Sparta13 Contractors Limited v Moeke [2015] NZHC 1222 (4 June 2015)

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BETWEEN	SPARTA13 CONTRACTORS LIMITED (In Liquidation) First Plaintiff VIVIEN JUDITH MADSEN-RIES and HENRY DAVID LEVIN as liquidators of SPARTA13 CONTRACTORS LIMITED (In Liquidation) Second Plaintiffs
AND	MAHU WIREMU MOEKE First Defendant MELODY ANN WIREMU Second Defendant

Hearing:	23 March 2015, further submissions received 13 April 2015
Appearances:	K M Wakelin and E E Meade for the Plaintiff
_Judgment:	_{4 June 2015}

This judgment was delivered by me on Thursday 4 June 2015 at 10.00 am pursuant to Rule 11.5 of the High Court Rules.

[1] Sparta13 Contractors Limited (In Liquidation) (Sparta) and its court appointed liquidators bring various claims against the first and second defendants consequent upon the liquidation of the company.

[2] Sparta was incorporated on 30 March 2011. It carried on business providing labour only services in the horticulture industry. The first defendant, Mr Moeke, is a director and shareholder of Sparta. The second defendant, Ms Wiremu, was at all material times a director of the company. Ms Wiremu was not, however, a shareholder.

[3] No statement of defence has been filed by either defendant and the matter proceeded before me by way of formal proof.

[4] Sparta ceased trading in May or June 2012. It was placed into liquidation on

2012. Ms Madsen-Ries and Mr Levin were appointed as liquidators. At the time of liquidation Sparta’s only assets were $11,126.64 in its bank account and its legal claims.

[5] Sparta first defaulted on its PAYE obligations in the period ending 31 August

2011. The following month it also defaulted on its GST obligations. From that time onwards the company was consistently in default in relation to GST and PAYE. Interest and penalties have consequently accrued. Sparta also incurred a penalty for on an income tax default for the period ending 31 March 2012.

[6] No financial statements were ever prepared for the company. The defendants did not keep any accounting records, either. The liquidators have therefore had to use the limited available records to reconstruct the financial position of the company. The key material that has given them insight into Sparta’s financial position are its bank statements and information provided by Inland Revenue.

[7] Mr Levin says that the principal reason for Sparta’s failure to meet its tax

obligations was that the defendants were consistently taking and using funds from

the company for their personal expenses rather than applying those funds for proper purposes, namely accounting to Inland Revenue. He says that, to the extent the funds taken by the defendants gave rise to a debt owed to the company, it had no value.¹In other words, it was not a readily realisable asset that the company could use to meet its accruing tax debts.

[8] Mr Levin also deposed, and I accept, that the payments made to the defendants were inconsistent with the business expenditure of the company. Indeed, they seem clearly to have been for their personal benefit. The fact that there are no records that indicate that the transactions were of some other nature, such as wages,

[9] Based on the above, the liquidators submit, and I again accept, that Sparta was insolvent from at least August 2011, when it became unable to pay its debts as they became due in the normal course of business.³

[10] Total creditor claims in the liquidation amount to $109,514.78. The individual claims are as follows:

(a) The claim by Inland Revenue totalling $96,585.31, which is made up of the following amounts:

¹If, on the other hand, the funds taken by the defendants did not give rise to a debt owed to the company, then the company plainly did not have the benefit of the funds to meet its debts.

²Under s 161 of the Companies Act 1993 the defendants cannot claim remuneration or any other benefit unless, at the time they received it, they first, as directors, authorised that to happen on the basis that it was fair to the company and gave a certificate supporting that conclusion.

Failure to meet those requirements renders then personally liable for the amount of any payment

or benefit except to the extent that they prove that it was fair to the company at the time it was made. Given that the defendants have taken no steps to defend the claim there is no prospect of that occurring. Nor, on the facts of the case before me does there seem any possibility that they would be able to do so.

