COMMISSIONER OF INLAND REVENUE v CLOONEY RESTAURANT LIMITED [2020] NZHC 451

COMMISSIONER OF INLAND REVENUE v CLOONEY RESTAURANT LIMITED [2020] NZHC 451 [10March 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-3000[2020] NZHC 451BETWEEN COMMISSIONER OF INLANDREVENUEPlaintiffAND CLOONEY RESTAURANT LIMITEDFirst DefendantANTONY STEWARTSecond DefendantHearing: 2 March 2020Appearances: N H Malarao and H Salisbury for the plaintiffNo appearance for the defendantsDate of judgment: 10 March 2020JUDGMENT OF JAGOSE JThis judgment was delivered by me on 10 March 2020 at 11.00am.Pursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Meredith Connell, AucklandInland Revenue Department, Wellington[1] In this proceeding, the Commissioner of Inland Revenue seeks declaratory andcompensatory relief against the defendants, in connection with the Clooney restaurantbusiness' tax liabilities. The defendants have not continued their defence of theproceeding. By reason of procedural directions of this Court,1 it now comes before mefor formal proof.2Background[2] Clooney was a restaurant of some repute, operating from premises inAuckland's Freemans Bay since the mid-2000s. It initially operated through apartnership formed between four separately-owned companies. The second defendant,Antony Stewart, was sole director and (by 2010) shareholder of one of thosecompanies. He became sole director of each of the other three companies in August2012, all of which he acquired on 6 November 2013, thus becoming also eachcompany's sole shareholder. The companies' only material asset was the Clooneyrestaurant business. They ceased trading from 1 April 2014.[3] Mr Stewart then operated the Clooney business through Clooney RestaurantLimited, the first defendant, of which he also was sole director and shareholder.The formal transfer of the business from the vendor companies to the first defendanton 25 September 2014 expressly excluded the vendor companies' liabilities to theCommissioner of Inland Revenue for tax periods in the twelve months ending31 March 2014, amounting to $383,958.40 (and to specified creditors in the sum ofsome $3,000). Consideration for the transfer was $3,301.20, calculated by netting thevalue of transferred assets ($411,546.00) against liabilities to be assumed by the firstdefendant ($408,244.80) in respect of assigned creditors.[4] Also on 25 September 2014, Mr Stewart placed the vendor companies intoliquidation. According to the liquidator, Henry David Levin, their combined financialstatements at 30 September 2014, after transfer of the business (and its assets and1 Commissioner of Inland Revenue v Clooney Restaurant Ltd, CIV-2017-404-3000, minute, 12December 2019.2 High Court Rules 2016, r 15.9, and the principles referred to in Chen v Zhong HC Auckland CIV-2010-404-1995, 14 November 2011; Neumayer v Kapiti Coast District Council [2013] NZHC1106; Ferreira v Stockinger [2015] NZHC 2916; Kim v Cho [2016] NZHC 1771, [2016] NZAR1134; and Superior Blocklayers Ltd (in liq) v Bacon [2016] NZHC 2601, (2016) 14 TCLR 425.assigned liabilities), "left a shell with virtually no assets (only $3,713) and liabilitiesof $927,691". The Commissioner previously had issued statutory demands forpayment of their tax liabilities, and then served liquidation proceedings on thecompanies on 15 September 2014.[5] Clooney ceased operations in October 2019, the first defendant then liable tothe Commissioner for tax debts in the amount of $152,741.94. That sum since hasgrown with associated penalties and interest to $201,256.53 as at 27 February 2020.Commissioner's claims[6] The Commissioner alleges:(a) transfer of the Clooney business to the first defendant was a dispositionof property intended to prejudice creditors, liable to be set aside unders 348 of the Property Law Act 2007, and seeks the first defendant pay$383,958.40 as compensation to the vendor companies and associatedrelief;(b) transfer of the Clooney business to the first defendant was in breach ofMr Stewart's director duties to the vendor companies under ss 131(1),133, 135, 136, and 137 of the Companies Act 1993, and seeks he paycompensation to the vendor companies or to the Commissioner andassociated relief; and(c) as director of the failed vendor companies, Mr Stewart's directorship ofthe first defendant and involvement through it in the continuingClooney business was in breach of s 386A of the 1993 Act, renderinghim personally liable to the Commissioner for the first defendant'sdebts under s 386C, and seeks judgment and associated reliefaccordingly.Discussion—first cause of action: disposition prejudicing creditors[7] Section 348 of the Property Law Act 2007 enables prejudicial dispositions tobe set aside, so (the value of) the prejudicially-disposed property is "restored for thebenefit of creditors".3[8] I am satisfied the Commissioner is prejudiced by the transfer from the vendorcompanies to the first defendant.