MCKAY BUILDERS LTD (IN LIQ) v MCKAY [2017] NZHC 1202

MCKAY BUILDERS LTD (IN LIQ) v MCKAY [2017] NZHC 1202 [2 June 2017]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV-2015-409-845[2017] NZHC 1202BETWEEN MCKAY BUILDERS LIMITED(IN LIQUIDATION)First PlaintiffVIVIEN JUDITH MADSEN-RIES ANDHENRY DAVID LEVIN ASLIQUIDATORS OF MCKAY BUILDERSLIMITED (IN LIQUIDATION)Second PlaintiffsAND PAUL JOHN MCKAYFirst DefendantKIM YVONNE MCKAYSecond DefendantHearing: 29 May 2017Appearances: N H Malarao and G A Campbell for the PlaintiffsNo appearance by or for the DefendantsJudgment: 2 June 2017JUDGMENT OF MANDER J[1] The liquidators of MacKay Builders Ltd (the company), Ms Vivien Madson- Ries and Mr Henry Levin (the liquidators), seek to recover from the defendant shareholders, Mr Paul McKay and Ms Kim McKay, their current account debt. The liquidators also allege breaches by Mr McKay of duties he owed to the company as its director. The matter proceeded by way of formal proof.11 McKay Builders Ltd (in liq) v McKay [2017] NZHC 934.Background[2] The company which provided labour-only building services began trading in 2003. It ceased trading in mid-2013, and on 1 October 2015 the company was placed into liquidation on the application of the Commissioner of Inland Revenue.[3] Mr McKay was the sole director of the company and held a 50 per cent shareholding. Ms McKay held the remaining half of the company's shares. Thecompany only ever employed Mr McKay and an apprentice. As at the date of liquidation the liquidators assessed that, apart from legal claims, the company had no realisable assets. Creditor claims total some $320,000, with Inland Revenue's claimin the liquidation being approximately $315,500.[4] Following their appointment the liquidators obtained records from the company's previous accountants, Inland Revenue, and the defendants themselves. The liquidators were also given access to the company's accounting records that were stored on a cloud-based accounting software application ("Xero"). Financialstatements for the financial years ending (FYE) 2010-2013 were published in Xero on 23 March 2014, and for the FYE 2014 on 27 April 2015.[5] Based upon the orthodox test for insolvency, the liquidators determined that the company from at least 30 November 2009 was unable to pay its debts as they became due in the normal course of business, and that the value of its liabilities exceeded that of its assets.2 They concluded the company was operating with significant and generally worsening trading deficits or minimal trading surpluses, with consistent severe working capital deficits from the FYE 2009. It had negative net assets from that time with significantly under-reported debts owed to Inland Revenue.[6] The company was frequently late or unable to meet its obligations to Inland Revenue throughout 2008 until the date of its liquidation. The company began defaulting on its obligations in respect of GST and income tax from as early as 2007.The company's GST debt began to accrue more rapidly from 30 November 20092 Companies Act 1993, s 4.onwards, and it began defaulting on its obligations in respect of PAYE from 31 December 2009. As a result, the company began incurring interest and penalties on its unpaid tax debts. These continued to accrue despite the company making some payments towards its tax debt.[7] One of the liquidators, Mr Henry Levin, an insolvency specialist, gave evidence that in his experience a failure to pay tax debts on a regular basis over an extended period of time is a sure sign of a company in financial difficulty. Funds held in respect of such tax debts (with the exception of income tax) should only be held by a company for a short period of time, as an intermediary, before being paid to Inland Revenue. The company was unable to pass these funds to Inland Revenue because it was having to apply the money it held as an intermediary to service its own debts.3[8] In Mr Levin's opinion the company's inability to pay its due debts had become chronic by 30 April 2010, at which point it almost entirely stopped payingGST and its PAYE. This state of affairs mirrors the company's own reported figureswhich showed it was operating with severe working capital deficits from, at the latest, the FYE 2009 onwards. The financial statements report that the company operated with liabilities in excess of its assets from that year to the FYE 2014. However, as already observed, these finalised financial statements did not accurately record the growing liability to Inland Revenue. The financial position of the company was likely therefore to have been worse than was actually reported.[9] In summary, the company was unable to meet its debts from 30 November2009 (at the latest) which was when the company's more significant tax debts beganto accrue. The company was also clearly balance sheet insolvent, with its financial statements showing that it was operating with overall net liabilities in excess of its assets in each financial year from the FYE 2009 onwards. The company was therefore consistently failing both the cash flow limb (from 30 November 2009) and the balance sheet limb (from the FYE 2009) of the solvency test.3 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171.The liquidators' claim[10] The liquidators have brought proceedings against the McKays alleging five causes of action. These claims can be broken into three parts:(a) The liquidators' first cause of action is for recovery of the shareholders' current account debt in the sum of $293,129 which it is alleged is owed by the McKays.4 The second and third causes of action are pleaded as alternatives to the first cause of action and seek recovery of distributions to shareholders, or the setting aside of dispositions that prejudice creditors.5 These causes of action are pleaded against both Mr and Ms McKay.(b) The liquidators' fourth cause of action seeks a declaration that Mr McKay has breached his duties as a director which he owed to the company. The liquidators seek compensation from Mr McKay, including for the sum of $306,548.43 representing the loss to creditors.6(c) The liquidators' fifth cause of action seeks a declaration thatMr McKay has breached his obligation to prepare and keep accurate accounting records and financial statements of the company. The liquidators seek to recover the costs of the liquidation.