Willburn Furniture and Restorations Ltd (in liquidation) v Gledhill [2016] NZHC 331 (2 March 2016)

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BETWEEN	WILLBURN FURNITURE AND RESTORATIONS LTD (IN LIQUIDATION) First Plaintiff
AND	COLIN DAVID OWENS AND GRANT STEPHEN JARROLD Second Plaintiffs
AND	MATTHEW LAWRENCE GLEDHILL First Defendant
AND	CAMERON MATTHEW GLEDHILL Second Defendant

Hearing:	4 February 2016
Appearances:	K C Francis and S K Shaw for Plaintiffs No appearance for defendants
_Judgment:	_{2 March 2016}

[1] Willburn Furniture and Restorations Limited (In Liquidation) (“the company”) operated in the Christchurch CBD as an antique trading and furniture restoration business. The first defendant, Mr Matthew Gledhill, was its sole director and shareholder. Following the February 2011 earthquakes, the company relocated to premises in Sockburn and, during the subsequent three financial years, it received substantial sums in insurance payments totalling $322,089.

[2] The plaintiffs, being the company and its liquidators, say that following receipt of these insurance payments, the first defendant withdrew funds from the

_{company or used the company’s funds for his own personal benefit,
and disposed of}

WILLBURN FURNITURE AND RESTORATIONS LTD (IN LIQUIDATION) v GLEDHILL [2016] NZHC 331 [2 March 2016]

assets to himself and to his son, the second defendant, for no consideration. This meant that when the business was placed into liquidation on 28 May 2015, there were no assets left in the company to satisfy the company’s creditors.

[3] This proceeding is brought seeking to recover the value of company assets disposed of, and to recover amounts owed to the company, for the benefit of the company’s creditors.

[4] The plaintiffs filed this proceeding in the High Court on 14 September 2015 and served each of the defendants on 22 September 2015. Any statement of defence was due to be filed and served by 28 October 2015 but no statement of defence has been filed. Consequently the plaintiffs’ claim proceeded by way of a formal proof hearing.

[5] The plaintiffs’ claim was supported by extensive affidavit evidence from one of the liquidators, Colin David Owens.

[6] He explains that following the Christchurch earthquakes, and the company’s relocation to premises in Sockburn, the company received substantial sums in insurance payments, totalling $322,089. When the last insurance payment of

$205,907.54 was received on 16 November 2012, the company had a credit balance in its bank account of $209,820.93. However, the first defendant, as the sole director and shareholder of the company, then began to withdraw substantial sums from the company and to use company funds to meet personal expenditure.

[7] Specifically, Mr Owens explains that as at 31 March 2012, the first defendant’s shareholder current account contained a credit balance of $48,315 but, by 31 March 2014, this had become a debit balance of $33,895 and, by the date of liquidation, the amount of the current account debt stood at $91,995.79. This represented a net withdrawal of funds from the company of $140,310.79 in excess of the shareholder’s salary to which the first defendant was entitled.

[8] An analysis of the expenditure demonstrates that it involved significant personal expenditure by the first defendant, including cash withdrawals, drawings for clothing, groceries, dining, alcohol, electronics, entertainment, payment of personal rental expenses, and payment of a personal credit card.

[9] The expenditure also included use of the company account to pay $56,000 towards the purchase of a vessel now owned by the first defendant called the “Calanthe”. In addition, in the period from 1 April 2014 onwards, the liquidator identified that $12,994.63 was paid from the company in finance payments for the vessel and $3,994.90 was paid in berth rental fees to Port Marlborough.

[10] By 31 March 2014, the insurance proceeds were dissipated and the company had incurred a substantial overdraft. The plaintiffs say that the company was unable to pay its due debts from that point onwards and was insolvent.

[11] Importantly, the first defendant has not provided any adequate explanation in relation to his use of company funds. He has acknowledged that he “has been taking drawings where money is tight in the business”. It appears he has little appreciation of the distinction between assets and funds of the company and his own personal assets, saying to the liquidators “how many times do I have to say that I am Willburn Furniture and Restorations Limited?”

[12] On 17 March 2015, shortly before the expiry of the company’s lease of its premises, a number of assets which the liquidators say belonged to the company, were sold by auction. The net proceeds from the auction totalled $33,680.08. This sum was paid into the personal bank account of the second defendant, Mr Cameron Gledhill, on 20 March 2015. Prior to liquidation the second defendant repaid $11,000 to the company from the proceeds of the auction. Despite demands being made by the liquidators, the second defendant has declined to refund the balance of $22,680.08.

