H INVESTMENTS LIMITED (IN LIQ) v OFFICIAL ASSIGNEE [2018] NZCA 76

H INVESTMENTS LIMITED (IN LIQ) v OFFICIAL ASSIGNEE [2018] NZCA 76 [29 March 2018]IN THE COURT OF APPEAL OF NEW ZEALANDCA319/2017[2018] NZCA 76BETWEEN H INVESTMENTS LIMITED (INLIQUIDATION)AppellantAND OFFICIAL ASSIGNEERespondentHearing: 28 November 2017Court: Clifford, Dobson and Collins JJCounsel: M D Branch and S J M Rawcliffe for AppellantP V Cornegé and G E Slevin for RespondentJudgment: 29 March 2018 at 3.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs for a standard appeal on aband A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Dobson J)ContentsIssues on the appeal................................................................................................. [1]Factual background ................................................................................................ [4]The High Court judgment ...................................................................................... [9]Grounds for the appeal ......................................................................................... [15]Estoppel .................................................................................................................. [16]The liquidators' proof of debt .............................................................................. [31]Standard of proof................................................................................................. [31]Onus of proof ....................................................................................................... [42]Should the Assignee have accepted the liquidators' proof? ................................ [48]Cash flow insolvency ........................................................................................... [60]Balance sheet solvency........................................................................................ [67]Breach of director's duties .................................................................................. [77]Result ...................................................................................................................... [96]Issues on the appeal[1] The narrow issue in this appeal is a challenge to the High Court's confirmationof the Official Assignee's rejection of a proof of debt claim filed against the estate ofa bankrupt by the liquidators of a company of which the bankrupt was the sole directorand shareholder.1 H Investments Ltd (in liq) is the appellant (the company) and therespondent is the Official Assignee (the Assignee) in his capacity as the trustee inbankruptcy of the director, Mr Nyall Hitchcock.[2] The liquidators' proof of debt claim alleged breaches of duty owed byMr Hitchcock to the company under ss 131, 135, 136 and 137 of theCompanies Act 1993 (the CA) during the period he was its alter ego. The claims werethat Mr Hitchcock had failed to act in the best interests of the company, had allowedthe company to recklessly trade and incur obligations which he did not believe onreasonable grounds the company could perform, and failed to exercise due care andskill. The claims subsequently included a claim for failing to maintain accountingrecords, contrary to s 194 of the CA.[3] The appeal also raises somewhat wider issues of the standard required for acreditor to make out a proof of debt claim in bankruptcy, and where the onus of proof1 H Investments Ltd (in liq) v Official Assignee [2017] NZHC 996.lies in dealing with claims of this nature against the estate of a bankrupt. A furtherissue, in effect of estoppel, was raised for the first time on appeal.Factual background[4] Mr Hitchcock was declared bankrupt in July 2013. The Assignee wasappointed as his trustee in bankruptcy. The company was described by the liquidatorsas providing "contracting and repair services". In February 2014, the company wasplaced in liquidation on a creditor's petition filed on behalf of Inland Revenue (IRD).Shortly thereafter, the liquidators filed a proof of debt with the Assignee to claimagainst Mr Hitchcock's estate in bankruptcy for the full extent of debts owed by thecompany at the time of liquidation, totalling some $163,000.[5] A substantial portion of the unpaid creditors in the company's liquidationcomprised amounts claimed by Mr Hitchcock and a family partnership associated withhim (the Hitchcock interests). Those creditors executed a deed of waiver on 28 July2014. The deed was addressed to the company in liquidation, and its liquidators. Theparties executing the deed were the Assignee and Mr Hitchcock and his wife aspartners of the family partnership that was a creditor of the company in liquidation.The terms of the deed recorded a waiver of those creditors' rights to claim in theliquidation .[6] The effect of the waiver was to reduce the amount of the creditors' claimsagainst the company in liquidation. On 5 August 2014, the liquidators filed a reducedproof of debt claim in Mr Hitchcock's bankruptcy for some $50,000, comprising theoutstanding claims against the company in liquidation. There were only two creditors,with IRD being by far the largest.[7] Some 14 months after filing the reduced proof of debt claim, a barristerinstructed by the Assignee (Mr Cornegé) requested further information in support ofthe liquidators' claim. Further details were provided, but the Assignee relied on advicereceived from Mr Cornegé that the information was insufficient to establish thatMr Hitchcock had breached his duties as a director of the company.[8] In January 2016, the Assignee gave notice of rejection of the liquidators' proofof debt. The liquidators challenged that decision by way of an application to theHigh Court under s 239 of the Insolvency Act 2006 (the Act). On 19 May 2017,Associate Judge Sargisson dismissed the application, upholding the Assignee'sdecision to reject the liquidators' proof of debt.2The High Court judgment[9] The Judge analysed the liquidators' claim as involving the followingpropositions. The company's financial statements suggested it was insolvent from2010 to 2013 on both a cash flow and balance sheet approach.3 There was no evidencethe company kept proper accounting records that would support a contraryconclusion.4 Accordingly, the necessary inference was that, by continuing to trade andincur debts, including as now relevant for GST, Mr Hitchcock had breached a rangeof director's duties including, in particular, by carrying on the business in a mannerlikely to create a substantial risk of serious loss to creditors and by allowing thecompany to incur obligations it could not meet.5[10] The Associate Judge was critical of the adequacy of research undertaken by theliquidators on numerous aspects of the company's financial status, and the consequentlack of evidence to support the allegations of breach of director's duties byMr Hitchcock.6 The liquidators' correspondence advancing the claim that supportedits proof of debt stated that the evidence available to the liquidators "suggested" thatMr Hitchcock had continued to trade the company whilst insolvent. TheAssociate Judge considered that the standard of evidence could indeed "suggest"insolvent trading but that such a standard was materially inadequate when a claimantagainst a bankrupt's estate needs to establish the basis for an unliquidated demand.