HENDERSON v THE REGISTRAR OF COMPANIES [2023] NZHC 1233

HENDERSON v THE REGISTRAR OF COMPANIES [2023] NZHC 1233 [24 May 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-1424[2023] NZHC 1233BETWEEN DAVID HENDERSONAppellantAND THE REGISTRAR OF COMPANIESRespondentHearing: 9 February 2023Appearances: D W Grove for AppellantS P Connolly & A M Piaggi for RespondentJudgment: 24 May 2023JUDGMENT OF PAUL DAVISON JThis judgment was delivered by me on 24 May 2023 at 4.30pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors:Grove Darlow, AucklandCrown Law Office, WellingtonIntroduction[1] David Henderson (the appellant) appeals a prohibition order made by theDeputy Registrar of Companies pursuant to s 385 of the Companies Act 1993(the Act), which prohibits him from being a director of a company or being concernedin the management of a company for a period of three years.[2] The appellant says that the failure of the company of which he was a directorwas not a result of his mismanagement, but rather the result of unforeseen mattersoutside his control. He says that the property development project with which thecompany was involved was from the outset commercially viable, and having regardto all the circumstances the prohibition order made by the respondent was not justified,and should be quashed.Background[3] On 17 May 2022, the Deputy Registrar of Companies (the Deputy Registrar)issued a notice (the prohibition order) to the appellant relevantly stating:PURSUANT to section 385(3) of the Companies Act 1993, I Peter Barker,Deputy Registrar of Companies, hereby prohibit DAVID STEWARTHENDERSON from being a director or promoter of, or being concerned inor taking part, whether directly or indirectly, in the management of anycompany for a period of three years as from the date of this notice.[4] The Deputy Registrar's decision to issue the prohibition order arose from theappellant's management of Cambridge on the Avon Ltd (the company), of which hewas one of two directors, the other being Mr Martin Kells. Mr Kells was the soleshareholder of the company. The company was incorporated on 19 December 2016and is the trustee of the Cambridge on the Avon Trust (the Trust), which was settledby Mr Kells on 3 February 2017. The company was put into liquidation by order ofthe High Court on 7 June 2018.[5] On 3 May 2017 the company settled the purchase of a property comprising sixapartments located at 19 Carlton Mill Road, in Merivale, Christchurch (the property).The company intended to renovate and redevelop the apartments with the intention ofon-selling them. The company was nominated as purchaser of the property by Quay22 Properties Ltd (Quay Properties) which had entered into an agreement to purchasethe property from Cranford Entertainment Ltd (Cranford Entertainment) on 22September 2016, and in February 2017 Quay Properties and the company entered intoa deed of nomination pursuant to which the company, as trustee of the Trust, wasnominated and became the purchaser of the property.[6] The company financed its purchase of the property by borrowings from: thevendor, Cranford Entertainment; No 68 Ltd; and Le Compte No 2 Ltd (Le Compte),the latter being a company associated with the appellant. In each case the companyentered into loan agreements and the loans were secured by registered mortgages andpersonal guarantees from the appellant and Mr Kells.1 The Cranford Entertainmentloan was subsequently repaid from proceeds of a further loan from Value PlusHoldings Ltd (VPHL) of $2,100,000 which was secured by a registered first mortgageover the property. The VPHL loan advance was made available on 19 October 2017,and was for a term of six months. The $2,100,000 loan included an establishment feeof $100,000 which was deducted from the loan funds by VPHL on the date the loanwas advanced to the company. The VPHL loan was jointly and severally personallyguaranteed by the appellant, and Mr Kells.[7] In June 2017 the company engaged Smartlift Systems Ltd (Smartlift) to carryout relevelling of the building on the property. Smartlift's invoices dated 7 July 2017for $54,774.10, and 31 July 2017 for $91,290.16 were not paid on or before the dateson which they were due, and a dispute arose between the company and Smartliftregarding the overdue payments.[8] On 28 September 2017, the appellant obtained a valuation report in respect ofthe property from Jones Lang LaSalle, Valuation and Advisory (Jones Lang). In theirreport Jones Lang noted that as at the date of their inspection of the property it wasundergoing strengthening and refurbishment work from earthquake damage. Theywere instructed by the appellant to provide an "as is where is" valuation of the propertyas well as an "as if complete" valuation for the six apartments, assuming that the1 Cranford Entertainment Ltd, loan $900,000 term expiring 28 January 2018, secured by registeredfirst mortgage; No 68 Ltd, loan $500,000 for term of 12 months, secured by second mortgage; LeCompte, loan $2,500,000 payable on demand, secured by second mortgage over 19 Carlton MillRoad and a second mortgage over 280 Bealey Avenue Christchurch.earthquake damage was remediated under engineering supervision and full insurancewas obtained. They were also to assume that in conjunction with the earthquakeremediation work, the apartments would be refurbished to a professional standardincluding with new kitchen and bathroom fixtures and fittings. Jones Lang noted intheir report that their client had informed them that the cost to complete therefurbishment and earthquake strengthening was $912,525 including GST. Theyvalued the property on an "as is where is" basis at $2,950,000 (inclusive of GST), andtheir "as if complete" valuation assessed the units once completed as valued between$900,000 and $975,000 inclusive of GST and $15,000 of chattels. The total valuationof the six "as if complete" apartments was $5,600,000 (inclusive of GST) and chattelsof $90,000.[9] On 19 October 2017, Smartlift issued a statutory demand in respect of theunpaid amount of its invoices. After the company paid the first of the two invoicesthe statutory demand was withdrawn. However, Smartlift's second invoice for$91,290.16 remained unpaid, and on 13 November 2017 it issued a second statutorydemand for that amount.[10] The company responded by filing an application in the High Court seeking anorder setting aside Smartlift's second statutory demand. The application wasscheduled for hearing in the High Court on 14 February 2018, but on 8 February 2018the company filed a memorandum requesting the Court to strike out its ownapplication, and accepting that it would be liable for costs. Smartlift however appliedto the Court for an order pursuant to s 291(1)(a) of the Act directing the companywithin three working days from 8 February 2018, to pay the outstanding sum togetherwith default interest. By judgment dated 16 February 2018, Associate Judge Osborne2made an order dismissing the company's application to set aside Smartlift's statutorydemand, and directed the company to pay a total sum of $114,737.933 by noon on 23February 2018, and in default of payment Smartlift could apply for an order puttingthe company into liquidation.4 However, the company failed to pay the outstandingsum, and Smartlift subsequently applied for an order putting it into liquidation.2 As His Honour Osborne J then was.3 The $114,737.93 being the contractual debt of $105,061.93 together with costs and disbursementsof $9,676.4 Cambridge on the Avon Ltd v Smartlift Systems Ltd [2018] NZHC 175.[11] On 15 March 2018 the Inland Revenue Department (IRD) approved anapplication by the company for non-active status. In its letter to the company the IRDexplained the effect of the non-active status:This means you won't have to file income tax or imputation returns for thecompany for 2017 and future income years, unless the company stops meetingthe non-active company criteria.[12] On 26 April 2018, following the Company defaulting on loan repayments,VPHL appointed receivers pursuant to the terms of its security. Following theirappointment the receivers appointed a real estate agent to market the property for saleby auction, which was scheduled for 14 June 2018. Prior to the auction the receiversreceived several pre-auction offers for the property, and they accepted the highest offerof $3,400,000 on 14 June 2018. However, on 7 June 2018 the High Court made anorder placing the company into liquidation, and appointed Mr Geoff Brown andMs Lynda Smart of Rodgers Reidy (NZ) Ltd, as joint liquidators (the liquidators).[13] From the proceeds of sale the first and second secured creditors (VPHL andNo 68 Ltd) were repaid in full. In an affidavit sworn by Mr Henderson on 5 June 2018in support of an application by the company for an adjournment of Smartlift's petitionfor an order placing the company into liquidation, he stated that Le Compte, whichwas owed approximately $2 million, had agreed to waive its security so that the sumof approximately $300,000 remaining after payment of the secured creditors VPHLand No 68 Ltd, could be applied to meeting the amounts outstanding to unsecuredtrade creditors which totalled approximately, $316,000.[14] In his affidavit Mr Henderson stated that the development had progressedsignificantly and there remained approximately $500,000 of further work required tobe done before each of the six apartments could be sold. He said that he understoodfrom real estate agents that on completion each apartment would be worthapproximately $1 million. And he said that the unsecured creditors of the companywere:(a) Smartlift, $112,000.(b) Trends Kitchens, $63,000.(c) Aqua Plumbing, $32,000.(d) Stone Mason $9,000.(e) Jeremy Claxon Tiler $65,000.(f) Tim Whittle Labour and Miscellaneous $35,000.[15] However, the company's application for adjournment of the Smartliftcreditor's petition was declined, and as I have noted, the company was placed intoliquidation on 7 June 2018.[16] In their second report dated 7 January 2019, the liquidators stated that theunsecured creditors of the company totalled $405,384.80. Following settlement of theliquidator's sale of the property and payment of the first and second secured creditors,no funds remained available to pay the unsecured creditors who had carried out workon the property.[17] On 15 January 2021 the IRD notified the company that the Trust was underaudit, and issued a default income tax assessment for the period ending 31 March 2019of $181,242.27 plus shortfall penalties of $36,248.45. Those amounts were in additionto the unsecured creditors which totalled $405,384.MBIE (Integrity and Enforcement Team) investigation[18] In December 2021 the Integrity and Enforcement Team (IET) of the Ministryof Business, Innovation & Employment (MBIE) carried out enquiries and obtainedinformation from the liquidators regarding the company, its management prior toliquidation, and the circumstances which had led to it being placed in liquidation.[19] In their response to an MBIE questionnaire which asked the liquidators whatevents or circumstances had caused the failure of the company, the liquidators said:The Company appears to have insufficient working capital/ cashflow to fundthe development through to completion. In addition to the petitioningcreditors claim several creditors also remained unpaid for invoices datingfrom October 2017 onwards. The Company was placed into receivership on26 April 2018 under terms of a security agreement and mortgage in favour ofValue Plus Holdings Limited. The receivers proceeded to sell the property,originally listing this for sale by auction but then achieving a pre-auction saleat a price higher than valuation. The sale price achieved was sufficient to payout the first and second registered mortgagees but not the third. No fundsremained for payment of the various unsecured creditors who had undertakenwork on the property.