[11] In relation to the first cause of action the McKays have acknowledged owing a debt under the current account but maintain it is limited to the sum of $76,628.7First cause of action: Current account debt repayable on demand[12] The liquidators seek to recover the shareholders' current account debt in thesum of $293,129 representing advances repayable on demand. The company made4 The amount claimed in the statement of claim was $296,650, but was amended to this figure inthe plaintiffs' evidence.5 Respectively pursuant to Companies Act 1993, s 56(1) and Property Law Act 2007, s 348.6 Pursuant to Companies Act 1993, s 301.7 McKay Builders Ltd (in liq) v McKay [2017] NZHC 934 at [5].demand of the McKays for the outstanding current account debt by letter of 9 December 2016.8Legal principles[13] Advances made by a company to its shareholders are debts owed by the shareholder to the company and are repayable on demand.9 In the absence of a company resolution classifying drawings as being otherwise they constitute repayable advances.10[14] The McKays accept that the finalised financial statements do not correctly record the position as between themselves and the company.11 However, they plead they were entitled to wages or a salary from the company and therefore that their indebtedness is limited to the figure of $76,628. The merit of that defence will be considered shortly. However, a severe difficulty for the McKays is the dearth of any company records that support their contention. It is a director's duty to ensure that a company's records correctly record and reflect the company's transactions, and adirector will be accountable for a failure to keep and maintain proper accounting records.12[15] In Chesterton Holdings v Durney Ltd (in liq) this Court rejected similar a director's claim alleging that drawings recorded in the company's accounts ought tohave been coded as wages.13 In dismissing that claim and granting summary judgment, Associate Judge Gendall (as he then was) observed that the company in liquidation was entitled to rely on its accounts as being a true and accurate statementof the company's financial affairs, noting that a current account advance to ashareholder is repayable upon demand.148 An earlier demand was made by way of letter dated 12 January 2016.9 Thom Contractors Ltd (in liq) v Thom HC Auckland CIV-2008-404-6829, 28 April 2009 at [16];Re Samarang Developments Ltd (in liq) HC Christchurch CIV-2003-409-2094, 30 September 2004 at [55]; New Zealand Game Meats Export Ltd (in liq) v Lau HC Whangarei CP34/98, 19 March 1999.10 Re Samarang Developments Ltd (in liq), above n 9, at [55].11 Amended statement of defence at 9.7.12 Companies Act 1993, s 194(1); Thom Contractors Ltd (in liq) v Thom, above n 9, at [17].13 Chesterton Holdings Ltd (in lia) v Durney HC Napier CIV-2011-441-007, 19 May 2011 at [9].14 At [17], citing New Zealand Game Meats Export Ltd (in liq) v Lau and Thom Contractors Ltd (in liq) v Thom, above n 9.[16] In that case the liquidators' claim was for a sum which represented thedefendant shareholder's current account debt. The director acknowledged that she received the monies in question, but claimed she did so only as an employee of the company and the monies were wages rather than drawings. Associate Judge Gendall held that the director, having recorded the payments received as a current account debt, and in the absence of any other indicia that these wages, such as an employment agreement or paying income tax on the payments received, could not credibly contend that the liquidators should not rely on the accounts prepared by the company.[17] In Thom Contractors Ltd (in liq) v Thom liquidators demanded that the sole shareholder and director repay shareholder advances made to him over a three year period.15 He disputed the demand, contending that the payments were, at least in part, salary. As in this case, he was unable to point to any contemporary record justifying his assertion. Although he had not finalised financial statements in their current form, as a director any salary he received would need to have been documented and supported by a certificate, and there was no evidence as to the hours the director claimed to have worked.16[18] In New Zealand Game Meats Exports Ltd (in liq) v Lau, this Court held that because the existence and state of company records as at the date of liquidation of a company is the responsibility of the directors, they carry the onus of satisfying theCourt that such records are correct. A liquidator is entitled to rely on the company'srecords prepared at the direction of the directors of the company for which they are responsible.17 That approach accords with the statutory duties of a director and his or her fiduciary obligations to the company to ensure accounting records are kept at all times which correctly record the transactions of the company.18 A director is obliged to account to the company for its funds, and it is incumbent upon him or her to explain what has become of the company's property in their hands.1915 Thom Contractors Ltd (in liq) v Thom, above n 9.16 Companies Act 1993, s 161.17 New Zealand Game Meats Export Ltd (in liq) v Lau, above n 9, at 12-13.18 Companies Act 1993, s 194.19 GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch) at [143]-[149]; Morgenstern v Jeffreys[2014] NZCA 449, (2014) 11 NZCLC 98-024 at [56] and [58].Is the current account debt recoverable?[19] The published financial statements for the company record that the McKays maintained a joint current account. Mr Levin's analysis concluded the McKays presently owe the company $293,129 as a result of them withdrawing a net $257,056 from the company in cash and a further $12,017 in interest during the period commencing from 1 April 2010. In his view, had that money not been applied as it was, for the benefit of the shareholders, the company would have had sufficient funds to meet most of its debts. It is likely all its tax debts would have been paid on time and the accrual of penalties and interest avoided. In his assessment there would not have been a need for the liquidation.[20] The McKays have resiled from their earlier stance that the company owed them $99,466 to a position where they accept that under the current account they owe the company $76,628. The difference between the liquidators' calculation of the amount owed to the company under the current account and the McKays'calculation essentially derives from a claimed entitlement by the McKays to draw money because of work they maintain they were doing for the company.[21] When the liquidators first examined the published financial statements a discrepancy between the balance of the current account recorded in the financial statements for the FYE 2013 and that reported as the comparative figure for the FYE 2013 in the published financial statements for the following FYE 2014 was noted. The 2013 published financial statements recorded the McKays as owing the company $78,717, whereas the comparative figure for that year contained in the published financial statements for the FYE 2014 recorded the company owing the McKays $111,846.[22] It was not until draft financial statements and correspondence between the McKays and their accountant was made available, as a result of discovery after the commencement of this proceeding, that the liquidators became aware of how this discrepancy in the figures had occurred.