IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV [2016] NZHC UNDER the Companies Act 1993

Transcription

1 IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV [2016] NZHC 1400 UNDER the Companies Act 1993 IN THE MATTER BETWEEN AND AND AND of the liquidation of Aluminium Plus Wellington Ltd (in liquidation) C D OWENS AND D S VANCE AS LIQUIDATORS OF ALUMINIUM PLUS WELLINGTON LTD (IN LIQUIDATION) Plaintiffs A C SHAW AND I A SHAW AS TRUSTEES OF THE I&A SHAW FAMILY TRUST First Defendants A C SHAW Second Defendant I A SHAW Third Defendant Hearing: May 2016 Counsel: J Sumner and S Eglington for Plaintiffs J Grace for Defendants Judgment: 24 June 2016 JUDGMENT OF BROWN J C D OWENS AND D S VANCE AS LIQUIDATORS OF ALUMINIUM PLUS WELLINGTON LTD (IN LIQUIDATION) v A C SHAW AND I A SHAW AS TRUSTEES OF THE I&A SHAW FAMILY TRUST [2016] NZHC 1400 [24 June 2016]

2 Introduction [1] The I & A Shaw Family Trust (the Trust) commenced trading in 1995 initially as a farming enterprise. From 2007 it traded as a glazier and manufacturer of aluminium joinery using the trade name Aluminium Plus. The second defendant (Mrs Shaw) and the third defendant (Mr Shaw) are the trustees. [2] The Trust obtained the glass, aluminium and other products it required from a number of suppliers. The majority of those suppliers were willing to contract directly with the Trust. However one supplier, CSR Viridian (New Zealand) Limited (Viridian), advised that it was not prepared to contract with a trust but wanted to trade with a corporate entity. Mr Shaw understood that that was a Viridian head office policy. [3] Because Viridian would be an important supplier for the Trust business, to satisfy Viridian, Aluminium Plus Wellington Ltd (the Company) was incorporated on 17 May Mr and Mrs Shaw were the directors of the Company. [4] It was the intention of Mr and Mrs Shaw as directors of the company and as trustees of the Trust that the Company would enter into contracts for the supply of goods by Viridian and any other supplier who preferred to contract with the Company rather than the Trust. However the Trust was to be the entity that entered into contracts with customers for the installation of glass and aluminium joinery in buildings. Goods purchased by the Company would be passed on to the Trust for use in the installation business. [5] Mr Shaw deposed that most suppliers were given the option whether to contract with the Company or with the Trust and they were informed about the relationship between the two entities. He stated that virtually all suppliers elected to supply directly to the Trust rather than to the Company. [6] The only significant supplier who elected to contract with the Company was Viridian. Mr Shaw deposed that Viridian was fully aware of the existence of the Trust and knew that it was the Trust which carried on the business of installation of glazing work for its customers. He stated that there was never any suggestion that

3 the Trust would cease to perform the glazing work or that supply contracts with other suppliers would be re-negotiated with the Company. [7] The Company did not have a bank account. When Viridian supplied product it issued an invoice to the Company and payment was made to Viridian by cheque from an account operated by and in the name of I & A Shaw Family Trust. [8] The statement of claim dated 11 June 2015 described the arrangement between the Trust and the Company in this matter: 18 The First Defendants used the Company to purchase goods or services from suppliers for the benefit of the Trust. 19 The goods would be passed to the Trust for distribution to its clients in consideration of the Trust making payment of the invoiced amount direct to the suppliers. 20 Payment by the Trust in the manner described at 19 above would extinguish the Company debt to the supplier ( the purchase and supply agreement ). [9] The response in the statement of defence dated 22 September 2015 stated: 13. The First Defendants admit paragraphs 18 to 20 of the statement of claim and say that: (1) Viridian and Dynex Extrusions Limited ( Dynex ) were well aware of the business arrangements referred to in paragraphs 18 to 20 of the statement of claim when they supplied products to the Company; (2) Those business arrangements were entered into because suppliers wished (sic) enter into contracts with a company and not a trust; (3) No supplier was misled. [10] Hence it is common ground that the Trust and the Company entered into a purchase and supply agreement whereby: (a) the Trust used the Company to purchase goods and services from suppliers for the benefit of the Trust;

