Cooper v Debut Homes Ltd ((in Liquidation))

• Jurisdiction: New Zealand
• Judge: Asher J
• Judgment Date: 08 March 2019
• Neutral Citation: [2019] NZCA 39
• Court: Court of Appeal
• Docket Number: CA175/2018
• Date: 08 March 2019

Between

Leonard Wayne Cooper

Appellant

and

Debut Homes Limited (In Liquidation)

First Respondent

Vivien Judith Madsen-Ries and Henry David Levin as Liquidators of Debut Homes Limited (In Liquidation)

Second Respondents

Leonard Wayne Cooper and Tracey Cooper as Trustees of the L & T Cooper Family Trust

Third Respondents

[2019] NZCA 39

Court:

Miller, Asher and Gilbert JJ

CA175/2018

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Companies — breach of director's duties — reckless trading — voidable transactions

Counsel:

R B Hucker and R F Selby for Appellant

P V Shackleton for First and Second Respondents

• A The appeal is allowed in part.

• B The High Court order for Mr Cooper to pay compensation under the Companies Act 1993, s 301(1)(b)(ii) is quashed.

• C The High Court order setting aside the General Security Agreement in part under the Companies Act 1993, s 299 is quashed.

• D The High Court order granting leave to the liquidators to re-apply to the court for an increase in compensation if the trustees of the L and T Cooper Trust succeed in proving in the liquidation is quashed.

• E The High Court order setting aside payments as voidable transactions remains in force.

• F The first and second respondents must pay the appellant costs for a complex appeal on a band A basis and usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Asher J)

Table of Contents

	Para No
Introduction	[1]
Background	[6]
The High Court decision	[13]
The Companies Act	[21]
Section 131(1)	[24]
Section 135	[28]
Did Mr Cooper breach ss 131 and 135?	[34]
Overview	[34]
The GST obligation	[37]
Breach of s 131?	[46]
Breach of s 135?	[61]
Our conclusion on ss 131 and 135	[64]
Section 136	[66]
Section 138	[71]
The trust advance and the repayment	[79]
The voidable transactions	[87]
Compensation under s 301 for breach of duty	[94]
Conclusion	[96]
Result	[98]

Introduction

1 This case concerns the liability of the appellant Leonard Cooper for alleged breaches of his duties as a director under the Companies Act 1993 to the first respondent Debut Homes Ltd (in liquidation) (Debut Homes). The claim has been brought by the second respondents as the liquidators of Debut Homes.

2 The case revolves around Mr Cooper's decision at the start of November 2012 when Debut Homes was in financial difficulties, to complete and sell houses that Debut Homes had been building. The primary creditor who will benefit from the litigation is the Inland Revenue Department (the IRD). It seeks to prove for GST on a number of sales of properties that was not paid from the proceeds of sale at the time they were settled. GST was outstanding and continues to be outstanding. Unsecured creditor claims in the liquidation totalled $499,507, and of that sum $366,011 is GST and $84,088 is interest and penalties.

3 Debut Homes was a residential property developer, incorporated on 1 August 2005. For the purposes of profit it purchased vacant sections, constructed homes on them, and sold them on completion. Its shareholders were Mr and Mrs Cooper, and Mr Cooper was its sole director. The Coopers provided the initial working capital for the company of $210,000. In the last 18 months of the company's trading life, Mr Cooper worked for the company without remuneration. There were, however, payments of $34,129.54, made by the company to him that could not be identified as for company purposes.

4 The L & T Cooper Family Trust (the Trust) is the third respondent in this case. Mr and Mrs Cooper are the settlors, trustees and beneficiaries of the Trust. The Trust advanced $376,816.56 to Debut Homes throughout 2013 and early 2014. A General Security Agreement (GSA) was entered into on 22 March 2013 documenting that advance. The GSA gave the Trust general security over the assets of the company. The funds were used to pay accounts for the building completion work so that it did not come to a standstill. This loan by the Trust was only partially repaid, leaving the Trust with a deficit of more than $200,000. The Trust has not made any claim in the liquidation.

5 In a High Court judgment issued on 15 March 2018 1 Hinton J found that Mr Cooper had breached his duties under ss 131(1), 135(b) and 136 of the Companies Act. She made the following orders: 2

• (a) Under s 301(1)(b)(ii) of the Act, Mr Cooper was required to make a contribution in the sum of $280,000 towards the assets of Debut Homes.

• (b) Under ss 292 and 294(5) of the Act, the payments made by Debut Homes to Mr Cooper totalling $34,129.54, were set aside as voidable transactions. Mr Cooper is also required to repay that amount to the liquidators.