[11] The Judge was not persuaded that the liquidators could make out insolvencyduring the relevant period on either cash flow or balance sheet bases. In the yearsbetween 2010 and 2013, the company had apparently met all its trade creditors apart2 H Investments Ltd (in liq), above n 1, at [87].3 At [55].4 At [55].5 At [55].6 At [65]–[67].from payments of GST to IRD.7 The Judge was not satisfied that failure to pay theIRD was a case of inability to pay, when there was a prospect that it was a case ofrefusal to pay.8 In terms of the balance sheet test, the Judge considered that obligationsowed to the Hitchcock family interests could be disregarded, and on that basis was notsatisfied that the company was insolvent in a balance sheet sense.9[12] As a component of the assessment of balance sheet solvency, the liquidatorstook the view that the book value of the company's assets comprising heavy machinerywere substantially overstated. These assets were recorded in the company's 2013financial statements at $79,666. The liquidators had invited a person who apparentlytraded such items to appraise them, and received an informal report that the assetswere in bad condition, would be difficult to market, and might not return much morethan the cost of disposal. The Associate Judge was critical of the adequacy of thisappraisal. The expertise of the appraiser was unknown and the cursory nature of theopinions expressed were considered inadequate as a basis for writing down the valueof the assets from the amounts stipulated in the company's financial statements.10[13] On all these grounds, the Associate Judge reached the conclusion that, on thebalance of probabilities, the liquidators had not established that the company hadtraded whilst insolvent. Her Honour found that the liquidators had not made outbreaches of any of the provisions of the CA by Mr Hitchcock over the relevantperiod.11[14] In reaching those conclusions the Judge was influenced by what she saw as thepuzzling circumstances surrounding the waiver of the claims of the related partycreditors in the company's liquidation. That waiver supported the approach taken bythe Assignee's expert witness to the significance of those debts for the company'ssolvency when still trading.12 Moreover, the liquidators' entry into those arrangementsreflected, at the time, the company thereby having sufficient realisable assets todischarge the GST debt.7 On liquidation, there was also a modest debt of some $2,800 owed to PGB Wrightson Ltd.8 H Investments Ltd (in liq), above n 1, at [64].9 At [64].10 At [83].11 At [86].12 See below at [67].Grounds for the appeal[15] In their initial notice of appeal, the liquidators challenged as wrong in fact andlaw the Judge's central conclusions on insolvency, breach of director's duties andcausation. Those grounds were subsequently:(a) expanded by a new claim of, in effect, estoppel based on the terms ofthe deed of waiver;(b) further particularised on the issues of insolvency, breach of duty andcausation; and(c) supplemented by another, new, argument that as Mr Hitchcock was "theeffective defendant" and the liquidators had established a prima faciecase as to his liability as a director:(i) it was up to the Assignee to produce evidence fromMr Hitchcock if otherwise available inferences were to berebutted; and(ii) the Assignee's failure to do so meant there were no discretionarymatters that might reduce the amount of Mr Hitchcock'sliability once established.Estoppel[16] The terms of the deed of waiver and the circumstances of its execution assumedsome importance in the liquidators' appeal. The recitals at the outset of the deedincluded the following:E The company [acting by the liquidators] has filed a proof of debt inthe bankrupt estate [of] Mr Hitchcock.G Mr Hitchcock has applied for an annulment of his bankruptcy. Inorder that all creditors can be paid, and the annulment granted, theAssignee [the Official Assignee as Mr Hitchcock's trustee inbankruptcy] and the [p]artnership [the Hitchcock interests] haveagreed to waive their respective rights to file [c]reditors' claims in thecompany's liquidated estate.[17] The covenants in the deed included an acknowledgment by the parties as to theaccuracy of the recitals. The operative provision of the deed recorded a waiver by theAssignee and the partnership of all rights to claim in the company's liquidation and acommitment not to bring any action against the company or its liquidators or staff.[18] Mr Branch submitted for the liquidators on appeal submitted that they wereentitled to assume at the time that reduction of the claims against Mr Hitchcock's estatein bankruptcy to this extent would enable him to find the resources necessary todischarge the remaining claims against his estate in bankruptcy, so as to achieve anannulment of his bankruptcy. Anticipating such an outcome involved an assumptionthat their proof of debt for the reduced amount of some $50,000 would be accepted bythe Assignee.[19] Mr Branch argued that the meaning reasonably conveyed by the terms of thedeed was that if the liquidators reduced the extent of their claim againstMr Hitchcock's estate, which they could do once the Hitchcock interests abandonedtheir claim against the company in liquidation, then the claims against Mr Hitchcock'sestate in bankruptcy would be reduced to an extent that interests on his behalf couldfund payment of those claims, thereby entitling Mr Hitchcock to an annulment.[20] Implicit in that sequence of events was acceptance by the Assignee of theliquidators' claim as presented in the proof of debt claim for the reduced amount.Mr Branch argued that completion of the deed of waiver by the Assignee committedhim to that course.[21] Mr Branch did not define this as giving rise to an estoppel preventing theAssignee from subsequently being able to resile from an implied acceptance of theliquidators' proof of debt claim. However, that was the essential nature of this part ofthe appeal. The argument had not been raised in the High Court.