[20] In response to a question as to whether the company maintained sufficientrecords to enable the directors to ascertain its financial position at any given time, theliquidators said:I consider that the Directors would have had sufficient information torecognise that there was a cashflow shortage and an inability to pay creditorsas the accounts fell due – via provision of supplier invoices however it ispossible that they may have considered the Company to be balance sheetsolvent by virtue of the likely sale price able to be achieved.[21] In response to a question as to whether the company traded or incurred debtsor other obligations when insolvent the liquidators said:Yes, despite the statutory demand being issued by one supplier the companycontinued to engage other suppliers to undertake work on the property,including tilling work to a cost of $65,482.33 invoiced in February 2018 andkitchen installations at a cost of $67,427 invoiced on 30 December 2017.[22] And in response to a question as to whether the company incurred debts forwhich there was no reasonable prospect of repayment, or without obvious assessmentof its ability to repay when they became due, the liquidators said:We consider that many of the debts of the company were incurred withoutobvious assessment of the ability to repay when due, the expectation seems tobe that contractors engaged to undertake building works would be paid eitherfrom further refinancing, or from the sale proceeds from the developmentrather than in accordance with their ordinary terms of trade.[23] On 16 March 2022 the IET served the appellant with a written notice pursuantto s 385(5) of the Act advising him that he had been identified as "possibly meetingthe criteria to be prohibited from managing companies under section 385 of theCompanies Act 1993." The notice enclosed copies of a number of relevant documentsincluding correspondence between MBIE and the liquidators and the liquidators'response to the IET questionnaire, and copies of the appellant's own affidavits whichhad been filed in High Court in relation to the company. The notice advised theappellant that he had 20 working days from the date of service within which to respondto the notice, and said that thereafter and after considering any representations theappellant made and any other information he provided, if the Registrar consideredthere were grounds to do so he/she may prohibit him from being a director or promoterof a company, or from being concerned in the management of a company for up to 10years.[24] Following the Deputy Registrar granting an extension of time for the appellantto respond, the appellant's solicitors Aspiring Law, wrote to MBIE on his behalf byletter dated 27 April 2022 submitting that there were no grounds for making aprohibition order pursuant to s 385. They explained that as the company was a trusteeand had never traded: there had been no mismanagement by the appellant; there shouldnever have been any claims made by creditors or the IRD against the company; it wasnot required to file tax or GST returns; and it had non-active status approved by theIRD. Explaining the company's background, Aspiring Law said:6. There appears to be a misunderstanding as to the status of thisCompany. It was a trustee company only and was the trustee of theCambridge on Avon Trust ("Trust"). The deed of trust is attached.7. The Company, whilst Mr Henderson was a director, did not trade. Itdid not and was not required to prepare any financial accounts, basedon accounting advice. Indeed, the IRD approved non-active status on15 March 2018, and accordingly it did not have any tax requirementsfrom the 2017 income tax year onwards. Please see attached letterfrom the IRD confirming this fact.8. As such, it was not required to prepare financial statements. Alltaxable activities, including accounting for GST, was undertaken bythe Trust. The Trust's IRD number is [redacted.9. What appears to have happened, and you will need to discuss thiswith the receivers, was that when it took over the sole asset of theTrust (a property development located at 19 Carlton Mill Road,Christchurch) and the Company was then placed in liquidation,somehow, either the receivers or the liquidators registered it for GSTand obtained GST refunds. Clearly, that should not have occurred,however, it was completely outside of my client's control.10. The only purpose of the Company was therefore to have the title ofthe property in its name, but beneficially that property was owned bythe Trust.11. You will note that Mr Henderson was never a shareholder of theCompany.12. Further, as advised to the liquidators, creditors invoiced the Companyas trustee to the Trust. Certainly, the GST refund referred to in theliquidator's report dated 11 January 2022 should not have beenreceived. Again, that is nothing to do with Mr Henderson. Further,the Trust was registered with the IRD for income tax and GSTpurposes for all its taxable activities. Attached is the letter of 2 March2017 confirming the same.13. My client notes that the receivers report:a. Confirms that the Company was a corporate trustee.b. States on page 5 that sufficient funds were recovered to payall secured creditors and that there was a surplus of $5,750plus GST that was refunded to the liquidator. It would appearclear therefore that all secured creditors have been paid.14. There were no further secured debts at that time, including any debtsto the IRD.15. The Trust was incorporated, Mr Henderson understands, solely toprogress the development of the property at 19 Carlton Mill Road,Merivale, Christchurch.16. The property was purchased for the sum of $1,860.000 plus GST (ifany), with settlement being completed on or about 3 May 2017.Please see the attached settlement statement and deed of nomination.17. As at the time of the purchase and finance a detailed valuation wasobtained of the property. This is attached.18. In essence, this was an existing 6-unit development. It had suffereddamage through the earthquake, so the project was to rectify thedefects, tidy it up, and sell it.19. You will see from the valuation that its value in an as is where iscondition was assessed at $2,950.000.20. Once completed, however, each of the units were valued as having anaggregate value of $5,600.000. The anticipated costs to complete theremediation and works was $1,500,000 plus GST.21. Accordingly, from the outset, and based on the professional valuationevidence, this was to be a profitable development.22. You will note that there was a third security to Le Compte Limited.This was an entity associated with Mr Henderson, and it contributeda capital amount in excess of $300,000 to progress that development.As matters worked out, however, those funds were lost.23. The difficulty that occurred was that given delays, out of MrHenderson's control, completion of the remedial works took longerthan expected. To Mr Henderson's shock, the first security holderfunder refused to extend the funding, and instead called the fundingup and appointed a receiver. Efforts were made at that time torefinance the project with a view to competing it. Unfortunately,those efforts were unsuccessful, principally because:a. The availability of finance reduced significantly; andb. Due to the involvement of Mr Kells, financiers werehesitant to assist.24. It was those factors, and those factors alone, that caused thereceivership. Please note that when the first security holder called upits loan, the total facility had not yet been used. Accordingly, the Trustwas not trading whilst insolvent. It was the actions of the first securityholder that led to the Trust's insolvency.25. Mr Henderson cooperated with the receivers, and indeed identified theeventual purchaser of the property. Mr Henderson understands thatthe development was completed by the purchaser and the units weresold for sums significantly above the valuation.26. Accordingly, this project was viable from the beginning, and wouldhave been completed successfully but for the actions of the firstsecurity holder. Mr Henderson denies that the Trust was tradingwhilst insolvent. I note in this regard that there is no suggestion bythe liquidators that that was the case.[25] Addressing the issue of reckless and insolvent trading, the appellant's solicitorssaid:28. As advised, tax returns were not required to be filed from the yearended 31 March 2017, as the IRD had approved non-active status forthe Company.29. The assessment by the IRD, sent to the liquidators, and not [theappellant], are incorrect. That assessment should have been made tothe Trust, and not the Company. The Company was not required tofile any returns while [the appellant] was a director of the company.30. The Company was liquidated on the basis that it was a trustee of theTrust. In fact, the correct process would have been an application tothe Court to replace the Company as the trustee of the Trust.[26] Regarding the failure to keep proper company records the appellant's solicitorssaid:32. The liquidators were advised that no financial statements wereprepared. That is correct and has been confirmed by the Company'schartered accountants. The Company itself did not trade. As such,there was no requirement to maintain financial records. The requiredcompany records including minutes were kept. No one, and inparticular, the liquidators, have asked to see these.33. What is critical is that after the Company was placed in receivershipand then liquidator Mr Henderson took all steps required of him andanswered all questions from the liquidators. He is unaware of anyinstance in which he was requested to provide further documentationor information to the liquidators. That is confirmed by the fact thatthe liquidators do not refer in any of their reports to Mr Hendersonbeing uncooperative or failing to provide documentation. Indeed, ifthe liquidators ask for company documentation now, everything thatis available, and was necessary, could and would be provided. Thesimple fact is that the liquidators have not requested anything further.There has also been no information requested from the Company'schartered accountants.[27] Following Aspiring Law's 27 April 2022 letter to MBIE, MBIE requested theappellant to provide any company records created and kept pursuant to s 189 of theAct. And on 9 May 2022 the Deputy Registrar forwarded the appellant a "PreliminaryMinute" under s 385 of the Act. In the preliminary minute, the Deputy Registrar notedthat the IET had alleged several instances of mismanagement by the appellant,including that he had failed to keep company records and had therefore breached s 189of the Act. The Deputy Registrar noted that the appellant had previously advised thata minute book and records had been kept, and he requested the appellant to providehim with all of the records created and kept pursuant to s 189 of the Act, so that hewould be able to make a determination regarding the IET's allegation. The DeputyRegistrar further noted in his preliminary minute that the IET had alleged that thecompany had failed to prepare financial statements in breach of s 194 of the Act. TheDeputy Registrar noted that the appellant claimed that the company did create andkeep certain records in accordance with s 194, and he requested the appellant toprovide him with all and any such records, so that he could make a determinationregarding the IET's allegation.