ABEDI v SULTAN KEBAB LIMITED (IN LIQUIDATION) [2018] NZHC 2426

ABEDI v SULTAN KEBAB LIMITED (IN LIQUIDATION) [2018] NZHC 2426 [14 September 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-000463[2018] NZHC 2426BETWEEN FAKHRODIN ABEDIAppellantAND SULTAN KEBAB LIMITED(IN LIQUIDATION)RespondentHearing: 16 August 2018Appearances: J Noble for the AppellantP Shackleton for the RespondentJudgment: 14 September 2018JUDGMENT OF HINTON JThis judgment was delivered by me on 14 September 2018 at 11.00 ampursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Boyle Mathieson, AucklandMeredith Connell, Auckland[1] This is an appeal against a decision of the District Court, granting summaryjudgment to the liquidators of the Company, against its sole director and shareholder,for the balance of an overdrawn current account.1 The issue on appeal is as to thecorrect balance of the appellant's shareholder current account, and whether theappellant has raised a tenable defence, such that the matter should go to a defendedhearing.Background[2] The respondent is Sultan Kebab Limited (In Liquidation). The appellant,Mr Abedi, was at all material times the sole director and shareholder of Sultan KebabLimited (the Company). Prior to liquidation, the Company operated a takeaway shop,working mainly on the basis of cash receipts, much of which it seems Mr Abedi tookfrom the till, or paid into his personal account.[3] The Company's record-keeping was very poor, and it failed to file GST orincome tax returns for a number of years before being liquidated on 7 November 2014,on an application filed on 22 September 2014.[4] On 16 February 2018, Judge G Harrison entered summary judgment againstMr Abedi in the sum of $153,364.16 for his overdrawn shareholder current account.[5] The liquidators calculated Mr Abedi's shareholder current account balance as$156,915.26, made up as follows:Payments Made Payments Received Total$ $ $Vehicle expenses (@ 75%of $4,420.23) 3,315.17 3,315.17Cash withdrawals 49,632.60 49,632.60Donations 64.50 64.50Farmers finance 665.99 665.99Personal insurance forFakhrodin Abedi 2,342.42 (1,307.21) 1,035.21Legal expenses 280.00 280.001 Sultan Kebab Ltd (In Liq) v Abedi [2018] NZDC 2199.Loan repayments 679.00 679.00Other personal expenses 1,092.46 (7.09) 1,085.37Transfer to personalaccount 0156-0225441-25 91,188.67 (10,246.25) 80,942.42Transfer to Ziba Abedi 15.00 15.00Balance of sale proceedsfrom sale of business 19,200.00 19,200.00Total 168,475.81 (11,560.55) (156,915.26)[6] The difference of $3,551 between the total in the Liquidators' Schedule, andthe judgment sum, arises because the respondent did not seek summary judgment forsome amounts included in the schedule. This was because those amounts fell outsidethe restricted period for the purposes of s 310 of the Companies Act 1993 (the Act), towhich I refer shortly.[7] Mr Abedi's defence to the summary judgment was that any money he hadreceived from the Company as detailed in the Liquidators' Schedule, and more,(in fact, a total of approximately $163,590) was used to pay the Company's bills. Inother words, he had simply acted as an intermediary or agent for the Company and hetherefore did not owe the Company any money.[8] Judge Harrison found against that argument on the basis that there were norecords to support it.[9] Mr Abedi now appeals.Analysis[10] There is no real dispute that the "payments", as set out in the Liquidators'Schedule, were received by Mr Abedi in the first instance.[11] Rather, Mr Abedi has provided evidence of what he says are company expensesthat he has paid totalling $163,590.[12] Ordinarily, Mr Abedi might have been entitled to claim the benefit of theexpenses he says he has paid, as a potential set-off, such that arguably no net amountwas due by him to the Company. Summary judgment would then not have beenavailable.[13] However, Mr Abedi is precluded from claiming any set-off by the operation ofs 310 of the Act.[14] Under s 310(3) of the Act, following a liquidation, a related person is notentitled to claim the benefit of a set-off arising from a transaction made within the"restricted period" unless the related person proves that at the time of the transaction,the related person did not have reason to suspect that the company was unable to payits debts as they fell due.[15] The restricted period means the period of two years before the application tothe Court, plus the further period to the date of the order. The restricted period wouldtherefore be from 22 September 2012 to 7 November 2014. As all of the paymentsallegedly made by Mr Abedi, occurred during the period between October 2012 and7 December 2014 they clearly fall within the "restricted period", or after theliquidation.[16] Moreover, Mr Abedi is clearly a related person for purposes of s 310(5) of theAct, and the respondent has provided proof that Mr Abedi could not have had reasonto consider the Company was able to pay its debts as they became due when he madeall of the payments comprising the $163,590 sum. That is not contested by Mr Abedi.[17] Therefore, the potential set-off of $163,590 is not available to Mr Abedi byvirtue of s 310(3) of the Act.