Kumar v Smartpay Ltd
| Jurisdiction | New Zealand |
| Judge | Collins J |
| Judgment Date | 31 August 2023 |
| Neutral Citation | [2023] NZCA 410 |
| Court | Court of Appeal |
| Docket Number | CA427/2022 |
[2023] NZCA 410
IN THE COURT OF APPEAL OF NEW ZEALAND
I TE KŌTI PĪRA O AOTEAROA
Collins, Lang and Woolford JJ
CA427/2022
Appellant in person
D J Chisholm KC and J D Ryan for Respondent
Companies — appeal against a finding the appellant was liable to pay funds to the liquidators of the company he was the sole shareholder and director of — directors duties — reckless trading — approach to looses — Companies Act 1993 — Insolvency Act 1986 (UK)
The appeal was dismissed.
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A The appeal is dismissed.
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B The appellant is to pay the respondent costs for a standard appeal on a band A basis together with usual disbursements. We certify for two counsel.
(Given by Collins J)
Mr Kumar's appeal challenges two judgments of the High Court in which Downs J concluded Mr Kumar is liable to pay $850,427 to the liquidators of Optimizer Corporation Ltd (OCL). 1 This was the loss claimed by Smartpay Ltd (Smartpay), a creditor of OCL, arising from what the High Court found were Mr Kumar's breaches of three sections of the Companies Act 1993 (the Act) when he was a director of OCL. 2
The three sections of the Act that Mr Kumar was found to have breached, are:
We will explain these and other provisions of the Act in further detail at [35] to [66].
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(a) Section 131, which concerns the duty of a director to act in good faith and in what the director believes to be the best interests of the company.
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(b) Section 135, which prohibits a director from allowing a company to carry on business in a manner likely to create a substantial risk of serious loss to the company's creditors.
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(c) Section 136, which provides a director must not agree to the company incurring obligations unless he or she reasonably believes at the time that the company will be able to perform its obligations when required to do so.
In addition to disputing that he breached the Act, Mr Kumar maintains the High Court miscalculated the amount of Smartpay's losses.
The litigation focuses upon three companies:
Together, these three companies shall be referred to as the group of companies.
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(a) OCL, which was incorporated on 5 June 2013 and placed into liquidation on 10 December 2015.
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(b) Odev Ltd (Odev), which was incorporated on 21 January 2005 and also placed into liquidation on 10 December 2015.
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(c) Optimizer HQ Ltd (HQ), which was incorporated on 11 April 2013 and placed into liquidation on 27 November 2020.
At all relevant times Mr Kumar was the managing shareholder of HQ, the sole director of Odev, and a director of OCL. When OCL was incorporated it issued 1,000 shares at $1 per share. All of OCL's shares were owned by HQ.
Odev developed a product called Swipe HQ, which was a debit and credit card system that enabled merchants to process Eftpos transactions through a mobile Eftpos terminal.
Two agreements are central to the dispute.
Pursuant to the first agreement, dated 28 May 2014, OCL provided Spark NZ Ltd with the right to market and sell Swipe HQ and supplied Spark with mobile Eftpos terminals. This agreement was for one year. No fee was payable by Spark to OCL. It appears to have been assumed that OCL would gain revenue from Spark's clients who used the Swipe HQ system.
Under the second agreement, dated 18 September 2014, Smartpay, which makes and supplies Eftpos terminals, agreed to supply OCL with Eftpos terminals. Specifically:
Both agreements were signed by Mr Kumar on behalf of OCL.
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(a) Under cl 6.1 and schedule 1 of the agreement, OCL was to rent Eftpos terminals from Smartpay and pay Smartpay $48 per terminal, a fee of $18 per month for each terminal and 0.35 per cent (plus GST) of the “Gross Transaction Value from credit cards processed through the [Eftpos] Terminals per month”.
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(b) Under cl 3, the agreement between OCL and Smartpay was for two years.
In addition to the Spark and Smartpay agreements, OCL entered into other significant financial commitments, including the lease of commercial premises for a five-year period commencing 1 March 2015 at an annual rent of $103,327 plus GST. This lease followed an earlier lease that OCL had executed for the same premises on 30 September 2014.
Contrary to the assumption that underpinned the Smartpay agreement, OCL received no revenue from Spark's clients. Rather, revenue generated from the Spark agreement went to HQ. In reality, OCL had no revenue and was dependent on HQ or Odev to meet its obligations to its creditors, including Smartpay.
The gravamen of Smartpay's claim against Mr Kumar is that he allowed OCL to incur significant liabilities knowing that it had no revenue or meaningful assets and was therefore not in a position to meet its liabilities and obligations to Smartpay.