[13] The company was the registered owner of a 2005 Nissan Caravan van with the registration number FRD885 (the van). On 25 May 2015 the first defendant became the registered owner of the van, just three days before the company was

placed into liquidation. No consideration has been received by the company for the disposition of the van to the first defendant. On 30 July 2015 the van was then transferred to a person called Matthew Cruden.

[14] The van was purchased by the company for $21,739 in late 2010. The liquidators estimate the market value of the vehicle was $14,500 at the time the registered ownership was transferred to the first defendant. Despite demands being made by the liquidators and their solicitors, the first defendant has refused to return the van or pay the company fair market value for the van.

[15] When the company went into liquidation on 28 May 2015, the liquidators received unsecured creditors’ claims totalling $122,401.76. These claims comprise

$96,765.63 owed to Inland Revenue, $21,737.08 owed to ANZ Bank New Zealand Ltd and $3,899.05 owed to HSW Limited, the company’s accountants. In addition to these claims, Inland Revenue also claims Court costs of $2,786 and $893.47 in disbursements.

[16] The plaintiffs plead four causes of action against the first or second defendant. These are:

(a) a claim against the first defendant under s 348 of the Property Law Act 2007 for the disposition of the van that was an asset of the company, and seeking an order that the first defendant pay the company the sum of $14,500 or such other sum as constitutes the reasonable equivalent value of the van as compensation for the disposition;

(b) a claim against the second defendant under s 348 of the Property Law Act 2007 that the disposition of proceeds of the sale of the company stock and plant by way of auction, was a disposition of property that was a valuable asset of the company, and seeking an order that he pay

the company the sum of $22,680.08 (being the amount achieved through the sale, less the $11,000 already repaid to the first plaintiff);

(c) a claim by the company against the first defendant for repayment of the amount he owes to the company which represents his drawings from the current account of $91,995.79;

(d) as an alternative to the first and third causes of action against the first defendant, and the second cause of action against the second defendant, the plaintiffs claim damages against the first defendant under s 301 of the Companies Act 1993 for breaches of directors’ duties under ss 131, 133, 134, 135 and 137 of that Act, and seek:

(ii) an order that the first defendant pay compensation calculated by reference to the loss or damage pleaded; and

[17] In addition to the plaintiffs’ substantive causes of action, the plaintiffs also

(b) costs and disbursements in these proceedings (which are claimed on a solicitor/client basis).

First and second causes of action: setting aside dispositions which prejudice creditors

[18] The first and second causes of action are based on the dispositions of the company’s assets, namely the disposition of the van, and the disposition of the company’s stock sold at auction on 17 March 2015.

[19] Sections 344 to 350 of the Property Law Act 2007 allow the Court to restore the property of a debtor that has been disposed of in a manner that prejudices its creditors, for the benefit of those creditors.

(1) This subpart applies only to dispositions of property made after 31 December 2007—

(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.

(a) was insolvent at the time, or became insolvent as a result, of making the disposition; or

(b) was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or

(c) intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor's ability to pay.

(a) a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and

(b) a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another; and

(c) a disposition of property by way of gift includes a disposition made at an undervalue with the intention of making a gift of the difference between the value of the consideration for the disposition and the value of the property comprised in the disposition; and

(d) a debtor must be treated as insolvent if the debtor is unable to pay all his, her, or its debts, as they fall due, from assets other than the property disposed of.

[22] If the criteria in s 346 are met, then the Court may order that the property vest in the debtor company as an asset that the liquidators may realise to pay creditors, or alternatively, order the property holder to compensate the debtor for the disposition.¹

(a) the person received the property for valuable consideration in good faith without knowledge of the fact that it had been the subject of a disposition;²or

[24] For the liquidators to succeed in their claim, therefore, they must establish in respect of both the van and the company assets sold at auction:

(a) that the company disposed of property that was a valuable asset of the company; and

(b) that the company was insolvent at the time, that is, it was unable to pay its debts as they fell due from assets other than the property disposed of; and

[25] Examples of where an intent to hinder delay or defeat creditors could be inferred were discussed in Regal Castings Ltd v Lightbody.⁴Relevantly, they

(a) there was an absence of full value being obtained for an asset; (b) the debtor retained the use or benefit of the property;

[26] The liquidators submit that the disposition of the van from the company to the first defendant by re-registering the vehicle in the name of the first defendant on

25 May 2015 was a disposition of property that prejudiced creditors of the company.

[27] At the time of the transfer the vehicle had a recorded book value of approximately $12,198. Mr Owens gave evidence that, based on the market value assessment obtained from Turner’s auctions, the market value of the van at the time ownership was transferred to the first defendant was:

(a) $14,605 if in excellent condition; (b) $13,281 if in average condition; (c) $11,957 if in poor condition.