4 (b) the goods would be passed to the Trust for distribution to its clients in consideration of the Trust making payment of the invoiced amount direct to the suppliers; (c) such direct payment would extinguish the Company s debt to the supplier. [11] Between 7 October 2013 and 20 December 2013 the Company purchased materials from Viridian in the sum of $61, At the time of supply invoices were issued by Viridian to the Company for payment for those materials. [12] Because the invoices were not paid, Viridian issued proceedings against the Company in the District Court at Levin. Although the Company served a notice of defence and counterclaim, it failed to serve an information capsule in the form required by the District Court Rules Consequently judgment by default was entered against the Company on 14 July 2014 in the sum of $87, comprising: (a) the claim of $79,182.00; 1 (b) costs and disbursements of $2,396.25; (c) interest of $6, Judgment for costs of $1, was also entered against the Company in respect of its counterclaim. [13] Although in its solicitor s letter to the plaintiffs dated 27 January 2015 the defendants contended that there were grounds to apply to set aside the default judgment, in fact the Company has never taken any steps to seek to have that default judgment set aside. 1 Comprising: - invoices total 61, interest 4, credit consultants costs 14,108.90

5 [14] A statutory demand dated 22 July 2014 was then served on the Company for the sum of $88, comprising: (a) the judgment for $87,648.82; (b) the judgment for $1,068.50; (c) interest of $ [15] Subsequently Viridian commenced winding up proceedings against the Company for failure to comply with the statutory demand. The Company was placed into liquidation on 14 October 2014 in the High Court at Wellington. The plaintiffs were appointed liquidators of the Company. [16] In this proceeding the plaintiffs seek to recover from Mr and Mrs Shaw in their capacities as trustees of the Trust the sum of $99, for breach of contract. Relying on various causes of action alleging contravention of the Companies Act 1993 (the Act) they also seek an order for compensation under s 301 of the Act against Mr and Mrs Shaw as directors of the Company in the sum of $125,884.59, comprising the Company s alleged debts of $99, and the costs and disbursements of the liquidation totalling $26, Issues [17] The issues are for determination are: (a) Are Mr and Mrs Shaw as trustees of the Trust liable for the Company s debts by reason of a breach of the purchase and supply agreement? (b) Did the second and third defendants contravene s 135 of the Companies Act 1993? (c) Did the second and third defendants contravene s 136 of the Act?

6 (d) Did the second and third defendants contravene s 137 of the Act? (e) If the second and third defendants were in contravention of the Act should an order be made requiring them to pay compensation pursuant to s 301 of the Act? First cause of action: breach of contract [18] The plaintiffs claim that the Trust received the benefit of the materials supplied by Viridian in the last quarter of 2013 at [11] above but failed to make payment to Viridian in accordance with the purchase and supply agreement. Consequently it is claimed that the Trust breached the purchase and supply agreement with the Company by failing to make payment of the sum of $88, together with what the amended statement of claim described as additional indebtedness totalling $10, The latter figure comprised $6,395.49, being the award of the Disputes Tribunal dated 18 August 2014 in favour of Dynex Extrusions Ltd, and $3, being the sum of unpaid invoices rendered to the Company by Yellow Pages Group Ltd. [19] The statement of defence asserted that the Trust had no contractual obligation to pay the Viridian debt. Pursuant to leave granted on 3 May 2016 an amended statement of defence was filed on 6 May 2016 which elaborated upon that ground of defence by inserting in para 17 the following statement: By an agreement dated on or about December 2013 the Company agreed that the First Defendants were released from any obligation they may have to pay for goods supplied by Company in settlement of all claims between the First Defendants and the Company arising from the supply of faulty goods. It was on that basis that the defendants contended that the Trust had no contractual obligation to pay the Viridian debt. [20] The plaintiffs did not file a reply to the amended statement of defence. However at the hearing I granted leave to the plaintiffs to do so and on 31 May 2016 the plaintiffs filed a reply denying para 17 of the amended statement of defence.

