Grant and Another v Guo

• Jurisdiction: New Zealand
• Judge: Woolford J
• Judgment Date: 09 October 2015
• Neutral Citation: [2015] NZHC 2480
• Docket Number: CIV-2015-404-000213
• Court: High Court
• Date: 09 October 2015

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

[2015] NZHC 2480

CIV-2015-404-000213

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

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.

Appearances:

A Cherkashina and B J Norling for Plaintiffs

Defendant in person

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 financial documentation of OCL, it “became apparent” that Ms Guo failed to keep proper accounting records. In particular, they say that:

• (a) OCL never prepared any end of year financial statements which would comply with statutory requirements; and

• (b) OCL never kept any ledgers, registers and supporting documents which would correctly record and explain the transactions, assets and liabilities of OCL at any given time.

11 The liquidators say that the failure to keep proper records has adversely affected the liquidation, particularly as it has resulted in uncertainty as to OCL's assets and liabilities. The liquidators therefore could not secure OCL's physical assets, or collect receivables that were owing to OCL as at the date of liquidation. They also have been unable to consider taking legal action against OCL's suppliers under the voidable transactions regime or Ms Guo for recovery of her overdrawn current account with OCL.

12 Further, the liquidators say that they were owed $12,992.19 in the liquidation of OCL as at 29 January 2015.

13 They submit that they should be able to recover from Ms Guo their fees, and that Ms Guo should be found personally responsible for all the outstanding debts of OCL.

Law

14 The allegations against Ms Guo stem from her behaviour as a director during the period from the company's incorporation on 27 April 2010, until liquidation on 8 February 2013. The law that was in force in relation to financial reporting at that time has now been updated 1. I apply the law that was at force at the time of the relevant breaches, as is appropriate.

15 Section 194 of the Companies Act as applicable provides that accounting records must be kept at all times, according to the strict terms of that section. The records must achieve the following objectives:

• (a) Correctly record and explain the transactions of the company; and

• (b) Will at any time enable the financial position of the company to be determined with reasonable accuracy; and

• (c) Will enable the directors to ensure that the financial statements of the company comply with section 10 of the Financial Reporting Act and any group financial statements comply with section 13 of that Act; and

• (d) Will enable the financial statements of the company to be readily and properly audited.

16 Section 194(4)> provides that if the board of the company does not comply with the requirements, every director of the company has committed an offence and is liable on conviction to the penalty set out in s 374. Section 374 provides for directors to face a fine of up to $50,000.

17 In Maloc Construction Ltd (in liq) v Chadwick, the Court held that the records must be such that they will, at any time, enable the financial position of the company to be determined without requiring explanation or reconstruction 2. The Court stated that a company must keep the records necessary to achieve the objectives listed above. This duty is an ongoing duty, as evidenced by the words “at any time” in s 194(1)(b) of the Act.

18 These duties were applicable to Ms Guo and OCL at all relevant times.

19 Section 10 of the Financial Reporting Act as applicable, provides:

10 Obligation to prepare financial statements

• (1) The directors of every reporting entity must ensure that, within 5 months after the balance date of the entity or, where the entity is required by any other Act to prepare financial statements or accounts within a shorter period after the end of its financial year or balance date, within that period, financial statements that comply with section11 of this Act are-

  • (a) Completed in relation to the entity and that balance date; and

  • (b) Dated and signed on behalf of the directors by 2 directors of the entity, or, if the entity has only 1 director, by that director.

• (2) The directors of every exempt company must ensure that within 5 months after the balance date of the company or, if all the members or shareholders of the company agree, within 9 months after the balance date of the company, financial statements that comply with section 12 of this Act are-

  • (a) Completed in relation to the company and that balance date; and

  • (b) Dated and signed on behalf of the directors by 2 directors of the company, or, if the company has only 1 director, by that director.

20 The liquidators say that,...