[28] He explains that the liquidators were unable to obtain a more definitive valuation because the defendants refused to return the van to them. The liquidators seek compensation for the market value of the van at the time of disposition to the sum of $14,500.

[29] The liquidators say that the first defendant put forward various explanations concerning his transfer of the van to his personal ownership. These included:

(a) that the van had been sold to the “Gledhill Trading Trust” (the trustees

purpose of sale was to pay for work done by the trustees in helping the company move premises after the building lease expired;

(c) in a subsequent e-mail dated 12 June 2015, the first defendant said he had sold the van for $5,000 and “unfortunately I’ve spent the money so add this amount to what I owe the company”;

(d) further emails respectively said that the van was sold to cover a debt for work done by the trustees, and was sold “to cover living expenses”.

[30] As the liquidators say, the first defendant has provided no evidence for the existence of the Trust or of any debt owed by the company to it. They also submit, and I accept, that the timing of the transfer (three days before liquidators were appointed) and the inconsistency in, and lack of evidence for, the explanations provided, are reasons to reject these explanations as credible and to treat the transfer of ownership of the van as a disposition of an asset of the company with the intent to prejudice creditors.

[31] The only matter I am not satisfied on is why the compensation sought is the equivalent of a van of this make and age in excellent condition. Given there is no evidence that it was in such condition, and the book value at the time of transfer was just over $12,000, I consider the most reasonable inference to draw on the evidence is that the van was in average condition which means it was worth, in round figures,

[32] Accordingly, I am satisfied that this claim is supported by the evidence, and I order, under s 348(2)(a) and s 350(1)(b) of the Property Law Act 2007, that the first defendant pay the company the sum of $13,300 in compensation for the disposition of the van, together with interest from the date of liquidation.

[33] Relying on the same provisions of the Property Law Act 2007, the liquidators say that the disposition of $22,680.08 to the personal bank account of the second defendant (being the net amount he retained from the sale of company assets at auction on 17 March 2015), should also be the subject of a setting aside order under s 348 of the Property Law Act 2007.

[34] The liquidators have provided, in evidence, a copy of the advertisement of the auction, which advertised the sale as the “Willburn Antiques Auction” along with a list prepared by the auctioneers in relation to “Willburn Furniture” and which describes approximately 130 lots available for purchase. The account rendered by the auctioneers of the proceeds of the auction shows that the net proceeds totalled

$33,680.08. As already explained, the proceeds were paid to the personal bank account of the second defendant (the son of the first defendant), but a total sum of

$11,000 was then returned to the company in four separate payments to the company’s bank account between 25 March 2015 and 21 April 2015. Despite demands made by the liquidators to the second defendant for payment of the rest of the proceeds of auction, the balance of $22,680.08 remains owing to the company.

[35] The defendants have offered various explanations for why the proceeds of the auction were paid to the second defendant including:

(a) the second defendant said that the items sold by the auctioneer “were items that belong to us personally from our apartment and family home”;

(b) the first defendant said that the company “had only a few items sold in the sale” and that the other items were “family ear looms (sic)”;

(c) the first defendant advised that only a small number of the items sold were owned by the company and that the company “has not bought any furniture since the earthquake”.

[36] The liquidators assert that the defendants’ claims lack credibility and this Court can be satisfied that the assets belonged to the company. In support of this they say:

(b) the items sold are of a type that would be expected to be held by an antique trader as stock in trade;

(c) documents prepared by the company and/or its accountants reflect that the company continued to have circulating stock in trade after the earthquakes which was valued at $50,000 as at 31 March 2014, as is reflected in the stocktakes and the level of stock recorded in each year in the company’s annual accounts as signed by the first defendant;

(d) several of the items sold at auction are specifically recorded in the company’s records as assets of the company including the “Ascent” branded saw, buzzer, and band saw and blade;

(e) the sale of assets occurred at a time when the company’s lease was coming to an end and the company appeared to be winding up its business.

