CLARKE v REGISTRAR OF COMPANIES [2018] NZHC 1608

CLARKE v REGISTRAR OF COMPANIES [2018] NZHC 1608 [2 July 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2017-404-2303[2018] NZHC 1608UNDER THE Companies Act 1993IN THE MATTER OF An appeal under s370 against a decision ofthe Deputy Registrar of CompaniesBETWEEN HAMISH JAMES CLARKEAppellantAND REGISTRAR OF COMPANIESRespondentHearing: 22 March 2018Appearances: P F Dalkie for AppellantJ K Gorman for RespondentJudgment: 2 July 2018Reissued: 13 August 2018JUDGMENT OF VAN BOHEMEN JThis judgment was delivered by me on 02 July 2018 at 2pmPursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors:Dyer Whitechurch, AucklandCrown Law, WellingtonIntroduction[1] The two principal issues in this appeal are:(a) Was the decision of the Deputy Registrar of Companies to prohibit theappellant, Hamish Clarke, from being a director, promoter or takingpart in the management of any company correct in terms of s 385(3) ofthe Companies Act 1993 (the Act)?(b) If that decision was correct, was the seven-year period of theprohibition set by the Registrar disproportionately severe as alleged byMr Clarke?[2] In the course of argument, Mr Dalkie, counsel for Mr Clarke, conceded thefirst issue and focused his submissions on the second – the period of the prohibitionwhich he said was disproportionately severe. Even so, I examine the first issue toshow why I consider the concession was appropriate.Nature of the appeal[3] Mr Clarke's appeal was brought under s 370 of the Act. Under that section, aperson aggrieved by a decision of the Registrar under the Act may bring an appeal tothe High Court. In such an appeal, the Court must consider the merits of the caseafresh but the appellant bears the onus of persuading the Court to depart from thedecision appealed against and the Court should interfere with the decision only if itconsiders there was an error of law or principle, a relevant consideration wasoverlooked or an irrelevant consideration taken onto account, or the decision wasplainly wrong.1Was the prohibition properly imposed?[4] By notice dated 8 December 2016 under s 385(5)(a) of the Act (which was notserved on Mr Clarke until 5 May 2017), the Ministry of Business, Innovation and1 Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]; Maniv Registrar of Companies [2016] NZHC 3002 at [5]; Brand v Registrar of Companies [2016]NZHC 2983 at [37].Employment informed Mr Clarke he had been identified as a potential candidate forprohibition under s 385 of the Act. An accompanying letter of the same date set outthe reasons the Ministry had come to that view, identified and enclosed copies ofdocuments that would be considered, and invited Mr Clarke to make submissions onthe proposed action and to provide any relevant information.[5] The Ministry's notice identified five companies of which Mr Clarke had beena director and which had been put into liquidation in the five years before the notice.These were Mr Clarke's principal operating company, Valiant Homes Ltd, and fourspecial purpose companies set up for specific residential developments that Mr Clarkehad proposed to undertake. Mr Clarke was one of two directors of Valiant Homes Ltdand the sole director of the special purpose companies. The accompanying letterrecorded that, in total, the five companies owed the Inland Revenue Department$1,109,094, including preferential debts of $904,200.92, largely for unpaid Goods andServices Tax.[6] Because the companies had been put into liquidation in the preceding fiveyears, the Registrar or his Deputy had the power under s 385(4)(b) of the Act toprohibit Mr Clarke from being a company director unless Mr Clarke could satisfy theRegistrar or Deputy Registrar either that he was not responsible for the manner inwhich the companies had been managed or that it would not be just or equitable toprohibit him from being a company director.[7] By submission dated 23 May 2017, Mr Dalkie for Mr Clarke:(a) Explained how Mr Clarke had established and operated his businesswhich was to undertake residential developments on in-fill sites;(b) Noted the advice Mr Clarke had received from a business associate,Mr Weise about the payment of GST, noted the role played by Mr Weisein the management of Mr Clarke's companies, and recordedMr Clarke's expectations regarding a loan which did not materialise;(c) Raised questions about the nature of the evidence to be relied on by aRegistrar when making a decision under s 385 and said the burden ofproof lay with the Registrar.