[28] Aspiring Law responded to the requests made in the Deputy Registrar'spreliminary minute by letter dated 11 May 2022 advising that as the company was nottrading, and had IRD approved non-active status, it was not required to keep financialrecords or prepare any financial accounts. They enclosed a letter written by thecompany's accountants, Michael Prasad Group Ltd also dated 11 May 2022 in whichMr Prasad said:We refer to paragraph 4 of your Preliminary Minute headed "Failure to keepproper accounting records" and more specifically to paragraph 4.1 where youstate "IET also alleges that the Company did not prepare financial statementsand it did not comply with s 194"In our professional view, this allegation has no basis.The company was a trustee company and did not trade on its own account. Onthat basis, we made an application to the Inland Revenue Department for"Non-Active Status" for the company. The application for Non-Active statuswas approved by the Inland Revenue Department on 15 March 2018 (a copyof the approval letter is attached).You will note from the letter that the approval was from the date ofincorporation on 19 Dec 2016 to 31 March 2017, being the first income taxyear for the company and also applied for future years. The company wasapproved by Inland Revenue Department as not having a requirement to fileany income tax or other returns from the date of its incorporation as it did notundertake any taxable activities on its own account.On this basis, there was no requirement for the Company to prepare anyfinancial statements and hence it did not any obligation to meet any of therequirements of S194 or meet any of the requirements of the TaxAdministration Act (Financial Statements) Order 2014 and more particularlyI refer you to paragraph 6 whereby non-active companies are exempt from theminimum requirements for preparing financial statements.[29] On 13 May 2022 the appellant's solicitors provided MBIE (IET) with a numberof further documents including a copy of the term loan agreement between thecompany and No 68 Ltd; the Deed of Nomination dated 3 February 2017 betweenQuay 22 Properties Ltd and the company as trustee of the Trust; a copy of the termloan agreement between the company and Cranford Entertainment; a copy of a formof registerable mortgage; and a copy of the term loan agreement between the companyand VPHL.The Final Minute of the Deputy Registrar of Companies and the prohibition notice[30] On 17 May 2022 the Deputy Registrar issued a "Final Minute" pursuant tos 385 of the Act. In this document the Deputy Registrar rehearsed the procedural andfactual background, and identified the relevant legislation and legal principles, beforeaddressing and determining each of the allegations made by the IET against theappellant. The Deputy Registrar noted that the IET alleged that the appellant hadfailed to carry out his statutory duties as a director of the company in four respects:(a) reckless and insolvent trading;(b) failure to keep proper company records;(c) failure to keep proper accounting records; and(d) failure to co-operate with the liquidators.Whether the company carried out the development[31] In his decision the Deputy Registrar addressed the issue of which party orparties were responsible for carrying out the development at the property. He said:13.6 It seems to be contended that the Property was being developed by theTrust. However, the work was being undertaken by the Company. Itseems to be contended the Company was doing that as a trustee of theTrust. I might have expected that if the Trust was the ultimate ownerof the Property, it had a real interest in ensuring the Company wasdoing what the Trust expected it to do. I might have expected someinstructions or direction from the Trust to the Company, but it wouldappear there is no record of any such communications.13.7 Once the Company acquired the Property, the units on the Propertyhad to be re-furbished and the Property developed. That requiredsome party to undertake business activity. That had to be either theTrust or the Company.13.8 I assume it is contended by the Candidate that the Company wascarrying out the activity as trustee for the Trust. But just because theCompany agreed to be a trustee for the Trust, does not mean that theCompany was not also engaging in business activity.13.10 The contract with SSL was accepted by the Company and signed byone of the directors. I consider that while there was a trustee deed inexistence the Company was acting in its own capacity and not as abare trustee. Another way of putting it is that whatever the wordingof the Trust Deed, the substance of the transactions is they were beingundertaken by the Company in its own name. Someone wasundertaking business activity when the Property was being developedand there is nothing to suggest it was the Trust. And insofar ascreditors were concerned, they thought they were only dealing withthe Company. The Company could be, and was, in a dual role of aproperty developer and trustee.13.12 The Candidate provided me with a letter from the IRD to the Trusteesin the Cambridge on the Avon Trust dated 3 February 2017. It statedthe Trustees were registered for GST. I place no reliance on that for asubmission that it was the trust carrying out the business activity. Thefact that the trustees were registered for GST does not mean that theywere filing GST returns arising from the development work on theProperty.13.20 I have not examined whether [Michael Prasad Group Ltd's]statements are correct regarding [Tax Administration (FinancialStatements) Order 2014]. But even if there was no legal requirementto file income tax returns, I consider that the Company and itsdirectors, in carrying out the work on the Property, needed to havefinancial information before them.13.21 I noted at paragraph 10.2 above that I must be satisfied that there hasbeen mismanagement. I do not have to be satisfied that themismanagement breached s 194. I consider that the directors neededto have financial information before them that would enable them todetermine the Company's financial position at any point in time.Without being prescriptive, I would anticipate the financialinformation before them that would include budgets, cash flowforecasts and reconciliations comparing budgets with actuals. So,whatever the position might be under s 194 it is clear that theCompany did not compile the type of financial information that isnecessary for directors to determine whether the Company wassolvent or not. I consider the failure to have such information ismismanagement.13.22 [Michael Prasad Group Ltd's]conclusions depend upon it beingcorrect that the Company did not trade. That is based on a view thatit was the Trust that was the entity doing the trading. I consider, basedon how the Company conducted itself and its dealings with itscreditors, the Company itself was the entity that carried out the workon the Property. It was not doing so on behalf of the Trust. I expandon this below.13.23 Whatever the position might be regarding the Trust Deed, statementsmade by the Candidate, on behalf of the Company, in his affidavits,carry more weight. The Company gave various reasons for disputingthe SSL debt. But not once did it ever claim that it was the Trust thatowed the money and not the Company. I also refer to the passages inthe Affidavits that I quoted at paragraph 12.2(o), (s) and (t) above.That was a direct acknowledgement that the parties referred to werecreditors of the Company. If the Company thought the liquidation wasa mistake, they had an opportunity to test that before the Court whenopposing the statutory demand.13.25 I am satisfied the Company undertook business activity in developingthe Property and in doing [so] the directors of the Company had theduties as laid down in the Act. I believe that the most favourableposition that could be advanced for the Candidate is that the Companywas both a property developer and a corporate trustee. That issufficient for me to come to the conclusion I have. Whatever the formof the transaction purported to be, in substance it was the Companythat carried out the development work on the Property.13.26 In any event, I am not aware of any provision in the Act, whichexcuses the directors of any company from having to comply with theduties and obligations imposed on directors under the Act. Thedirectors of a trustee company are not excused from thoserequirements.The allegation of reckless and insolvent trading[32] In addressing the allegation of reckless and insolvent trading, the DeputyRegistrar said:14.46 There is nothing in the information supplied by the Candidate,or elsewhere, to indicate that the Candidate made a soberassessment of the situation once the Company became insolvent.There is nothing to indicate any change of strategy. That meansthat either the Candidate did not know the situation the companywas in, or did, and just deliberately ignored the reality of whatwas happening. Either alternative is equally damming.14.47 There is nothing to indicate that the Candidate considered theinterests of any of the creditors.14.48 The accumulated debts of the unsecured creditors weresubstantial. There were also exacerbating features. The Companytraded for less than 18 months and racked up substantial debts.The reality is that the Company had no capacity to repay thosedebts and no payments will be able to be made to the unsecuredcreditors.14.49 I have already dealt generally in paragraph 9 above, with theclaim that events took place in the Company which were outside ofthe Candidate's control. If a loan falls due for repayment it is areasonable possibility that the loan will not be renewed. That is not amatter outside of the control of the directors. If they choose to takeon short term debt, they need to consider in advance what to do if theloan is not renewed.14.51 The circumstances that arose were from operational mismanagementby the directors. These were matters within the control of thedirectors. I am satisfied that the elements constituting reckless tradinghave been made out in respect of the Company.The allegation of failure to keep proper company records[33] In addressing the allegation of failure to keep proper company records, theDeputy Registrar said:15.4 S 189 provides a company must keep certain documents at itsregistered office, They include:(a) Minutes of all meetings and resolutions of the shareholdersand directors for the previous seven years;(b) Certificates required to be given by directors under the Act forthe previous seven years;(c) Copies of all financial statements;(d) Copies of all accounting records as required to be kept unders 194 of the Act.15.5 The records must be kept at the registered office of the companyand they must be kept in written form or in a manner that they areeasily accessible and convertible to written form.My decision15.6 I have already determined that once the Company owned assetsand it entered into contractual relationships it was carrying onbusiness. Therefore, the Company was obliged to comply withs 189. In any event there is nothing in the Act which says thats 189 does not become operative until the Company starts to carryon business.15.9 It is common ground that the Company made a deliberatedecision to not keep financial records. That is necessarily a breachof s 189(1)(h) and (i). But I make no further comment on thatbecause the substantive breach is under s 194. I deal with that inparagraph 16 below.15.10 There is nothing to indicate that the minutes and resolutions referredto in the Further Information were actually kept at the registered officeas required by the Act. It is also apparent that the Further Informationwas not given by the directors to the liquidators.15.13 It is an important matter. I consider the holding of meetings, andkeeping a record of such meetings is not just administrativeneatness. It is part of the cornerstone of good governance. Theholding of director meetings is crucial for the proper running of acompany. It allows the directors to set the strategy and monitorwhat was happening. The