[9] The Commissioner is a creditor of the vendor companies at least in the amountof their tax liabilities. The transfer alienates the vendor companies' property, renderingit a qualifying "disposition".4 As illustrated by the partnership's financial accounts for30 September 2014, it was a disposition made at a time the vendor companies wereinsolvent, as "unable to pay all [their] debts, as they fall due, from assets other thanthe property disposed of".5[10] It is prejudicial, because it defeats the Commissioner's exercise of any right torecourse in respect of the property.6 That clearly was the transfer's objective,7 comingimmediately after the Commissioner's service of liquidation proceedings, andexpressly to exclude "[a]ll Taxation duties and excise of the Vendor (as those termsare defined in the Tax Administration Act)", leaving only the vendor companies'heavily-indebted 'shell'. In those circumstances, the first defendant "must be taken tohave intended this consequence".8[11] There is no proof of the available defences (and no prospect either may beestablished).9 As an alternative to vesting the Clooney business in the vendorcompanies, I therefore may require the first defendant to pay "reasonablecompensation" to the vendor companies.103 Property Law Act 2007, s 344.4 Section 345(2).5 Section 345(1)(d).6 Section 345(1)(a).7 Section 346(1)(b).8 McIntosh v Fisk [2017] NZSC 78, [2017] 1 NZLR 863, at [35]–[36].9 Property Law Act 2007, s 349(1).10 Section 348(2)(b).[12] The 'alternative' illustrates the restitutionary nature of the relief: "to correctnormatively defective transfers of value, usually by restoring the parties to their pre-transfer positions".11 The vendor companies thus otherwise would have restored theirassets, which the transfer valued at $411,546, as well as the balance of their liabilities.[13] The Commissioner's counsel, Nick Malarao, proposes the transfer's assetvalue could be identified as 'reasonable compensation' (although he only seekspayment of the lesser tax liability). Without netting off the assumed liabilities, suchdoes not appear restitutionary, but a windfall to the vendor companies' remainingcreditors, who would have access to a larger sum than if the assigned creditors alsowere competing for the funds.[14] Mr Levin identifies the vendor companies' 30 September 2014 liabilities, otherthan those owed predominantly to the Commissioner, to be "the partnership loanaccounts of $583,750" owed to shareholders (being Mr Stewart, deemed to havesurrendered any charge for the general benefit of creditors)12. There is no evidence asto the position of the assigned creditors, for trade and operational debts. Presumablythe first defendant met those liabilities in the course of the continuing Clooneybusiness, or otherwise is accepted to be responsible for them.[15] But the Commissioner is a preferential creditor in the amount of $235,862.81,to which other creditors' interests are in any event deferred.13 'Reasonablecompensation' must be at least that sum. Given the Commissioner is the only creditorto claim in the vendor companies' liquidation, reasonable compensation in thecircumstances should be the whole of its claim.—second cause of action: breach of director duties[16] It is trite law directors have duties to the company to act in good faith and inits best interests. These duties are recited, and with greater specificity, in theCompanies Act 1993.14 In particular, a director "must exercise a power for a proper11 Investment Trust Companies v Revenue and Customs Commissioners [2017] UKSC 29, [2017] 2WLR 1200 at [42].12 Companies Act 1993, s 302; Insolvency Act 2006, s 7.13 Companies Act 1993, Sch 7.14 Sections 131–138.purpose",15 and not agree to, cause or allow "the business of the company to be carriedon in a manner likely to create a substantial risk of serious loss to the company'screditors".16 The "best interests of the company" include taking account of itsobligations to creditors, which have greater weight in circumstances of at least pendinginsolvency.17 Directors "must exercise the care, diligence and skill that a reasonabledirector would exercise in the same circumstances".18[17] I have no difficulty in concluding Mr Stewart's transfer of the Clooneybusiness from the vendor companies to the first defendant was in multiple breach ofhis duties