Adtraction Marketing Limited (in liquidation) v Ehrenfeld [2018] NZHC 2777 (26 October 2018)

Last Updated: 12 November 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-003217 [2018] NZHC 2777

BETWEEN	ADTRACTION MARKETING LIMITED (IN LIQUIDATION) Plaintiff
AND	GABRIEL EHRENFELD Defendant

Hearing:	21 September 2018
Appearances:	N F D Moffatt and R A Morris for Plaintiff Defendant in Person
Judgment:	26 October 2018

JUDGMENT OF VENNING J

This judgment was delivered by me on 26 October 2018 at 3.00 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors: Bell Gully, Auckland Copy to: Respondent

ADTRACTION MARKETING LTD (IN LIQ) v EHRENFELD [2018] NZHC 2777 [26 October 2018]

Introduction

[1] Adtraction Marketing Limited (Adtraction) was placed in liquidation on 11 April 2014 by special resolution of its shareholder. Following review of its affairs by the liquidators, Adtraction now sues a former director, Mr Ehrenfeld, alleging that he breached the duties owed to the company under ss 131 and 137 of the Companies Act 1993 (the Act).

Background

[2] Adtraction was incorporated on 4 November 2004. It carried on business as an advertising agency. It took bookings from companies wishing to advertise and then placed the bookings with advertising companies such as Yellow Pages Group Ltd (Yellow). Yellow and the other advertising companies charged Adtraction fees which it collected from its customers. A substantial portion of Adtraction’s revenue was gained from the commission paid to it from the advertising companies for the business Adtraction placed with them. Yellow was the principal advertising company used by Adtraction.

[3] In 2013 the directors of Adtraction at the time, Gregory Hughes, Rajeev Khushal, and James Stewart, were concerned to maintain and perhaps enhance the business of Adtraction. Mr Ehrenfeld, a director of Reeltime Media Ltd (Reeltime) became interested in Adtraction’s business. After discussions regarding the possible restructure of the business, on 7 October 2013 Adtraction’s shareholders sold their shareholding to Reeltime and a related company, which Mr Ehrenfeld was also a director of, Atlaua Pty Ltd. Ultimately, Coastal Digital Ltd (Coastal Digital), which Mr Ehrenfeld was the sole director of, was nominated as the purchaser of the shares in Adtraction.

[4] Mr Ehrenfeld became a director of Adtraction on 9 October 2013. On the same date Mr Khushal and Mr Stewart resigned as directors. Until Mr Hughes resigned on 28 February 2014 Mr Ehrenfeld and Mr Hughes were the only directors of Adtraction.

[5] Almost immediately following Mr Ehrenfeld’s appointment as a director Adtraction began to make a series of payments to two subsidiaries of Reeltime, Tohil
Pty Ltd (Tohil) and Tandem Pty Ltd (Tandem), these Australian companies belonging to the Reeltime group of companies. Between October 2013 and February 2014 Adtraction made the following payments to Tohil:

(a) $34,574.25 on 14 October 2013;

(b) $20,020.00 on 15 November 2013;

(c) $25,802.66 on 20 November 2013;

(d) $33,191.16 on 24 December 2013;

(e) $55,092.14 on 13 January 2014;

(f) $32,198.48 on 27 January 2014; and

(g) $21,858.83 on 13 February 2014.

[6] In addition to the payments made to Tohil, Adtraction also paid a further
$5,821.75 to Tandem on 4 February 2014.

[7] At all material times Mr Ehrenfeld was also a director and the secretary of Tohil. Reeltime was the sole shareholder of Tohil. An Australian Securities filing for Reeltime, disclosed 100,000 shares were held in his name. Mr Ehrenfeld’s position is that he holds the shares on trust.

[8] The liquidators calculate that as at its liquidation Adtraction owed
$2,080,287.14 to creditors.

[9] The total paid by Adtraction to Tohil and Tandem between 14 October 2013 and 13 February 2014 was $228,559.27 (the payments). The company seeks to recover that sum from Mr Ehrenfeld.

The company’s claim

[10] Adtraction says that in directing or authorising the payments Mr Ehrenfeld breached his duty under s 131 of the Act to it in that he failed to act in good faith and in the best interests of the company. The company says Adtraction had no contractual obligation to make the payments and nor did Reeltime, Tohil or Tandem provide any consideration or other value to Adtraction in exchange for the payments. Adtraction submits no responsible director could have considered the payments to be in the best interests of Adtraction.