[22] An estoppel may arise to prevent A asserting what would otherwise be a lawfulentitlement against B where A has represented to B that they will not do so and B hasrelied reasonably on that representation and altered its position to its materialdetriment.13 Being an equitable remedy, the facts, and the quality of the evidencerelating to the facts, are central to whether or not an estoppel arises and, if it does, theterms of any relief which may be granted. As this Court said in Wilson ParkingNew Zealand Ltd v Fanshawe 136 Ltd, "the clearer and more explicit the assurance is,the more likely it is that a court will be willing to grant relief".14[23] As we noted above, no claim of estoppel was made by the liquidators in theiroriginating application. No evidence relating to any such estoppel, nor indeed to thedeed of waiver or the circumstances in which it was signed, was given in the affidavitson which the High Court relied. Not surprisingly, therefore, there is no discussion ofthe issue of estoppel in the High Court decision under challenge.[24] Rather, the topic is mentioned for the first time in the liquidators' revised noticeof appeal where they assert, as their first ground of appeal, that:The [Assignee] is estopped from rejecting the proof of debt because, by deedof waiver dated 28 July 2014, the [Assignee] agreed that all creditors of the[b]ankrupt would be paid and the [c]ompany was a creditor of the [b]ankrupt.[25] Understandably, there is no allegation of any error by the High Court in notreaching that conclusion. Thus, in the absence of any evidence directly relevant to theclaimed estoppel, the liquidators on appeal could only rely on the terms of the deed ofwaiver, which had been put into evidence for the Assignee by Mr Parsons as anannexure to his affidavit.[26] Mr Branch argued, in effect, that the deed of waiver spoke for itself. That is,its terms, and recital G in particular, evidenced the Assignee's agreement that he wouldaccept the company's proof of debt and that all Mr Hitchcock's creditors – includingthe company – would then be paid, thus facilitating an annulment of Mr Hitchcock'sbankruptcy. When measured against that proposition, the terms of recital G are, attheir best, opaque. The Judge read the reference in recital G "in order that all creditors13 Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at[115].14 At [115].can be paid", as a reference to all creditors of the company.15 Given that the waiverwas of claims Mr Hitchcock and the partnership might otherwise have had against thecompany, that is perhaps understandable. For his part, Mr Branch argued that theconjunction between the reference to all creditors being paid, and the annulment beinggranted, meant that necessarily the reference was to all of Mr Hitchcock's creditorsbeing paid.[27] We are inclined to agree with Mr Branch that the reference in recital G is toMr Hitchcock's creditors and not those of the company. That appears the more likelyinterpretation of the words in the deed and the limited extent that it is reasonable toinfer context from them. However, we accept that it is difficult for the Assignee tocontest that interpretation in the absence of any evidence on the circumstancessurrounding the completion of the deed of waiver, so if it were decisive, the point ishardly free from doubt.[28] Assuming that Mr Branch is correct that the reference in recital G is toMr Hitchcock's creditors, we are not persuaded that, without more, the Assignee'scompletion of the deed can found an estoppel against him. There is no evidence thatthe Assignee participated in the deed of waiver on the premise that the liquidators'proof of debt had been accepted. That would have involved acceptance, without anyapparent dialogue or research, of a claim for a liquidated sum that depended on allegedbreaches of director's duties.[29] Particularly given the nature of the liquidators' claim, the terms of the deed ofwaiver are clearly inadequate on their own to commit the Assignee to what could wellbe a compromising of his statutory obligations and the rights of other creditors.[30] We accept that the Assignee may compromise his scope of action bycontractual commitments that bear upon the estate in bankruptcy. Such commitmentswould need to be justified by the Assignee as entered into, in the exercise of hisdiscretion, because they were in the best interests of the administration of thebankrupt's estate. However, such positive commitments deliberately made on definedterms are a very different matter from creating what we consider would be an15 H Investments Ltd (in liq), above n 1, at [22].unintended fetter on the Assignee's ability to act in administering Mr Hitchcock'sestate consistently with the law and in what he considered to be the best interests ofall creditors. It follows that the liquidators cannot advance their claim inMr Hitchcock's bankruptcy by reliance on the deed of waiver.The liquidators' proof of debtStandard of proof[31] Turning to the approach of the Associate Judge in assessing the liquidators'proof of debt claim, a first criticism raised was that the Associate Judge had appliedthe wrong standard of proof. The standard adopted was that the liquidators had toestablish their claim on the balance of probabilities.16[32] Mr Branch submitted that a lesser standard applied as if in a formal proofhearing, and that the Assignee and, on appeal, the High Court, ought to admit the claimon finding that it had a reasonable likelihood of success. Arguably, it should berelevant to the standard of proof that the bankrupt whose actions were being attackedhad an opportunity to rebut the allegations but chose not to. In those circumstances,the liquidators submitted that unrebutted allegations should be accepted unless theywere demonstrably unjustified.[33] Mr Branch characterised the process for lodging proof of debt claims andhaving them assessed by the Assignee as one that was designed to be less robust,expensive, and time consuming than a court process. He observed that decisions onproof of debt claims are often made by people who are not legally trained and it wasinappropriate for the assessment to be as refined as if the matter was before the Court.[34] Mr Branch invited analogy with the test applied in determining an applicationfor leave to apply to the Court for directions on matters arising in the course of aliquidation. Section 284(1) of the CA provides for such applications by the liquidatoror a liquidation committee, and by other categories of potentially interested parties if16 At [43].they obtain the leave of the Court. In determining a review of a refusal by an AssociateJudge to grant such leave, the High Court described the task under s 284 as follows:17The grant of leave must be based on whether the applicant has an arguablecase with a credible factual basis and a reasonable likelihood of success. Evenwith leave, the Court will not interfere with a liquidator's exercise ofdiscretion unless it is clearly wrong or unreasonable.