[37] I am satisfied that the evidence establishes that the auction assets belonged to the company and that the proceeds should have been paid in their entirety to the company. The list of auction lots is consistent with the type of stock the company would have held in its inventory and some items are specifically identified in the company’s records. If this was not the sale of the company stock, at a time when the company’s lease was coming to an end, then there is no credible explanation for when and how the company’s stock was disposed of and there is no credible evidence to support the items coming from any other source.

[38] I am therefore satisfied that there has been a disposition of the company assets which meets the requirements of s 348. Therefore, pursuant to s 348(2)(a) and s 350(1)(b) of the Property Law Act 2007, I order that the second defendant is to pay the company the sum of $22,680.08 in compensation for the disposition, together with interest from the date of liquidation.

Third cause of action against first defendant – debt owing on the current account

[39] It is a well-settled principle that advances made on a shareholder’s current account constitute debts owed by the shareholder to the company and are repayable on demand.⁶The company’s financial statements show that the first defendant’s current account was overdrawn by $33,895 at 31 March 2014 when in all prior years it had been in credit. Between 1 April 2014 to 28 May 2015 the company’s bank statements record $66,710.79 in transactions that were personal drawings made by

the first defendant. The company’s bank statements also record personal contributions of $8,610 made by the first defendant to the company during this period.

[40] As the plaintiffs submitted, it appears that the first defendant simply regarded the company’s account as a personal account and used it for his personal expenditure. As a result, as at 28 May 2015, the first defendant owed the company

$91,995.79 which he had withdrawn from the current account. The plaintiffs have made formal demand on the first defendant for repayment of the debt, but the debt has not been paid, nor has the first defendant provided any explanation as to why this expenditure should not be repaid by him to the company.

[41] In light of the clear evidence of funds being withdrawn by the first defendant from the company for the sum claimed by the plaintiffs, and that such funds were used for personal expenses and not legitimate company expenses, I am satisfied it is appropriate to grant judgment to the first plaintiff in the sum of $91,995.79 against the first defendant, together with interest from the date repayment was required to be

Fourth cause of action against the first defendant: breaches of directors’ duties

[42] Although the plaintiffs have succeeded on the first three causes of action and the amounts recoverable are the same or greater than are claimed under the fourth cause of action, a finding is nevertheless made on it. This is because it may become relevant if, for example, there is no recovery from the second defendant on the second cause of action, so the company’s loss due to the first defendant’s breaches under the fourth cause of action still exceeds what has been recovered by the liquidators on the other causes of action.

[43] The plaintiffs provided full and careful submissions as to why the first defendant fell short of compliance with his statutory and fiduciary duties as the company’s director, particularly in regards to the duties contained in ss 131(1), 133,

[44] The claim for compensation under the fourth cause of action is advanced as an alternative claim to the cumulative claims under the first, second and third causes of action and is brought under the procedural mechanism provided by s 301 of the Act.

[45] As explained in the plaintiffs’ submissions, the principal purpose of s 301 is to compensate those who have suffered loss as a result of illegitimate trading.⁷The Court of Appeal has described s 301 as being analogous to a derivative type of action,⁸and as “a procedural short-cut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against” its directors.⁹

[46] Section 301 does not, of itself, impose any duties on directors. Rather, it is a

¹⁰Peace and Glory Society Ltd (in liq) v Samsa [2009] NZCA 396, [2010] 2 NZLR 57 at [47].

(a) has there been a breach of a duty owed by a director to the company? (b) if so, to what extent should the director contribute to the losses of the

The first defendant did not act in good faith and in the best interests of the company

[49] Section 131(1) of the Act provides that a director of the company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company. Once the company is of doubtful solvency, that duty is also owed to its creditors and, as was said in Sojourner v Robb: “... Creditors are persons to whom the company has ongoing obligations. The best interests of the company include the obligation to discharge

[50] In this case, the plaintiffs point to the fact that the first defendant, in addition to his shareholder salary, withdrew a net amount of over $140,000 from the company for personal expenditure, including a significant contribution to the purchase of a vessel in the Marlborough Sounds. The plaintiffs say that this systematic appropriation of the company’s funds to the point of insolvency could not have been carried out in good faith and in the best interests of the company. The company’s failure to pay its taxes and other liabilities to creditors was due in part to the first defendant’s use of the company’s funds for his personal benefit.