[11] Mr Moffatt submitted the position was aggravated by the fact the total payments had an element of self-dealing given Mr Ehrenfeld’s interest as a shareholder of Tohil’s parent company, Reeltime, and also the payments were made at a time when Adtraction had failed to pay significant amounts owing to its creditors. Adtraction failed to pay the Yellow invoices from 30 December 2013 on. It also failed to pay another creditor, Fairfax, in full between December 2013 and February 2014. Adtraction’s employees were not paid salary and wages in March 2014.

[12] In the alternative, Adtraction claims that in authorising the payments Mr Ehrenfeld breached his duty under s 137 of the Act and failed to exercise the care, diligence and skill required of a reasonable director in the circumstances. Again it is submitted that the company received nothing of value from Tohil and Tandem in return for the payments made and the payments were made at a time when the company could not pay its trade creditors which it needed to do to continue operating.

Mr Ehrenfeld’s position

[13] Mr Ehrenfeld represented himself. Mr Ehrenfeld’s defence to the claim was wide-ranging. He raised the following general issues:

(a) Adtraction was insolvent at the time he became a director and his actions did not contribute to its insolvency. If it did become insolvent after he became a director then the insolvency was due to the actions of Mr Hughes and others, rather than the payments in issue.
(b) At the time his companies bought into Adtraction, the company was in significant decline. Adtraction gained significant advantages from being part of the Reeltime group as it had access to Reeltime’s products and expertise.

(c) Related to (b) Mr Ehrenfeld says he believed that the arrangements “to deploy” the administrative and business expertise and products from the Reeltime group was an appropriate step to arrest the decline of Adtraction. The payments were made for products and services to restructure the business of Adtraction at commercial rates. The payments were made in good faith, and in the exercise of business judgement.

(d) Mr Ehrenfeld noted that Mr Hughes agreed with the payments at the time.

(e) In answer to the claim under s 137 of the Act Mr Ehrenfeld submitted that any reasonable director with knowledge of Adtraction’s circumstances would know that the company had no future in continuing its existing business model without some change. A director continuing without change would have been acting in neglect of the duty of care.

(f) Mr Ehrenfeld suggested the extent of the debt owing to Yellow was concealed from the accounts shown to him.

Evidence

[14] The evidence in support of Adtraction’s claim was led by affidavits from Mr Sanson, an insolvency practitioner, Mr Hughes and Mr Khushal. Mr Ehrenfeld swore a number of affidavits in response on his own behalf.

[15] Mr Sanson and Mr Hughes were cross-examined by Mr Ehrenfeld and Mr Ehrenfeld gave evidence and was cross-examined by Mr Moffatt.
[16] Mr Khushal was not available for cross-examination so Mr Moffatt confirmed Adtraction did not rely on his affidavit evidence. I put that affidavit to one side.

Preliminary points

Estoppel

[17] Mr Ehrenfeld submitted that Adtraction was estopped from pursuing its present claim against him as it had previously made an “identical claim” for the same amount in this Court.

[18] The claim Mr Ehrenfeld refers to is a notice issued by the original liquidators under s 294 of the Act to set aside the payments as voidable transactions. The notice was directed to Mr Ehrenfeld and referred to the payments being made to Reeltime as agent for Mr Ehrenfeld. Mr Ehrenfeld served an objection in response to the notice and the liquidators took no further steps in relation to it. No application was filed in the Court to set aside the payments. Instead the liquidators elected that Adtraction would bring these proceedings. There has been no determinative ruling or adjudication on the issue and there are no other extant proceedings. No issue of estoppel arises.

Indemnity

[19] During the course of the proceeding Mr Ehrenfeld also referred to an indemnity contained in an indemnity and access deed between Adtraction and him. He sought to rely on it in answer to the claim. The copy of the deed before the Court has not been executed but, even if it had been, it would not be applicable to Adtraction’s claims to recover the payments. The terms of cl 6.1 of the Deed provide that:

6. DIRECTOR’S INDEMNITY AND DEFENCE COSTS

6.1 Indemnity – other than for legal costs

The Company indemnifies the Director from the date of this Agreement out of the property of the Company, to the extent and for the amount that the Director is not otherwise entitled to be indemnified and is not actually indemnified, against any liability (except for legal costs) incurred either before or after the date of this Deed, by the Director, as a director of the Company, to another person provided that the liability is not:

1. owed to the Company ...