[8] Mr Clarke's submission did not deny that each of the five companies identifiedin the Registrar's notice had failed to pay significant sums of GST the companies hadcollected on transactions they had undertaken but explained why GST had either beenpaid late or withheld. The main explanations were a lack of cash flow, Mr Clarke'sdecision to pay other creditors ahead of the IRD because interest on late payments ofGST was cheaper than the interest payable to other creditors, and Mr Clarke'sexpectation of receiving from Arrow International a loan of $2,000,000 which did noteventuate. The submission asserted that in paying other creditors and deferring or notpaying GST, Mr Clarke had been acting on the advice of Mr Weise who had told himthat paying off trade creditors ahead of making GST payments was a common businesspractice.[9] Following the Registrar's receipt of Mr Clarke's submission, there wascorrespondence between the Registrar and Mr Clarke, via Mr Dalkie, about where theburden of proof lay in decisions under s 385(4)(b) of the Act, with the Registrarmaking it clear the burden lay on Mr Clarke to satisfy the Registrar why the Registrarshould not prohibit Mr Clarke from being a director. The Registrar offered Mr Clarkethe opportunity to revise his submissions in the light of this clarification. Mr Clarkechose not to make any further submission.[10] In a minute dated 28 August 2017, the Deputy Registrar found Mr Clarke hadnot satisfied him Mr Clarke was not at least partly responsible for the insolvency of atleast one of the companies and that, in accordance with s 385(4)(b) of the Act, theDeputy Registrar had the power to prohibit Mr Clarke from being a director. TheDeputy Registrar also found that Mr Clarke had not satisfied him that it would not bejust and equitable for the Deputy Registrar to exercise that power. The DeputyRegistrar further determined he should not exercise his general discretion not toprohibit Mr Clarke from being a director.[11] The Deputy Registrar's decision canvassed and found against Mr Clarke on anumber of factual matters. The central question was whether Mr Clarke hadmismanaged the companies given the large arrears of GST. The Deputy Registrarnoted that Mr Clark's submission did not deny that GST was payable, did not deny theGST had not been paid, and did not question the amounts but argued that the arrearsshould not be considered mismanagement. The Deputy Registrar said he had not beensatisfied that there had not been reckless trading and that there had not beenmismanagement. Indeed, he went on to find there was "very serious" mismanagementand a breach of the trust reposed in company directors regarding the filing of GSTreturns. The Deputy Registrar also commented that two of the special purposecompanies incurred significant tax arrears within a year of commencing operationsand continued to incur further GST liabilities as they continued to trade whileinsolvent.[12] In the course of the hearing before me, Mr Dalkie conceded that the findingsregarding the non-payment of GST were open to the Deputy Registrar and Mr Clarkeno longer challenged the Deputy Registrar's decision to prohibit Mr Clarke from beinga company director having regard to the test in s 385(4)(b). Accordingly, the rest ofthe hearing, including the oral submissions on behalf of the Registrar, proceeded onthe basis of that concession and focused on the length of the prohibition.[13] Those concessions were properly made. It was clear from the informationbefore the Deputy Registrar and the Court that there was no dispute over the amountsof unpaid GST, that Mr Clarke was responsible for the non-payment of GST, and thenon-payment of GST was a key factor in the companies being put into liquidation.Mr Dalkie properly accepted that arguments based on ss 130 or 138 of the Act – thatMr Clarke should not be held responsible because he had relied on the advice ofMr Weise – could not succeed because the circumstances in which those sections applyhad not been made out.[14] I also accept the submission from Ms Gorman, counsel for the Registrar, thatMr Clarke's failure to pay the considerable arrears in GST and that the use of fundscollected on behalf of the Government to pay other creditors was a breach ofMr Clarke's duties under s 135 of the Act, having regard to the observations made inSyntax Holdings (Auckland) Ltd (in liq) v Bishop and in Richard Geewiz GeeConsultants Ltd v Gee concerning the quasi-trust character of funds payable to theInland Revenue Department.2[15] For these reasons, if Mr Dalkie had not made the concessions I would haveupheld:(a) The finding of the Deputy Registrar that the non-payment of GSTamounted to serious mismanagement of the companies by Mr Clarke;and(b) The decision of the Deputy Registrar to prohibit Mr Clarke from beinga director of any company in the exercise of the Deputy Registrar'spowers under ss 385(3) and 385(4)(b) of the Act.Was the period of prohibition disproportionate?