[18] In those circumstances, in order to defeat the summary judgment application,Mr Abedi needed to put up some plausible evidence that the Company monies receivedby him, as listed in the Liquidators' Schedule, were used to pay the Company'sexpenses. On that basis, he would not have in effect personally received them, as hewould be only an intermediary or agent, acting for the Company. He obviously doesnot need to prove that is the case, but he needs to put up some plausible evidentialfoundation for his defence.2 The evidence he has put up would have been sufficientat a summary judgment level if a set-off were available, but for the defence to whichhe is limited, he needs evidence of a link between the payments in the Liquidators'Schedule and the payments allegedly made by him.[19] Leaving to one side the Cash Withdrawals ($49,632) and the Transfers toPersonal Account ($80,942), there is no evidence (other than assertion) that thebalance of the items in the Liquidators' Schedule (vehicle expenses, et cetera) werepaid to Mr Abedi as an intermediary for the company. The total of those balance items,being $26,340, would therefore be an undisputed shareholder current account balance,regardless of the position with the alleged payments made by Mr Abedi.[20] The payments of $163,590 Mr Abedi says he has made, would therefore needto be married-up with the breakdown of the Cash Withdrawals and Transfers toPersonal Account in the Liquidators' Schedule.[21] Of the "Company expenses" Mr Abedi says he has paid, $85,270 does notqualify. This is the total of rental payments made by Mr Abedi for the lease of theshop. The lease was in the name of Mr Abedi and a Mr Khaden, not in the name ofthe Company. This was therefore his own obligation, not a payment he made on behalfof the Company. He might well claim or have a set-off against the Company becauseit in turn (presumably) leased the premises from himself and Mr Khaden, but that doesnot affect the calculation of his current account in this case and it cannot be said thatwhen he paid the $85,270 sum, he was paying the Company's debt.[22] Of the balance payments Mr Abedi says he made (totalling $78,320), he hasprovided no plausible evidence linking them directly or proximately with the cashwithdrawals, or the transfers to personal account, debited to his shareholder currentaccount, with the exception of payments totalling $9,896. To the extent of the $9,896sum, Mr Abedi's evidence, or the evidence of Ms Keene for the plaintiff, does linkcash withdrawals debited to Mr Abedi's current account with payments made by himat the same (or similar) time on behalf of the Company. Mr Shackleton, for therespondent acknowledged that was arguable.2 Maclean v Stewart (1997) 11 PRNZ 66 (CA).[23] As to the payments totalling $9,896, I therefore consider there is a tenabledefence. That amount may be wrongly included as shareholder debt, when in fact itrepresents funds of the Company paid to Mr Abedi (or used by him), for payment ofthe Company's expenses.[24] There is otherwise no evidence, other than assertion on the part of Mr Abedi,to link any particular cash withdrawal (or transfer to his personal account) with anexpense paid by him on behalf of the Company. That includes no linkage in terms oftiming of payments, nor any contemporaneous documentation. Also, this is not asituation where Mr Abedi has not had an opportunity to provide some evidence,beyond assertion, if it existed.[25] As was held in Centaur Flooring Systems Ltd (In Liq) v Dolbear3 and inThom Contractors Ltd (In Liq) v Thom,4 both of which were summary judgmentapplications, a director of a Company must bear responsibility for maintaining properaccounting records, such that in the event that the Company's records do notadequately record (or record at all) whether or how payments were made for theCompany's purposes, a defendant director cannot rely on the failure to keep properrecords to advance a defence. That principle applies here, by analogy.[26] I therefore conclude that Judge Harrison was right that there was no tenabledefence to the application for summary judgment for the overdrawn current account,to the extent of $143,468 approximately, being the total sum for which he allowedsummary judgment ($153,364), less the sum of $9,896. In respect of that sum, I acceptthere is a tenable defence.[27] The respondent is therefore entitled to summary judgment in the sum of$143,468.3 Centaur Flooring Systems Ltd (In Liq) v Dolbear HC Auckland CIV-2010-404-6677, 31 August2011 at [36]-[39].4 Thom Contractors Ltd (In Liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009 at [17]and [21]-[22].[28] As Mr Shackleton notes, while Mr Abedi is prohibited by s 310(3) of the Actfrom asserting a set-off against the Company, and therefore summary judgment isavailable to the respondent, Mr Abedi can still file a separate claim in the liquidationfor the amount which he says is due to him, which will then be subject to the usualassessment by the liquidators. (Mr Shackleton has already noted in his submissionson this appeal that a number of the payments allegedly made by Mr Abedi on behalfof the Company, are disputed.)Conclusion[29] The appeal succeeds in that the summary judgment quantum is reduced from$153,364.16 to $143,468.[30] The appellant having been substantially unsuccessful, must pay costs on a2B basis to the respondent.------------------------------------------------Hinton J