish directors who fail to ensure that their company keeps proper accounting records, and to provide compensation to creditors who suffer loss as a result.⁶A director’s personal culpability will be relevant to the extent to which he or she will be personally liable to meet the company’s debts and liabilities.⁷

[25] The courts have emphasised, however, that a cautious approach is required in this area.⁸This reflects the fact that a failure to keep records may not have contributed materially, or in some cases at all, to the ultimate failure of a company.

[26] Three factors have persuaded me that Mr Keighley should be responsible for all of the debts that the company incurred under his stewardship. The first is that the liquidators have identified personal expenditure on his part using company funds to the value of $85,155. As I have already recorded, the absence of any records relating to the level of Mr Keighley’s current account has inhibited the liquidators to date from attempting to recover those funds from Mr Keighley. I consider, however, that this factor can properly be taken into account when assessing the extent to which Mr Keighley should be responsible for the company’s debts. If necessary, the Court could rely upon it as constituting “any other reason” in terms of s 300(1)(b)(ii) for making the declaration.

[27] The second factor is that the lack of records has prevented the liquidators from ensuring that receivables owing to the company are collected for the benefit of the creditors. Usually the collection of outstanding trade debts is one of the first tasks undertaken by a company’s liquidators. In the present case that has not been possible because of the lack of primary records.

[28] The third factor is that the costs of the liquidation currently amount to just under $89,000. I have no doubt that a significant proportion of those costs were

_{incurred as a direct or indirect result of the company’s
failure to keep proper}

⁶_{Re Network Agencies International Ltd (in liq)
[1992] 3 NZLR 325 (HC) at 330.}

[29] I therefore consider it appropriate in the circumstances of this case to require Mr Keighley to assume responsibility for all of the debts that the company incurred whilst he was its sole director.

[30] I make a declaration under s 300(1)(b) of the Companies Act 1993 that Mr Keighley is responsible, without limitation of liability, for Timberline’s debts in the sum of $354,891.89. The liquidators are also entitled to interest on that sum at the prescribed rate under s 87 of the Judicature Act 1908 from the date upon which the company was placed in liquidation until the date of this judgment.

[31] The liquidators are entitled to costs on a category 2B basis together with disbursements as fixed by the Registrar.

High Court of New Zealand Decisions

Grant v Keighley [2014] NZHC 3296 (17 December 2014)