(a) September 2013 accounting entries[23] The discovery of further Xero records showed that in September 2013 (three months after the company had ceased trading) the McKays' accountant passed a series of journal entries retrospectively creating a wage expense for the financial years ending 2010-2013 (wage alignment journals) totalling $184,397.55. The wage alignment journals also created a corresponding entry purporting to record the introduction of funds by the McKays totalling the same amount. As a result of these journal entries, the draft financial statements record that the McKays owed the company $48,159 under the current account.(b) March 2014 accounting entries[24] The accountant passed a further set of journal entries on 23 March 2014 (wage reclassification journals). The effect of the wage reclassification journals was to decrease or credit the wage and salary expense by a total of $190,562 for the FYE 2010-2013, and increase or debit the drawings or current account asset by the same amount for those same financial years.[25] At the same time, the accountant created journals allocating shareholder salaries to the McKays for those financial years (salary allocation journals, part 1). The effect of the salary allocation journals, part 1, was to increase or debit the shareholder salary expense by $162,600 and decrease or credit the shareholder"funds introduced" liability by the same amount.[26] The accountant also "published" the financial statements for those financial years in Xero on 23 March 2014. Once a report is published in Xero, the report cannot be changed, but the underlying ledger used to formulate the report can still be altered. As a result of the discovery of these journal entries, the liquidators were able to discern why the figures in the financial statements for the FYE 2013 differed from the comparative figures for that same financial year appearing in the financial statements for the following year. As a result of the wage reclassification journals and the salary allocation journals, part 1, the financial statements recorded that the McKays owed the company $76,122.(c) January-April 2015 accounting entries[27] The liquidators established from their inquiries that in April 2014 theMcKays' accountant had written to Inland Revenue seeking to amend the company'sPAYE returns for the FYE 2010-2013. However, Inland Revenue did not consider that any error had been made in these returns and declined to reassess them. As a result, the accountant was obliged to void the wage reclassification journals, which he did on 31 January 2015. The effect of this was to increase or debit the wage and salary expense by a total of $190,562 for the FYE 2010-2013, and decrease or credit the drawings asset for the same amount for the same period.[28] On 27 April 2015, the accountant posted a further set of journals editing the historical salary expenses for the FYE 2013 and creating a salary expense for the FYE 2014 (salary allocation journals, part 2). The result of voiding the wage reclassification journals and the creation of the salary allocation journals, part 2, wasto turn the company's current account asset into a liability to the McKays of$99,466.[29] The liquidators assessed that the effect of these various accounting entries and adjustments was to turn the debt owed by the McKays to the company, as recorded in their current account, into a debt the company owed to them. The McKays have now resiled from that position but, as noted, maintain their liability to the company is less than has been assessed by the liquidators.[30] Mr Levin's evidence is that he can accept the wage alignment journals were,in part, an honest attempt to align the wages recorded on the company's PAYEreturns as being paid to the McKays with the wages expense recorded in thecompany's accounting records which had not previously included those wages. However, where wages have not been paid to the worker it is appropriate that the debt be recorded as a debt owed by the company to the worker who is an unsecured creditor.[31] The McKays, through their accountant, instead of recording the non-paid wages as a debt, created a fictitious corresponding entry purporting to show funds having been introduced by the shareholders which were never received by thecompany. It was Mr Levin's evidence and that of Mr Scott Mason, a chartered accountant and tax specialist who provided expert evidence, that any sum owed to the McKays for work done for the company is a liability arising from the non- payment of net wages which would simply remain owing to the employees as unsecured creditors, not as funds introduced. Such accounting entries only served to create the appearance of removing a large and valuable asset, being the debt owed by the shareholders, from the accounting records of an insolvent company.[32] The liquidators' analysis did establish that some funds were introduced by theMcKays which can be verified against the company's bank statements. Those fundsrepresent wages that were paid to Mr McKay by a building company and depositedinto the company's bank account. Those deposits had the effect of reducing thedrawings under the current account and have appropriately been reflected by the liquidators as a credit to the McKays, representing actual funds introduced.[33] However, Mr Levin's uncontested conclusion is that the company never received the cash the wage alignment journals or the shareholder salary journals purport to record. These adjustments were artificially entered into Xero after the company had been experiencing severe cash flow problems for some four or more years and had ceased to trade. Furthermore, it had incurred and been unable to pay the majority of the approximate $315,500 it owed to Inland Revenue.[34] Notwithstanding this being the actual state of the company throughout this period, the journal entries purported to reflect the McKays having received the benefit of $104,398 in respect of the wage alignment journals and $204,530 in respect of the salary allocation journals at a time when the company was clearly insolvent and accruing significant tax debts. I accept Mr Levin's evidence that thesefictitious entries based on funds being introduced by the McKays are unjustifiable. At best, any sum owed to them for work done for the company is, as Mr Levin observed, just that, a sum owed and not funds introduced.[35] In reviewing the company's bank statements, the liquidators did not identifyany transactions consistent with the payment of wages to the McKays. It appears the McKays used the company bank account to meet their personal expenses. Bankstatements record payments that are consistent with such expenditure, with company funds being used to meet the household expenses of the McKays, such as groceries, takeaways, Sky television, and health bills. There are no withdrawals that match wages paid.