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

• Jurisdiction: New Zealand
• Judge: Brown J
• Judgment Date: 24 June 2016
• Neutral Citation: [2016] NZHC 1400
• Docket Number: CIV 2015-454-67
• Court: High Court
• Date: 24 June 2016

Under the Companies Act 1993

In the Matter of the liquidation of Aluminium Plus Wellington Ltd (in liquidation)

BETWEEN

C D Owens and D S Vance As Liquidators of Aluminium Plus Wellington Ltd (In Liquidation)

Plaintiffs

and

A C Shaw and I a Shaw as Trustees of the I&A Shaw Family Trust

First Defendants

And

A C Shaw

Second Defendant

And

I a Shaw

Third Defendant

[2016] NZHC 1400

CIV 2015-454-67

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

Claim by the plaintiff liquidators against the defendants as trustees for breach of contract, and against the defendants as directors of a Company for compensation under s301 Companies Act 1993 (CA) (Power … to require persons to repay money or return property) for breaches of s135 CA (Reckless trading), s136 CA (agreed to the Company incurring an obligation [it] would be able to perform), and s137 (Director's duty of care) — the defendants were trustees of a trust that installed aluminium windows — the trustees set up a Company, of which they were the directors, as a creditor refused to supply the windows to a trust rather than a corporate entity — the Company had no bank account or assets — it contracted for the windows with a creditor and then supplied them to the trust which then paid the creditor directly — the Company was wound up after failing to pay invoices for windows supplied — the liquidators argued that the trustees were liable under a purchase and supply agreement with the Company — the trustees said that the Company had released the Trust from this agreement as part of a settlement, as some of the material supplied to the Trust had been defective and the Company also owed the Trust for consequential losses — whether the trustees were liable for a breach of the purchase and supply agreement — whether allowing the Company to trade when it did not have a bank account or assets, or any way of generating income to meet liabilities, breached s135, s136 or s137 CA — if there was a contravention of the CA, whether an order under s301 CA should be made for compensation to be paid.

Counsel:

J Sumner and S Eglington for Plaintiffs

J Grace for Defendants

JUDGMENT OF Brown J

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 2007. 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 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;

• (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 $61,043.05. 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 2009. Consequently judgment by default was entered against the Company on 14 July 2014 in the sum of $87,648.82 comprising:

Judgment for costs of $1,068.50 was also entered against the Company in respect of its counterclaim.

• (a) the claim of $79,182.00; 1

• (b) costs and disbursements of $2,396.25;

• (c) interest of $6,070.57.

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.

14 A statutory demand dated 22 July 2014 was then served on the Company for the sum of $88,814.54 comprising:

• (a) the judgment for $87,648.82;

• (b) the judgment for $1,068.50;

• (c) interest of $97.22.

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 $99,005.03 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 $99,005.03 and the costs and disbursements of the liquidation totalling $26,879.56.

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?

• (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 $88,814.54 together with what the amended statement of claim described as “additional indebtedness totalling $10,190.49”. 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 $3,795.00 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...