[12] Seven causes of action are pleaded in total. They can be conceptually divided into three parts. The first part (comprising causes of action one to three) relates to money said to have been taken from the company by the defendants. Those claims, which are pleaded in the alternative, are as follows:

(a) A claim for $191,649 said to be owing under the defendants’ current accounts. The debt comprises:

(ii) other transactions of a personal nature totalling $2,572 (claimed to be owed by both defendants jointly and severally);

(b) A claim for $181,174 under s 297 of the Companies Act 1993 (the Act) for transactions entered into by the company at an undervalue, the difference in value comprising:

(c) A claim for $191,649 under s 298 of the Act for the disposition of property at undervalue, the difference in value comprising:

[13] The fourth to sixth causes of action relate to alleged breaches of director duties under ss 131, 135, and 136 of the Act and seek declarations and compensation under s 301 in the amount of creditor losses totalling $109,514.78 and costs of the liquidation totalling $46,320.54.

[14] The seventh cause of action relates to the company’s failure to keep records and seeks a declaration under s 300 that the defendants are personally liable “for such parts of the debts of the company and the costs of the liquidation that the Court considers just”.

[15] It is important to record that the fourth to seventh causes of action were pleaded neither in the alternative to each other nor in the alternative to the first three causes of action. At the formal proof hearing I therefore expressed some concern that there appeared to be an element of double recovery involved. I later received further submissions on that point and shall return to it later.

[16] In my view the claim as pleaded over-complicates what is, in reality, a fairly straightforward matter. One’s instinct is that seven causes of action in relation to a relatively low level (and ultimately undefended) claim is excessive. Such an abundance of causes certainly tends not to be conducive to judicial expedition. I therefore propose to approach the matter in a somewhat different way.

(a) the defendants have taken and used company funds totalling $191,649 without the necessary authorisations and for their own benefit;

(c) the company is insolvent, with debts totalling $109,514.78, a portion of which comprises interest and penalties for late payment;

[18] The object of the first three causes of action is simply to obtain an order that the defendants pay back the money they have taken and used for their own personal purposes, without the appropriate authorisations. If there was an intention to repay (which seems most unlikely) they owe a debt to the company. If they did not intend to repay then they have converted the company’s funds. Accordingly it seems to me to matter not whether there is a “current account” debt strictly so-called; the second defendant was not, in any event, a shareholder. Nor is it necessary to rely on s 297 or 298. Rather, the appropriate mechanism for obtaining repayment of the money is s 301, which relevantly provides:

(1) If, in the course of the liquidation of a company, it appears to the court that ... a past or present director ... has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder, —

(i) to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or

(ii) to contribute such sum to the assets of the company by way of compensation as the court thinks just; or

(c) where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.

[19] The Court of Appeal has described the operation of s 301 in the following way:⁴

[53] The section provides a procedural short-cut by which a liquidator, creditor or shareholder may pursue the claims which a company in liquidation may have against, inter alia, its former directors. Proceedings under s 301 can extend to claims that directors have “misapplied or become liable or accountable for money or property of the company” or are otherwise liable for a “breach of duty or trust”. This language naturally encompasses restitutionary claims (including a claim for an account of profits). It follows, logically, that relief under s 301(1)(b) may be calculated on a restitutionary and not just a compensatory basis. As to s 301(b)(ii), we note that “compensation” can, depending of course on context, encompass restitutionary remedies: see Charter plc v City Index Ltd [2006] UKHL 26; [2007] 1 WLR 26 (Ch). (We note that in City Index the defendant's gain — for which restitutionary relief was sought — was equivalent to the plaintiff's loss, something which is not always the case.) As well, there is s 301(b)(i) which could be invoked. We note that there are some semantic issues associated with all of this to which we revert at [60].

[56] Given the approach which the Judge took (which we are about to discuss) it is appropriate to make some comments on the nature of the relief to which Aeromarine 1 might have been entitled against Mr and Mrs Robb.