recording of resolutions; declarations ofinterest, issuing of certificates etc helps focus a director's mind inseparating their personal interests from what is in the best interestsof the company, for example. Without these disciplines it becomeseasier for mismanagement to flourish. And with mismanagementcomes the greater risk of company failure.Conclusion15.14 I am satisfied there was at least a technical breach of s 189. Butbecause of the decisions I have come to elsewhere I have decided tosuspend making any decision on the allegation. Accordingly, I havenot taken this allegation into account.The allegation of failure to keep proper accounting records[34] Addressing the allegation of a failure to keep proper accounting records, theDeputy Registrar said:16.12 The Candidate says that financial records as contemplated by s194 were never created and so were never kept. The Candidatesays the Company was justified in making that decision. Buteven if the Company had solely been a corporate trustee, it wasstill obliged to comply with s 194. In any event my earliercomments regarding the trust company, are applicable here.These failures amount to mismanagement. If a company doesnot have reliable, accurate and up to date financial informationthe director is in the same position as a ship's captain in reefinfested waters without accurate and up to date charts.16.13 That means such lack of information is likely to cause, orcontribute to the failure of a company and I am satisfied that isthe position here.Conclusion16.14 I am satisfied IET's allegations are correct; that it amounted tomismanagement and it was at least a partial reason for the failure ofthe Company.The allegation of failure to co-operate with the liquidators[35] Addressing the allegation of a failure to co-operate with the liquidators, theDeputy Registrar said:17.9 I am satisfied the allegation has no substance. The liquidatorsmay not have got all the active assistance that they thought shouldbe given. But in part that might be, because of the positionadopted by the Candidate regarding the Company being acorporate trustee, there was not much to give.17.10 I consider the Candidate's inter-actions with the liquidators doesnot fall into the category of active assistance; like that which theCandidate says he gave to the receivers (which I refer to below).But the Candidate did what was required of him when theliquidators asked him.Conclusion17.11 I treat the Candidate's dealings with the liquidators, as a neutralfactor when considering the exercise of my discretion, anddetermining an appropriate period of prohibition.The Deputy Registrar's decision regarding prohibition of the appellant[36] Having considered the issue of whether the company was involved in orconducting the property development venture, and each of the four allegations madeby the IET against the appellant, the Deputy Registrar then turned to consider whetherto prohibit the appellant from being a director and if so what period. He said:19.8 I have already noted Davidson and that it considered that thesetting of standards, and deterrence, are important factors. Allpersons who are directors or manage a company must have itreinforced for them that they must exercise proper governance andnot ignore the basic duties imposed on them. They must be heldaccountable for their actions. It is also important that there isconsistency in treatment of candidates so as to be fair to allcandidates.19.9 In addition, I consider that s 299 of the Insolvency Act is analogousto s 385. Henderson [2017] NZHC,474 considered the purpose of s299 of the Insolvency Act and it followed and approved Davidson.At [29] Associate Judge Osborne stated:"- there is a public interest in protection. This goes beyond thatsection of the public who may be involved in a particular company orin potential dealings with the former bankrupt and from the mostobvious group to be protected. There is also a public interest indeterrence."Risk to the public19.11 Another important factor to take into account is the protection ofthe public. The public requires protection from incompetent,stupid, misguided and irresponsible directors as well as theunscrupulous and dishonest director. If the Candidate was ever adirector or manager of a company in the future is there a risk that hecould mismanage a company and that insolvency would result in aloss to creditors.19.15 The personal attributes of a candidate are also relevant but unlessthere are exceptional circumstances the risk to the public is likelyto outweigh the risk of possible adverse circumstances to thecandidate. A candidate is likely to incur some adverse publicityfrom a notice of prohibition and may suffer reputational harm.It is likely that prohibition will cause difficulties for a candidateand his or her family. But that is an inevitable consequence ofbeing prohibited and is an element of the deterrent factor. That,of itself, is not a valid reason to not impose a period of prohibition.I deal with the issue of future work prospects below.Consequences of prohibition on future work prospects19.16 I note that a notice of prohibition does not necessarily prevent aperson from taking up paid activity. It simply restricts the scopeof those activities. For example, in most circumstances being anemployee of an organisation would not breach a notice ofprohibition.19.17 Furthermore, a notice of prohibition will not necessarily preventa person from carrying on their own business provided it isunincorporated. It is true that without the privilege of limitedliability the individual becomes personally responsible for thedebts of the business but that just reinforces the principle that asober assessment should be undertaken each time the businessis about to enter into significant commitments. In addition, itwould not be too different from operating a company becausenearly all banks, and many trade creditors, require a director of acompany to personally guarantee a company's debt.My consideration of all the factors referred to in respect of theCandidate19.30 The Candidate (with his fellow director) was directlyresponsible for the mismanagement. I make the followingcomments on the specific acts of mismanagement:(a) The trading on of the company while it was insolvent, andthe entering into contracts without even considering theinterests of the creditors, or ever taking stock of a deterioratingfinancial situation, was very serious.(b) I do not consider the failure to have adequate financialrecords and accounts as being just some sort of "technical"breach. Having up to date financial information, and utilisingit, is a financial plank of good governance. Insolvencypractitioners often say the failure to have adequate financialrecords is one of the most common reasons behind the failureof a company. I am satisfied that the Candidate's reason for nothaving financial records was specious. And, the Candidatescontinued insistence that he was justified in taking the positionhe did indicates he would still do the same thing today.(c) I consider the nature of the mismanagement to be at leastreckless. And I am satisfied that there were no other reasonsfor the Company's failure which did not involvemismanagement, or were outside the control of the Candidate.(d) I note the somewhat enigmatic statement that the Candidatewas not a shareholder of the Company. That of course iscorrect. I am not sure whether it is meant to imply that theCandidate was a non-executive director who did not personallybenefit from the mismanagement. If that was the intention thenthe Candidate would have had to be more explicit. It is clearthat the Candidate was closely involved in the Company. Anyreturn that he might receive from the project was not going tobe limited to director's fees. If this factor was going todetermine my ultimate decision, I might have sought moreinformation. Because it was not, I did not.Even if the Candidate could be classified as a non-executivedirector the Candidate was closely involved in the operations ofthe Company. The SSL quotation was originally sent to theCandidate personally. The Candidate was the face of theCompany in court in relation to the SSL proceedings as can beseen from the First Affidavit and Second Affidavit. I again referto paragraphs 18.6 – 18.13 of this final minute.(e) It is an aggravating feature that the mismanagementcommenced almost from the time the Company was formed andthat the Company's indebtedness grew to such a substantialamount over a very short period of time.(f) There was not one error of judgement leading to seriousconsequences. There were separate multiple instances ofmismanagement over a period of time.19.31 I consider that having regard to the nature and scale of themismanagement, the Candidate is a risk to the public. I considerthe Candidate either does not recognise the duties andresponsibilities required of a director or decided to ignore them.Either alternative is equally damming. He shows no remorse andhe shows no understanding of the position of the creditors. TheCandidate blames the Company's failure on others, or on events forwhich he takes no responsibility. Because the Candidate is notprepared to recognise, or understand, where he went wrong thenthere is a high risk of further mistakes in the future.19.32 In making this assessment I have taken into account, so far as I can,the Candidate's past performance before the mismanagementoccurred. Overall, it is a positive assessment. I am assuming, withoutmaking inquiry, and having no information to the contrary, that therehave been no previous business failures where mismanagement hasbeen alleged. And the mismanagement has been only in respect ofone company.19.33 Another aspect in considering the risk profile of the Candidate is whathas been the performance of the Candidate subsequent to theCompany going into liquidation. The Candidate is currently a directorof 6 companies. Because these companies have not been placed inliquidation can be regarded as a positive factor and that it lowers theCandidate's risk profile.19.34 There is a limit as to how much weight I can give this factor. 