[35] Mr Branch submitted that a similar test was sufficient for a creditor filing aproof of debt claim in a bankruptcy or liquidation.[36] Mr Cornegé for the Assignee disputed Mr Branch's characterisation of theAssignee's task. He described it as a quasi-judicial one, with no suggestion in eitherthe statutory provisions or current practice that the standard was less rigorous thanwould be required to make out a civil claim in court. Arguably, the fact that thedefendant to a money claim is bankrupt should not lessen the standard required for theclaimant to make out the claim.[37] Mr Cornegé submitted that the Associate Judge had adopted the correctstandard of proof in requiring the claim to be established on the balance ofprobabilities. He submitted that it was indeed the same standard as required in formalproof hearings, which is currently the usual civil standard. He cited the High Courtjudgment in Ferreira v Stockinger, where Duffy J rejected an approach for a plaintiffon formal proof that, because the defendant had not filed a statement of defence, hewas not required to establish the legal tests to prove his claim but was only requiredto establish quantum.18 That was treated as an outdated approach to formal proof withthe Court being required to be satisfied that the plaintiff's evidence was such as wouldbe necessary to make it out if the proceeding had gone to trial.19[38] Sections 233 to 242 of the Act set out the procedure for a creditor to submit acreditor's claim form, and the role of the Assignee in examining that form. Theseprovisions relate to "provable debts" that are defined as "a debt or liability that a17 Walker v Gibbston Water Services Ltd [2014] NZHC 494 at [30].18 Ferreira v Stockinger [2015] NZHC 2916 at [32]–[35].19 At [35].creditor of the bankrupt may prove in the bankruptcy".20 That terminology reflectsthe onus that rests on a claimant creditor.[39] The Assignee's role is to examine the creditor's claim and either admit or rejectthe claim, in either case in whole or in part.21 The Assignee may require furtherevidence in support of the claim and may summon and examine different categoriesof persons who may contribute to the evidence on the existence of the claimed debt.22If the Assignee rejects a claim, the Assignee is required as soon as is practicable togive the creditor notice of the grounds for rejecting the claim.23 The Act also allows acreditor whose claim has been rejected to apply to the court for an order modifying orreversing the Assignee's decision.24 The creditor is to bear the cost of proving theclaim.25[40] We do not consider the approach to applications for leave under s 284 of theCA provides an appropriate analogy. An application for a grant of leave to seekdirections raises a preliminary issue as to standing with no substantive consequences.If granted, it would require the party whose conduct is being challenged to respond tothe applicant's concerns. The court's assessment of a leave application is limited todeciding whether standing should be recognised to argue issues about the manner inwhich a liquidation is being conducted. In contrast, the task of the Assignee inexamining proof of debt claims does have a substantive impact because it determinesthe claimant's entitlement to share in the bankrupt's estate, and that decision hasfinancial consequences for all others whose proof of debt claims are accepted by theliquidator.[41] Bearing in mind the implications for proportionate recovery between allcreditors who prove their debts, the Assignee must discharge these obligations fairlyto all. There is nothing in these provisions or in current practice that would supportthe application of a standard less than the balance of probabilities. To do so would20 Insolvency Act 2006, s 231.21 Section 234.22 Section 236.23 Section 235.24 Section 239.25 Section 233(5).distinguish debtors who are bankrupt from those who are not. Accordingly, thebalance of probabilities is the standard of proof that is to apply.Onus of proof[42] Mr Branch also argued that once a prima facie basis for a claim against thebankrupt's estate is presented in a proof of debt claim, then the debtor has an obligationto respond with evidence that would refute the claim or inferences that the creditor'sclaim relies on.[43] Mr Branch suggested that the expectation of such a shifting onus could beadvanced on stronger grounds in this case than in others where Mr Hitchcock remainedavailable and was personally interested in the outcome of his bankruptcy because hewas pursuing an annulment. Further, because the grounds for claims against himalleging breaches of director's duties owed under the CA involved at least someelements of subjectivity, the best evidence denying the inferences asserted by theliquidators would come from Mr Hitchcock's personal explanation as to how he haddischarged his statutory obligations as a director.[44] Mr Branch argued that, at least in circumstances of claims alleging breach ofdirector's duties such as were advanced here, the Assignee should seek an explanationfrom the impugned director and in the absence of explanation, be prepared to drawinferences adverse to the director and supporting (if necessary to the point of makingout) the liquidators' claims.[45] Mr Cornegé resisted the concept of any shift of the onus to the debtor or theAssignee in the process of the Assignee's examination of proof of debt claims. Hesubmitted that in a significant majority of bankruptcies, the bankrupt is indifferent tothe manner in which his or her estate in bankruptcy is administered. Many bankruptsrelocate, including leaving New Zealand. In many cases, bankrupts resist contact withthe Assignee so that any change in onus that triggered an obligation on the Assigneeto seek responses to claims such as the present ones would create obligations thatAssignees are not equipped to deal with.[46] There is no basis for inferring such a change of onus from the terms of the Actproviding for this process. The concept of a debt that is provable in the bankruptcymeans that claims may be accepted in circumstances going beyond those in whichthere is a judgment against the debtor, or the amount is for an undisputed liquidatedsum. Section 236 of the Act gives the Assignee power to summon defined categoriesof persons for examination as an aspect of consideration of claims that have beenlodged. However, there is nothing in that or other sections providing for the processthat would support Mr Branch's suggested transfer of onus. The categories of personsthe Assignee is empowered to summon for examination could include the bankruptwithin a generic description, but bankrupts are not specifically identified as a distinctcategory. We agree with Mr Cornegé that it would be impractical and inconsistentwith the efficient administration of bankrupt estates to create an expectation that thatwill occur.