Madsen-Ries v Ng [2016] NZHC 131 (11 February 2016)

Last Updated: 4 March 2016

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2015-419-340 [2016] NZHC 131

UNDER	the Companies Act 1993
IN THE MATTER	of the liquidation of Global Concept Resources Limited
BETWEEN	VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN First Plaintiffs
AND	GLOBAL CONCEPT RESOURCES LIMITED (IN LIQUIDATION) Second Plaintiff
AND	CHONG KIAT NG First Defendant
AND	GOLDEN PAGODA LIMITED Second Defendant

Judgment:	4 February 2016
Appearances:	K M Wakelin and G A Campbell for Plaintiffs No appearance for Defendants
Reasons:	11 February 2016

_{JUDGMENT OF KEANE J}

This judgment was delivered by me on 11February 2016 at 10am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Meredith Connell, Auckland

VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN v GLOBAL CONCEPT RESOURCES LIMITED (IN LIQUIDATION) [2016] NZHC 131 [11 February 2016]

[1] On 4 February 2016 I gave judgment for $761,725.65, on formal proof, against Chong Kiat Ng, the sole shareholder and director of Global Concept Resources Limited, in favour of Global (now in liquidation) and also, to a lesser extent, in favour of its liquidators, Vivienne Madsen-Ries and Henry Levin.

[2] I also gave judgment for $189,225.82, including interest, in favour of Global against Golden Pagoda Limited, another company of which Mr Ng was and remains sole shareholder and director. (I did so on a joint and several basis because I also held Mr Ng liable to Global and the liquidators for that sum, as well as a related sum,

$10,000.)

[3] I awarded Global and the liquidators $20,859 costs and $299 disbursements, and held Mr Ng and Pagoda jointly and severally liable.

[4] In this decision I set out in summary, and without reference to the authorities referred to, my reasons for the judgment I gave. In short, I accepted the submissions made to me relying on Mr Levin’s uncontested evidence.

Global’s inevitable demise

[5] Global was incorporated by Mr Ng on 26 April 2004. Its sole business was a restaurant in Hamilton called Pattaya Satay House. It traded until 2012, when the restaurant was sold for $200,000 to Shenanigans Hamilton Limited.

[6] Global at no stage accounted to the Inland Revenue for PAYE or GST. On 30

September 2010 the Inland Revenue seized Global’s business records, such as they were, under an access warrant; and on 5 October 2010 gave notice to Mr Ng and Global that their taxation affairs were to be investigated.

[7] Global proved to have no primary records and the Inland Revenue audit depended principally on Global’s bank statements and Mr Ng’s admissions. The audit culminated in an agreement set out in a letter to Mr Ng, dated 22 September

2014, to which he subscribed on Global’s behalf, forfeiting any right of challenge.

[8] In early 2012 Global entered into the agreement for sale and purchase with Shenanigans as a result of which it sold the restaurant. It received a $10,000 deposit, which was never banked. There is no record of where it went. On 10 April 2012, the date of settlement, Shenanigans paid into Global’s bank account $189,751.60 and Global immediately transferred $185,814.97 to Pagoda, which Mr Ng had incorporated on 8 September 2011.

[9] On 13 July 2015, on the application of the Commissioner of Inland Revenue, this Court made an order placing Global in liquidation and appointing Ms Madsen- Ries and Mr Levin as the liquidators.

[10] On the liquidation the Inland Revenue, relying on the September 2011 agreement, claimed as an unsecured creditor to be owed by Global $453,461.79: on a preferential basis the core PAYE and GST Global had conceded it owed,

$309,678.90, and Court costs on the liquidation, $3,894.71; and on an unsecured basis the interest and penalties also agreed, $143,782.89. (Under the agreement Global had no residual income tax liability and had a loss to carry forward as at 31

March 2012, $195,761.34.)

[11] The Inland Revenue remains Global’s sole creditor. Global may have been able to satisfy the claims of all other creditors, funding its ability to do so by failing to account for PAYE and GST. Or it may be that, despite advertising by the liquidators, other creditors remained unaware that Global was in liquidation, or saw no point in claiming. In the absence of better evidence, these possibilities can only be speculative.

[12] On 29 September 2015 the liquidators and Global brought this present proceeding, which was served on Mr Ng and Pagoda on 22 October 2015. They had until 27 November 2015 to file and serve a statement of defence and did not do so. Nor have they taken any steps since. On that basis the claim was set down for formal proof and I gave judgment.

Global’s chronic insolvency

[13] In giving judgment I accepted Mr Levin’s uncontested evidence that Global must have been insolvent from the outset. In the absence of any financial records it cannot be said that from the outset Global’s liabilities exceeded its assets. But according to the September 2014 agreement Global suffered losses in every year except that ending 31 March 2011, when its surplus was miniscule.

[14] What is clear, moreover, is that soon after being formed Global failed on 31

August 2004 to account for PAYE and on 30 September 2004 for GST; and remained in default until it ceased trading. Its core tax debt grew, as did penalties and interest. On that basis alone it proved unable to pay its debts as they became due in the ordinary course of business.