4 of theCompanies [sic] have been operational for about 2 years or less. Thatis not much of a proven track record. I also note that for one of thelonger operating companies there has been another director as well.19.37 I have taken into account the overall purpose of the Act. But there isno absolute right for any person to be a director of a company. If aperson abuses that role or does not understand what is required of acompany director then it is right proper that person that person isrestricted from undertaking that role. In any event the purpose of thelimited liability company is to allow a business person, as ashareholder, to invest capital into a venture but have no personalliability beyond that. Prohibition as a director does not prevent theCandidate from investing his money into a venture, as a shareholder.19.38 Even if risk to the public had been absent, I consider that on the basisof deterrence and setting appropriate standards of commercialbehaviour, that is another reason for exercising my discretion toimpose a period of prohibition. The Candidate's failings were at abasic level. Directors need to have it re-enforced to them that there isno place for directors who lack the basis understanding of what isrequired of a company director.19.41 I recognise that the Candidate could have been influenced by hisprofessional advisors in taking certain positions. Hypotheticallyspeaking, it is possible that directors misunderstand what they aretold, or might even get poor advice. I have determined there is nodefence under s 138 for the Candidate's actions. However, to put thebest possible slant from the Candidate's perspective I have taken thispotential factor into account in the exercise of my discretion.19.42 The Candidate says that he actively co-operated with the receivers"and indeed identified the eventual purchaser of the property" TheCandidate had personally guaranteed the debt owed by the Company.It was in the Candidate's personal best interests that the Property soldat a good price to clear his personal liability. It was a sensibledecision, from a personal perspective, for the Candidate to take theaction he did. Nevertheless, he did so. It benefitted the Company. Itis a positive feature and I have taken it into account.19.43 I also recognise, if I understand the Submissions correctly, that theCandidate lent money to the Company through LCL.5 It has lost allof that money and so the Candidate has suffered financial loss as acreditor, as well as the unsecured creditors.5 Le Compte No 2 Ltd.19.45 After taking into account all the matters referred to in paragraph 19above, and considering the statutory purpose of s 385, I havedetermined that I should exercise my discretion to impose a period ofprohibition.20.11 When I considered the different factors at play in deciding whetherto exercise my discretion it came down to an either or decision.In considering the period of prohibition I have a wider range ofone to ten. I have given the positive factors I referred to inparagraph 19 full weight, and my decision reflects this.21.1 After taking all matters into account, and the particular mix offactors in this case, I direct that the Candidate is prohibited for aterm of three years (to take effect from the date of the section385(3) notice) from being a director or promoter of a company,or being concerned in, or taking part, whether directly orindirectly, in the management of a company.[37] The Deputy Registrar issued a Notice pursuant to s 385(3) of the Act,prohibiting the appellant from being a director or promoter of a company or beingconcerned in or taking part in the management of a company for a period of threeyears.SubmissionsThe appellant[38] As noted at the commencement of this judgment the appellant's grounds ofappeal are that:(a) the failure of the company was due to unexpected matters outside hiscontrol as a director;(b) the property development project was from its outset commerciallyviable and a good business opportunity; and(c) the failure of the company was not caused by the appellant'smismanagement, or alternatively a sufficient degree of mismanagementto justify the making of a prohibition order.[39] Mr Grove for the appellant submits that in reaching the decision to make aprohibition order, the Deputy Registrar erred by misunderstanding the nature andfunction of the company which was a non-trading entity and corporate trustee of theTrust. He submits that it was the Trust, and not the company, which was carrying outthe property development project at 19 Carlton Mill Road, Christchurch.[40] Mr Grove says that a non-trading company such as Cambridge on the AvonLtd, could only be mismanaged and prepare financial accounts if it was actuallytrading. He submits that it is significant that the company had been approved by theIRD as having non-active status, meaning that it was not required by the IRD to fileincome tax or imputation returns from 2017. He notes that all taxable activitiesrelating to the development project, including accounting to the IRD for GST, wereundertaken by the Trust which had its own IRD number, and complied with itsfinancial reporting obligations. He says that although the appellant provided therespondent with the Trust's IRD number, the respondent did not request the Trust'sfinancial and management records, and he says that had such a request been made,those records could have been provided.[41] Mr Grove notes that the appellant had previously obtained professional legaland accounting advice from his solicitors and Mr Prasad respectively, in which he wasadvised that the company was not required to prepare and maintain financialstatements and did not have any obligation to meet any of the requirements of s 194of the Act. He submits that the appellant was entitled to rely on that advice in decidinghow he was required to conduct the management of the company and discharge hisduties as a director. He submits that the respondent failed to consider the implicationsof this situation before making the prohibition order and prohibiting the appellant frombeing a director of a company for three years.[42] As regards the viability of the property development project, Mr Grove saysthe comprehensive Jones Lang valuation of the property demonstrates that it shouldhave been extremely profitable, and he notes that the purchase price was $1,860,000and the "as is where is" valuation was $2,950,000. He notes that the valuation of thecompleted project was $5,600,000, and the estimated cost of completing theremediation work was $1,500,000. He submits on that basis it is clear that it was acommercial and profitable development.[43] Mr Grove says that as a result of delays which arose in getting the remediationwork completed the project took longer than had been expected. The first securityholder VPHL which was principally funding the development refused to extend theterm of its loan, called it up and appointed receivers. Following their appointment thereceivers moved swiftly to arrange a sale of the property and the company was placedinto liquidation. Mr Grove says that the appellant had taken active steps to avoid thathappening approaching alternative funders so as to pay out the creditors and completethe development. He notes that on 5 June 2018 Acumen Finance confirmed that it wasputting a finance package together for a loan totalling $4.0 million for a nine monthterm to be advanced to another company associated with the appellant to enable theoutstanding creditors of the company to be paid and the Carlton Mill project to becompleted. However, before that could be progressed the company was placed inliquidation by the Court. Mr Grove also notes that the appellant had arranged for thethird security holder, Le Compte, to waive its security so that any surplus fundsfollowing repayment of the first and second secured creditors could be applied towardspaying the company's unsecured creditors.[44] Mr Grove also notes that shortly prior to the High Court making the orderplacing the company into liquidation, the company received a written offer from anunrelated party for the purchase of the property for $3,400,000. The party who madethe offer subsequently purchased the property from the receivers.[45] Mr Grove further submits that as not all of the loan funds available to thecompany under the VPHL loan had been drawn as at June 2018, the company hadfunds available to it which it could have applied towards paying the unsecuredcreditors, and accordingly it was not trading whilst insolvent.[46] As regards the allegation that the appellant as the director of the companyfailed to maintain proper accounting records, Mr Grove submits that any such failuredid not cause or contribute to the failure and liquidation of the company, and does notjustify the making of a prohibition order. He submits because the appellant was wellaware of the amounts owed to the unsecured creditors and the secured borrowings,this is not a case of a director continuing to operate a company where the absence ofproper accounting records means that they did not know the correct financial positionof the company. Mr Grove submits that the IET allegation that the appellant hadmismanaged the affairs of the company by reason of not maintaining financial records,was not made out.The respondent[47] Mr Connolly for the respondent submits that the appellant bears the onus ofsatisfying this Court that it should differ from the Deputy Registrar's decision. Hesays the appellant must demonstrate an error of law or principle, or that a relevantconsideration was overlooked, or that the Deputy Registrar's decision was plainlywrong. He says the appellant has not discharged that onus in this case.[48] Mr Connolly says the Deputy Registrar was correct to find that two types ofmismanagement occurred and were at least a partial reason for the failure of thecompany: reckless and insolvent trading; and a failure to keep proper accountingrecords. In relation to the former, Mr Connolly says Mr Henderson caused thecompany to enter into short term lending arrangements that were not sufficient tofinance the project through to completion and ensure that trade creditors could be paidin accordance with their ordinary terms. He says the short-term nature of the fundingarrangements meant the company would need to rely on refinancing being available,and when it was not, there was no contingency plan. Further, he says the companycontinued to incur obligations to creditors after it had defaulted in its obligations toSmartlift and had been issued statutory demands.[49] In relation to the second ground of mismanagement, a failure to keep properaccounting records, Mr Connolly highlights that no financial records were kept by thecompany. In responding to Mr Henderson's submission that the company did not needto keep accounting records because it was only the trustee of the Trust and did nottrade on its own account, he says the Act's requirement to keep proper accountingrecords pursuant to s 194 does not contain an exemption for corporate trustees. Hefurther notes that ss 135 and 136 of the Act that impose directors' duties, and s 385that empowers the Registrar to prohibit persons from managing companies, also donot contain exemptions for corporate trustees. Mr Connolly says the appellant'sposition misunderstands the legal nature of a trust and the status of a trustee, as thecompany acting as trustee remains directly liable in its own right for liabilities incurredby third parties. Accordingly, the directors of such a company must maintain properaccounting records to be able to determine the financial position of the company, toassess its solvency on an ongoing basis and ensure that it does not engage in recklessor insolvent trading. Mr Connolly submits that the absence of any accounting recordsfor the company meant that Mr Henderson was not readily able to assess and monitorthe company's financial position accurately and, as a consequence, he was not able todischarge his duties once the company encountered financial difficulties. Further,Mr Connolly says the "non-active" status of the company for tax purposes is a redherring. He says this fact simply reflects the position in tax law that the Trust, despitenot being a separate legal entity, is treated as a separate taxpayer and so tax returns arefiled in the name of the Trust. This does not exempt the company or its directors fromcomplying with the Companies Act. Therefore, Mr Connolly says the DeputyRegistrar was correct to conclude that reckless and insolvent trading and the failure tomaintain proper accounting records constituted instances of mismanagement and wereat least a partial cause of the company's failure.[50] Mr Connolly says the Deputy Registrar correctly exercised his discretionpursuant to s 385 of the Act. He says that the Deputy Registrar took into accountfactors that were correct and appropriate, including: the nature of the mismanagementand the role of Mr Henderson in relation to that; the purpose and intention on the Actgenerally; the purpose of setting standards and specific deterrence; the riskMr Henderson poses to the public; factors personal to Mr Henderson; the consequenceof prohibition on future work prospects; the extent of the loss and its effect on creditorsand investors; timeliness; and market conditions. Finally, Mr Connolly submits thatthe period of prohibition of three years imposed by the Deputy Registrar wasappropriate and reflects a correct and reasonable exercise of the Deputy Registrar'sdiscretion, in line with other relevant decisions.