[57] Such relief could have been truly compensatory, to make up for the loss suffered by Aeromarine 1 by reason of the breach of duty. That such relief is available in these circumstances is apparent from the cases cited in the City Index judgment. Since the breach of duty involved a sale at less than fair value, such compensation would be the difference between the contract price paid by Aeromarine 2 and the fair value of the assets acquired. It is fair to say that the assessment of compensation on that basis in this case poses some real problems as it is far easier to conclude that the fair value of the assets exceeded the sale price than to be specific as to that fair value. As we have noted already, the key difficulty with an assessment of fair value as at February 2003 is how to accommodate the reality that a sale to a third party of Aeromarine 1's goodwill at that time would have required some contractual commitments from Mr and Mrs Robb.

[60] Before we turn to discuss the judgment under appeal, there are two associated semantic points which we should mention. Although “compensation” primarily has the meaning ascribed to it in [57], “restitutionary compensation” is not an oxymoron. In Chirnside v Fay at [94] Blanchard and Tipping JJ referred to “damages based on a notional disgorgement of profits made, but not realised”. As to this, reference can also be made to Edelman, Gain-Based Damages (Hart 2003). Often, as perhaps in the City Index case, the gain to the defendant is merely the corollary of the loss to the plaintiff. But where there is a duty to account for profits, it is not necessarily an abuse of language to describe as “compensation” a monetary award in lieu of such an account. Such an award compensates the beneficiary, not for losses associated with the original breach but rather for not having an account of profits. In the balance of this judgment we will use “compensation” in its strict sense of compensation for loss. Further, although it is possible to question whether an account of profits is a “restitutionary” form of relief (cf Elias CJ in Chirnside v Fay at [17]), it is convenient in this case to describe a monetary award in lieu of an account of profits as restitutionary.

[21] In the meantime, and as far as the $191,649 is concerned, there can be no doubt that the prerequisites for an order of repayment under s 301 is met here. In short:

(b) they have misapplied or retained or become liable for money belonging to the company.

[22] Although the finding at (b) makes it not strictly necessary, I would also hold that the defendants’ actions in taking and using the money were not in the best interests of the company and therefore in breach of their director duties under s 131. The defendants should be ordered to repay the sums taken.⁵

[23] Unlike the first to third, the fourth to sixth causes of action expressly rely on s 301. They plead breaches of the duties owed by the defendants under ss 131, 135 and 136 of the Act and seek declarations in that regard. But in addition to these declarations and the “restitution” that is the subject of the first three causes of action, compensation in an amount equivalent to the creditors’ losses ($109,514.78) and the costs of the liquidation ($46,320.54, thus far) is also sought.

[24] I have already recorded my view that the defendants were in breach of their duty under s 131 to act in the best interests of the company. The other sections relied upon are:

(a) s 135, which provides that a director must not 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; and

(b) s 136, which prohibits a director of a company agreeing to the company incurring an obligation unless the director believes that at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

[25] I confess that I have some doubt about whether the duties reflected in these two provisions can be said to be seriously in issue here. There seems to be a degree of over-egging in seeking to apply them to the very simple facts of the defalcation that occurred. For example, can it really be said that taking the money was a decision made in the course of conducting Sparta’s business? Moreover, and

_{notwithstanding the way the claims were pleaded, it is not my
understanding that the}

company seeks to be compensated three times over in the same amount for each alleged breach. And while Ms Wakelin submitted that declarations as to the (alleged) breaches are important in and of themselves, such relief does not appear to me to be the focus of s 301. Accordingly I do not propose to consider ss 135 and

[26] The critical question in relation to the s 131 (fourth) cause of action as pleaded is whether the defendants’ failure to act in the best interests of the company should give rise to an order that they pay compensation under s 301 in the sum of the creditors’ losses and the costs of the liquidation.⁶

[27] Given that the Court has already determined that the defendants should repay the $191,649 they took from the company, the issue is whether they should also be required to compensate the company in the amount of the creditors’ losses and the liquidation costs.