[47] We accordingly reject the criticism that either the Assignee or the High Courton appeal were wrong in treating the onus of making out a provable claim on the proofof debt as remaining with the liquidators as claimants.Should the Assignee have accepted the liquidators' proof?[48] Shortly after their appointment on 18 February 2014, the liquidators wrote inrelatively summary terms to Mr Hitchcock care of the Assignee on 4 March 2014. Inless than a page and a half, the liquidators stated that their investigation: [suggested] that you have breached your [duties] as a director of the[c]ompany by allowing the [c]ompany to incur obligations to creditors when,in our view, you could not have had expected, on reasonable grounds, that the[c]ompany would be able to perform these obligations when it was requiredto do so.The letter advised that, as a director, Mr Hitchcock owed relevant duties includingthose set out in ss 131, 133, 134, 135, 136 and137 of the CA.[49] The only specific conduct cited as constituting a breach of director's duties wasthat the company had owed debts to IRD that had accumulated since January 2010 butdespite that, Mr Hitchcock had continued in trade "until at least 2014". The liquidatorsconsidered that Mr Hitchcock did not have reasonable grounds to believe that thecompany would be able to perform its current obligation to pay its tax and other debtswhen the company had outstanding and increasing obligations to pay GST to IRD.[50] The letter was sent with a completed version of the printed form notifying aproof of debt claim. In the part of the form requiring details of the debt the liquidatorscompleted the "date of supply" as "31.01.10 to 18.02.14" and the "description of goodsor services supplied" as "a breach of director's duties under ss 131, 133–137 of the[CA] causing creditors losses (letter dated 4 March 2014)".[51] As we have previously observed, there is no evidence of contact between theliquidators and the Assignee in the period up to completion of the deed of waiver on28 July 2014. In early August 2014, the liquidators submitted an amended proof ofdebt claim form which was in the same terms as the original form, except for reductionof the amount claimed to omit the claims of the Hitchcock interests.[52] Some 14 months later in October 2015 Mr Cornegé wrote to the liquidatorsadvising that he acted for the Assignee and was seeking further information.Mr Cornegé treated the information thus far provided to the Assignee as insufficientto conclude that Mr Hitchcock had breached his director's duties. The letter warnedthat in the event that the liquidators did not provide further information, the Assigneewould reject the proof of debt claim.[53] In a 3 November 2015 email, a member of the liquidators' staff respondedsomewhat more fully with background information about the nature of the company'sbusiness and the identity of the claims received in the liquidation from creditors(excluding those originally received from the Hitchcock interests). The email includedsummaries of the company's financial performance for the 2010 to 2013 years, withthe observation that the company had generated losses in the 2010 and 2011 years andgenerated only modest surpluses in the 2012 and 2013 years. The summary detailsindicated that the net surpluses after tax were in deficit in the 2010 and 2011 years,that there were decreasing deficits in the working capital situation from the sum of$230,000 in 2010 to $153,000 in 2013 and that the net asset position for the companyhad similarly shown decreasing deficits from $103,000 in 2010 to $74,000 in 2013.[54] The letter cited the company's failure to pay GST since January 2010. It reliedon that for the view that the company had been unable to meet its obligations in atimely manner causing Mr Hitchcock to be in breach of the duties he owed to thecompany. The email also addressed concerns about the limited records that had beenproduced from the company's accountant. It expressed the view that the liquidatorshad found no evidence that Mr Hitchcock had caused the company to prepare abusiness plan, budgets, cash flow projections and other such accounting records. Theemail concluded with reference to the liquidators' view that Mr Hitchcock's decisionto continue operating the business amounted to "a breach of his duties as director".[55] Mr Cornegé wrote further on behalf of the Assignee on 16 December 2015stating that the Assignee having considered the additional information provided stillconsidered it was insufficient to conclude that Mr Hitchcock had breached hisdirector's duties. The letter stated that it was difficult to conclude in the absence offurther information that it was improper for Mr Hitchcock to allow the company tocontinue trading, given that it had generated surpluses in 2012 and 2013 and that themajority of the company's liabilities were current account debts. The letter raised theissue of whether the liquidators had examined Mr Hitchcock. It indicated thatrejection of the liquidators' claim was likely, but offered one final opportunity toprovide further analysis.[56] A further email from a member of the liquidators' staff on 23 December 2015repeated the view earlier expressed that the figures in the financial statements "do notin any way release the director of liability for breaches of his duties causing creditorlosses". That email went on to refer to a valuation the liquidators had obtained of thecompany's assets which showed that the proceeds of realisation (after meeting thecosts of doing so) would not provide any return to creditors. That comment was areference to an informal email to the liquidators dated 5 June 2014 (18 months beforethe communication in which it was referred to) from "Gordon" at "Crusher Dealer".It does not appear that a copy of the informal assessment of realisable value of theassets was provided.[57] In January 2016 Mr Cornegé advised the liquidators that their proof of debtclaim was formally rejected.