[36] Importantly, the liquidators during the course of their investigations into the affairs of the company were unable to find any documentation recording an agreement by the company to pay the McKays' wages. In particular, the liquidatorsfound no employment agreement or resolution of the director authorising the payment of remuneration. As I discuss at [39], there were no entries in an interests register as required by s 161(2) of the Companies Act 1993 (the Act), nor certificates certifying that the payment of a salary was fair to the company in accordance with s 161(4) of the Act.[37] It is clear the various journal entries made after the company ceased trading were simply to give the appearance of the McKays introducing funds into the company. This had the effect of transforming the McKays' current account from acompany asset (a receivable) into a liability (a payable). The justification for this accounting treatment appears to be the McKays' position that they were entitled to wages/salaries from the company. The difficulty for the McKays is that the journal entries creating credits in their favour are simply paper transactions of no legal effect. Further, even if it was accepted that these accounting adjustments were capable of having legal effect such transactions could not be offset against theMcKays' debt to the company.Paper transactions[38] The legitimate payment of wages or a salary to the McKays is dependent upon an accurate ascertainment of the legal arrangements that were entered into by them or existed between them and the company. That cannot be determined by an assessment of the broad substance of the relationship or transaction (here, the purported post facto entitlement to wages) measured by the overall economic consequences for the participants.2020 NZI Bank Ltd v Euro-National Corporation Ltd [1992] 3 NZLR 528 at 539.[39] I have already traversed the absence of documentation recording any employment relationship, let alone the essential terms by which the McKays were employed by the company. The absence of an agreement or of accounting records recording the actual payment of wages/salaries by the company to the McKays as an actual transaction or series of transactions is telling. The creation of journal records purporting to record non-existent company transactions does not assist.21[40] Mr Mason gave evidence that, in the absence of anything else, he would treat undefined payments or other transfers of value to beneficiaries as being an unsecured advance, that is, a loan. His evidence was that employment payments and dividends require some form of documentation. In particular, he referred to a clause of thecompany's constitution pertaining to remuneration paid to a director whether in that capacity or otherwise. That clause is consistent with s 161 of the Act, which permits payment of remuneration or other benefits to a director provided entries are made in the appropriate interest registers and the appropriate documentation is completed. Mr Mason noted there was no evidence to suggest that the McKays, when setting remuneration for themselves as shareholder-employees, went through any of the processes required by the constitution. In his view, this lack of process undermines the validity of the suggestion of an employment relationship.[41] The company did file PAYE returns and employer monthly schedules with Inland Revenue which referred to gross earnings on PAYE in relation to the McKays. However, as I have already observed, the company's bank statements do not recordpayments to the McKays which are consistent with wages having been paid. As I have noted, Mr Levin accepted the wage alignment journal may well have been part of an honest attempt to align the wages recorded on the company's PAYE returns as having been paid to the McKays, with wages expenses that should have beenrecorded in the company's accounting records. However, the only legitimate effect of that would be to create a debt owed by the company to the unpaid worker. There is a fundamental difference between wages which may be owed to workers as a debt owed by the company and borrowings from, or advances to, people who are shareholders of the company.21 Reynolds v HSE Holdings Ltd HC Whangarei CIV-2009-488-000738, 17 September 2010.[42] An associated difficulty for Mr McKay arises from his status as a director. I have already noted the requirements of the company's own constitution regarding remuneration paid to him. This was a factor considered in the similar case ofWellington Audiovisual Ltd v Euro Boston Group Ltd.22 There the Court considered whether a director could retrospectively claim a salary from a company for work previously undertaken. A director who also held shares in his capacity as a trustee sought to make a claim for remuneration for work done for the company and a wider group of connected companies. As in the present case, the director owed the company under his current account.[43] This Court held that the evidence did not support the director's assertion thatthe company had agreed to pay him remuneration for services he provided. It was noted that no remuneration resolutions had been passed in accordance with thecompany's constitution. Heath J cited with approval the Court of Appeal's judgmentof Putaruru Pine and Pulp Company (NZ) Ltd v MacCulloch, where it held:23unless a contract to pay can be proved a director has no enforceable right to be paid anything for his services; there can be no such thing as the right to sue on a quantum meruit. Where by articles of association remuneration to directors is fixed and no more is said, the presumption is that the remuneration so fixed is only for the future and not for past services.[Emphasis added][44] Heath J also observed that a director is a fiduciary and that there is an inherent risk of conflict in a transaction which benefits the directors receiving the remuneration to the potential detriment of the company required to pay. As a result, there is a need for prescriptive rules which must be strictly applied when determining whether and how much a director should be remunerated.24Transactions cannot be set-off[45] Even if I had been minded to accept the journal entries created by theMcKays' accountant to be valid, or considered the McKays were entitled to remuneration on the basis of services rendered or work undertaken for the company22 Wellington Audiovisual Ltd v Euro Boston Group Ltd (2010) 3 NZTR 20-010 (HC).23 Putaruru Pine and Pulp Company (NZ) Ltd v MacCulloch [1934] NZLR 639 (CA).24 At [23].(a quantum meruit basis), s 310(2) and (3) of the Act would bar the journal entries from being used to reduce the current account.