[51] Mr Connolly says that costs should follow the event.LawThe appeal[52] The appeal is brought pursuant to s 370 of the Act, which provides:370 Appeals from Registrar's decisions(1) A person who is aggrieved by an act or decision of the Registrar underthis Act may appeal to the Court within 15 working days after the dateof notification of the act or decision, or within such further time as thecourt may allow.(2) On hearing the appeal, the court may approve the Registrar's act ormay give such directions or make such determination in the matter asthe court thinks fit.[53] An appeal under s 370 is a hearing de novo.6 In Toilolo v Registrar ofCompanies, Wylie J referring to s 385 of the Act explained:7[31] Section 385 requires the decision-maker to be satisfied as to a numberof threshold issues; if he or she is satisfied, the section then confers adiscretion to prohibit. The authorities suggest as follows:(a) In regard to the factual findings required before the discretioncan arise, the Court must consider the merits of the caseafresh. The weight given to the reasoning of the DeputyRegistrar is a matter for the Court's assessment. Theappellant, bears the onus of satisfying this Court that it shoulddiffer from the decision of the Deputy Registrar, and it is onlyif this Court considers that the decision is wrong that it isjustified in interfering with it.(b) In regard to the exercise of the discretion, in the event thedecision-maker as to the factual matters specified, thethreshold for a successful appeal is more limited. Anappellant has to demonstrate and error of law or principle, orthat an irrelevant consideration was taken into account, or thata relevant consideration was overlooked, or that the decisionwas plainly wrong.Section 385 Companies Act 1993[54] Section 385 of the Act relevantly provides:385 Registrar may prohibit persons from managing companies6 Toilolo v Registrar of Companies [2019] NZHC 1090 at [30].7 Toilolo, above n 6 (footnotes omitted).(1) This section applies in relation to a company –(a) that has been put into liquidation because of its inability topay its debts as and when they became due:(2) (3) The Registrar or the FMA may, by notice in writing given to a person,prohibit that person from being a director or promoter of a company,or being concerned in, or taking part, whether directly or indirectly, inthe management of, a company during such period not exceeding 10years after the date of the notice as is specified in the notice. Everynotice shall be published in the Gazette.(4) The power conferred by subsection (3) may be exercised in relationto—(a) any person who the Registrar or the FMA is satisfied was,within a period of 5 years before a notice was given to thatperson under subsection (5) (whether that period commencedbefore or after the commencement of this section), a directorof, or concerned in, or a person who took part in, themanagement of, a company in relation to which this sectionapplies if the Registrar or the FMA is also satisfied that themanner in which the affairs of it were managed was wholly orpartly responsible for the company being a company inrelation to which this section applies; or(5) The Registrar or the FMA must not exercise the power conferred bysubsection (3) unless—(a) not less than 10 working days' notice of the fact that theRegistrar or the FMA intends to consider the exercise of it isgiven to the person; and(b) the Registrar or the FMA considers any representations madeby the person.(6) No person to whom a notice under subsection (3) applies shall be adirector or promoter of a company, or be concerned or take part(whether directly or indirectly) in the management of a company.(7) Where a person to whom the Registrar or the FMA has issued anotice under subsection (3) appeals against the issue of the noticeunder this Act or otherwise seeks judicial review of the notice, thenotice remains in full force and effect pending the determination ofthe appeal or review, as the case may be.[55] The prohibition of directors under s 385 is both penal and protective in nature.As Miller J observed in Davidson v Registrar of Companies:8[91] . As I explain below, the legislation initially examines mismanagementcontributing to insolvency, without focussing on the conduct of any givendirector. Causation having been established, the Registrar may prohibitanyone falling into the class of directors and managers. Prohibition is aimednot at remedying wrongs done to shareholders and creditors of the insolventcompany but at protecting the public from unscrupulous or incompetentdirectors in future, deterring others, and setting appropriate standards ofbehaviour. At the same time, any given director or manager inevitablyexperiences prohibition as a punishment; it is an adverse consequence of aninquiry into his or her involvement in an insolvent company.[56] In his detailed analysis of s 385 Miller J said:9[94] Section 385 applies to a company that is unable to pay its debts as theyfall due, or on which execution has been returned unsatisfied, or which hasbeen put into receivership, or which has entered into a compromise with itscreditors, or which is in voluntary administration. The theme is businessfailure, evidenced by insolvency.[95] Prohibition may follow where the qualifying company's plightresulted wholly or in part from the manner in which its affairs were managed.(I put the onus to one side for the moment.) So the legislation requires a causalrelationship between management of the company's affairs and its qualifyingcircumstances.[96] There is a sense in which failure always results from management, fora company must act through human agency. However, Mr Rennie acceptedthat the section's purpose is that of disqualifying directors and managers whoare not fit and proper persons to act in those capacities; it is aimed atmismanagement. Both counsel assumed that, for a director, some departurefrom the standard of care, diligence and skill set by ss 137 and 138 of the Actwill be required.[97] I take a somewhat different view. I accept that the section is aimed atthose who through some want of integrity, skill, judgement or industry are notsuitable directors or managers. They may well have behaved in ways thatbreach a director's duties and standard of care under ss 131 - 137, and theRegistrar must recognise that under s 138 a director is entitled to rely onothers. But ss 131 - 137 address an individual director's accountability toshareholders and creditors of a company which the director has already served,while s 385 is protective and forward-looking. The Registrar's inquiry isaddressed initially to mismanagement of the company's affairs and its causalconnection to insolvency, not the behaviour of individual directors. Suchmismanagement having been identified, all of the company's directors andmanagers are eligible for prohibition. The power to prohibit them is broadand discretionary in nature. When exercising it the Registrar is not confined8 Davidson v Registrar of Companies [2011] 1 NZLR 542 (footnote omitted).9 Footnote omitted.to conduct that caused the company's insolvency; all of the individualdirector's attributes and conduct in office may be taken into account.[100] Of course the Registrar does not wield the power against a Board andmanagement team collectively; rather, each respondent must be examinedindividually in all the circumstances of the case. The power is discretionary;s 385(3) and s 385(4) both provide that the Registrar "may" exercise it. Likeany other discretionary power, it must be exercised for the statutory purpose,that of excluding from company management those who are unsuited to it.[103] By way of summary, the Registrar's inquiry should follow thefollowing steps:a) Does the company, or do the companies where there weremore than one, qualify under subsection (1);b) Was the respondent a director or manager of the company orcompanies within the 5 years preceding the Registrar's notice;c) Where there is one qualifying company:i) was the manner in which the company's affairs weremanaged a contributing cause of its qualifying status;and, if soii) ought the Registrar exercise the discretion to prohibitthe respondent in all the circumstances?e) Where prohibition is appropriate, what is the appropriateterm?[57] The steps outlined by Miller J in Davidson were subsequently adopted byCull J in Brand v Registrar of Companies,10 and also by Wylie J in Toilolo.11 I shallconsider the appellant's grounds of appeal with reference to the four steps describedby Miller J as are relevant where one qualifying company is involved, and asapplicable to the present case. And as Miller J explained in Davidson, once thedecision-maker is satisfied that the company is a qualifying company within s 385(1)and also satisfied that the person to whom the notice was addressed was a director (orconcerned in the management) of the company, the initial focus is on whether therewas mismanagement of the company's affairs, and if so whether the mismanagement10 Brand v Registrar of Companies [2018] NZHC 3148 at [45]–[47].11 Toilolo, above n 6, at [35]–[36].contributed to the insolvency, rather than to the conduct of individual directors.Should the decision-maker be satisfied that mismanagement occurred which hadcausal connection to the company's insolvency, the power to prohibit a director isbroad and discretionary in nature. The power to make a prohibition order is not aimedat remedying wrongs done to shareholders or creditors of the insolvent company, butat protecting the public from incompetent or unscrupulous directors in the future,deterring others and setting appropriate standards of director conduct. Whenexercising that discretionary power, the decision-maker is not confined to consideringconduct that directly caused or contributed to the company's insolvency, and allaspects of an individual director's conduct in office may be taken into account. Thatincludes making an assessment of a director's conduct in relation to themismanagement found to have occurred, and the decision-maker can also take intoaccount a director's individual qualities and their contribution to the failure of thecompany.12AnalysisDid the company carry out the development project?[58] A preliminary issue arises as to whether, notwithstanding its position as atrustee for Trust, the company carried out or was involved in carrying out theapartment development project. The company purchased the property and borrowedfunds to complete the purchase including vendor finance. It also borrowed the fundsit required to carry out the construction and to undertake the planned refurbishment ofthe apartments. On behalf of the company Mr Henderson as director signed theSmartlift quotation. It is clear that it was the company which undertook the purchaseof the property and which was carrying out the apartment reinstatement andrefurbishment project. The fact that the company was a trustee does not legallyinsulate it or preclude it and its directors from compliance with the provisions of theAct. And I agree with the Deputy Registrar that the company was carrying out a dualrole both as developer and trustee.12 Brand v Registrar of Companies, above n 10, at [177]; and Toilolo, above n 6, at [102]–[103].[59] The non-active status approved by the IRD on 15 March 2018 did not have theeffect of excusing the directors of the company from compliance with their obligationsunder the Act. It simply meant that the company was not required to file annualincome tax or imputation returns for the period commencing with its incorporationunless it ceased to satisfy the non-active company criteria. Moreover, by 15 March2018 which was coincidentally the date on which the receivers were appointed byVPHL, the company had been underway with the work on being undertaken since June2017 when Smartlift commenced its levelling work, and the several other contractorswho had been engaged by the directors of the company had also carried out work onthe apartments but had not been paid.