New Zealand Labour Enterprises Ltd and Another v Sembhi and Another

JurisdictionNew Zealand
CourtHigh Court
JudgeCampbell J
Judgment Date05 May 2021
Neutral Citation[2021] NZHC 986
Docket NumberCIV 2019-404-2127
Date05 May 2021

UNDER The Companies Act 1993

IN THE MATTER OF The liquidation of New Zealand Labour Enterprises Limited

Between
New Zealand Labour Enterprises Limited
First Plaintiff
Craig Alexander Sanson and Malcolm Grant Hollis
Second Plaintiffs
and
Amandeep Sembhi
First Defendant
Dap Sembhi
Second Defendant

[2021] NZHC 986

Campbell J

CIV 2019-404-2127

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Companies — claim by liquidators for payment of money owed on a current account with the company and a claim for compensation against the directors for breach of their duties — deemed or shadow director — meaning of director — approach to compensation — “new debt” approach — “net deterioration” approach — Companies Act 1993

Appearances:

H L Hui for the Plaintiffs

No appearance for the Defendants

JUDGMENT OF Campbell J

This judgment was delivered by me on 5 May 2021 at 4:00 pm

Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

Introduction
1

The first plaintiff, New Zealand Labour Enterprises Limited (the company), was incorporated on 3 January 2013. It operated as a supplier of labour, trading from Papakura, Auckland.

2

The company was put into liquidation on 31 May 2019. The second plaintiffs, Mr Sanson and Mr Hollis, were appointed the company's liquidators. Mr Sanson and Mr Hollis are insolvency practitioners at PricewaterhouseCoopers (PwC).

3

The plaintiffs have brought claims against Ms Amandeep Sembhi, the company's sole shareholder and director, and against Mr Dap Sembhi, who the plaintiffs say was a shadow director of the company.

4

The first cause of action is by the company against Ms Sembhi. It is for payment of money owed by Ms Sembhi on her current account with the company. The second cause of action is by the company and the liquidators against both Ms Sembhi and Mr Sembhi, alleging breaches of various duties as directors of the company. The plaintiffs seek compensation for breaches of those duties under s 301 of the Companies Act 1993 (the Act).

Procedural history
5

The plaintiffs commenced this proceeding in October 2019. The proceeding was served on the defendants on 21 October 2019.

6

The defendants filed and served a statement of defence on 20 November 2019. They did not provide initial disclosure with their defence. In March 2020, the defendants' solicitor applied to withdraw as solicitor on the record. Since then the defendants have taken no further steps.

7

In November 2020, Associate Judge Bell set this matter down for a formal proof hearing. In advance of the formal proof hearing, the plaintiffs filed a comprehensive affidavit from Mr Sanson. Among other things, Mr Sanson's affidavit addresses Ms Sembhi's current account with the company, and the financial position of the company in the years leading up to its liquidation. The plaintiffs also filed an affidavit of Steve Farquhar, an associate director of PwC. Mr Farquhar has assisted the liquidators with the administration of the liquidation. His affidavit details interactions he had with Mr Sembhi following the appointment of the second plaintiffs as liquidators.

Factual background
8

As noted, the company was incorporated on 3 January 2013. Ms Sembhi is its sole shareholder and director. Mr Sembhi is the husband of Ms Sembhi. The plaintiffs allege that Mr Sembhi was a deemed or shadow director of the company. I will address the basis of those allegations when I consider the second cause of action below.

9

The company operated as a supplier of labour services. It ceased trading in March 2018. The High Court put it into liquidation on 31 May 2019, on the application of the Commissioner of Inland Revenue.

10

The company had negligible assets, but substantial debts, at liquidation. The liquidators have admitted claims totalling $396,335.07 as debts of the company. Of that amount, almost $390,000 is owed to the Inland Revenue.

11

The company's debt to the Inland Revenue consists primarily of unpaid GST and PAYE deductions. The company was defaulting on its GST obligations from as early as 31 March 2014.

12

The plaintiffs claim that the company was insolvent from, at the latest, 31 March 2015. I address that below, when considering the second cause of action.

First cause of action: current account debt
13

Upon investigating the financial affairs of the company, the liquidators found that Ms Sembhi maintained a current account with the company.

14

The company's financial statements for the year ending 31 March 2017 reported that Ms Sembhi owed the company $407,692 on her current account. Ms Sembhi signed those financial statements, as director, on 24 January 2018.