Liability arising from breach of a duty owing to Adtraction itself is expressly excluded from cover.

Alleged misrepresentations

[20] Mr Ehrenfeld also argued that Mr Hughes and other directors of Adtraction had misrepresented its financial position to him prior to his agreement to purchase Adtraction’s shares. However that is not an issue the Court is required to (or can) determine in the current proceedings.

[21] As the Court pointed out to Mr Ehrenfeld, the issue was whether, once he became a director he acted in breach of the duties owed to the company under ss 131 and 137 at the relevant time. For that reason the Court restricted Mr Ehrenfeld’s cross- examination which otherwise would have traversed irrelevant material.

[22] On a related point, and as I said at [13] above, Mr Ehrenfeld argued that Adtraction did not become insolvent following his appointment as a director, or as a result of the payments in issue. Again, the issue is not when Adtraction became insolvent. The only relevance of Adtraction’s financial position is in relation to its ability to pay its creditors, particularly Yellow, when the payments were made to Tohil and Tandem.

Issues

[23] The issues that arise from the pleadings are:

(a) whether Mr Ehrenfeld authorised the payments to Tohil and Tandem;

(b) whether Adtraction had any obligation to make the payments;

(c) whether Tohil and/or Tandem provided any value to Adtraction in return for the payments;
(d) if Mr Ehrenfeld did authorise the payments, whether at the time he did, and in relation to each payment, he acted in breach of the obligations he owed Adtraction under ss 131 and 137 of the Act.

Mr Ehrenfeld authorised the payments

[24] Although in his pleading Mr Ehrenfeld denied authorising the payments, the evidence overwhelmingly supports the conclusion he knew of and authorised the payments in issue.

[25] Mr Hughes produced emails which confirm Mr Ehrenfeld directed him to make the payments on 14 October, 15 November, 20 November and 24 December 2013. The remaining payments were authorised by Mr Ehrenfeld. The ASB Bank administration system notes his as the user name associated with the payments.

[26] As Mr Hughes observed, given Mr Ehrenfeld was the sole director of Coastal Digital, which company owned 100 per cent of the shares in Adtraction, he was able to direct Adtraction to make the payments.

The obligation to make the payments

[27] The plaintiff pleads that at the time the payments were made there was no obligation to make the payments. In response Mr Ehrenfeld points to an email he sent on behalf of Reeltime to Mr Hughes with the subject line “Adtraction – Capital requirements and monthly fees” on 14 October 2013. In that document Mr Ehrenfeld said:

I have prepared a preliminary capital budget and head office contribution budget for Adtraction, which we will implement immediately. From our perspective, the issue is to build the business so that it can:

1. Self-sustain future ongoing organic growth;

2. Contribute its share to Group head office costs;

100. Have adequate working capital for operations;

4. Generate profits for shareholders.

The approach is a squeeze and release methodology, whereby the business is immediately brought to account for its cost centres, but supported with head

office discounts or forbearance of certain costs, the devising of a proper execution plan and the provision of a capital budget for the same, ensuring that the discounts and subsidies can be removed over a short period of time. Working capital is for growth purposes, not for payment of ongoing expenses. This methodology drives revenue and profit growth but provides cost control by utilising group resources for efficiency.

My preliminary estimate is that it will take an injection of approximately AUD 450,000, which is approximately NZD 530,000 to achieve the required outcomes in Adtraction, after which, it will be quite capable of paying off its own debt, growing organically at a good pace, paying its fair share of head office overheads and making an appropriate contribution to Group profits.

I attach my calculations below:

ADTRACTION

MONTHLY HEAD OFFICE CONTRIBUTION

AUD NZD

Monthly Head Office Contribution			$ 50,000.00	$ 58,998.68
Comprised of: People	p.a. Equivalency
Administrative Personnel	$ 60,000.00		$ 5,000.00	$ 5,899.87
Finance	$ 60,000.00		$ 5,000.00	$ 5,899.87
Finance Senior	$ 120,000.00		$ 10,000.00	$ 11,799.74
Legal	$ -		-	$ -
Marketing	$ -		-	$ -
			$ 20,000.00	$ 23,599.47
Product
Licensing Fees			$ 30,000.00	$ 35,399.21
Branding Fees			$ -	$ -
TOTAL			$ 50,000.00	$ 58,998.68
Discounts	% Discount
Oct-13		40.00%	$ 30,000.00	$ 35,399.21
Nov-13		30.00%	$ 35,000.00	$ 41,299.08
Dec-13		20.00%	$ 40,000.00	$ 47,198.94
CAPITAL REQUIREMENTS
			$ -	$ -
Devise Strategy, Training,		Oct-13
Recruitment			$ -	$ -
Provide Management & Product		Nov-13
Services
Deploy Expansion		Dec-13	$ 100,000.00	$ 117,997.36
			$ -	$ -
Reduce Creditors Further expansion Further expansion	Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14		$ 200,000.00 $ 100,000.00 $ - $ - $ 50,000.00 $ - $ 450,000.00	$ 235,994.72 $ 117,997.36 $ - $ - $ 58,998.68 $ - $ 530,988.12