[58] Mr Branch submitted that irrespective of the correct position on the standardof proof, Mr Hitchcock's decision to continue trading despite more than three years'default in payment of GST provided grounds for finding a breach of the variousdirector's duties that had been cited in the liquidators' original letter to him and theAssignee. If there was no onus for Mr Hitchcock to provide an alternative explanation,then at least in the absence of any evidence from him, the adverse inference theliquidators invited ought to be drawn. Namely, that the company could not meet itsobligations to pay the GST and continued to trade despite the GST liability pluspenalties and interest remaining unpaid.[59] Mr Branch submitted that the High Court was wrong in finding that theliquidators had not made out insolvency on either of the two tests, namely cash flowsolvency or balance sheet solvency. The solvency test is defined in s 4 of the CA inthe following terms:4 Meaning of solvency test(1) For the purposes of this Act, a company satisfies the solvency test if—(a) the company is able to pay its debts as they become due in thenormal course of business; and(b) the value of the company's assets is greater than the value ofits liabilities, including contingent liabilities.Cash flow insolvency[60] The liquidation process had been started by service of a statutory demand onbehalf of IRD and non-payment of that demand evidences the company's insolvencyin 2013. The liquidators' allegations of breach of director's duties by Mr Hitchcockdepended on establishing a state of insolvency back to 2010, or for some materialperiod between then and the company's failure to meet the statutory demand in 2013.[61] The liquidators' case was that the non-payment of GST from 2010 wassufficient to establish that the company had not been able to pay its debts as theybecame due (the cash flow solvency test) since 2010. In 2010 and 2011 the financialstatements for the company showed a loss on a cash basis, but modest surpluses wereachieved in 2012 and 2013. On the relatively scant evidence before theAssociate Judge, she was not prepared to treat these facts as sufficient to discharge theonus of establishing insolvency throughout.26 The financial results did not enable herHonour to come to only one conclusion — that the company had been unable to payits debts as they fell due.27[62] Mr Branch characterised the obligation to make timely payment of GST to theIRD as a priority because GST is trust money for which the company is obliged toaccount. According priority to payment of GST is also the course competent directorsadopt because non-payment triggers penalties and additional interest that meansdelayed payment incurs proportionately more serious adverse consequences for thecompany than deferring payment of other company debts. Accordingly, a competentdirector could not do otherwise than ensure timely payment of GST.[63] The Associate Judge had reservations that the evidence established an inabilityto pay the company's debts, rather than a refusal to do so. There was no evidence ofany dialogue between the company and the IRD in the 2010 to 2013 period untilservice of the statutory demand.28 The absence of any formal steps to pursue paymentfor the period of more than three years left the Associate Judge with a doubt that theremay have been some accommodation reached about lessening the outstanding GSTliability over time.29[64] We agree with the Associate Judge that non-payment of GST over a period ofyears in circumstances such as the present case cannot, of itself, be sufficient toestablish cash flow insolvency. Depending on the facts in a particular case, relativelylittle further evidence may be necessary to make it out. This case is somewhat atypicalin that the evidence of the circumstances of Mr Hitchcock's governance of thecompany is unusually sparse. There is, for example, no suggestion that the liquidatorsexercised their powers to examine Mr Hitchcock in order to obtain further evidencefor their assessment of whether he had breached obligations as a director of thecompany.26 H Investments Ltd (in liq), above n 1, at [67].27 See, for example, at [67].28 At [64].29 At [64].[65] The statutory imperative cited by Mr Branch that ought logically to requiredirectors to treat payment of GST in priority to other creditors also gives rise toalternative remedies open to the IRD to seek recovery of GST that are not available tothe general body of creditors. IRD may, for example, deduct the GST from paymentdue to the director.30 If the actions of the director amount to evasion within s 143B ofthe Tax Administration Act 1994, then they may also face a term of imprisonment oran additional fine.[66] We are accordingly not satisfied that a cash flow test for insolvency can bemade out.Balance sheet solvency[67] The Associate Judge was also not satisfied that the liquidators had made outthe company's insolvency on a balance sheet basis through the period to which itsclaims related. Two aspects of the analysis leading to that finding are challenged onappeal.[68] First, the balance sheet of the company included relatively significant loanadvances from Hitchcock interests as liabilities. If they were included in the relevantpre-liquidation periods, then balance sheet insolvency would be made out.[69] However, the Associate Judge accepted the analysis on behalf of the Assigneethat the extent of those liabilities should be excluded. This rested primarily on theevidence, post liquidation, that the Hitchcock interests agreed to abandon their claimfor repayment of the amounts advanced to the company.31 Further, the Associate Judgesuggested there was uncertainty as to the form in which the advances were made, andwas not able to discount the prospect that they were intended to be transformed intoequity in the company.32[70] We agree with Mr Branch that the Associate Judge erred in excluding the debtsowed to Hitchcock interests. The financial statements adequately identified them as30 Goods and Services Tax Act 1985, s 43.31 H Investments Ltd (in liq), above n 1, at [64].32 At [64].loan advances with the consequence that the lending entities would have been entitledto claim repayment prior to any distributions to shareholders. The post-liquidationacknowledgement by those interests that they abandoned any claim to repayment ofthe advances cannot retrospectively alter their status during the years in question.Indeed, the initial response of the Hitchcock interests in filing the proof of debt claimsfor repayment of the advances can only be consistent with their treating them as loans,up to the point in time at which that step was taken.[71] The extent of that indebtedness is, on its face, sufficient to make out balancesheet insolvency for the company during the relevant periods.[72] As to the appropriate book value of the company's assets comprising property,plant and equipment, the liquidators proposed that the book value, as at the date of thefinancial statements for the 2013 year, should have been written down substantiallyfrom the figure of $79,666.