[60] Irrespective of the non-active status approved by the IRD in March 2018, thedirectors of a company, which was trading and engaged in a commercial activity toredevelop the property and apartments which included borrowing funds and engagingcontractors to carry out the work required on the apartments, needed to know thefinancial position of the company in order to meet their obligations and those thecompany had to third parties such as the contractors the company engaged to performwork on the apartments. Without maintaining proper financial records the directorswould not be in a position to plan and monitor the financial position of the companyto ensure that it was solvent and able to meet its obligations to contractors which itengaged to carry out work on the project.Does the company qualify under subs (1)?[61] The company was put into liquidation by order of the High Court on 7 June2018 on the application of a creditor, Smartlift, after it had failed to satisfy a statutorydemand for payment of a debt. I am accordingly satisfied that the company qualifiesand falls within s 385(1).Was the appellant a director of the company within the five years preceding the DeputyRegistrar's notice?[62] The appellant does not dispute that he was a director of the company within aperiod of five years prior to the notice being given to him by the Deputy Registrar.And I note that a Company Extract issued by the New Zealand Companies Officedated 10 May 2022 produced in evidence, records the appellant as being one of thetwo directors of the company.Was the manner in which the company's affairs were managed a contributing cause ofits qualifying status?[63] Section 385(4)(a) requires the Registrar to be satisfied that the manner in whichthe company's affairs were managed was wholly or partly responsible for the companybeing a qualifying company under s 385(1). Relevantly in this case, the Registrar mustbe satisfied that the manner in which the company's affairs were managed was whollyor partly responsible for it being unable to pay it debts when they fell due andconsequently put into liquidation.[64] The two types of mismanagement identified by the Deputy Registrar as havingcaused or contributed to the failure and liquidation of the company were reckless andinsolvent trading, and failure to keep proper accounting records.Reckless and insolvent trading[65] The venture by which the property was acquired for the purpose of beingrepaired, refurbished and then resold was undertaken by the company on the basis ofthe directors' estimate of the time required to complete the work, and then market theunits for sale, and settle the sales. The borrowings arranged by Mr Henderson onbehalf of the company to finance the purchase of the property and the work requiredto put the apartments into a saleable condition, were in each case for relatively shortperiods. These short terms meant that it was crucial for the company to complete theredevelopment and sell the apartments within the time frame provided by the terms ofthe loans it had arranged, or if delays were encountered, be in a position to refinancethe original borrowings so as to be able to meet the company's obligations to thirdparties, including the contractors it had engaged to do the work on the apartments.[66] It is clear that soon after Mr Henderson, acting on behalf of the company,engaged Smartlift to undertake the foundation releveling work required to rectify thedamage caused to the apartments by the Christchurch earthquake, the company did nothave funds with which to pay for the work Smartlift undertook. On 29 May 2017,Smartlift submitted a quotation for $158,765 plus GST for the repair and levellingwork required on the property. The written quotation was addressed to Mr Hendersonpersonally and was accepted by Mr Henderson on behalf of the company on 12 June2017. The terms of trade included with Smartlift's quotation stated that payment forthe work was to be pursuant to a payment schedule, and payments were required to bemade within seven days of the date of an invoice. The payment schedule requiredpayment of 20 per cent of the quoted price upon acceptance of the quotation,30 per cent once all the lifting pads were poured, and 50 per cent on completion of allSmartlift's work. The quotation further stipulated that no work would commence untilthe quote and formal conditions had been signed. The quotation also provided thatunless expressly forming part of the work covered by the quotation, all other worksrequired were excluded from the quotation sum.[67] As Smartlift commenced work in June 2017 it appears that the company paidthe initial 20 per cent component due on acceptance of the quotation. However theSmartlift invoice dated 7 July 2017 for $54,774.10 was not paid within seven days andnor was the Smartlift invoice dated 31 July 2017 for $91,290.16. The company'sfailure to pay these invoices as they became due, so soon after the work on the projecthad got underway, provides a clear indication that only two months after having settledits purchase of the property on 3 May 2017, by early July 2017 the company did nothave the capital or access to funding with which to meet its obligation to pay its tradecreditors. However, the company's inability to pay Smartlift did not prevent it fromengaging other contractors to undertake plumbing work, to construct kitchen cabinets,and to undertake stone masonry and tiling.[68] On 19 October 2017 the $2,100,000 loan from VPHL was available to bedrawn down and on that same day the Cranford Entertainment loan of $900,000 wasrepaid. The company's borrowing from VPHL was arranged by Mr Henderson and heand Mr Kells signed the loan documents as directors of the company and also in theircapacity as personal guarantors of the loan. This loan was for a term of only sixmonths, expiring 19 April 2018 and at a very high interest rate of 16.75 per cent perannum. The term of the Cranford Entertainment loan expired on 28 January 2018, andso the net effect of the VPHL borrowing was to provide the company with funds torepay the Cranford Entertainment loan; to extend the date for repayment to 19 April2018 and following repayment of the Cranford Entertainment loan provideapproximately $1 million with which to meet the construction and other costs ofcompleting the development. The comparatively short term of the VPHL loan and thehigh interest rate that was charged, shows that the directors of the company wereproceeding on a very short-term high-risk basis in terms of the project funding, andwere running a risk that completion of the building work, marketing and selling of theapartments and settling of the agreements for sale and purchase entered into withpurchasers, could all be achieved within the six month term of the VPHL loan.[69] Despite arranging the VPHL loan funds which were available to it from19 October 2017, the company failed to pay Smartlift's first statutory demand,coincidentally issued that same day, 19 October 2017. In its first statutory demandSmartlift sought payment of its 7 and 31 July 2017 invoices totalling $146,064.26within 15 working days from service of the notice. Subsequently on 13 November2017, Smartlift issued a second statutory demand seeking payment of $91,290.16 ithad claimed in its invoice dated 31 July 2017. Once again, the company failed to makeany payment.[70] As I have earlier noted Smartlift's creditor's petition was initially set down tobe heard in the High Court on 14 February 2018. In his affidavit sworn on27 November 2017 and filed in support of the company's application to set aside theSmartlift statutory demand, Mr Henderson said that at that time the company had$250,000 in its solicitors' trust account. Having applied on 27 November 2017 for anorder setting aside Smartlift's 13 November 2017 statutory demand, on 8 February2018 the company withdrew and abandoned its application, and on 16 February 2018the High Court made orders directing the company to pay Smartlift a total of$114,737.93, by midday on 23 February 2018. Once again no payment was made.[71] From this sequence of events it appears that despite holding funds of $250,000in its solicitors' trust account, and despite having arranged the VPHL loan the fundsof which were available from 19 October 2017, and despite the orders made by theHigh Court 16 February 2018, the company failed to make any payment to Smartlift,leading to Smartlift filing a creditor's petition seeking an order for liquidation of thecompany.[72] By June 2018 the VPHL loan was two months overdue for repayment, and theSmartlift invoices and those of the other trades who had worked on the apartmentstotalling approximately $405,000 remained unpaid. VPHL had not been willing toextend the term of its loan which by 5 June 2018 amounted with interest toapproximately $2,350,000. The second mortgagee, Number 68 Ltd, was owedapproximately $850,000, and Le Compte, was owed approximately $2,000,000.[73] In his affidavit sworn on 5 June 2018 in support of the company's applicationfor an adjournment of Smartlift's creditor's petition, Mr Henderson said that thedevelopment project was at a stage where approximately $500,000 of further workwas required before the apartments could be marketed for sale. Facing an applicationfor an order for the winding up and liquidation of the company, Mr Henderson saidthat Le Compte had agreed to waive its security so that the surplus proceeds of thereceiver's sale could be applied to paying the unsecured creditors. Mr Henderson saidthat the company was seeking alternative funding and that a conditional offer offunding of $4,000,000 was being negotiated.[74] Despite Mr Henderson's efforts, no alternative funding was arranged and theorder putting the company into liquidation was made by the High Court on 7 June2018.[75] This summary makes it clear that at the time when the company embarked onthe apartment development project, the viability of the project and the company'sability to fund the purchase of the property, the cost of the remedial work andimprovements, and the marketing of the apartments, entirely depended on the workbeing completed and the apartments sold within the time frame prescribed by the termsof the loan funding which had been arranged. The directors of the company could notbe confident that the project would not encounter delays and they could not reasonablyor prudently proceed with the project and incur debt by engaging contractors andsuppliers in the expectation that the parties loaning the funds required for the project(other than Le Compte with which Mr Henderson was associated), would on requestby the company readily agree to extend the term of their loans in the event that theproject encountered delays.[76] Within a matter of weeks after work on the apartments was commenced, thecompany failed to pay Smartlift in accordance with the terms agreed to when acceptingthe quotation, and its failure to do so shows that it was insolvent from mid-July 2017and remained insolvent throughout the period which ended with the Court putting thecompany into liquidation on 7 June 2018. From this review of the company's history,I am well satisfied that in his role as a director, Mr Henderson conducted and managedthe affairs of the company in a reckless manner. During that period and on behalf ofthe company Mr Henderson engaged Smartlift and the several other contractors toundertake work on the apartment building and did so in circumstances in which heknew the company was insolvent and unable to meet its obligations to pay for thework, unless it could borrow to do so which was at best an uncertain prospect.