Greg, unless further refined, we will be proceeding on this basis.

You are instructed to transfer AUD 30,000 (which is approximately NZD 35,400) from the ASB Trading Account to the following Head Office Account today before international transfer cut-off time. Please confirm once this is done.

Account details are:

Account Name: Tohil Pty Ltd

Bank: Australia and New Zealand Banking Group Limited

Branch Name: Rose Bay

Bank Address: 720 New South Head Road, Rose Bay NSW 2029,

Australia

...

Please acknowledge receipt of this email. Thank you.

[28] Mr Hughes responded to that email in the following terms:

Hi Gabriel,

I fully understand your rationale and approach. This is part of the reason why we were keen on Adtraction joining RMA [Reeltime].

Obviously, if we are going to be paying $60,000 per month then we will need growth to fund this.

I am going to have a chat with the Yellow Agency Manager today and advise her of RMA but also see if we can acquire the cache of clients that were with agencies who have lost their accreditation. If we are successful we will need the admin resource sooner than later.

Confirming I will transfer AUD$30,000 today Regards

Greg

[29] During the hearing the “squeeze and release” methodology referred to in the email was discussed further. It refers to a practice whereby Reeltime charged a fee to its subsidiaries, including Adtraction, for services provided by it (or other companies in the group such as Tohil) but also provided a discount to that fee for a limited period of time. The ‘squeeze’ was the requirement to pay the fee, the ‘release’ the discount. That is consistent with the reference in the email to discounts for the months of October, November and December.

[30] The head office contribution required of Adtraction (before application of the discount) was AUD 50,000 per month. In return Reeltime or its other subsidiaries were to provide the following services:

• administrative personnel: to a value of AUD 5,000 a month;

• financial services: to a value of AUD $5,000 a month;

• finance senior: to a value of AUD $10,000 a month; and

• licensing fees: to a value of AUD 30,000 a month.

[31] The $50,000 was discounted by 40 per cent in the month of October which led to the figure of AUD $30,000 referred to in the email and which Mr Ehrenfeld directed to be paid on 14 October. During his cross-examination Mr Hughes said that, while he acknowledged the email from Mr Ehrenfeld and the approach in principle, he was concerned at the financial burden placed on Adtraction and noted that Adtraction would require significant growth to meet the additional commitment of up to AUD
$50,000 per month. He made that point in his email reply and in evidence said that he repeated it in his contemporaneous discussions with Mr Ehrenfeld. Despite his reservations, he accepted that he made the payment of $30,000 on 14 October at Mr Ehrenfeld’s direction.

[32] The email exchange and Mr Hughes’ acknowledgement of the arrangement as a director of Adtraction at the time is evidence of an arrangement between Reeltime and Adtraction pursuant to which Adtraction agreed to make payments to Reeltime in
exchange for the services referred to and which also included a commitment by Reeltime to inject capital into Adtraction.

[33] While there may have been such an arrangement, one would expect that specific invoices would be raised detailing the services supplied. Mr Ehrenfeld was not able to refer to or identify any such contemporaneous invoices.

[34] At the outset of the hearing Mr Sanson produced invoices he had downloaded from the Xero accounting system operated by Adtraction. The invoices appear to relate to the claims for head office contributions of $50,000 of 31 October 2013, 30 November 2013, 31 December 2013, 31 January 2014, 28 February 2014, and 27 March 2014. The invoices purport to be issued from Tohil for head office contributions but on their face all the invoices were apparently approved and created on 26 March 2014, with the exception of the one dated 27 March 2014, which referred to a payment reversed on 27 March. The inference to be drawn from the dates of the documents is that the invoices were created after the event and after issues arose in relation to the payments. They seem to be an ex post facto attempt to justify the payments. I also note the invoices do not provide for the discounts in October, November and December.