[51] The plaintiffs also submit that it is impossible that the first defendant could not have failed to appreciate that it was contrary to the best interests of the company to use the company’s bank account to pay for personal expenditure and acquire personal assets when the company was in overdraft and had unpaid debts. Indeed,

_{the first defendant’s statement to the liquidator in relation to
the unpaid debts to}

Inland Revenue that he “doesn’t give a damn”, is evidence of his clear disregard for the best interests of the companies or its creditors, in breach of his duties under s 131(1).

[52] The plaintiffs also say the first defendant breached his duty to act in good faith and in what he believed was in the best interests of the company by disposing of the van to himself, at a time when the company was insolvent, for no valuable consideration. The first defendant’s inconsistent and unsupported explanations as to reasons for the disposal of the van strongly suggests a lack of good faith.

[53] Equally they say, the first defendant breached his duty under s 131(1) of the Act by allowing the company to dispose of valuable company assets at auction, despite the company being insolvent, and directing the funds to be paid into his son’s personal bank account. Again, as the plaintiffs submit, his contradictory and unsupported explanations rule out any possibility that the first defendant genuinely considered such a disposition to be in the best interests of the company.

[54] In light of the evidence provided, I am satisfied that all three actions referred to by the plaintiffs constitute breaches of the duty in s 131(1).

The first defendant exercised his powers as a director for an improper purpose

[55] The plaintiffs’ submissions under this head largely reflect their submissions under s 131(1) explaining that the defendant exercised his powers as a director of the company for an improper purpose in three ways:

(a) in transferring the registered ownership of the van from the company to himself without ensuring the company receive fair compensation;

(b) in allowing the company to dispose of valuable company assets at auction without receiving full compensation for those assets and instead directing the proceeds of sale to his son; and

[56] Again, I am satisfied that the first defendant failed to use his powers as director for a proper purpose and that therefore, a breach of s 133 of the Act is established.

[57] Section 134 of the Act imposes a duty on a director not to act, or agree to the company acting, in a manner that contravenes the Act. The plaintiffs submit that by breaching his duties as a director, as set out under ss 131(1) and 133 (above) and ss 135 and 137 (below), the defendant acted in a manner that contravened the Act.

[58] As this alleged breach relies on a finding that the director has breached the Act in some other way, it duplicates the other heads of claim under s 301 and is, in my view, superfluous.

(a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company's creditors; or

(b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors.

[60] In Mason v Lewis the Court of Appeal set out what it described as “the essential pillars” of s 135 as follows:¹²

(a) the duty which is imposed by s 135 is one owed by directors to the company (rather than to any particular creditors);

(c) it focuses not on a director’s belief but rather on the manner in which a company’s business is carried on and whether that modus operandi creates a substantial risk of serious loss; and

(d) what is required by the directors when the company enters troubled waters is “sober assessment” of an ongoing character, as to the company’s likely future prospects.

[61] The Courts have also drawn a distinction between what are described as “legitimate” and “illegitimate” business risks, with a finding of reckless trading only following on from the taking of an illegitimate business risk.¹³In this case, when the company was technically insolvent from 31 March 2014, but was incurring further debts which it had no realistic prospect of paying, the first defendant created a substantial risk of serious loss to the company’s creditors by disposing of assets without returning fair compensation to the company and continuing to withdraw substantial funds from the company for his own personal benefit after the company

[62] I have no hesitation in concluding that in doing this, the first defendant was not taking legitimate business risks. Instead, he carried on the business of the company in a manner which was obviously detrimental to the company and was both likely to, and did, create a substantial risk of serious loss to the company’s creditors.

The first defendant failed to exercise powers or perform duties with the care, diligence and skill that a reasonable director would exercise in the same circumstances (s 137 of the Act)

A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—

¹³Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570 and Lower v Traveller

[64] While in some cases, there may be some debate about what a “reasonable director” might have done in a particular factual context, in my view, there can be no doubt that from 31 March 2014 when the plaintiffs’ evidence shows the company was unable to pay all its debts as they fell due, the decisions to dispose of assets without ensuring that fair compensation was paid to the company, or to use company funds for personal expenditure, was a gross breach of s 137. It is impossible to imagine circumstances where such clear disregard by a director for the interests of the company could ever be considered reasonable. Thus, a breach of s 137 is established.