to the former companies. Relieving the companies of their only significantasset, while leaving them without means to meet substantial liabilities, is not in theirbest interests. No proper purpose of the vendor companies was met by exercise of hispowers to transact the transfer; it was exercised instead to enable the Clooney businessto continue to trade for the benefit of the first defendant. Thus it was a transfer in theconduct of the vendor companies' business, creating significant risk of substantial lossto creditors. Inferentially, the transfer and vendor companies' liquidation precisely wasmotivated by the Commissioner's service of liquidation proceedings on the vendorcompanies. A reasonable director in circumstances of the Clooney business'insolvency would 'soberly' have assessed the companies' – not the business' – futureprospects,19 which assessment on any objective view could not have resulted inalienation of the vendor companies' only asset while retaining their material liabilities.[18] On liquidation, as is the present case, a director may be required to compensatethe company for such breach, or pay such sum to an applicant creditor.20 The amountof that contribution is to be determined by reference to the cause of, culpability for,15 Section 133.16 Section 135. There is uncertainty if the s 136 prohibition on a director agreeing to the companyincurring particular obligations extends to tax debts: compare Peace and Glory Society Ltd (in liq)v Samsa [2009] NZCA 396, [2010] 2 NZLR 57 and Cooper v Debut Homes Limited (in liq) [2019]NZCA 39, [2019] 3 NZLR 57; the Supreme Court has reserved its decision on appeal from thelatter. In the circumstances, the Commissioner seeks to adjourn its s 136 claim, with leave to revisitit in wake of the Supreme Court's decision. That aspect of the Commissioner's claim will beadjourned accordingly.17 Nicholson v Permakraft (New Zealand) Ltd (in liq) [1985] 1 NZLR 242 (CA) at 250.18 Companies Act 1993, s 137.19 Mason v Lewis [2006] 3 NZLR 225 (CA) at [48]–[51].20 Companies Act 1993, s 301.and duration of trading under "inadequate corporate governance" leading todeterioration of the company's financial position.21[19] Again, I have no hesitation in concluding the vendor companies' unmetliabilities to the Commissioner exclusively is caused by Mr Stewart failing to ensurethe companies remit tax payments to the Commissioner. The Commissioner onlyevidences the partnership's prior overdue PAYE payments for the period to30 November 2008, which appear to have been resolved in 2009. But GST ceased tobe remitted in March 2013. By July 2013, employee deductions also ceased to beremitted. No further payments were made before the companies ceased to trade from1 April 2014.[20] For the entirety of that time, Mr Stewart was the companies' sole director.Although he spent extended periods away from New Zealand pursuing businessopportunities in San Francisco, that is not exculpatory; he remained the companies'sole director with all the obligations for the companies' governance that entailed. Thecompanies' business pattern of conduct continued under the first defendant;Mr Stewart explained the sums intended for remittance to the Commissioner wereused by the business "to pay [other] creditors".[21] For all those reasons, I think it just Mr Stewart should be liable to contributethe whole sum of the vendor companies' liability to the Commissioner, for payment tothe Commissioner on her application.—third cause of action: 'phoenix' company director liability[22] Except with presently irrelevant exceptions,22 s 386A of the 1993 Act prohibitsa director of a failed company, for a period of five years after commencement of its21 Mason v Lewis, above n 19, at [108]–[110].22 Companies Act 1993, ss 386D–386F. The last section allows an exception for a company knownby the same or a similar name as of a failed company's pre-liquidation name(s), if known by thatname for at least twelve months before the liquidation commenced and was not dormant duringthat period. A company is not dormant if its transactions "have occurred throughout that period":s 386F(2). 