7 [21] The evidence indicated that there had been some history of supply by Viridian of defective product from time to time, although it appeared to be Viridian s position that any defective product had been identified and replaced. [22] The defective product contention was recorded in the Company s counterclaim filed in the proceeding brought by Viridian in the Levin District Court. The notice of counterclaim signed by Mr Shaw dated 15 April 2014 stated: Over a period of time the plaintiff owes the defendant sums of money due to incorrect invoicing, supplying of faulty products, delays in supplying, rework on job sites caused by plaintiff but done by defendant. Whilst the relationship was going these credits were noted but never quantified. Since the relationship is over then they need to be quantified and offset from plaintiff s claim. Court to confirm the final credit which could be as high as the $61,000 claimed. Hence no loss to the plaintiff. [23] In the section of the document relating to the facts justifying the counterclaim it was stated: A invoice for $13,340 has been sent through as the first credit due to the plaintiff which was not disputed or owing. More credits are being worked on presently so can be presented at Court. [24] The reference to an invoice for $13,340 was a reference to an invoice from Aluminium Plus to Viridian Glass Ltd Partnership dated 13 February 2014 for labour costs and an additional discount given to the client in respect of a Trust installation in Churton Park apparently undertaken at a point prior to the 2013 orders the subject of Viridian s claim. [25] Mr Shaw s brief of evidence explained the December 2013 agreement whereby the Company agreed that the first defendants were released from their obligation to pay for goods supplied by the Company in the following way: 54. As Viridian was no longer willing to acknowledge that credits owed for the consequential losses, it was necessary for the Company to come to an arrangement with the Trust regarding those losses. It was my understanding that if I did not take steps to recover money that I thought was owing, then I would be breaching my duty to the beneficiaries and would likely be liable for that money myself. 55. The Second Defendant and I, acting in our separate capacities as directors of the Company and trustees of the Trust decided that a fair arrangement, between the two entities would be that the Company

8 would not require the Trust to pay for the invoices issued by Viridian that were outstanding at that time. The amount of the outstanding invoices were $61, It was understood that if Viridian brought court proceedings against the Company, then the Company would counterclaim for the credits owed and receive whatever amount was awarded under the counterclaim, whether that amount was greater or less than $61, The agreement that the Trust would not have to pay $61, was intended to be a settlement of all claims the Trust may have against the Company in respect of the faulty glass. The figure seemed fair. As mentioned already, the costs of wasted labour in one job was $13,340.00, so a figure of $61, for the losses of all the faulty glass supplied was a conservative. Although I did not have a record of all the extra expenses caused to the Trust. A lot of those losses were not even tangible so it would have been difficult to put a dollar value on them even if notes had been kept. However, those losses still existed. There was no doubt that faulty glass had been supplied to the Trust and there was no doubt that further losses resulted. The lack of records seemed to us to be a factor to take into account when considering how much to settle for but it did not seem to us to be a reason not to settle. 57. This settlement between the Company and Trust was not put in writing as it seemed to the Second Defendant and I that writing a contract between ourselves would be artificial and contrived. We may have been wrong about that, but there was nevertheless an agreement. [26] The plaintiffs were understandably sceptical about the agreement deposed to by Mr Shaw, noting that conveniently for the Trust there is no evidence to support the existence of the agreement except for the evidence of Mr Shaw himself. Attention was drawn to the inconsistency between the fact of the alleged release and the evidence in the form of subsequent s demonstrating that the Trust was proposing to make payment of invoices in January 2014, that is subsequent to the alleged release. [27] While it is true that the only evidence in support of the fact of the agreement between the directors and the trustees was sourced from Mr Shaw and was not corroborated in any document, having observed Mr Shaw give evidence I am unable to conclude that he was not telling the truth. [28] Mr Shaw is an accountant who operates under the trading name Accounting +. He prepared the Trust s financial statements and as tax agent lodged the Company s two monthly GST returns which were all nil returns. Tax

9 returns for the Company were also filed by Mr Shaw and they too were nil returns. Although it may appear to be a rather fictional arrangement, the impression which I gained of Mr Shaw was that an agreement between the directors and the trustees of the nature deposed to was a step which would appeal as logical to him. I proceed therefore on the somewhat surprising footing that, although clearly not at arm s length, Mr and Mrs Shaw as directors of the Company did agree to release the Trust from the purchase and supply agreement. [29] I consider that if the party with the burden of the obligation, that is the Trust, had wished to be released from the obligation, then it would have been an implied term of the purchase and supply agreement that the Trust would give advance notice of the termination of the arrangement. It would not be possible for the Trust to unilaterally terminate the purchase and supply arrangement in respect of supplies made by Viridian to the Company for the benefit of the Trust prior to notice of termination being given. [30] However the release of the Trust deposed to by Mr Shaw was by mutual agreement between the directors and the trustees. I consider that it was effective to discharge the Trust immediately, with the consequence that the Trust no longer had an obligation to pay the extant Viridian invoices. Consequently in those circumstances the fact that the Trust did not pay the amount of those invoices to Viridian did not result in the Trust being in breach of an obligation to the Company. That obligation had been discharged, albeit substantially to the detriment of the Company. [31] In those circumstances I consider on the basis of the facts as found that the plaintiffs fail in their claim against Mr and Mrs Shaw as trustees for breach of the obligation to perform the purchase and supply agreement. Rather their complaint is more appropriately directed at the directors of the Company in agreeing to abandon the method by which payment would be made for goods ordered by and invoiced to the Company.