[16] Under s 385(3), the maximum period Mr Clarke can be prohibited from beinga company director is 10 years. The maximum period was five years until the sectionwas amended by the Financial Markets (Repeals and Amendments) Act 2013 witheffect from 1 April 2014.[17] The Act does not specify the test to be applied by the Deputy Registrar whensetting the period of the prohibition. It can be inferred, however, that the period mustbe just and equitable given that s 385(4)(b) requires any director being considered forprohibition under that section to satisfy the Registrar that the proposed exercise of thepower of prohibition would not be just and equitable.[18] As Mr Dalkie submitted, there has been judicial consideration of whether thepower of prohibition is to be exercised for the purposes of protecting the public or forpunishing the conduct of the person being considered for prohibition. The position is2 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171 at [12]; Richard Geewiz GeeConsultants Ltd v Gee [2014] NZHC 1483 at [98].made clear in Davidson v Registrar of Companies,3 the first decision to specificallyconsider s 385. In that decision, Miller J said:4[91] I need not categorise prohibition under s 385 as [either protective orpunitive]. it is both. the legislation initially examinesmismanagement contributing to insolvency, without focusing on theconduct of any given director. Causation having been established, theregistrar may prohibit anyone falling within the class of directors andmanagers. Prohibition is not aimed at remedying wrongs done toshareholders and creditors of the insolvent company but at protectingthe public from unscrupulous or incompetent directors in the future,deterring others and setting appropriate standards of behaviour. Atthe same time, any given director or manager inevitably experiencesprohibition as a punishment; it is an adverse consequence of aninquiry into his or her involvement in an insolvent company.[19] Mr Dalkie suggested that in the above passage Miller J took a differentapproach to that taken by Asher J in Kelly v Structured Finance Ltd where it was heldthat the public interest in prohibitions of this kind is to be approached from theperspective of protecting the public rather than punishment.5 I do not consider AsherJ to have said anything materially different from what Miller J said in Davidson.Asher J's observations in Kelly were made after he had adopted the reasoning ofTompkins J in Re Trott that the protection of the public may require that a person bemarked as a bankrupt and suffer the stigma that goes with bankruptcy.6 In other words,protection of the public and the fact that the recipient may see prohibition as apunishment go together, as stated in Davidson.[20] The Deputy Registrar set the period for Mr Clark at seven years – to run fromthe date of the notice given under s 385 (3), being 28 August 2017. In setting thatperiod, the Deputy Registrar referred to the reasons for the decision to prohibit MrClarke from being a director. Principally, these related to Mr Clarke's mismanagementof the company over the non-payment of GST but they also included Mr Clarke'sfailure to keep proper accounts. The Deputy Registrar also found that Mr Clarke hadfailed to cooperate with the liquidators of the companies.3 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC).4 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [91].5 Kelly v Structured Finance Ltd [2009] 2 NZLR 785 (HC) at [63].6 Re Trott [2009] 2 NZLR 800 (HC) at 810.[21] The Deputy Registrar made the following observations in the decisionregarding Mr Clarke's mismanagement:9.13 I consider the mismanagement to be very serious. The fact the IRD's"shareholder" is the State is irrelevant. Directors are not required totreat the IRD as a special class of creditor per se. However, the IRDshould not be given an inferior status either. The IRD should be paidon the same basis as any other unsecured creditor. 10.8 For a company to remain solvent it must be both cash flow positiveand have assets that exceeded liabilities as per section 4 of the Act.Once [Mr Clarke's] Companies did not pay the IRD, and particularlythe lack of payments over a sustained period, the Companies couldnot be solvent. At that point in time under any sober assessmentMr Clarke should have ensured the Companies ceased to trade. 