[46] Section 310(1) of the Act provides that the respective obligations of a creditor and an insolvent can be assessed on a net basis. However, that permissive rule is qualified by subsections (2) and (3). Those provisions provide:310 Mutual credit and set-off...(2) A person, other than a related person, is not entitled under this section to claim the benefit of a set-off arising from—(a) a transaction made within the specified period, being a transaction by which the person gave credit to the company or the company gave credit to the person; or(b) the assignment within the specified period to that person of a debt owed by the company to another person—unless the person proves that, at the time of the transaction or assignment, the person did not have reason to suspect that the company was unable to pay its debts as they became due.(3) A related person is not entitled under this section to claim the benefit of a set-off arising from—(a) a transaction made within the restricted period, being a transaction by which the related person gave credit to the company or the company gave credit to the related person; or(b) the assignment within the restricted period to that person of a debt owed by the company to another person—unless the related person proves that, at the time of the transaction or assignment, the related person did not have reason to suspect that the company was unable to pay its debts as they became due....[47] Mr McKay is a related person, being a director of the company in liquidation.25 He is not entitled to the benefit of a set-off arising from a transaction made within the restricted period.26 The exception to that prohibition is if he is able to show he did not have reason to suspect the company was unable to pay its debts as25 Companies Act 1993, s 310(5).26 Section 310(3)(a).they became due. The restricted period in the present case commenced on 21 July 2013, being two years from the date the application to place the company into liquidation was made.27 The journal entries (the wage alignment journals and the salary allocation journals) were both passed within the restricted period.[48] Mr McKay, as the sole director of the company, had responsibility for itsaffairs. He had a duty to the company to be sufficiently appraised of the company'sfinancial position to make decisions regarding the company. It is plain that he wasaware of the company's growing tax debts and of its inability to meet those debts asthey became due. The company's tax debts during this period were continuing to grow, and Inland Revenue was making deductions from the company's bankaccount. It appears therefore that Mr McKay, as the director of the company, would not in any event have been able to benefit from the journal entries made during the restricted period.[49] Ms McKay is not a related person. However, in order to obtain the benefit of a set-off arising from a transaction made within the specified period there is an onus on her to show that she did not have reason to suspect the company was unable to pay its debts as they became due.28 The specified period as it relates to her commenced on 21 January 2015, being six months from the date the application to place the company into liquidation was made.29 The salary allocation journals, part 2, were passed within this specified period.[50] The evidence shows that Ms McKay was responsible for maintaining thecompany's books and was the primary point of contact when dealing with thecompany's accountant at this time. It follows that, as a shareholder of the company,Ms McKay was aware of the dire financial position of the company and is therefore not entitled to the benefit of the salary allocation journals, part 2.27 Section 310(7).28 Section 310(2)(a).29 Section 310(6).Decision[51] For the reasons canvassed, I am satisfied the McKays are liable to the company for their shareholder current account debt in the sum of $293,129, which is repayable on demand.Alternative causes of action[52] Having found that the journal entries do not represent genuine transactions entered into by the company with the McKays, it is not strictly necessary for me to consider the alternative bases upon which the liquidators seek recovery of theshareholders' current account. However, for completeness, I will review the claimsput forward in the alternative to the plaintiffs' first cause of action.Second cause of action: Distribution to shareholders[53] Section 52 of the Act sets out the procedural requirements for the authorisation of a distribution by a company made to shareholders. In summary, the section provides:(a) A company is required to be satisfied on reasonable grounds that it will, immediately after the distribution, satisfy the solvency test.(b) Directors who vote in favour of a distribution must sign a certificate stating that, in their opinion, the company will, immediately after the distribution is made, satisfy the solvency test and the grounds for that opinion.[54] Section 56 of the Act further provides that remedies are available to the company in certain situations. In summary, the provision provides:(a) A company is able to recover a distribution to a shareholder if immediately after the distribution was made the company was insolvent. The shareholder has a defence if he or she received the payment in good faith, altered his or her position in reliance on the validity of the payment, and it would be unfair to require repayment.(b) A company is able to recover from the director (to the extent not recovered from the shareholder):(i) any distribution the director had failed to properly authorise under the Act; or(ii) if the director did not have reasonable grounds for believing the company was solvent at the time the distribution was authorised.[55] The date for assessing the solvency of the company is the date of the resolution authorising the distribution, and not any earlier date on which the physical payment may have been made.30 The Act defines a distribution by a company as being the direct or indirect transfer of money to, or for the benefit of, the shareholder in relation to shares held by that shareholder.31 That statutory definition includes any transfer of property by the company, and the corresponding provision of a benefit to or for its shareholder, or receipt of the benefit by or on behalf of the shareholder in that capacity. Whether a distribution has been made by the company is a question of substance rather than form.32[56] The liquidators argued that had I found that the journal entries represented legally effective transactions which extinguished the McKays' current account debt that such an outcome would fall within the definition of a distribution which includesan "... indirect transfer of money or property... to or for the benefit of the shareholder...".33 Because the company was clearly insolvent at the time these journal entries were made it follows that such a distribution is able to be recovered by the company.