[28] As the Court of Appeal noted in the passage from Robb I have quoted above, the amount gained by a delinquent director and lost by the affected company may sometimes be the same. The Court also noted that there may in some cases be no meaningful distinction between restitution and compensation. Here, however, the company necessarily argues that there is such a distinction and that the defendants should both repay the amount they have gained but also compensate for creditors and liquidation losses.

[29] I am unable wholly to agree with that position. That is because the core part of the creditors’ losses, namely the money owed to IRD (and to ACC and to Telecom) is not a loss to Sparta, but a debt properly incurred in the course of business. Moreover, if the monies taken by the defendants are repaid as ordered, those debts can be met.

[30] I nonetheless accept that the same cannot be said in relation to that portion of the debt that constitutes interest and penalties. Those sums would not have been

incurred by Sparta but for the defendants’ actions (or inactions) and I can see no reason why compensation should not be ordered in those amounts. The same can be said for the reasonable costs of the liquidation. There should be compensation orders in those amounts.

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

(ii) section 201 or 202 (which relates to the preparation of financial statements or group financial statements) or any other enactment that requires the company to prepare financial statements or group 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 one 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) of this section 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.

[32] In short, s 300 contemplates that compensation may be payable by a director to an insolvent company for debts that have been incurred by the company itself. This can be compared with s 301, which envisages orders that focus on particular debts owed by a director to a company.⁷

[33] The case of Walker v Allen is instructive here.⁸There, Ellen France J found that the prerequisites for liability under s 300 had been met, namely that the director’s failure to keep proper accounting records had caused both substantial uncertainty as to the assets and liabilities of the company and had impeded the conduct of the liquidation. But she found that the principal cause of the company’s inability to pay its creditors was the director’s decision to carry on trading in the knowledge that the company owed a substantial debt that would continue to accrue and that the debt was higher than disclosed. Her Honour held it was appropriate to

[34] In my view, the present case is similar. While there has been an undoubted and significant record keeping failure, I do not consider that this failure has contributed in any obvious or significant way to the company's inability to pay all its debts. The cause of that inability was the defendants taking from the company the money that could have been applied to the debts. Nor, in light of Mr Levin’s quite coherent picture of the company’s relatively uncomplicated finances can it be said that the failure has resulted in substantial uncertainty as to the assets and liabilities of

_{the company. And while it is probably fair to say that the deficit has
impeded an}

orderly liquidation I do not consider that it can be said to have “substantially” done so. In any event, there is, in my view, no need to resort to s 300, given the findings I have made above.

[35] More particularly, I do not consider that the mere fact that ss 300 and 301 co-exist means that double recovery is contemplated or permitted. For the reasons already given, orders will be made under s 301 that the defendants are to repay the money taken by them together with compensation for any additional loss they have caused to the company. On the assumption that those orders can and will be met by the defendants then any money so paid will, no doubt, be used to repay the company’s creditors and the costs of the liquidation. To suggest that in those circumstances the defendants should also be held responsible for (and required personally to pay) the very same debts under s 300, seems to me to be both punitive and wrong in principle.

(a) The first and second defendants are, between them, to pay to Sparta the sum of $7,449, together with interest at the Judicature Act rate calculated from 30 July 2014.¹⁰

(b) The first defendant is to pay Sparta the sum of $169,200, together with interest calculated together with interest at the Judicature Act rate calculated from 30 July 2014.

(c) The second defendant is to pay Sparta $15,000 together with interest at the Judicature Act rate calculated from 30 July 2014.

(d) The first and second defendants are, between them, to pay to Sparta compensation for the extra costs incurred by the company as a result

¹⁰By “between them” I mean that they are jointly and severally liable for this part of the judgment

(ii) $32,006.66 (being the combined total of the amounts set out at [10](a)(ii) and (iii) above).

[37] I record my view that all that would have been necessary to achieve the above result is a single cause of action, not seven.

High Court of New Zealand Decisions

Sparta13 Contractors Limited v Moeke [2015] NZHC 1222 (4 June 2015)