[77] As the Deputy Registrar noted, there is nothing in the evidence to show thatthe directors of the company considered the interests of the company's creditors orundertook an assessment of the financial position as the project proceeded and delayswere encountered. And I agree with the Deputy Registrar's observation that thedirectors' failure to do so means that they either did not appreciate or realise thesituation the company was in, or if they did they failed to act in response to thesituation. Either explanation for what occurred demonstrates reckless and insolventtrading, and I find that Mr Henderson was central and instrumental to the making ofdecisions and to the management of the company during the extended period of itsinsolvency prior to liquidation.[78] As a director of the company, Mr Henderson was required to comply with theprovisions of ss 135 and 136 of the Act which relevantly and respectively provide thata director of a company must not cause or allow the business of the company to becarried on in a manner likely to create a substantial risk of serious loss to thecompany's creditors, and must not agree to the company incurring an obligationunless the director believes at that time on reasonable grounds that the companywill be able to perform the obligation when it is required to do so. I find that themanner in which Mr Henderson caused or allowed the company's apartmentdevelopment project to be carried on was such as was likely to create a substantialrisk of serious loss to the company's creditors, and that there was no reasonablegrounds on which Mr Henderson could have believed at the time when it enteredinto its obligations, that the company would be able to perform its financialobligations to its creditors when they were due.Failure to keep proper records[79] It is accepted by Mr Henderson that the company failed to keep financialrecords, and Mr Grove submits that as the company was not trading and was acceptedby the IRD as being "non-active" and not required to file annual returns, it was notrequired to do so. I reject that submission.[80] Irrespective of whether the company was required to file annual returns andfinancial statements with the IRD, as the company was engaged in a propertydevelopment project which involved financing it with borrowings and engagingcontractors and other third parties to perform work to carry out the project, thedirectors needed to maintain financial and accounting records so as to be able tomonitor the financial position of the company, and be able to readily assess itssolvency to ensure that it was solvent, and would be able to meet its obligations tocreditors. Section 194 of the Act requires the board of a company to ensure thataccounting records which correctly record the transactions of a company are kept atall times. There is no dispensation from this requirement for a company such asCambridge on the Avon Ltd which was functioning as a corporate trustee, andMr Henderson and his fellow director, Mr Kells, failed to ensure that any accountingrecords were kept by the company. The failure to maintain proper accounting recordsmeant that as a director Mr Henderson was not able to readily assess the financialposition of the company and thereby not in a position to discharge his statutory dutiesunder ss 135, 136, and 137 of the Act.[81] The administrative discipline involved in the preparation and maintenance offinancial accounts and records would have clearly shown the company to be insolventduring the period commencing around early July 2017 through until liquidation in June2018, and the availability of that financial information would obviously have informedthe directors' decisions regarding the project and its funding. It is also clear that in hisrole as a director, Mr Henderson made no provision for the real possibility that VPHLwould not agree to extend the term of its loan beyond 19 April 2018 and how theproject would be funded and completed should that happen. From the evidence itappears that rather than taking pro-active steps to anticipate and address the financialpressure the company would be under, the directors were content for the company toendeavour to "ride out" the financial pressure and demands for payment being madeby Smartlift and the other unsecured creditors, in the hope that the project would becompleted and apartments sold before legal action was taken by either the secured orunsecured creditors which would result in the very outcome that has eventuated,namely losses being suffered by unsecured creditors and liquidation of the company.[82] And I am accordingly satisfied that the directors' failure to maintain properaccounting and financial accounts for the company caused or contributed to the failureand ultimate liquidation of the company.Did the Deputy Registrar err in the exercise of the discretion to prohibit the appellantfrom being a director in all the circumstances?[83] I have found that the Deputy Registrar did not err in his finding that thedirectors of the company were required to comply with the relevant provisions of theAct notwithstanding that the company was a corporate trustee, and "non-active" forthe purposes of filing annual financial accounts with the IRD.[84] I also agree with the Deputy Registrar's finding that Mr Henderson's claim thatthe failure of the company was the result of matters beyond his control cannot besustained.[85] It is apparent that Mr Henderson and his fellow director proceeded with theapartment development project at least from around early July 2017 notwithstandingthat the company was insolvent. The short term borrowing from VPHL in October2017 to repay a vendor finance loan provided by Cranford Entertainment to completethe reinstatement and refurbishment of the apartments meant that unless the projectwas completed within the six month term of that loan, the company was likely to beunder considerable financial pressure. VPHL's subsequent refusal to extend the termof its loan ought to have been anticipated and that possibility provided for by thedirectors, and it cannot be considered to be a factor outside the directors' control whichresulted in the company's failure.[86] I am also satisfied that the Deputy Registrar undertook a thorough and well-informed assessment of the circumstances and factors causing or contributing to thefailure of the company, which included a detailed consideration and assessment of theactions of Mr Henderson as having contributed to it. And Mr Henderson's positionthat the causes of the company's failure were due to matters beyond his controldemonstrate that despite the benefit of a hindsight examination of the company'sperformance and the matters leading to its failure, he appears to have no insight intohow his own actions and decisions contributed to the failure. Having failed toacknowledge his contribution to what occurred, Mr Henderson remains a risk ofrepeating such commercial mismanagement. I agree with the Deputy Registrar thatthis is a significant factor in the assessment of whether to prohibit Mr Henderson as adirector for a period. Furthermore, the Deputy Registrar's assessment of the risk posedby Mr Henderson to the public and the objective of deterrence and the maintenance ofstandards of governance and/or management undertaken by directors, well justify hisconclusion that a prohibition of Mr Henderson is both necessary and appropriate.[87] For these reasons I am satisfied that in reaching his decision the DeputyRegistrar did not err, and his decision to exercise the discretion to prohibitMr Henderson from being a director of a company was well founded having regard tothe factual background and Mr Henderson's conduct which caused or contributed tothe failure of the company.If prohibition was appropriate, did the Deputy Registrar err in imposing a three yearterm?[88] I am also satisfied that the Deputy Registrar did not err in deciding to imposea three year term of prohibition. The three year term can be usefully compared to thetwo and a half years imposed in Davidson. In that case the Court noted that althoughspecific deterrence was not needed, the objectives of standard-setting and generaldeterrence were factors warranting prohibition. Justice Miller said:13[142] But for the reasons I have just given, standard-setting and generaldeterrence do matter in this case. They call for a substantial period ofprohibition if the sanction is to be meaningful. I agree with the DeputyRegistrar that the maximum period of five years is not reserved for the worstpossible cases; on the contrary, there may be many cases in which a substantialperiod is needed.[89] In deciding to prohibit Mr Henderson for a period of three years, the DeputyRegistrar considered the nature of Mr Henderson's mismanagement of the companyand he considered that rather than a single act of mismanagement there had been anumber of separate acts of mismanagement. Referring to Davidson the DeputyRegistrar noted:20.10 The Candidate is different from Mr Davidson. He seemingly hadeither no understanding of the basic duties of a company director orelse he deliberately ignored them. The Candidate's level ofcompetence is different to that of Mr Davidson. Mr Davidson was notconsidered to be a risk to the public but I consider the Candidate to bea risk to be the public. The Candidate ranks below Mr Davidson, interms of his competence and conduct.[90] The Deputy Registrar also took Mr Henderson's personal background; hishistory as a director of companies involved in property development with no priorbusiness failures; the likely effect of prohibition on him; and the nature of hismismanagement of the company, and concluded that having regard to the statutorypurpose of s 385, the appropriate term of prohibition was three years.[91] I find that the Deputy Registrar did not err in his decision to fix the three yearterm of prohibition. I am satisfied that the Deputy Registrar took all relevantconsiderations into account and did not consider or take account of any irrelevantconsiderations. The three year term of prohibition is comparable and distinguishablefrom the term imposed in Davidson and the reasonableness of that term is also to beassessed by reference to the possible maximum of 10 years provided by s 385(3).13 Davidson v Registrar of Companies, above n 8, at [142]. The five year maximum period wasamended and increased to 10 years effective 1 April 2014, by s 150 of the Financial Markets(Repeals and Amendments) Act 2013.Conclusion[92] The appellant has failed to show that the Deputy Registrar erred in his decisionimposing a three year prohibition on him being a director or promoter of a companyor being concerned in or taking part in the management of a company.[93] For these reasons, I shall dismiss the appeal, and the Notice of Prohibitionissued to the appellant by the Deputy Registrar and dated 17 May 2022 is upheld andshall remain in force for three years from the date of the Notice.Result[94] The appeal is dismissed.[95] The respondent having succeeded in opposing the appeal is entitled to an orderfor costs and reasonable disbursements.[96] In the event that the parties are unable to agree costs, I direct that they file andserve costs memoranda not exceeding three pages in length, excluding the title pageand any schedule or disbursement related documentation. The respondent's costsmemorandum is to be filed and served by 5.00 pm on 7 June 2023. The appellant'scosts memorandum is to be filed and served by 5.00 pm on 21 June 2023. Followingthe Registrar's receipt of the parties' costs memoranda, I shall determine the order forcosts on the papers._____________Paul Davison J