10.9 I consider the nature of the mismanagement as well as the extent of itis severe. I consider his mismanagement was either wilful orfundamentally ignorant of what is required of a company director. 11.11 I do not regard the failure to keep proper accounts as some sort oftechnical breach. I regard it as serious and fundamental. Insolvencypractitioners have stated that such failure is a prime reason forcompany failure. 11.18 I do not regard a breach of s 189 [requiring a company to keep recordsat its registered office] as a technical breach. It is a fundamentalrequirement of directors to ensure that proper governance is beingobserved. The maintenance of records is a discipline whichreminds the directors of the duties and processes they must follow. [22] I consider these conclusions were justified on the information before theDeputy Registrar. As already noted, I agree with the Deputy Registrar's conclusionsregarding the non-payment of GST. Regarding the company records, Mr Clarke wasunable to provide any satisfactory explanation of why he was unable to produce therecords of the five companies. The assertion that the document management of thecompanies had been taken over by Mr Weise does not explain why there were norecords. It is understandable the Deputy Registrar viewed with suspicion the claimthe offices used by the companies had been ransacked by employees and tradecreditors once news of the liquidations became public, and the invitation to speculatethat this must have led to the loss of the records, given there was no evidence of acomplaint to the police about the alleged break in.[23] Mr Dalkie asserted there was an element of predetermination in the decision toprohibit Mr Clarke from being a director for a period longer than his period ofbankruptcy and referred to an email of 22 July 2016 from an official at the Ministry tothe liquidators. I do not agree. The email states that the Deputy Registrar "may"determine that the conduct of bankrupt individuals warrants a period of prohibitionlonger than the period of their bankruptcy and that Mr Clarke was being consideredfor a director prohibition because of the number of failed companies in which he hadbeen involved. It does not say Mr Clarke was being considered for director prohibitionjust because he was a bankrupt.[24] I accept Mr Dalkie's related submission that a decision under s 385 is separatefrom the question of an individual's bankruptcy, except, as noted by Ms Gorman, tothe extent that the bankruptcy is one of Mr Clarke's personal circumstances to whichthe Deputy Registrar could and did have regard when setting the period of theprohibition.[25] Mr Dalkie said the email of 22 July 2016 also showed the Deputy Registrarwas using the prohibition to punish Mr Clarke rather than to protect the public. I donot accept that. It is clear the Deputy Registrar's focus was on protecting the publicrather than punishing Mr Clarke. The Registrar made the following observations whendeciding the period of prohibition:15.3 I must also take into account the personal circumstances of Mr Clarkebut unless there are exceptional circumstances (and none have beenadvanced) I consider the risk to the public outweighs any possiblehardship to Mr Clarke. 15.4 I consider Mr Clarke then and now has no concept at all as to theduties and responsibilities required of a company director. This is nota failing on a technical level. It goes to a more basic failing of a personwho has a flawed understanding of his duties and responsibilities tothe Companies and its creditors. I consider there is nothing to indicateany insight by Mr Clarke as to his mismanagement and the effect hehad on others. I consider Mr Clarke is a serious danger to thepublic and the public requires protection from Mr Clarke.[26] Nor do I accept, as Mr Dalkie said, that these findings by the Deputy Registrarwere emotive, value subjective comments, were not based in reason or a properobjective analysis of the facts, were tendentious statements that suggested apredilection against Mr Clarke from the outset, and that they were not conclusionsopen to be made on an objective analysis of ascertained facts, especially where theprocess was a decision made on the papers.