[73] In June 2014, the liquidators requested by email addressed to a partiallyidentified individual at "CrusherDealer.com" that that firm review the state of plantand machinery assets and provide comments on their realisable values. The sameevening an email response from "Gordon" reported on an assessment of the machinerythat had been undertaken with Mr Hitchcock. The report was to the effect that themachinery was generally in poor condition and opined that "recovery and sale costsare likely to overshadow the eventual return for them".[74] There is no evidence that the liquidators took further steps to realise the assets.The existence of the June 2014 appraisal was disclosed to the Assignee some 18months later.[75] The informal June 2014 appraisal could not provide an adequate basis forrecasting the value of those assets at any given point prior to the date of the last set offinancial statements. We note that the book values had dropped significantly from$161,758 in the 2010 financial statements to $110,868 and $95,498 in the 2011 and2012 years before the final book value at $79,666. There is no evidence of the exactidentity or expertise of the appraiser, nor is there any basis on which the substantiallyreduced values could be attributed to the machinery at any particular dates in the 2010to 2013 years. Therefore, there is no justification to recast the values of the assets inthe company's financial statements in the years to which the liquidators' allegationsagainst Mr Hitchcock relate.[76] Despite the rejection of the liquidators' approach to the book value of thoseassets, we are satisfied that the inclusion of the liabilities owed to the Hitchcock familyinterests was sufficient to make out balance sheet insolvency of the company in theperiod to which the claims relate. Having said that, those associated party creditorshad, at relevant times, provided comfort or forbearance to the company as regards thedebts owed to them. An example of this is their subsequent completion of the deed ofwaiver. It may have been possible to challenge the conclusion of balance sheetinsolvency had the issue been contested. No such evidence was, however, provided.Breach of director's duties[77] The next issue is whether the liquidators adduced sufficient evidence toestablish breach by Mr Hitchcock of one or more of the duties owed by him to thecompany under the CA. The liquidators did not particularise any conduct or omissionsby Mr Hitchcock that they relied on as making out the breach of each of the duties thatthe liquidators claimed had been committed.[78] Mr Branch submitted that inferences sufficient to make out a breach ofdirector's duties had been accepted in other cases of conduct that he likened to that ofMr Hitchcock in the present case. However, his submission did not deal with therelative extent of evidence in the other cases that he cited. Mr Cornegé submitted thateach of the cases cited were distinguishable because of the different factualcircumstances, and the greater extent of evidence adduced in support of the liquidators'claims.[79] For instance, Mr Branch cited the decision in A & N Contractors (2009) Ltd(in liq) v Liefting as a case where the director had preferred his own interests overthose of the IRD as a beneficiary of the company.33 In that case, the company had33 A & N Contractors (2009) Ltd (in liq) v Liefting [2015] NZHC 3091.defaulted on every type of tax for over two and a half years, and incurred debtstotalling more than $250,000 while the directors drew almost $300,000. Failure tokeep proper accounting records was evidenced, as was the negligible prospect of thecompany being able to meet its debts.[80] Similarly, Mr Branch relied on the decision in Kaikoura Freight Ltd (in liq) vCollins as making out liability for carrying on a company's business in a mannercreating a substantial risk of serious loss to creditors and incurring obligations thatcould not be met.34 That case involved evidence that the company had incurredsubstantial debts over almost four years of what was found to be insolvent trading, andwhere the director "flouted reality" by taking salary and drawings throughout theperiod of insolvent trading.35[81] We do not treat any of these decisions cited by Mr Branch as accepting a lesserstandard of evidence than we consider was reasonably required in the present case.[82] Contested claims of breaches of directors' duties under ss 131, 135, 136 and137 of the CA generally involve a reconstruction of the choices made by a director incontinuing to trade in difficult circumstances. The Court has emphasised that theseare duties owed to the company rather than to any particular creditors, and that the testas to whether risks assumed in the conduct of the company were legitimate orillegitimate ones will be an objective test.36 It will require the Court to reconstruct thechoices made by the director when the financial future of the company ought to havebeen appreciated as being precarious. That entails a "sober assessment" as to thecompany's likely future income and prospects.37[83] The evidence available in this case is inadequate to embark on any meaningfulassessment of the liquidators' claims. If informed of existing and potential sources ofrevenue for the company, the range of expenses and other liabilities incurred, andprojections for future profitability throughout identified parts or all of the period inwhich it was alleged Mr Hitchcock breached these duties, the Court might well have34 Kaikoura Freight Ltd (in liq) v Collins [2017] NZHC 1490.35 At [41].36 Mason v Lewis [2006] 3 NZLR 225 (CA) at [51].37 At [51].found such a breach. But here there is no evidence to begin that task, other than asfound in the company's accounts. For instance, the alleged breach of the obligation tomaintain adequate records rests on the fact that Mr Hitchcock referred the liquidatorsto external accountants who produced financial statements for the relevant years, butvery little else. They sought to infer breach of the requisite duty from the absence ofprimary records such as bank statements and copies of receipts and invoices. There isno evidence of the extent of any additional inquiries or searches undertaken by theliquidators. Consistently with other aspects of their allegations they have proceededon the basis that if such records existed, there would be an onus on Mr Hitchcock toproduce them or explain the circumstances in which they were no longer available.However, that would depend on a transfer of onus that the liquidators are not entitledto rely on.