10 Second cause of action: breach of s 135 of the Act Solvency [32] As a preliminary to each of the three Companies Act causes of action the plaintiffs first addressed the question of the solvency test. Noting s 4 of the Act, they submitted that the test is one of solvency, not liquidity, recognising that a temporary lack of liquidity may not equate to insolvency if the debtor is able to realise assets or borrow funds within a relatively short timeframe in order to meet its liabilities as they fall due. [33] The Court of Appeal said precisely that in Yan v Mainzeal Property and Construction Ltd (in rec and in liq). 2 The Court of Appeal continued: [59] As it was put by Barwick CJ in the High Court of Australia s decision Sandell v Porter: the debtor s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation by sale or by mortgage or pledge of his assets within a relatively short time relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor s inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. [60] In Sandell v Porter, the Court was dealing with legislation referring to the ability of the debtor to meet liabilities from his own moneys. There is no longer any such limitation in the relevant provisions of the Act. Nevertheless, the authorities recognise that the insolvency of the company requires consideration of debts currently due or falling due within a relatively short time. As Barwick CJ emphasised in Sandell v Porter, the issue of insolvency requires consideration of the debtor s entire financial position. A realistic commercial approach to the assessment is required. [34] In response to the contention for Mr and Mrs Shaw that the Company was solvent by virtue of the purchase and supply agreement, the plaintiffs submitted: 2 Yan v Mainzeal Property and Construction Ltd (in rec and in liq) [2014] NZCA 190 at [59].

11 8.4 It is submitted that whilst the second and third defendants claim the Company was not insolvent, as it had access to third party funding sources at material times (i.e. the Trust), that claim misses the point, as those third party funding sources were not an asset of the Company (let alone an asset that was currently realisable). The Company had no control whatsoever over whether the Trust would provide it funding at any point in time and whether any funding would be provided in future was entirely at the discretion of the trustees of the Trust. 8.5 Accordingly, it is submitted that access to third party funding is not to be taken into account in considering the Company s solvency. [35] The implications of another party assuming responsibility to discharge a company s debts was addressed in Yan 3 referring to the High Court judgment, the Court said: [39] Nevertheless, the Judge found that the fact that another related entity was prepared to assume responsibility to discharge the debt did not establish that the party legally liable for the debt was able to pay its debts. Rather, the fact that RGREL needed to ask Isola to pay the debt on its behalf pointed to the conclusion that RGREL was unable to pay its debts. The Judge considered that the same point applied in relation to other companies in the wider group. In particular, the Judge noted that another company, Richina Pacific Ltd (RPL) had confirmed cashflow support for RGREL and that RPL s financial statements had been produced. The Judge did not consider that this evidence demonstrated that RGREL was able to pay its debts. These findings are challenged on appeal by RGREL and we return to them later. [36] The Court later stated: [86] Finally, we do not share the Judge s view that the fact that RGREL had to rely on Isola and the Richina parent companies for support tends to suggest it cannot pay its debts. It is common for companies to require funding support from related companies in a group or from shareholders. However, on the view we take of this matter, the point is not material. [37] Applying that approach, I am unable to accept the plaintiffs starting contention that the Company was at all times insolvent because it had no assets or bank accounts. Provided that the Company had taken steps to ensure that there was a reliable arrangement in place for the payment by another solvent entity of invoices rendered to it, then it does not follow that it was insolvent because it could not pay for such supplies from its own funds. 3 Yan v Mainzeal Property and Construction Ltd (in rec and liq), above n 2.

12 Reckless trading [38] Section 135 states: 135 Reckless trading A director of a company must not (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. [39] In advancing the claim under s 135, the plaintiffs first referred to the well-known analysis by the Court of Appeal in Mason v Lewis: 4 [51] The essential pillars of the present section are as follows: the duty which is imposed by s 135 is one owned by directors to the company (rather than to any particular creditors); the test is an objective one; 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 what is required when the company enters troubled financial waters is what Ross (above at para [48]) accurately described as a sober assessment by the directors, we would add of an ongoing character, as to the company s likely future income and prospects. [40] They also drew attention to the recent observations in Grant v Johnston: 5 [37] What must be emphasised is that s 135 is not concerned with ordinary business risks but by allowing the business to be carried on in a manner which is likely to create a substantial risk of serious loss. The section is prospective in its effect, requiring the directors in a given situation to consider with care whether continuing to trade has realistic prospects of generating sufficient revenue to meet current and future liabilities. 4 5 Mason v Lewis [2006] 3 NZLR 225 (CA). Grant v Johnston [2016] NZCA 157.