'Throughout' means "during the whole of (a period of time, event, situation, etc.)":Oxford English Dictionary (online 3rd ed, Oxford University Press, Oxford, 2017). ClooneyRestaurant Limited, while incorporated under that name on 18 June 2012, filed GST and employerdeduction nil returns for the six months prior to 1 April 2014. The exception does not apply toliquidation, from being a director of a "phoenix company", or being involved in itspromotion, formation, management, or in the carrying on of a business in the same ora similar name. A 'phoenix company' is one known by a name that is, or is similar to,a failed company's pre-liquidation name. By 'similar name' is meant a name that is sosimilar to a name (including a trading name) of a failed company in the twelve monthsprior to its liquidation "as to suggest an association with that company".23[23] Prior to name changes on 19 September 2014, less than a week prior toMr Stewart placing them in liquidation on 25 September 2014, the vendor companieswere named respectively Clooney Limited, Clooney No 1 Limited, Clooney No 2Limited, and Clooney No 3 Limited. Clooney Restaurant Limited self-evidently isthose companies' 'phoenix'. Indeed, the vendor companies' partnership expressly wasgiven the name "Clooney Restaurant Partnership". Miranda Jane Law, giving evidencefor the Commissioner, produces an undated extract from the Clooney businesswebsite, referring to "the arrival of Clooney in 2006", which Mr Stewart continues"[t]welve years later", inferentially in 2018.24[24] As director of Clooney Restaurant Limited, Mr Stewart's contravention ofs 386A(1)(a) accordingly renders him personally liable for its relevant debts, beingthose incurred during Mr Stewart's management of the company.25Result[25] Under s 348 of the Property Law Act 2007, I order Clooney RestaurantLimited to pay compensation to the vendor companies in the amount of $383,958.40Clooney Restaurant Limited, which was dormant during the twelve months before the vendorcompanies' liquidations commenced on 25 September 2014.23 Companies Act 1993, s 386B(1) (definitions of 'phoenix company' and 'similar name').24 Ms Law additionally explained she could "see from the documents" Mr Stewart communicatedwith the National Business Review at the time of the vendor companies' liquidation to assure it theClooney business had been purchased by Clooney Restaurant Limited and continued to trade. Thedocuments to which she refers do not appear to be in evidence; I am provided with no basis onwhich to assess its reliability; and Mr Stewart (who sat in the public gallery throughout the hearingplainly was available to give evidence. All that renders Ms Law's assertion inadmissible hearsayand I therefore disregard it. She does produce the NBR's subsequent correspondence with MrStewart (who identifies himself as "Owner | Clooney"), advising him "there's no story here, youcan rest easy". Nonetheless, I am not prepared to infer the non-'story' is that outlined by Ms Law.Evidence Act 2006, ss 17 and 18.25 Companies Act 1993, s 386C.(plus interest for the period commencing 25 September 2014, calculated in accordancewith the Interest on Money Claims Act 2016).[26] I reserve the Commissioner leave to seek additional compensation ifMr Stewart, or any party related to him, makes any claim to the compensation orderedin the preceding paragraph, whether as secured or unsecured creditor of the vendorcompanies.[27] Under s 301(1) of the Companies Act 1993, I:(a) declare Mr Stewart breached his duties to the vendor companies underss 131(1), 133, 135, and 137 of the Act;(b) adjourn the Commissioner's claim Mr Stewart breached his duty to thevendor companies under s 136 of the Act, and reserve leave to theCommissioner to reactivate that claim;(c) order Mr Stewart to pay the Commissioner $383,958.40 (plus interestfor the period commencing 25 September 2014, calculated inaccordance with the Interest on Money Claims Act 2016).[28] Subject to any additional compensation ordered to be paid, I direct the totalrecovery by the vendor companies and the Commissioner under [25] and [27](c) aboveis not to exceed $383,958.40 (plus interest for the period commencing 25 September2014, calculated in accordance with the Interest on Money Claims Act 2016).[29] Under s 386C of the Companies Act 1993, I adjudge Mr Stewart liable to theCommissioner for $201,256.53, plus any further tax debts accrued after 27 February2020 to the date of this judgment.Costs[30] In my preliminary view, the Commissioner is entitled to category 2B costs forall steps taken in the proceeding, and disbursements. That is because, from whatI presently know of it, nothing in the steps the Commissioner took in this averagelycomplex proceeding required other than a normal amount of time. If that is notaccepted by the Commissioner, costs are reserved for determination on a shortmemorandum of no more than five pages – annexing a single-page table setting outany contended allowable steps, time allocation, and daily recovery rate – to be filedand served by the Commissioner within ten working days of the date of this judgment.—Jagose J