[84] So far as the breach of obligation to act in good faith and in the company's bestinterests rather than in his own, Mr Cornegé submitted that partial repayment ofMr Hitchcock's current account debt and that of his family partnership was notsufficient to make out preferment of personal interests when the details in each yearwere analysed. From 2010 to 2011, Mr Hitchcock's current account debt reduced from$131,879 to $76,906 with annual reductions thereafter of only $2,126 and $6,588. Thefinancial statements of the company do not record any salary and wages being paid tohim throughout the period so that in effect he was working for nothing and ultimatelylost nearly $70,000 of his investment in the company.[85] So far as the Hitchcock family partnership's financial position was concerned,it had invested $41,941 in the year to 31 March 2012 which debt was reduced by thecompany in the 2013 year by $36,853. On liquidation, the partnership lost some$47,698.[86] Although the last year's repayment to the family partnership might well bechallenged as an insolvent transaction (there was no evidence that the liquidators hadpursued that initiative), the single instance is inadequate without any context to fixMr Hitchcock with a breach of duty. It was a reduction, but by no means fullrepayment, of his family interests' debt owed by the company where he preferredrepayment of that obligation to honouring the company's obligations to the IRD. Thatoccurred in a year in which the cash flow outcome revealed a very modest surplus.[87] Section 137 of the CA imposes a positive duty on company directors toexercise the care, diligence and skill that a reasonable director would exercise whenperforming their duties. The duty requires the director to take into account the natureof the company, the decision or decisions that are impugned, the director's positionand the nature of his or her responsibilities.[88] The liquidators' allegation on this duty was that a reasonable director inMr Hitchcock's position would have ensured that IRD was paid, or ceased trading. Inthe absence of evidence of the relevant circumstances in which Mr Hitchcock electedto continue trading but not pay the GST, it is not possible to measure in the context ofhis circumstances whether he failed to exercise a requisite extent of care, diligenceand skill.[89] The IRD participates as the petitioning creditor in a very significant proportionof bankruptcies and liquidations in New Zealand. The stance adopted by theliquidators in this case, substantially for the benefit of IRD, reflects a situation that isnot entirely uncommon. The temptation for struggling businesses to use the GSTcomponent of amounts received in the course of its trading as working capitalsometimes proves to be irresistible, despite the severity of the adverse consequencesof doing so. The stance adopted by the liquidators in this case is that where that occurs,directors will trigger personal liability. It will constitute a breach of duties they oweto the company for them to continue trading whilst not accounting for GST, on theground that failure to pay the GST constitutes evidence that the company is unable topay its debts.[90] We do not accept the general proposition that failure by a company director toaccount for GST over a substantial period of time where a company subsequentlypasses into liquidation is, of itself, a sufficient basis for establishing breach of dutiesowed by the director to that company. When evidence of additional aspects of thedirectorship of a failed company is present, then it may well constitute an element ofthe evidence that makes up breach of director's duties. The simple proposition thatcontinued trading whilst not paying GST leads, on a subsequent liquidation, to liabilityfor breach of director's duties is unattractive.[91] We conclude that the liquidators did not adduce the evidence required to makeout a breach of Mr Hitchcock's duties as a director under any of these provisions ofthe CA.[92] That outcome means that it is unnecessary to consider two further componentsof the Associate Judge's decision that were challenged on the appeal. The first of thosewas a finding that so far as the debt to IRD was concerned, the IRD's apparentlycomplete inactivity from when the company first failed to make timely payment ofGST until the issue of a statutory demand in 2013 was a cause of the loss itsubsequently suffered, to an extent that it broke the chain of causation between anybreaches of the director's duty that might have been made out, and the loss nowclaimed by the liquidators. The rationale was that had the IRD acted much earlier, theloss would either have been avoided or proportionately reduced. The Associate Judgeappears to have been influenced in this reasoning by the range of options available toIRD.[93] We are not to be taken as endorsing any general proposition that inactivity bya petitioning creditor in a liquidation constitutes a break in the chain of causation oflosses subsequently suffered by a creditor where relevant breaches of directors' dutiescan be made out.[94] The remaining issue, had a breach of duty been made out, was an assessmentof the relative level of Mr Hitchcock's culpability. The liquidators' claims wereadvanced on the premise that he would be liable for 100 per cent of the losses provedin the liquidation. It is not an issue that needs to be addressed, but we observe thatsuch an assumption is unwarranted, without substantially more evidence than wasprovided in support of the liquidators' claims.[95] We mention one final matter. Any debt involved in the liquidators' claimagainst Mr Hitchcock was, as we have just mentioned, a contingent one. Moreover,where a director is found to have breached his duties as the liquidators alleged, theCourt has a discretion: both as whether to impose liability, and as to the amount of thatliability. There is well established authority that although contingent debts areprovable in company liquidations and personal bankruptcies, a contingent debt whichwill only come into existence once a discretion has been exercised is not a provabledebt. In our view, therefore, there is possibly an argument the Assignee could haverejected the liquidators' proof on that ground. That argument was not advanced byMr Cornegé. We make these comments, therefore, to avoid any subsequent inferencethat our judgment might be taken as authority that the liquidators' claim was for aprovable debt.Result[96] We accordingly dismiss the appeal.[97] The appellant must pay the respondent costs for a standard appeal on a band Abasis and usual disbursements.Solicitors:Harkness Henry, Hamilton for AppellantInsolvency and Trustee Service, Hamilton for Respondent