[65] A breach of a statutory duty under the Companies Act is a pre-requisite to relief being granted under s 301 of the Act, but is not determinative of the issue. As the Court of Appeal in Mason v Lewis said, “it is important not to conflate the provisions of s 135 and s 301 Companies Act 1993 when determining the “liability” issue. The issues are two-fold: should there be liability, then, what is the appropriate

relief?”¹⁴While that observation was made in relation to a breach of s 135, it applies

with equal force to any other breach relied on in a claim under s 301 of the Act.

[66] In Mason v Lewis, the Court of Appeal articulated a three factor approach to determining relief under s 301:

[109] The standard approach has been to begin by looking to the deterioration in the company’s financial position between the date inadequate corporate governance became evident (really the “breach” date) and the date of liquidation.

[110] Once that figure has been ascertained, New Zealand Courts have seen three factors – causation, culpability, and the duration of the trading – as being distinctly relevant to the exercise of the Court’s discretion.

[118] Finally, claims of this character necessarily have to be approached in a relatively broad-brush way. The jurisdiction to order recompense is of an “equitable” character.

[67] In this case the plaintiffs submit that the “breach date” for s 301 is no later than 31 March 2014, being the time at which they are satisfied the company became unable to pay its due debts. It is at this point that the plaintiffs say the first defendant ought to have undertaken an objective, “sober assessment” of the position of the company. This was not done. Instead the company continued to trade and incur liabilities, and the first defendant continued to take company funds for his personal use and dispose of company assets at undervalue, with the inevitable consequence of liquidation with outstanding debts to creditors.

[68] Logically, the first defendant’s actions were directly causative of the loss. His use of company funds lead to the company being unable to pay its debts as they fell due by 31 March 2014. Had he ceased trading at that point and ceased using company funds and assets for personal benefit, the unsecured creditors would most likely have suffered little, if any, loss. Given the breaches were carried out for personal gain, and with knowledge that it was to the detriment of creditors, his culpability was high.

[69] The plaintiffs advance two bases by which the loss occasioned by the first defendant’s breaches may be calculated. The first proceeds by itemising the specific dispositions and appropriations of company property and funds. In this respect, the plaintiffs say that the loss suffered as a result of the breaches is represented by:

(a) the value of the vehicle at the time of the disposition from the company to the first defendant (which I have found is $13,300); and

(b) the unpaid sum of $22,680.08 raised by the auction of the company assets; and

[70] It can be seen that this characterisation of the loss is identical to the loss claimed under the three headings in the first to third causes of action discussed above.

[71] The first two items are unproblematic. However, by the plaintiffs’ own assertion that 31 March 2014 should be considered the date of breach it is only drawings by the first defendant made after this date that can properly be claimed as loss arising out of the first defendant’s breaches. The further drawings taken by the first defendant for personal expenses from this point forward is a net sum of

$8,610 reimbursed to the company) and, on this approach, this is the sum I would award instead of $91,995.79 on the third claim.

[72] As a second means of quantifying the loss, and in the alternative, the plaintiffs seek an award of the sum of $126,081.23 comprising:

[73] Whilst the outcome under the s 301 quantification enquiry is, in all likelihood moot, given the plaintiffs’ success on the first three claims, my preferred approach to relief is to approach it in a broad-brush way. Therefore, should it become relevant, I would quantify the relief under s 301 in this second way i.e. the aggregate amount of outstanding debts to creditors in addition to Inland Revenue’s costs in the proceedings. This is because I am satisfied that the first defendant’s actions were causative of the liquidation and thus causative of the claims by creditors, including Inland Revenue’s claim for liquidation Court costs. It would be appropriate, therefore, that the relief awarded is based on the total losses to creditors.

[74] In addition to the alternate claims for relief under s 301 under the two alternative approaches set out above, the plaintiffs seek to recover liquidation expenses under s 301.

[75] The plaintiffs note that there have been instances where the Court has permitted a plaintiff company to recover the expenses of the liquidation under s 301, provided that these do not include the legal expenses in relation to the proceedings, which are dealt with separately under the cost rules.¹⁵However, the plaintiffs also, responsibly, note that in Madsen-Ries v Petera, Lang J commented that “the costs of administering a liquidation will generally be incurred regardless of whether or not the company’s directors are liable under s 300 or s 301”, so that a director should not be liable for general liquidation costs “unless there is a link between the incurring of those costs and the director’s conduct”.¹⁶Lang J further held that a causal link between the impugned conduct under s 301 and the loss caused to creditors could be established “where the actions that give rise to liability under s 300 or s 301 render an otherwise healthy company insolvent”.¹⁷Equally, in Madsen-Ries v Twine, Gilbert J held that such a link had been established where “liquidators [had] been required to incur expense in reconstructing books of account because the directors failed to keep proper records in breach of their duty to do so”.¹⁸