[35] Despite the issues with the generally unsatisfactory nature of the evidence in support of the justification for the payments, I am prepared, on balance, to accept that Adtraction agreed to make the payments referred to in the 14 October 2013 email on the basis of that email and in accordance with its terms.

[36] While it is not directly in issue in these proceedings, to the extent Adtraction was under an obligation to make the payments required, that obligation was in part also dependent upon the injection of AUD $100,000 fresh capital by Reeltime. That was to be introduced to Adtraction to enable it to deploy its expansion. That was to be paid in December 2013. It was never paid. Adtraction would have been entitled to cease making the payments after Reeltime’s failure to inject that capital in December.

Did Adtraction receive value for the payment?

[37] The next issue, which assumed some importance during the hearing, was whether Adtraction received value in return for the payments.

[38] There is very limited evidence of value being provided to Adtraction in return for the payments made. Of the $50,000 a month $30,000 (or $360,000 a year) was said to be for licensing fees. Mr Hughes’ evidence was that no company in the Reeltime Group had any product licence that Adtraction took to market in New Zealand. Mr Ehrenfeld did not cross-examine Mr Hughes on the point. When Mr Ehrenfeld was cross-examined on Mr Hughes’ evidence about this point Mr Ehrenfeld acknowledged that Mr Hughes was the principal person managing and operating Adtraction in New Zealand and would have been well placed to know if Adtraction was using any product licensed by Reeltime. Mr Ehrenfeld remained based in Australia. Mr Ehrenfeld was not able to provide any evidence to support the $30,000 a month fee for licensing fees. His response to questioning on this issue suggested he considered Mr Hughes’ evidence was wrong but he was not able to produce any contrary evidence. I find that no value was provided to support the claim for fees for licences provided to Adtraction. There was no basis for the AUD $30,000 component of the monthly payments.

[39] Mr Ehrenfeld did refer generally to a number of documents in an effort to seek to substantiate the support provided by Reeltime to Adtraction by way of administrative and financial services in return for the payments.

[40] Mr Ehrenfeld referred to a number of matters by way of example. First, an email from Mr Hughes of 5 March 2014 to Mr Ehrenfeld, which set out a draft payroll for March, noting that it had yet to be approved by “James”. The email also noted the payroll report for February which had been approved by “James” was also attached. The James referred to was James Mawhinney. Mr Mawhinney was the Chief Operating Officer of the Reeltime group. Mr Ehrenfeld suggested that showed that payroll or payroll review services were being provided by Reeltime group. While Mr Mawhinney may have had to approve the payroll for payment, from the terms of the
email it seems clear enough the payroll was prepared by Mr Hughes (or at least within Adtraction).

[41] Mr Ehrenfeld then referred to an email of 6 March 2014 from Mr Hughes to him copied to James Mahwinney querying an update on a capital injection. Mr Ehrenfeld suggested that showed Reeltime was working on a capital injection but, as noted, the capital injection was supposed to have been provided in December 2013. The email does not support Mr Ehrenfeld’s argument it was an example of financial services.

[42] Next, in an email of 10 March 2014 from Mr Hughes to Mr Ehrenfeld Mr Hughes noted that he would not be supplying the bank with financial accounts and it would be for Mr Ehrenfeld to submit them to the bank. That was however in response to an email from Mr Ehrenfeld in which he confirmed that he wanted to approve any draft accounts that were to be sent to the bank. Mr Ehrenfeld suggested these were examples of audit and verification services provided by Reeltime. But with respect to that submission, as I read the documents, they simply confirm Mr Ehrenfeld was exercising his authority as a director of Adtraction rather than the exchange being an example of Reeltime or its subsidiaries, particularly Tohil or Tandem, providing any particular services.

[43] Next Mr Ehrenfeld referred to a number of emails involving Mr Sanderson, who is general counsel for Reeltime, and the ASB Bank. The documents Mr Ehrenfeld identified essentially relate to Mr Sanderson’s involvement in the breakdown in the relationship between Adtraction and the bank, because of the bank’s concerns about Adtraction’s financial position and Mr Hughes’ attempts to terminate his personal guarantee. Again there is no explanation in Mr Ehrenfeld’s evidence, including in the emails, as to how they could possibly be services provided by Tohil, Tandem or Reeltime for the benefit of Adtraction.

