Central Tyres Waipukurau Ltd ((in Liquidation))…Ors v Pallesen…Ors

• Jurisdiction: New Zealand
• Judge: Williams J
• Judgment Date: 24 September 2015
• Neutral Citation: [2015] NZHC 2324
• Docket Number: CIV-2015-441-88
• Court: High Court
• Date: 24 September 2015

UNDER the Companies Act 1993

IN THE MATTER OF the liquidation of Central tyres Waipukurau Limited (in liquidation)

BETWEEN

Central Tyres Waipukurau Limited (In Liquidation)

First Applicant

Damien Grant and Steven Khov

Second Applicant

and

Michael John Pallesen

First Defendant

Michael John Pallesen, Kaylene Ruth Pallesen and Marcus Edward Mccarthy

Second Defendants

[2015] NZHC 2324

CIV-2015-441-88

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

Without notice application for a freezing order under Part 32 High Court Rules (freezing orders)- liquidators were claiming $1.4 million from a director alleging reckless trading, breach of a director's duty of care and failure to keep accounting records -the liquidators said there was personal liability under s300 (Liability if proper accounting records not kept) and s301 (Power of court to require persons to repay money or return property) Companies Act 1993 -they alleged that the director had placed the running of the company in the hands of someone who was not qualified to run it and that the director had allowed the company to continue to trade for six months knowing it was unable to trade its way out of debt -investigations revealed the director had sold a property 10 days after being notified of liquidators' claims -whether there was an arguable case on the substantive claim, assets for the order to attach to, a factual basis for inferring an intention to defeat a judgment by transferring the assets -whether the order should issued in the interest of justice.

Counsel:

B J Norling for Applicants

JUDGMENT OF Williams J

1 The second applicants, Damien Grant and Steven Khov, are liquidators of the first applicant Central Tyres Waipukurad Ltd. The respondent, Michael Pallesen, is the sole director of Central Tyres.

2 Mr Pallesen, Kaylene Pallesen and Marcus McCarthy are trustees for the Tutuki Trust. The Trust owns all shares in Central Tyres. The trustees are the intended second defendants in the substantive proceeding.

3 Central Tyres was placed into liquidation by the High Court at Napier on 16 April 2015.

4 The liquidators seek a without notice freezing order under Part 32 of the High Court Rules in relation to property held personally by Mr Pallesen. That property is as follows:

• (a) 134 Mt Herbert Road, Waipukurau with identifier HBF4/585 and legal description of Lot 4 Deposited Plan 14052;

• (b) 40 – 20 Norman Smith Street, Nukuhau with identifier SA20B/102 and legal description Lot 1 Deposited Plan South Auckland 14890; and

• (c) The proceeds of the sale of 16 Abbot Avenue, Waipawa with identifier HBM2/334 and legal description of Lot 13 Deposited Plan 20858.

5 The applicants in their statement of claim allege that Mr Pallesen as director of Central Tyres:

• (a) allowed the company to be traded recklessly, contrary to s 135 of the Companies Act 1993;

• (b) breached the director's duty of care owed to Central Tyres, contrary to s 137 of the Companies Act;

• (c) failed to ensure that Central Tyres kept proper accounting records, contrary to s 194 of the Companies Act; and

• (d) caused Central Tyres to advance sums to himself and the Trust.

6 The applicants say Mr Pallesen's personal liability arises under ss 300 and 301 of the Companies Act, set out below.

7 Overall, the applicants assess their financial claims to be worth

$1,461,629.91, comprising:

• (a) $426,495.87 for breaches of director's duties;

• (b) $74,157.57 for overdrawn personal current account;

• (c) $181,749.47 for overdrawn trust current account; and

• (d) $779,227.00 for intercompany receivable.

8 The liquidators say they have a good arguable case in these respects and that there is a real risk Mr Pallesen will attempt to dispose of the property described above in order to defeat judgment against him.

Background

9 Kieran Jones (employed by the liquidators) has filed an affidavit in support of the application. The affidavit sets out the background to the liquidators' claims.

10 It appears the last annual report prepared for Central Tyres was to the year ending 31 May 2012. At that point Mr Pallesen had an overdrawn current account of $5,162.00. Prior to the liquidation Mr Pallesen had made $58,034.12 in payments from Central Tyres to himself and third parties (the trust) for personal use. Those payments comprised debit transactions, internet banking transactions, ATM withdrawals and personal transfers. There is interest on the overdrawn current account balance of $10,061.45. Those payments for personal benefit plus interest total $74,147.57.

11 Central Tyres has, as far as the liquidators’ investigations have found, only one current account with the Bank of New Zealand. Mr Jones’ analysis of the current account balance reveals payments from Central Tyres towards a home loan, a credit card in the name of M J Pallesen, Sovereign Insurance policies. None of these debts is related to the business of Central Tyres. There are unexplained ATM withdrawals and personal transfers marked ‘personal’ and ‘drawings’.

12 In relation to the alleged breaches of director's duties under the Companies Act, Mr Jones and Mr Khov interviewed Mr Pallesen on oath on 24 June 2015. A number of observations are recorded by Mr Jones that relate specifically to the alleged breaches of the Companies Act:

• (a) Mr Pallesen exited from the day-to-day operations of Central Tyres around August 2012 and resumed an ‘overseeing role’ – the operations were left in the hands of an employee not qualified to run the business, leaving him to make important financial decisions with almost no oversight, to the point of liquidation;

• (b) as a result, creditors are unpaid and Central Tyres' tax obligations were not complied with – the company was allowed to continue trading by Mr Pallesen.

• (c) Mr Pallesen delegated responsibility for keeping financial and accounting records to an employee not qualified to undertake that task and with no expertise in the area – the records were subsequently inaccurate and, because of the lack of supervisions, the Mr Pallesen was unable to acknowledge Central Tyres was insolvent;

• (d) Mr Pallesen's oversight extended to checking the funds in the bank account one or two times a month, despite knowing this was an inadequate and incomplete measure of Central Tyres' financial position;

• (e) Mr Pallesen acknowledged his failure to recognise the position and ‘pull the pin’ meant that Central Tyres continued trading insolvent, incurring further debts to creditors; and

• (f) Mr Pallesen confirmed he knew Central Tyres couldn't trade out of the accrued debt at October 2014 (six months prior to liquidation).

13 Mr Jones also addressed whether Mr Pallesen may have any possible defence. Those that he contemplates are:

• (a) that Mr Pallesen may have made undocumented payments from Central Tyres to creditors that would be considered capital introductions (but the lack of records hamper the ability to pinpoint any such payment); and

• (b) that Mr Pallesen may have made direct capital introductions (funds or equipment) into Central Tyres that have not been recorded (but on the evidence there are no such recorded introductions).

14 However, being the sole director during the period of the alleged offending, Mr Pallesen has not sought legal advice in relation to his duties as a director, nor has he engaged an accountant to prepare records (because Central Tyres did not have the funds).

15 Mr Jones sets out that there is a real risk Mr Pallesen will dispose of assets, namely the three properties owned by him that I have identified. On 18 September 2015, 10 days after receiving a letter from the liquidators detailing the claims against him, Mr Pallesen transferred one of the properties to an unknown third party....