[57] It is not necessary for me to come to any concluded position regarding this alternative basis upon which the plaintiffs have put their case. However, noresolutions recording the company's decision to make any distribution to the30 Re Samarang Developments Ltd (in liq), above n 9 at [53]-[58]; National Trade Manuals Ltd (in liq) v Watson (2006) 9 NZCLC 264 (HC).31 Companies Act 1993, s 2.32 Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 at [64]-[65].33 Companies Act 1993, s 2.McKays have been made available, nor any director's certificates attesting to Mr McKay's opinion that the company will, immediately after the distribution is made, satisfy the solvency test, nor the grounds for such an opinion. Even if such documentation was available and authorisation had been provided by Mr McKay, objectively there would be no basis for Mr McKay to believe the company was solvent at the time the distributions were made. The company had ceased trading at the time the journal entries were passed and was hopelessly indebted to Inland Revenue.Third case of action: Setting aside dispositions that prejudice creditors[58] This second alternative cause of action is an allegation that the dispositions of property which the journal entries represent, even if accepted as genuine transactions, were made with the intent to prejudice creditors.Relevant law[59] The Property Law Act 2007 allows the Court to restore property of a debtor that has been disposed of in a manner that prejudices its creditors.34 Section 346 provides:346 Dispositions to which this subpart applies(1) This subpart applies only to dispositions of property made after 31 December 2007—(a) by a debtor to whom subsection (2) applies; and(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.(2) This subsection applies only to a debtor who—(a) was insolvent at the time, or became insolvent as a result, of making the disposition; or(b) was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or34 Property Law Act 2007, subpart 6 of part 6.(c) intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond thedebtor's ability to pay.[60] The plaintiffs submitted that should the journal entries be held to represent genuine transactions of the company, then applying the statutory definitions of"property" and "disposition" such transactions constituted dispositions of property.35The transactions which the journals represent amount to the company divesting itself of property to the McKays, and, as previously discussed, the company was clearly in a state of insolvency at the time of the making of the journal entries.[61] The more difficult question is whether the transactions the journal entries represent, or dispositions of property, were made with intent to prejudice creditors.Intent to prejudice a creditor[62] The effect of the journal entries was to credit the McKays' current account,either reducing or extinguishing the asset which their current account debt represented to the company. Under the Property Law Act a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property.36[63] The liquidators submitted the journal entries constituted dispositions of property which were prejudicial to the creditors of the company because the company lost access to a source of funds which would otherwise have been an available asset from which creditors could seek to recover their outstanding debts. The element of intention was discussed by the Supreme Court in Regal Castings Ltd v Lightbody, where Elias CJ observed:37[7] The financial position of the transferor at the time of the alienation is always a key consideration. It is not determinative against intent to defraud if the transferor is solvent at the time, particularly if he is contemplatingentering into a risky venture. But where the transferor's financial position isprecarious, it is objective evidence of intention to defraud if he acts to put property beyond the reach of creditors. Other indications of fraud commonly occurring are transfers to close relatives, particularly where the transfer is at an undervalue, alienations in which the transferor retains the35 Property Law Act 2007, s 345(2).36 Section 345(1)(a).37 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433.use or benefit of the property, and secrecy in the transfer or a misleading explanation for it.(Citations omitted)[64] Tipping J, in the same case, considered the concept of intent to prejudice acreditor extended to "creating or increasing a risk that they will not be paid or will be hindered or delayed in receiving payment".38[65] The evidence discloses that the company had been failing to meet its tax obligations from as early as 31 March 2007. It had a significant GST debt, and PAYE had been outstanding from 31 December 2009. The company defaulted on its obligations in relation to GST in every period from 30 November 2009 until 31 September 2013. Similarly, in respect of PAYE, in almost every period commencing 28 February 2010 until 30 September 2013, it defaulted. At the time the journal entries, which reduced or extinguished the McKays' current account obligations to the company, were approved, most of the approximate $315,500 debt to Inland Revenue was outstanding. It follows that the dispositions which the journal entries represent increased the risk that Inland Revenue would not be paid and, at the least, hindered and/or delayed Inland Revenue receiving payment of the sums it was owed.Without reasonably equivalent value in exchange or by way of gift[66] These dispositions had the effect of reducing the McKays indebtedness to the company, yet the journal entries were only able to be made by the fictional recording of funds having been introduced by the McKays. No actual funds were in fact introduced. There was, therefore, no reasonably equivalent value provided by the McKays in exchange for the disposition in their favour, which the reduction or elimination of their current account debt represented. There is no evidence available to me that they provided value by way of work which, in any event, the liquidators submit, would have fallen well short of the amounts credited to the McKays as a result of the journal entries.38 At [86].