[44] Mr Ehrenfeld then referred to email discussions in December 2013 just prior to Christmas with Mr Mawhinney in particular relating to demands for payment from Yellow. Mr Ehrenfeld was copied into all of the discussions. I accept it suggests some sort of supervisory role involving Mr Mawhinney on that issue.
[45] Mr Ehrenfeld also referred to emails to and from Ms Samantha Bark, an executive assistant at Reeltime, regarding branding of Adtraction in New Zealand and staff meetings.

[46] Mr Ehrenfeld also relied heavily on an email from Mr Hughes of 23 December 2013 in which Mr Hughes confirmed that Adtraction had collected $190,000 in debt with excellent help from “Hollie”. Mr Ehrenfeld made the point that Hollie was not employed by Adtraction but was employed within the Reeltime group. She had obviously provided some services in relation to the collection of significant debts.

[47] Mr Ehrenfeld also referred to correspondence in March 2014 relating to communications from Reeltime which he suggested were attempts to resolve the matters of Adtraction’s domain and email systems.

[48] In summary while there is some limited evidence of administrative support from Reeltime and its personnel such as Hollie and Mr Mawhinney from time to time, the services provided by Hollie appear to be a one-off and Mr Mawhinney’s services appear to be limited.

[49] Mr Moffatt made the point in his submission that the last payment complained of was made on 13 February 2014, and a majority of the documents Mr Ehrenfeld referred to related to matters or services arising or being provided in March 2014. Some of the other documents Mr Ehrenfeld referred to did however, identify what could be broadly described as administrative services.

[50] Mr Hughes did say that by the time Adtraction was bought by Coastal Digital it had been operating for nine years and had in place its own administrative financial accounting, legal and marketing systems. The need for further assistance in those areas was limited.

[51] However, on balance I accept some administrative and financial services were provided by Tohil and/or Tandem (on behalf of Reeltime as the parent company).
[52] To summarise this point, I find that no company within the Reeltime group provided value to support the claim for fees for licences provided to Adtraction, but I do find that Tohil and/or Tandem provided limited administrative and financial services to Adtraction.

Were the payments in breach of the duties under s 131 and 137?

[53] Section 131 of the Act provides:

131 Duty of directors to act in good faith and in best interests of company

(1) Subject to this section, a director of a 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.

(2) A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.

(3) A director of a company that is a subsidiary (but not a wholly-owned subsidiary) may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company and with the prior agreement of the shareholders (other than its holding company), act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.

(4) A director of a company that is carrying out a joint venture between the shareholders may, when exercising powers or performing duties as a director in connection with the carrying out of the joint venture, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of a shareholder or shareholders, even though it may not be in the best interests of the company.

[54] Section 131(2) does not apply. There is no evidence that the constitution of Adtraction permits its director to act in the best interest of a holding company even if not in the best interest of the company. Subsections (3) and (4) also do not apply.

[55] The good faith obligation requires directors to act honestly and with a proper motive and in the interest of the company. While the Court will not second-guess a director’s commercial decision, where a director acts in a way no director with any
understanding of fiduciary duties owed to the company would act, then the director’s subjective belief that such an action was in the best interests will not prevent a finding of a breach of duty.

[56] The position of creditors may also be relevant. In Sojourner v Robb this Court concluded:¹

... the standard in s 131 is an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criterion as to whether the directors have done what they honestly believe to be right. The standard does not allow a director to discharge the duty by acting with a belief that what he is doing is in the best interest of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company. If a director believes that the duty to act in the best interests of the company is a duty always to act in the best interests of the shareholders, and never in the interests of the creditors, in a situation of doubt as to the solvency of the company, the director cannot be said to be acting in good faith. Creditors are persons to whom the company has ongoing obligations. The best interests of the company include the obligation to discharge those obligations before rewarding the shareholders.

[57] There is the further overlay identified by Mr Moffat in the present case in that the payments were made for the effective benefit of other companies controlled by Mr Ehrenfeld.

[58] To the extent that payments were made for which no services were supplied there is a clear breach of s 131. That relates to all payments to the extent they can be attributed to the licensing fee.

[59] The next issue is whether, at the time such payments as might have been justified (and they were limited) were made, Adtraction was in a position to make those payments bearing in mind its obligation to other creditors.

[60] Mr Hughes’ evidence was clear enough that Adtraction failed to pay its creditors in February 2014. When it became clear to him it had no funds to pay its creditors or its other liabilities he resigned as a director on 28 February 2014.

