Grant and Another v Guo

JurisdictionNew Zealand
CourtHigh Court
JudgeWoolford J
Judgment Date09 October 2015
Neutral Citation[2015] NZHC 2480
Docket NumberCIV-2015-404-000213

[2015] NZHC 2480

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-000213

Under the Companies Act 1993

In the Matter of the liquidation of O'S Construction Limited (In Liquidation)

BETWEEN
Damien Grant and Steven Khov as Liquidators of O'S Construction Limited (In Liquidation)
Plaintiffs
and
Tianjiao Guo
Defendant
Appearances:

A Cherkashina and B J Norling for Plaintiffs

Defendant in person

Application for an order pursuant to s300(1)(b)(i) and (ii) Companies Act 1993 (CA) that the defendant was personally liable for the debts and liabilities of the company and an order that she pay the net liquidator fees and disbursements in liquidating the company — the applicant liquidators claimed that the defendant had breached the requirements of s194 CA (Accounting records must be kept), and s10 Financial Reporting Act 1993 (Obligation to prepare financial statements) by failing to keep proper accounting records — the defendant was the sole director of the company — the liquidators said that there was a direct link between the lack of financial reporting and the impeded liquidation, the inability of the company to pay all its debts, and the substantial uncertainty as its assets, as set out in s 300(1)(b)(i) — law that was in force in relation to financial reporting between the company's incorporation and its liquidation had been amended — whether the failure to comply had contributed to the company's inability to pay all its debts, or resulted in substantial uncertainty as to the assets and liabilities of the company, or substantially impeded the orderly liquidation — whether the defendant was personally liable for the debts and liabilities of the company — whether the defendant should pay compensation should be ordered in relation to the liquidators’ costs in undertaking the liquidation.

The issues were: whether there had been a failure to comply with s194 which contributed to the company's inability to pay all its debts, or resulted in substantial uncertainty as to the assets and liabilities of the company, or substantially impeded the orderly liquidation; whether G was personally liable for the debts and liabilities of the company; and whether G should pay compensation should be ordered in relation to the liquidators’ costs in undertaking the liquidation.

Held: While G had prepared limited excel spreadsheets for her personal record keeping, the spreadsheets were short of information which would enable a clear determination of OCL's financial position. In addition, the records contained within the spreadsheets did not ‘speak for themselves” ( Maloc Construction Ltd (In liq) v Chadwick). G did not keep accounting records of the type required under s 194 CA. Nor did she prepare any financial records for the financial years ending 2011, 2012 or 2013, as required by s10 FRA 1993.

The liquidators were unable to say whether OCL was insolvent at any given time within two years of being put into liquidation. They could not pursue any remedies against OCL's suppliers under the CA, including the voidable transactions regime. They could not identify whether G's use of the OCL account for personal spending gave rise to any liabilities. Similarly, the lack of record keeping had resulted in substantial uncertainty as to OCL's assets and liabilities. This demonstrated that the liquidation was impeded by the lack of records.

There was no evidence that G could fall within the exception for liability provided under s300(2) CA (took all reasonable steps to secure compliance or reasonably believed a competent and reliable person was charged with compliance). There was no evidence that she took any reasonable steps to secure compliance. The defendant had to actually prove that the defence applied (In Re Cellar House (in liq)). Section 300(2) was not a default to be disproved by the applicants.

The grounds contained in s300(1) (failed to comply with sections 194, 201 and 202 and the failure contributed to the company's inability to pay all its debts, or resulted in substantial uncertainty as to the assets and liabilities of the company, or substantially impeded the orderly liquidation) were made out, and that there was no available defence. Section 300 provided the Court with a broad discretion to make a declaration that G was personally responsible for all or any part of the debts and other liabilities of the company. The recommended factors to consider in making such an award were ( Mason v Lewis):

  • (a) Causation: Whether the action or inaction of a director or a former director contributed to a failure to comply and to the financial position of the company.

  • (b) Culpability: The extent to which the failure to comply resulted from the actions or inactions of a director or former director. A punitive element was involved so as to deter laxity on the part of directors in the keeping of proper accounting records.

  • (c) Duration: The period over which the director or former director was responsible for the keeping of proper accounting records especially over the periods in which the debts were incurred which directly or indirectly led to the company's insolvency.