[67] Because of my findings in respect of the first cause of action, it is not necessary for me to come to any concluded view regarding this part of the plaintiffs'case, nor is it necessary to make any order under s 348(2). However, I record that on the evidence placed before me for the purpose of the formal proof hearing, the grounds for such an order appear to have been established.Fourth cause of action: Breach of director's duties[68] The liquidators allege Mr McKay, as sole director, owed duties to the company which he breached. In particular that he owed the company the following duties:(a) To act in good faith and in what he believed to be the best interests of the company;39(b) not to cause or allow the business of the company to be carried on in amanner likely to cause serious loss to the company's creditors;40(c) not to allow the company to incur an obligation unless he believed at the time, on reasonable grounds, that the company would be able to perform the obligation when it was required to do so;41 and(d) to exercise the care, diligence and skill expected of a reasonable director.42[69] Under s 301(1) of the Act the Court may, on the application of the liquidator, inquire into the conduct of the director and order that person to compensate the company in such amount as the Court thinks fit.[70] The liquidators' case is that Mr McKay, in his capacity as the company's soledirector, fell well short of discharging proper governance over the company in breach of his duties as a director. While a director obtains the benefit of limited39 Companies Act 1993, s 131(1).40 Section 135.41 Section 136.42 Section 137.liability provided by incorporation, that privilege is conditional upon the exercise of proper corporate governance and compliance with the Act.43[71] A director's duty to the company intrinsically extends to the protection of theinterests of creditors when the company approaches insolvency. By protecting theinterests of the company the creditors' positions ought consequentially be safeguarded. The interests of the shareholders are secondary to that obligation.44The shield of incorporation will not relieve a director of responsibility for allowing a company to trade recklessly when he or she knows, or ought to have known, thecreditors' claims cannot be met.45[72] Claims brought pursuant to s 301 of the Act are subject to a two-stage evaluation:46(a) Has there been a breach of a duty owed by a director to a company?(b) If so, how much should the director compensate the company?Breach of duty to act in the best interests of the company[73] The liquidators allege Mr McKay breached his duty to the company to act in good faith and in what he, as a director, believed to be the best interests of the company by:(a) permitting the company to pass the journal entries, resulting in the reduction in the amount owed to the company under the current account by shareholders, without the company receiving equivalent value in exchange.(b) permitting the company to make advances to the shareholders under the current account:43 Mason v Lewis HC Auckland CIV-2003-404-936, 1 October 2008 at [103]; Mason v Lewis[2006] 3 NZLR 225 (CA) at [83].44 Robb v Sojourner [2007] NZCA 493, [2008] 1 NZLR 751 at [25]; Nicholson v Permakraft NZ Ltd (in liq) [1985] 1 NZLR 242 (CA).45 Re Group Hub Ltd (in liq) HC Hamilton CP18/00, 1 November 2001, at [10].46 Mason v Lewis (CA), above n 43, at [55].(i) without entering into a repayment agreement,(ii) without obtaining security,(iii) without making provision for the payment of interest, and(iv) at a time when the company was insolvent.[74] The liquidators submitted these actions resulted in Mr McKay personally benefitting from the advances to himself and allowing his interests to be preferred over those of the company, placing the company's creditors at a serious risk of loss.It follows that Mr McKay failed to safeguard the interests of the company'screditors.[75] Alternatively, the liquidators allege that insofar as the journal entries, and in particular the wage alignment journals and the salary allocation journals, constitute distributions, Mr McKay breached his duty to act in the best interests of the company by permitting such distributions in circumstances where the company was insolvent, and when he had no reasonable grounds to believe the company would meet the solvency test following the making of those distributions.[76] I have discussed the company's insolvency earlier in this judgment. As far back as November 2009, whether upon an analysis of its balance sheet, or measured against its ability to pay its debts as they fell due in the normal course of business, the company was insolvent. Mr McKay personally benefitted from the dispositions, and by allowing the journal entries to be made he placed the company's creditors at serious risk of loss. He thereby placed his own interests ahead of that of thecompany's.[77] Other breaches relied upon by the liquidators include the incurring of debts to Inland Revenue when such liabilities were unable to be paid, and the failure to ensure that sufficient funds were retained by the company to meet its tax obligations. As a result Mr McKay, as the sole director, allowed the company to incur tax obligations without having reasonable grounds to believe the company would be ableto discharge its obligations to Inland Revenue when required to do so. Mr McKay allowed the company to continue to trade in circumstances where the company had significant working capital deficits, significant net liabilities, and worsening and unstable trading results. There is no evidence that he sought to obtain the preparation of a business plan, budgets, or cash flow projections, to allow the company to operate on an informed basis.[78] There are two aspects to the director's duty to the company to act in goodfaith and in the best interests of the company. Firstly, the element of good faith requires a director to act honestly with a proper motive. Secondly, the element of acting in the best interests of the company requires a director to always act for the good of the company. Inherent to that duty is the concept of loyalty, whereby the good of the company will come first. A failure to give paramountcy to thecompany's interests in preference to the director's own interests, or those of another party, will be to breach the director's fiduciary duty to the company.[79] Should a director fail to adhere to his or her fiduciary obligations the director will breach s 131 of the Act. Any transaction tainted by that breach will be open to challenge, regardless of any fair value considerations, because it will involve a breach of the fiduciary duty owed to the company by the director.47[80] An example of such a breach in a situation akin to the present was that found established in Lakeside Ventures 2010 Ltd (in liq) v Levin.48 Keane J held that adirector who had depleted the company's cash funds through drawings and left the company's tax debt outstanding breached his duty under s 131(1). In thosecircumstances the Court held:[42] I am satisfied that [the director] was in breach of his duty under s 131(1) to act in good faith and the best interests of the company. He appropriated Lakeside's only tangible asset, its profit from the joint venture, depriving it of its ability to meet its related liability as and when it fell due. He delayed in filing Lakeside's income tax return, exposing it to penalties and interest...47 Morgenstern v Jeffreys, above n 19, at [99].48 Lakeside Ventures 2010 Ltd (in liq) v Levin [2014] NZHC 1048 at [42].