¹ Sojourner v Robb [2006] NZHC 1676; [2006] 3 NZLR 808 (HC) at [102].

[61] But Adtraction had significant issues regarding its ability to pay its creditors which Mr Ehrenfeld, as director, should have known about much earlier and at least from December 2013. Its principal creditor was Yellow. During the period when the payments were being made Adtraction’s arrears in relation to Yellow increased. Yellow was of course the largest and the most important of the advertising companies that Adtraction had a commercial relationship with.

[62] On 30 December 2013 Adtraction failed to pay Yellow invoices for
$447,708.63 which had been issued on 7 November 2013. Mr Sanderson has confirmed that Adtraction’s creditors were largely unpaid in January 2014 and February 2014.

[63] Given that substantial debt to Yellow, which remained unpaid and which should have been known to Mr Ehrenfeld by the end of December at the latest, Mr Ehrenfeld cannot be said to have been acting in good faith in authorising the payments to Tohil and Tandem in January and February 2017.

Alternative claim under s 137

[64] In the alternative, Mr Ehrenfeld was required to exercise the care, diligence and skill that a reasonable director would have exercised in the same circumstances. Section 137 provides:

137 Director’s duty of care

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,—

(a) the nature of the company; and

(b) the nature of the decision; and

(c) the position of the director and the nature of the responsibilities undertaken by him or her.

The standard is an objective standard, that of a reasonable director.
[65] Importantly in the present case a reasonable director with knowledge of Adtraction’s circumstances could not have justified authorising payments for licensing fees when no licensing product was provided and nor could a reasonable director have permitted payments to be made to Tohil and Tandem, at least as from the end of December, given the financial position of Adtraction.

[66] In requiring and/or making the payments, Mr Ehrenfeld failed to exercise the care, diligence and skill that a reasonable director would exercise in all the circumstances and in relation to the very limited nature of the services supplied.

Summary

[67] I accept there was a general agreement that Adtraction would pay Reeltime for licensing, administrative and financial services. However, Reeltime or its other subsidiaries provided only limited administrative and financial services, and provided no licensing services.

[68] Part of the agreement in relation to the payment of the services was that Reeltime would inject capital into the company in December which it did not do.

[69] At the time Adtraction made the payments the company was running into financial difficulty and was unable to pay its creditors. Even accepting some payments (with the exception of the fee for the licensing) might have been payable for the limited administrative and financial services supplied, the position had been reached by December when Mr Ehrenfeld must have been aware Adtraction was not able to pay its substantive trade creditors. No further payments after December should have been made or authorised by Mr Ehrenfeld. In making those payments Mr Ehrenfeld was in breach of his duties as a director of the company.

[70] To the extent the payments related to services that were not supplied by other members of the Reeltime Group and/or were made at a time when Adtraction could not pay its other creditors, Mr Ehrenfeld was effectively preferring Reeltime and other members of the group to Adtraction and as such was in breach of the duty of good faith that he owed Adtraction under s 131.
[71] In the alternative, in requiring the payments and/or authorising them Mr Ehrenfeld failed to exercise the care, diligence, and skill that a reasonable director would have been exercised in the same circumstances taking into account the financial position of Adtraction and the services supplied. Mr Ehrenfeld did not act as a reasonable director in demanding, making and authorising those payments.

Result

[72] As Mr Ehrenfeld is in breach of the duties he owed the company, its claim against him succeeds to the following extent (after making adjustment for the payments permitted for October, November and December relating to the provision of limited administrative and financial services):

Date	Amount claimed	Amount allowed for Admin/Financial Services (less discount) Adjusted to NZ	Balance
14 October 2013	$34,574.25	$13,821	$20,753.25
15 November 2013 20 November 2013	$20,020.00 $25,802.66	$16,031	$29,791.66
24 December 2013	$33,191.16	$17,691	$15,500.16
13 January 2014	$55,092.14	Nil	$55,092.14
27 January 2014	$32,198.48	Nil	$32,198.48
13 February 2014	$21,858.82	Nil	$21,858.82
04 February 2017	$5,821.75	Nil	$5,821.75
TOTAL:			$181,016.26

[73] The plaintiff is to have judgment against Mr Ehrenfeld in the sum of
$181,016.36.

Costs

[74] The plaintiff is to have costs on a 2B basis together with disbursements as fixed by the Registrar.



Venning J