13 [38] Significantly, as the purpose of s 135 is to avoid an inappropriate loss to a company s creditors through reckless trading, the company s financial position at all relevant times is critical. [41] It was the plaintiff s contention that Mr and Mrs Shaw had breached s 135(a) and (b) by creating a set of circumstances by the manner in which the business was carried on that created a serious loss to the Company s creditors. They contended: 9.4 Specifically, the directors did not trade the Company or keep proper accounts and records for the Company. The Company itself had no assets, or bank accounts and was beholden to the Trust, in terms of requiring the Trust to pay the Company s creditors. This meant that the Company was insolvent from the day it was incorporated. 9.5 It is submitted that the Company did not have any, let alone realistic, prospects of success of generating sufficient revenue (as it did not generate revenue) to meet current and future liabilities. Accordingly, the second and third defendants did not take the necessary care and were therefore reckless in the manner in which they traded the Company in terms of section 135 of the Act. [42] In my view the mode of operation of the Company in tandem with the purchase and supply agreement was not likely to have either of the consequences referred to in s 135. The effect of the arrangement was that liabilities incurred by the Company were matched by the payments which the Trust agreed to make on the Company s behalf. In those particular circumstances there was no necessity for the Company to have funds or assets of its own. Provided the arrangement was observed, the position of supplying creditors was protected. [43] However, absent the purchase and supply agreement the position would be quite different. Consequently, when Mr and Mrs Shaw as directors of the Company elected to release the Trust from the obligation to make payment to Viridian for supplies of product made by Viridian to the Company, Viridian was exposed to the risk of loss for the obvious reason that the Company had no income or assets from which to pay the amount of the invoices issued to it in the last quarter of [44] In the absence of any other means by which the Company could itself pay Viridian, I consider that in agreeing to release the Trust from the obligation to pay Viridian, the directors acted recklessly. There was a contravention of s 135.

14 Third cause of action: breach of s 136 [45] Section 136 states: 136 Duty in relation to obligations A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. [46] The plaintiffs submitted that to establish a breach of s 136 they must show that the directors agreed to the Company incurring an obligation at a time when they did not believe (a subjective test) on reasonable grounds (an objective test) that the Company would be able to perform that obligation when required to do so. 6 [47] The basis of the plaintiffs contention was essentially the same as for the s 135 claim, namely that because the Company did not trade and had no assets or bank accounts as at the date of the invoices rendered between October and December 2013, no reasonable grounds existed for the directors to believe that the Company would be able to make payment of those invoices when required to do so. [48] In my view this head of claim fails for two reasons. First, by virtue of the purchase and supply agreement in force at the time of the invoicing, I consider that the directors had reasonable grounds for the belief that payment would be made by the Trust which would be effective to discharge the debts incurred to Viridian. [49] Secondly, and despite Mr Sumner s argument to the contrary, I remain of the view as recorded in Richard Geewiz Gee Consultants Ltd (in liq) v Gee that, whereas s 135 addresses debts incurred on revenue account, the purpose of s 136 is to address obligations on capital account such as major investments. 7 In my view it does not apply to the present circumstances. 6 7 Fatupaito v Bates [2001] 3 NZLR 386 (HC). Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483.

15 Fourth cause of action: breach of s 137 [50] Section 137 states: 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. [51] The plaintiff s contention under this section drew again on their contention at On this issue I apply a similar approach to that in respect of s 135. I do not accept the proposition that the directors were negligent throughout the duration of the Company s operations by reasons of its alleged insolvency from the date of incorporation. In my view provided that the purchase and supply agreement remained in place there was no failure to exercise the requisite care and skill. [52] However the decision by the directors in December 2013 to release the Trust from its agreed role as funder of the purchases from Viridian by the Company for the Trust s benefit was plainly negligent. There was no other source of finding. It was not reasonable in my view to proceed on the basis that there would be an offset for the full amount of the invoices rendered during the October to December 2013 period. Indeed Mr Shaw recognised the possibility that any offset could be less than the amount owed. 9 [53] I also consider that there are grounds for contending that the defendants were negligent in other respects, for example in not maintaining adequate records. However the claim was not advanced on that footing and it is unnecessary to consider it further. 8 9 At [41] above. At [25] above.