[27] To the contrary, I am satisfied the Deputy Registrar's decision followed aproper process that accorded with the requirements of s 385 and with the requirementsof natural justice as discussed in Davidson:7(a) The Ministry's Notice and accompanying letter of 8 December 2016informed Mr Clarke of the decision under consideration and thematerial being considered for that decision, and offered Mr Clarke theopportunity to comment. The fact there was a five-month delaybetween the writing of the notice and letter and their service onMr Clarke did not affect their validity or cause prejudice to Mr Clarke.I consider below whether the delay is relevant to the calculation of theperiod of the prohibition.(b) Mr Clarke responded in an 18-page submission from his counsel.(c) Mr Clarke was given the opportunity to revise his submissions once theMinistry had clarified where the onus of proof lay and made it clear toMr Clarke that the responsibility lay with him to satisfy the Registrarwhy the Registrar should not prohibit Mr Clarke from being a directorbut did not take that opportunity.(d) Mr Clarke chose not to take that opportunity – although nothing turnson that fact alone.[28] I consider the Deputy Registrar's substantive findings of the risk Mr Clarkeposed to the public were properly open to the Deputy Registrar given the large arrearsthat GST accrued over a short period of time, Mr Clarke's evident lack ofunderstanding of his obligation to account for GST, the various efforts to evaderesponsibility by claiming Mr Clarke had been acting on the advice of Mr Weise andothers, the failure to produce the company accounts and the unsatisfactory explanation7 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [104]-[107].offered for the absence of records. The basis of the findings – the substantial arrearsin GST and the absence of records – are based on facts that Mr Clarke could notdispute.[29] Mr Dalkie's contention that the period of prohibition was disproportionatelysevere was based on a comparison with the prohibitions imposed in Davidson andBrand v Registrar of Companies,8 and with the period of bankruptcy imposed inBryers v Official Assignee.9 As the Deputy Registrar noted, the prohibitions imposedin Davidson and Brand – two and a half years and four years respectively – wereimposed at the time the maximum penalty was five years and the decision in Bryersdid not concern s 385. (Mr Bryers did not challenge the five-year prohibition imposedunder s 385 – also imposed when the maximum period was five years).[30] I accept that just because Parliament doubled the period of the permissiblemaximum prohibition does not mean the Registrar should automatically double theperiod when imposing a prohibition under the new maximum. I do not consider theDeputy Registrar did engage in such a doubling exercise, even though, when agreeingwith Mr Dalkie that Davidson was a useful reference point, the Deputy Registrar hadnoted that on one analysis he could simply double the two and a half years imposed inDavidson to set a starting point for the prohibition because of the increase in thepermitted maximum. Rather, I consider the Deputy Registrar properly looked at thecircumstances of Mr Clarke's case when setting the period. At the same time, theDeputy Registrar was correct to take into account the legislated increase in themaximum period of prohibition, reflecting an evident expectation on the part ofParliament that longer periods of prohibition should be imposed in appropriate cases.[31] Mr Dalkie sought to contrast the arrears of just over $1 million in GST owedto the IRD caused by Mr Clarke's actions with the many millions lost to investors inthe collapses of Bridgecorp, Blue Chip and South Canterbury Finance that were thebackground to the decisions in Davidson, Brand and Bryers. However, while the scaleof past losses is clearly relevant, as the Deputy Registrar acknowledged, it is not the8 Brand v Registrar of Companies [2016] NZHC 2983.9 Bryers v Registrar of Companies [2015] NZHC 384.sole factor. In this case, the Deputy Registrar considered the protection of the publicand setting of standards to be predominant factors.[32] In Davidson, Miller J said there was no dishonesty or impropriety of any sorton Mr Davidson's part. Mr Davidson's responsibility lay in failing to take moreassertive action in a situation of sustained mismanagement of the Bridgecorp groupby others.10 Miller J also held that the public had nothing to fear from Mr Davidsonwho had learned a painful lesson and agreed that specific deterrence was not needed,although he did go on to note that standard-setting and general deterrence did matterand warranted a substantial period of prohibition. It is inherent in those findings thatMiller J considered Mr Davidson knew and understood the need to avoid any repeatof the situation in which he had found himself. That contrasts starkly with theconclusions of the Deputy Registrar in this case that Mr Clarke had a flawedunderstanding of his responsibilities as a director and little insight of the impact of hisactions on others.