First cause of action – directors’ salary

[15] In giving judgment to Global against Mr Ng on the first cause of action, I

accepted that he was not entitled to the salary Global paid to him for the years 2008

– 2012, $89,431.23 (the salary he and the Inland Revenue had agreed he received for those years).

[16] I held him liable to repay that salary under s 161(5) of the Companies Act

1993 because the payments had been made in breach of that section. Global’s board, in reality Mr Ng as sole director, had never authorised his salary. Mr Ng, as sole director, had never certified that those payments were fair to Global and set out his reasons. Nor, I was satisfied, could Mr Ng have given such a certificate.

[17] In 2008 – 2012, and indeed before, Global was insolvent, as Mr Ng must have known. He must have known equally that payment of his salary would be detrimental to Global’s creditors, most obviously the Inland Revenue, and thus to Global; and therefore, that those payments could only be unfair to Global.

Second cause of action – recovery of advance

[18] In giving judgment to Global on the second cause of action against Pagoda for most of the balance of the purchase price for the restaurant, which Global had

transferred to Pagoda on 10 April 2012, the day it received that payment, I was satisfied that the transfer was an advance repayable on demand.

[19] On the company’s bank statements it was clear that Shenanigans had paid Global $189,751.60 and that Global had transferred $185,814.97 to Pagoda that day. (On 10 April 2012 Global’s account was otherwise $3,908.19 overdrawn.) On the evidence it was clear equally that this transfer was made without any agreement being entered into between Global and Pagoda recording why it was made and on what terms, and that it was made without security.

[20] On 18 September 2015 Global’s solicitors made demand on Pagoda. Pagoda did not respond and thus, I was satisfied, the advance remained due and owing. I gave Global judgment on a joint and several basis because I held Mr Ng equally liable.

Third cause of action – breach of duty

[21] In then giving judgment in favour of the liquidators and Global against Mr Ng under s 301 of the Companies Act 1993 on the third cause of action, principally for Global’s tax debt but also for the advance to Pagoda, I accepted that he was in breach of his four duties to Global under the Companies Act 1993:

(a) He did not act in good faith in what he believed to be in Global’s best

interests.¹

(b) He agreed or allowed Global’s business to be carried on in a manner likely to cause substantial risk of serious loss to its creditors, most obviously the Inland Revenue.²

(c) He agreed to Global incurring obligations without believing, or believing on reasonable grounds, that it would be able to honour those

_{obligations as and when required.}³

¹ _{Companies Act 1993, s 131(1).}

² Section 135.

(d) He failed to act with the care, diligence and skill of a reasonable director.⁴

[22] In short, Mr Ng kept Global, his surrogate, trading between April 2004, when he incorporated it, and until the restaurant was sold in April 2012, even though it was in an insolvent state and incapable of meeting its tax debt, leaving aside any wider liability.

[23] Equally, when the restaurant was sold, Mr Ng had Global transfer most of the purchase price balance immediately to Pagoda without any agreement or security, when Global was plainly insolvent. At the least, he failed to safeguard the interests of Global’s creditors. He must also be held answerable for the loss of the $10,000 deposit.

[24] As a result, I was satisfied that Global and the liquidators were entitled to the declarations they asked for as to Mr Ng’s breaches of his duties as a director and gave judgment in their favour under s 301(1)(b)(i).

Fourth cause of action – failure to keep records

[25] To be complete, I accepted as self evident that Global and the liquidators were entitled on their fourth cause of action to relief under s 300 as a result of Mr Ng’s failure to comply with his duty as sole director, under s 194, to ensure that Global kept accounting records.

[26] Mr Ng’s failure was wholesale. Global did not keep a cash book or general ledgers. Nor did it use an accountant or an accounting package. The only basis on which Global’s state could be assessed was as a result of the audit made by the Inland Revenue.

[27] The result of Mr Ng’s breach of duty was that there were no records enabling Global’s financial position to be determined reasonably accurately and its financial statements audited. Global was also deprived of the ability to prepare financial statements as s 10 of the Financial Reporting Act 1993 required.

[28] Given that Global traded from the outset while self evidently incapable of paying its debts, especially its tax debt, it is questionable whether Mr Ng’s failure in these respects appreciably increased creditor losses. But there can be no doubt that they increased the cost of the liquidation.

Judgment

[29] On the first cause of action I gave judgment in favour of Global against Mr Ng for $89,431.23 and interest of $2,523.68 (five per cent at a daily rate of $12.25 for 206 days, 13 July 2015 – 4 February 2016).

[30] On the second cause of action I gave judgment in favour of Global for

$185,814.97 and interest of $3,410.85 (23 September 2015 – 4 February 2016).

[31] On the third and fourth causes of action I gave judgment in favour of Global and the liquidators for:

(a) $457,356.50 and interest of $12,906.23 (13 July 2015 – 4 February

2016).

(b) $10,000 and interest of $282.19 (13 July 2015 – 4 February 2016).

(c) $185,814.97 (jointly and severally with Pagoda), and interest of

$3,410.85 (23 September 2015 – 4 February 2016).

[32] I also held that Mr Ng and Pagoda were jointly and severally liable to pay

Global and the liquidators category 2B costs, reduced to their actual costs of

_{$20,859.00, and disbursements of $299.00.}

P.J. Keane J