[76] In the present case, the liquidators say that significant work was required to enable them to reconstruct the current account and other accounts of the company after 1 April 2014, and this is shown in the detailed schedules appended to Mr Owen’s affidavit. Significant work was also required to locate and pursue company assets, which would not have been necessary had the assets not been improperly disposed of. I also note that the liquidators task was made more difficult by the first defendant’s intransigence, including his provision of conflicting and unsupported explanations for the dispositions and expenditure, and his lack of

¹⁵Richard GeeWiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 and Bay Kiwifruit

[77] However, more fundamentally, I am satisfied the evidence supports the fact that the company would have remained solvent, particularly given the injection of funds from insurance payments, but for the first defendant’s deliberate course of conduct in drawing money from the business for personal expenses and disposing of business assets. As I have already found in relation to the primary claim for relief under s 301, if it were not for the first defendant’s conduct, it is more likely than not that the company would have avoided liquidation.

[78] In such circumstances, I am satisfied that the amount the plaintiffs seek representing their fees of $26,133 in relation to the liquidation (which excludes the fees and costs of this proceeding), should form part of an award under s 301.

[79] The plaintiffs have been successful on all causes of action. I propose to make orders against the first and second defendants in respect of the plaintiffs’ first, second, and third causes of action. I also propose to make an order against the first defendant for an amount reflected in the s 301 inquiry¹⁹payable to the extent that the sums awarded under the first three orders are not recovered, and an order against the first defendant in respect of the expenses associated with the liquidation.

(a) Judgment against the first defendant on the first cause of action in the amount of $13,300 plus interest from the date of liquidation;

(b) Judgment against the second defendant on the second cause of action in the amount of $22,680.08 plus interest from the date of liquidation;

(c) Judgment against the first defendant on the third cause of action in the amount of $91,995.79 plus interest calculated from 31 July 2015;

(d) Judgment against the first defendant on the fourth cause of action in the amount of:

(i) $126,081.23 less any amounts recovered pursuant to the awards for the first, second, and third causes of action; and

[81] The plaintiffs seek costs against the first defendant on a solicitor/client basis. While the plaintiffs accept that costs are usually to be assessed based on the ordinary rules set out in Part 14 of the High Court Rules, they rely on an exception recognised in Madsen-Ries v Petera and also in the judgment of William Young J in

Mako Holdings Ltd (in liq) v Crimp.²⁰In Mako Holdings Ltd, the Court found that

two company directors had breached their duties to the insolvent company and had been guilty of reckless trading. His Honour, William Young J held:²¹

... unless the liquidator makes a full recovery someone is going to be out of pocket over this case. I see the case as being entirely the fault of Messrs Crimp and Carswell ... Both were in gross breach of their duties. There are very small sums of money at stake in this case. Unless full costs are awarded, the creditors will not get paid and, unless judges take a firm line with those who choose to act in this way, we will wind up creating incentives for directors to strip their companies on the basis that they can argue about it later.

[82] The plaintiffs submit that, like Crimp, this is an exceptional case where the first defendant was in gross breach of his duties and deliberately stripped the assets from the company without any regard for the interests of creditors. For this reason, they submit that an award of indemnity costs is justified and, if the Court is minded to make such an order, they seek leave to file a memorandum quantifying those costs following the hearing.

[83] The second defendant should also contribute to costs given his failure to refund $22,680.08 to the company, but I acknowledge his role is subsidiary to that of the first defendant, who is the party primarily responsible for the losses and damage suffered. The second defendant is therefore jointly and severally liable with the first

²⁰_{Mako Holdings Ltd (in liq) v Crimp HC Invercargill
CP23/99, 28 November 2000.}

[84] The first defendant’s costs liability however, should be greater than 2B costs and I reserve my finding on his liability for costs until I have received advice from the plaintiffs quantifying solicitor-client costs.

[85] I grant leave to the plaintiffs to file a memorandum quantifying their actual costs in this proceeding and the costs payable by the first defendant will be finalised in light of the actual costs incurred.

High Court of New Zealand Decisions

Willburn Furniture and Restorations Ltd (in liquidation) v Gledhill [2016] NZHC 331 (2 March 2016)