In 2014, OCL began to default on its obligations to provide Spark with Swipe HQ and mobile Eftpos terminals. OCL also began to default in its obligation to pay Smartpay the debts it owed Smartpay under the Smartpay agreement. As a consequence:
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(a) Spark terminated the Spark agreement on 22 May 2015.
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(b) Smartpay began to issue OCL with statutory demands, some of which were paid by Odev and a shareholder of Odev. Ultimately, however, HQ placed OCL and Odev into liquidation on 10 December 2015.
Following a four-day hearing during which Mr Kumar was represented by senior counsel, Downs J issued an interim judgment in which he made the following key factual findings: 3
[41] First, OCL had no assets beyond the $1,000 it presumably received for its shares. So, as soon as OCL incurred liabilities of more than $1,000, it became balance sheet insolvent. Second, OCL had no revenue. So, as soon as OCL incurred liabilities, it became cashflow insolvent. Third, OCL was, therefore, balance sheet and cashflow insolvent from near inception. OCL cannot have been other than insolvent in both respects when it entered the Spark agreement [on] 28 May 2014. Fourth, the revenue anticipated to OCL by the Spark agreement went not to OCL, but HQ. Fifth, OCL was therefore reliant on others — HQ, Odev or both — to meet its obligations under the Spark agreement. Indeed, OCL was reliant on others to meet every obligation it had, including those to Smartpay under the Smartpay agreement. Sixth, OCL had no legally enforceable means of securing financial help from HQ or Odev. So, at all material times, OCL was (a) insolvent; and (b) absent legally enforceable aid. Seventh, in testimony, Mr Kumar acknowledged he did not consider OCL's interests, only the interests of the group. Mr Kumar also acknowledged, again in testimony, OCL gained nothing by entering the Spark agreement. Eighth, Mr Kumar's interests conflicted in these circumstances: he was a director of every company in the group; the majority shareholder of HQ; and HQ wholly owned OCL.
The Judge was satisfied Mr Kumar “unquestionably breached” ss 131, 135 and 136 of the Act and that he failed to understand his duties as a director of OCL. Instead of focusing on his responsibilities to OCL Mr Kumar believed it sufficient to consider the interests of the group of companies as a whole. 4
Downs J conducted a second hearing in relation to quantum. By that stage Mr Kumar was no longer represented by counsel and he did not appear at the second hearing. 5 In assessing liability under s 301(1)(b)(ii) of the Act, Downs J relied on the evidence of Smartpay's Chief Business Officer, and Mr Van Delden, the liquidator of OCL. In his quantum judgment, Downs J summarised the evidence in relation to quantum in the following way:
[3] … Smartpay supplied OCL 2161 terminals, of which 1002 were recovered or returned to Smartpay. So, 1159 terminals remain outstanding at a cost of $345 per terminal — a total of $399,855. To this must be added two
amounts. First, what Smartpay was owed by OCL at the date of its liquidation: $120,407.43. Second, post-termination fees payable by OCL to Smartpay under the distribution agreement. These come to $330,165. The three sums total $850,427.43, a figure the liquidators have accepted.
Accordingly, Downs J ordered Mr Kumar to pay $850,427.43 (plus interest) to the liquidators by way of compensation. 6
Mr Kumar appeared for himself in this Court. He did so by way of AVL from India. Mr Kumar filed very comprehensive written submissions and argued his appeal with considerable diligence.
Mr Kumar appeared to accept that OCL by itself had no assets or income. He submitted, however, that when the assets of HQ and Odev were factored into the equation, the financial position of the group of companies as a whole was very secure.
Mr Kumar said, by way of example, that between 2013 and 2015 HQ raised a total of $9.912 million in fresh capital from local and offshore investors. He contended that while there was no documentary evidence of the financial interdependency of the three companies, the following three factors, at least implicitly, provided him with a “Tripod of Confidence” in OCL's abilities to meet its debts and obligations:
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(a) the overall financial strength of the company;
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(b) the business partnerships that were in place; and
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(c) the potential for business growth.
When inviting us to consider the substance of the financial viability of the overall group of companies Mr Kumar drew attention to the judgment of Lord Reed P in BTI 2014 LLC v Sequana SA [ Sequana]. 7 We shall explain that judgment when discussing the relevant legal principles.
In relation to the claim under s 131 of the Act, Mr Kumar argued:
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(a) The High Court failed to properly consider s 131(2) of the Act, which provides that where a company is a wholly owned subsidiary, the director of the subsidiary can consider the best...
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