[33] In terms of the protection of the public, therefore, Mr Clarke's situation isdifferent and more serious from that of Mr Davidson, notwithstanding the much moresignificant losses suffered in the Bridgecorp collapse and notwithstanding the fact thatit was the IRD rather than private investors that suffered the loss in Mr Clarke's case.Furthermore, to set the term of the prohibition principally by reference to the lossessuffered risks making punishment the primary focus – which Mr Dalkie agreed itshould not be. It is also relevant to recall the observations of Miller J in Davidson thatthe maximum period was not reserved for the worst possible cases and that there mightbe many cases where a substantial period of prohibition was needed.11[34] Mr Dalkie said that the seven-year prohibition imposed on Mr Clarke was atthe top end of the range and that this also showed it was disproportionately severe.However, Ms Gorman produced a list of prohibitions imposed over the period fromJanuary 2012 to February 2018 that shows that penalties have regularly been imposedat the upper end of the range – both when the maximum was five years and, since 1April 2014, when it became 10 years.10 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [140].11 Davidson v Registrar of Companies [2011] 1 NZLR 542 (HC) at [142].[35] Mr Dalkie did not object to the list to which he referred in making the case thatthe seven-year prohibition imposed in Mr Clarke's case was excessive. However, thelist shows that 18 of the 91 prohibitions imposed since 1 April 2014, or just under 20per cent, were for seven years or more, with some being for periods of eight, nine or10 years. While the Court is no position to assess how Mr Clarke's case compareswith those other cases, it is apparent that the penalty imposed on Mr Clarke is withinthe range of penalties imposed in recent years and is not the outlier contended by MrDalkie.[36] Accordingly, I see no basis for concluding that the prohibition imposed by theDeputy-Registrar was manifestly excessive or plainly wrong. Furthermore, asMs Gorman observed, Mr Dalkie has not pointed to any error of law or principle bythe Deputy Registrar in exercising his discretion to impose a seven-year prohibition.It follows that there is no proper basis for this Court to set aside the term imposed bythe Deputy-Registrar and impose one of its own.Should the period of prohibition take into account delays by the Ministry?[37] Mr Dalkie submitted that Mr Clarke should get credit for an eight-month delayin the inquiry by the Ministry which he says means that the inquiry should haveconcluded earlier and the period of prohibition would have started and ended sooner.It appears from the submission Mr Clarke made to the Deputy Registrar that the delayreferred to was between August 2015 and May 2016.[38] However, it is not the investigation but the notice issued under s 385(3) thatsets the starting point for the period of prohibition. The notice in this case was dated28 August 2017, after the delay alleged by Mr Dalkie. There is no basis, therefore, forgiving "credit" for actions that might have taken place before that date because thedecisions to proceed with the notice may not have been taken until after the period ofalleged delay.[39] A consequence of the prohibition period running from the date of the notice isthat Mr Clarke suffered no prejudice from the five-month delay between the issuingof the notice and its service on Mr Clarke or from the further time taken to clarifywhere the onus of proof lay in a situation covered by s 385(4)(b). Accordingly,Mr Dalkie's submission on these later delays and the argument there was doublecounting cannot succeed.Conclusion[40] It follows that:(a) The decision of the Deputy Registrar of Companies to prohibitMr Clarke from being a director, promoter or taking part in themanagement of any company under of s 385 of the Companies Act1993 was correct;(b) There is no basis for this Court to set aside the Deputy Registrar'sdecision setting the period of prohibition at seven years;(c) There is no reason to give Mr Clarke "credit" in calculating the periodof prohibition for alleged delays by the Ministry of Business,Innovation and Employment.Result[41] The appeal is dismissed.______________________G J van Bohemen J