15

Mr Sanson deposes that no financial statements were prepared for the company beyond the period ending 31 March 2017. Moreover, no ledgers or accounts were maintained for the company beyond that date. The liquidators therefore reviewed the company's bank statements to ascertain whether there were any transactions (either debits or credits) that should properly be included on Ms Sembhi's current account.

16

The liquidators' analysis of the company's bank statements showed that in the period from 1 April 2017 to 31 May 2019 (the date of the company's liquidation), the company:

  • (a) Transferred a total of $544,581.20 to or for the benefit of Ms Sembhi, which the liquidators have debited against Ms Sembhi's current account;

  • (b) Was credited with a total of $265,685, which the liquidators have credited to Ms Sembhi's current account.

17

Mr Sanson deposes that the net effect of this analysis is that after 31 March 2017, the amount Ms Sembhi owed to the company increased by a further $278,896.20.

18

In his affidavit Mr Sanson explains, in detail, how the liquidators identified the amounts that should be debited to Ms Sembhi's current account. These transactions are in three categories.

19

First, there is expenditure which presents as being for personal rather than company purposes, as the expenditure is inconsistent with the type of work that the company undertook. For example, Mr Sanson explains that there are many transactions that appear to be for the purposes of food, liquor, hospitality, groceries, pet supplies, and personal entertainment. Mr Sanson explains that these transactions all appear to relate to personal expenditure of Ms Sembhi, and bear no apparent relation to the business of the company. He says that neither of the defendants have provided the liquidators with any evidence that these transactions comprised legitimate company expenditure.

20

Secondly, there are numerous cash withdrawals. Mr Sanson says that the liquidators have not been provided with any information as to the use to which this cash was put. There is no financial information that codes or otherwise categorises these withdrawals. He says the defendants have not provided the liquidators with any evidence that these withdrawals were for proper company purposes.

21

Thirdly, there are numerous transfers to other bank accounts or to other bank cards. Mr Sanson explains that these other accounts or cards were found to be owned by the defendants. Transfers to these accounts or cards had been coded as drawings in the company's general ledger in periods prior to 31 March 2017.

22

The liquidators have also identified deposits into the company's bank accounts that were either recorded in bank statements as being payments from Ms Sembhi, or which originated from accounts belonging to Ms Sembhi. The liquidators have credited these payments against Ms Sembhi's current account.

23

Mr Sanson's assessment is that, after the above transactions are added to the current account balance as at 31 March 2017, Ms Sembhi was, as at the date of liquidation, indebted to the company in the sum of $686,588.20.

Decision on first cause of action
24

A debit balance on a shareholder's current account with a company represents a debt owed by the shareholder to the company. In the absence of an agreement to the contrary, the debt is repayable on demand. 1

25

Ms Sembhi filed a statement of defence. She did not allege that there was any agreement that prevented the debt represented by her current account being repayable on demand. She merely disputed the amount that was outstanding.

26

In respect of the amount outstanding, the burden is on the first plaintiff to prove, on the balance of probabilities, that Ms Sembhi owes the amount claimed. The first plaintiff has sought to discharge that burden in two distinct steps. First, it says, in reliance on the 31 March 2017 financial statements signed by Ms Sembhi, that as at that date Ms Sembhi owed the company $407,692 on her current account. Secondly, it says that Mr Sanson's analysis of transactions after 31 March 2017 shows that the amount she owed to the company increased by a further $278,896.20.

27

As to the amount outstanding as at 31 March 2017, the burden of proof on the first plaintiff will be discharged, in the absence of evidence to the contrary, to the extent that signed financial statements acknowledge a debt owing by one of the signatories. 2 Ms Sembhi signed the company's financial statements for the year ending 31 March 2017. These recorded that Ms Sembhi owed the company $407,692 on her current account. Ms Sembhi alleged in her statement of defence that the current account recorded in those financial statements failed to reflect that the defendants had not received salaries, and failed to give credits for funds paid to the company by the defendants. Ms Sembhi did not particularise these allegations, and did not provide any initial disclosure to support them. She has not provided any evidence that the amount recorded in the financial statements is in any way incorrect.

28

For these reasons, I find that Ms Sembhi owed the first plaintiff $407,692 on her current account as at 31 March 2017.

29

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