There appeared to be no mitigating factors in G's decision not to complete financial records or to maintain any accounting practices. As a sole director, she could not seek to shift some blame onto anyone else with responsibility. On the information provided, the liquidator's claim for the full debt was allowed.

All of the liquidation costs should be awarded in this case. Not only were substantial costs incurred by G's poor record-keeping and failure to co-operate with the liquidators, but liquidation might not have occurred at all if G had known of the company's actual financial position earlier. G could have avoided liquidation by paying the creditors, using the company's assets, if the company's financial position had been accurately recorded by her.

Declaration under s300(1)(b) CA that G was personally responsible without limitation of liability for all the debts of OCL. Judgment in favour of the plaintiffs against G. In addition, G was to pay the plaintiffs the net liquidator fees and dsbursements in the liquidator.

JUDGMENT OF Woolford J

Summary
1

The applicants, Messrs Grant and Khov, are the liquidators of O's Construction Limited (OCL or the company). The defendant, Tianjiao Guo, is the sole director of the company. OCL traded as a construction company from incorporation on 27 April 2010, until it was put into liquidation on 8 February 2013. OCL currently has five creditors who are owed $60,872.38.

2

The liquidators claim that Ms Guo has breached the requirements of s 194 of the Companies Act 1993, and s 10 of the Financial Reporting Act 1993 by failing to keep proper accounting records for OCL. They seek an order pursuant to s 300(1)(b)(i) and (ii) of the Companies Act that Ms Guo is personally liable for the debts and liabilities of the company, and an order that Ms Guo pay the net liquidator fees and disbursements in liquidating the company of $12,992.18.

3

No defence was filed within the requisite time limit after receiving the statement of claim. The claim has therefore proceeded as a formal proof hearing under High Court Rule 15.9.

4

When the case was first called in Court on 1 October 2015, Ms Guo appeared in person and sought to defend the claim. When I asked her why she had not taken any steps earlier to defend the claim, she said that she did not have a lawyer and did not read the documents with which she was served. She then told me that she had paid some creditors already and complained that the liquidators had taken some personal assets when they had seized the company's assets.

5

Rule 15.9(3) provides that after a proceeding is listed for a formal proof hearing no statement of defence may be filed without the leave of a judge, granted on the ground that there will or may be a miscarriage of justice if judgment by default is entered. I therefore outlined the nature of the liquidators’ case to Ms Guo and asked her whether she had any defence to the claim brought by them. Ms Guo said no. In those circumstances, I advised her that she was not able to defend the claim. I invited her to stay and listen the case, but she chose to leave the Court at that stage.

Formal proof
6

Rule 15.9(1) states that r 15.9 for a formal proof hearing applies if the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the judgment sought is other than for a liquidated demand.

7

Under r 15.9(4), the plaintiff must file affidavit evidence which establishes, to the Judge's satisfaction, each cause of action relied on. The liquidators have filed an affidavit of Prashika Chand in support of their claim.

Applicant's submissions
8

The liquidators say that following their appointment, they spent time trying to locate and obtain OCL's accounting records. They say that this proved difficult because Ms Guo has not co-operated and has no accounting records. Limited accounting and financial records have been obtained from Ms Guo and Michael Zhou, a friend who assisted in the preparation of financial statements for the year end 31 March 2012.

9

On 13 October 2013, the liquidators interviewed Ms Guo, using their powers under s 261 of the Companies Act. Ms Guo confirmed that on occasions she allowed some third parties to order supplies, which were paid for through OCL's trading account. However, no documentation was provided to show which payments those were, despite the liquidators issuing requests under s 261 of the Act, and obtaining a court order requiring the production of the relevant documentation under s 266 of the Act.

10

The liquidators say that, on reviewing the limited...

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1 cases
  • NZ Natural Therapy Ltd (in Liquidation) v Little
    • New Zealand
    • High Court
    • 29 November 2019
    ...above n 19, at [9]; discussing Petera High Court, above n 10, at [83]. 22 Madsen-Ries v Twine, above n 19, at [10]. 23 Grant v Guo [2015] NZHC 2480 at 24 Shaw v Owens, above n 19, at [20]–[23]. 25 At [21]. 26 At [22]. 27 At [23]. 28 Grant v Gifford [2018] NZHC 26, at [49]. 29 Petera (High ......

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