• (c) Under s 299(1) of the Act, the GSA entered into between Debut Homes and the Trust, dated 22 March 2013, was set aside as against the second defendants, only to the extent of the awards made against Mr Cooper in the judgment.

• (d) Leave was granted to the liquidators to re-apply to the court for an increase in compensation if the trustees of the L and T Cooper Trust succeed in proving in the liquidation as unsecured creditors.

Background

6 Debut Homes was incorporated in 2005. Mr Cooper was the sole director and worked full time in the business. He and his wife Tracey Cooper owned all the shares. From 2005 onwards Debut Homes completed a number of developments. By October 2012 it still had some to complete. The High Court Judge found, as at 31 October 2012, Debut Homes had paid all debts as they fell due including GST. 3 There had been notional balance sheet insolvency of Debut Homes in the years prior to this, but the company had been supported by shareholder loans from the Coopers, and had traded without default until this time.

7 By the end of October 2012 the company was plainly in financial difficulties. These are detailed in the High Court judgment. 4 As at early November 2012 it had four remaining properties to complete. A house at 4 Karika Place was very close to completion. A house at 28 Coby Sydney Drive (divided into two titles: 28B and 28C Coby Sydney Drive) and a house at 78 Pemberton Avenue were at early stages of construction. Two other houses were already completed and were rented out, but had not been sold.

8 After a meeting on 6 November 2012 between Mr Cooper and his accountant Mr Steve Furlong, Mr Cooper decided to limit the company's trading for the time being to the completion and sale of the remaining partially developed remaining properties, with all properties being sold as soon as possible. The GST position was discussed and Mr Cooper was told by Mr Furlong that there would be a GST deficit of at least to $300,000. 5 The figures however showed a surplus of $170,000 that could be available for GST. 6

9 Through its trading years, Debut Homes had two financiers, the BNZ and a second-tier lender JT Jamieson & Co Ltd (JTJ). In order to finance the completion of the houses on 7 November 2012 Debut Homes obtained further borrowing from JTJ on the basis that Mrs Cooper gave security over a $200,000 deposit that she had with JTJ.

10 More funds were required to complete the remaining houses. On 20 February 2013 Mr and Mrs Cooper as trustees of the Trust agreed to lend up to $380,000 to Debut Homes as further working capital. The funds were derived from the estate of Mrs Cooper's parents. There was a general security agreement signed by Debut Homes with the Trust in March 2013, and advances of $376,816.56 were made by it between March 2013 and February 2014. Mrs Cooper's $200,000 deposit to JTJ was returned to her and the security released. With the assistance of these funds the four properties at 4 Karika Place, 28B and 28C Coby Sydney Drive, and 78 Pemberton Avenue were completed and sold.

11 From November 2012 and through to early 2014 those properties and other properties that had already been completed prior to October 2012 were sold and the sales settled. Cash flow and the extra Trust funding were used to pay the costs of completion (although there was a modest trade shortfall at the end). On all the sales after 9 November 2012, no GST was paid. 7 Ultimately 28B and 28C Coby Sydney Drive, 4 Karika Place and 78 Pemberton Road were sold. Most of the money was paid towards the secured creditors BNZ and JTJ, although $170,103 was paid to the Trust leaving over $200,000 of the Trust loan outstanding.

12 On 7 March 2014 Debut Homes went into liquidation on the IRD's application. In addition to the $499,507 of unsecured creditor claims, Mr and Mrs Cooper were still owed a current account debt of approximately $210,000 and over $200,000 of the Trust loan. There were few other unsecured creditors, and some of them were contested.

The High Court decision

13 The proceedings have been brought by the liquidators, seeking a number of orders against Mr Cooper in his capacity as a director. Mr Hucker, for Mr Cooper, submitted that the decisions made by Mr Cooper in early November 2012 to complete the building of the houses and the sale of them, were sensible commercial decisions made in good faith and in the company's interests. Mr Cooper's actions were entirely in the company's interests and there was no breach by Mr Cooper of his duties. The effect of his actions was to minimise the losses to the creditors as a whole. The IRD was not a preferential creditor at the time.

14 We have already referred to the key orders that were made in the High Court. The Judge noted that the liquidators placed most emphasis on a breach of s 136 of the Companies Act (set out later in this judgment). She found that Mr Cooper agreed to the incurring of a GST obligation when he entered into agreements for sale and purchase after the end of October 2012. 8 She found there was...