16 Should compensation be ordered under s 301? [54] Section 301 relevantly provides: 301 Power of court to require courts to repay money or return property (1) If, in the course of the liquidation of a company, it appears to the Court that a past or present director, has 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, (a) (b) Inquire into the conduct of the, director, Order that person (i) (ii) To contribute such sum to the assets of the company by way of compensation as the Court thinks just; or [55] The Court of Appeal in Mason v Lewis 10 described the approach to be followed: [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 (see Re Bennett, Keane & White Limited (in liquidation) (No 2) (1988) 4 NZCLC 64,317 per Eichelbaum J; and Löwer v Traveller [2005] 3 NZLR 479, which endorsed those principles). [56] As Lang J noted in Madsen-Ries v Petera 11 compensation under s 301 must relate to the loss that a company has suffered as a result of the acts or omissions underpinning the relevant breach of duty by the director. Consistent with the plaintiffs theory of the case, the submission was made that the Company has always been insolvent and therefore all losses were directly attributable to the acts or omissions of Mr and Mrs Shaw as directors Mason v Lewis, above n 4 at [109] [110]. Madsen-Ries v Petera [2015] NZHC 538 at [94].

17 [57] However I have held that the breaches of the ss 135 and 137 duties occurred only at the point when the directors elected to sever the arrangement which had existed with the Trust whereby payment was made by the Trust on the Company s behalf for goods it had ordered. In so doing the directors effectively abandoned the only means by which the Company was able to ensure that the liabilities which it had directly incurred were extinguished. [58] Hence, unlike many cases where there may be a range of possible dates which constitute the breach date, the situation in this case is very simple. The breach occurred at the date of the agreement to release the Trust from its obligation to make the payments extinguishing the Company s liability. [59] The consequence of the breach was that the three entities who had made supplies to the Company, albeit for the benefit of the Trust, would go unpaid unless the Company established that there was a lawful basis for declining to make payment, eg by a counterclaim or set off. [60] The Company failed to do so. It did not apply to set aside the default judgment in favour of Viridian. It did not challenge the order in the Disputes Tribunal in favour of Dynex Extrusions Ltd. It is not for this Court to engage in some form of collateral challenge to those processes. [61] In those circumstances I accept the plaintiff s submission that it is appropriate to make an order that Mr and Mrs Shaw as directors of the Company should repay or restore to the Company the sum of $99, by way of compensation. [62] In addition to the amount of the Company s indebtedness, the plaintiffs requested that the order for compensation should include the liquidators costs and disbursements. The amount sought in the statement of claim was $22,263.00, being the costs and disbursements as at April [63] In the course of submissions Mr Sumner indicated that the figure to 18 March 2016 had increased to $43, However as it appeared that figure may have included amounts referable to the litigation, upon further reflection he advised

18 that the updated sum sought was only $26, and he lodged an amended statement of claim seeking that sum. At my invitation Mr Sumner tendered a print out of the time records relating to the conduct of the liquidation. [64] I have considered the discussion in several recent cases concerning whether compensation orders should include the liquidation costs. They are conveniently discussed by Woolford J in Grant v Guo. 12 In my view this is a case where it is appropriate to include in the compensation order the full liquidation costs. [65] The Company went into liquidation because Mr and Mrs Shaw decided to prefer the interests of the beneficiaries of the Trust over the Company and its creditors. The liquidation of the Company was a likely consequence of the abandonment of the purchase and supply agreement. I do not consider that in the circumstances of this case the recovery for the creditors should be diluted by the lqiuidators costs and disbursements. Disposition [66] There is judgment in favour of the plaintiffs on the first and third causes of action against the second and third defendants. An order is made under s 301 requiring the second and third defendants to repay or restore to the Company the sum of $125, [67] I decline to award interest because some of the amounts claimed comprise interest and collection fees. The plaintiffs are entitled to costs on a schedule 2B basis. 12 Grant v Guo [2015] NZHC 2480, [2015] NZAR 1585.

19 [68] Finally, I record that on the first morning of the hearing Mr Grace filed a memorandum advising of his intention to withdraw. However at my request he remained during the hearing to assist Mr Shaw. The Court records appreciation to Mr Grace for his courtesy and assistance. Brown J