[81] It would have been readily apparent to Mr McKay that the company was not performing. As observed by Mr Mason in his evidence, even though the financial statements of the company were not prepared until after the company had ceased trading, Mr McKay would have been well aware of the ongoing difficulty and failure by the company to meet its tax obligations. Notwithstanding the company's direfinancial position, Mr McKay continued to take drawings from the company, and used the company bank account effectively to meet personal household outgoings.[82] Furthermore, Mr McKay, in his position as the sole director of the company, allowed the journal entries to be made to conceal a significant asset of the company and, at least initially, to create a liability to himself and his fellow shareholder, Ms McKay, for wages/salaries. It is apparent both from the use of the company bank account and the subsequent accounting treatment which he permitted that he wasacting only for his and Ms McKay's benefit, to the detriment of the interests of the company.Allowing the company to engage in reckless trading[83] The statutory prohibition on a director, contained in s 135 of the Act, torefrain from engaging in reckless trading reflects the director's duty to protect theinterests of creditors when the company approaches insolvency. The plaintiffs allege that Mr McKay breached this duty by allowing the business of the company to becarried on in a manner likely to cause serious loss to the company's creditors. I havealready reviewed the well founded grounds upon which that allegation is made in addressing Mr McKay's failure to act in the best interests of the company.[84] The Court of Appeal, in Mason v Lewis, emphasised the need to take an objective approach to the assessment of whether there has been a breach of s 135.49The focus is not on a director's belief but rather on the manner in which a company'sbusiness is carried on, and whether that modus operandi creates a substantial risk of serious loss. The duty is owed to the company and requires directors to make a49 Mason v Lewis, above n 43, at [48]-[50]."sober assessment" when a company enters troubled financial waters as to its likely future income and prospects.50[85] It does not follow that once a company becomes insolvent, at least in a balance sheet sense, that it must cease trading, or that to continue to do so involves illegitimate risk taking. However, there will be limits to the extent to which directors can trade companies while they are insolvent in the hope that things will improve.51In Richard Geewiz Gee Consultants Ltd (in liq) v Gee, this Court held there will be even less justification for such a hope when the relevant liability is to Inland Revenue for GST and PAYE.52 In such a situation the funds payable to Inland Revenue have a quasi-trust character to them, whereby it is expected the company will only retain the funds for a short period pending payment to Inland Revenue.53In that case it was held that to permit the company to continue to trade in the knowledge that it was insolvent, and with no coherent plan for the payment of substantial amounts due to Inland Revenue, was irresponsible.[86] In support of the plaintiffs' claim that Mr McKay was in breach of s 135, reference was made to the similarities between the position of the present company and that which this Court dealt with in Boutique Tanneries Ltd (in liq) v Handley.54The company in that case had remained afloat for a number of years by meeting its obligations to creditors with the exception of Inland Revenue. For some period it failed to pay GST and PAYE before it went into liquidation. Over that time obligations to Inland Revenue were deferred in preference to obliging other creditors who provided services or materials required to continue trading. However, the reality of accumulating penalties for late payment of tax reflected poorly on the business judgement of those running the company, and, consistent with Mr Levin'sevidence in the present case, was reflective of a more fundamental issue regarding the inability of the company to pay its debts as they fell due.50 At [51].51 Re South Pacific Shipping Ltd (in liq) (2004) 9 NZCLC 263,570 (HC).52 Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483.53 Syntax Holdings (Auckland) Ltd (in liq) v Bishop, above n 3.54 Boutique Tanneries Ltd (in liq) v Handley HC Auckland CIV-2006-404-2713, 24 July 2008.[87] Mr Levin's evidence was that the company's financial position deterioratedunder Mr McKay's directorship, such that by 30 November 2009 the company was insolvent. The company had incurred significant tax debts which had gone unpaid and remained outstanding as at the date of liquidation. These included GST, PAYE and student loan employer contributions, which the company ought only to have retained temporarily before being passed on to Inland Revenue. I accept that by continuing to trade whilst insolvent for that period, some four years, Mr McKay created a substantial risk of serious loss to the company's creditors which ultimatelycame to pass.[88] The company only ever had minimal surpluses available to it from trading. Any hope Mr McKay may have had that the company's financial position wouldimprove was forlorn and without any realistic or rational basis. A "sober assessment" of the company's prospects during this period ought to have resulted inthe company ceasing to trade. However, there was no evidence that Mr McKay undertook any analysis of the company's financial position but, rather, chose to continue to trade the company, resulting in continuing and significant loss to Inland Revenue.Breach of duty causing the company to incur obligations[89] Section 136 of the Act prohibits a director from agreeing to a company incurring an obligation unless the director believes, on reasonable grounds, that at the time the company will be able to perform the obligation when it is required to do so.[90] During the period 30 November 2009, being the latest date of the company'sinsolvency, until the date of its liquidation, the company continued to incur taxobligations under Mr McKay's directorship. The company almost continuously failed to meet its obligations in respect of GST from 30 November 2007 to 30 September 2013 and, similarly, in respect of PAYE from 31 December 2009 to 30 September 2013, leading to an outstanding tax debt of some $307,000.[91] The liquidators are required to prove that Mr McKay agreed to the company incurring these obligations when he did not believe, on reasonable grounds, that the company would be able to discharge these tax obligations when required to do so.55[92] The practical application of this combined subjective and objective test, and the overlap between the obligations placed on a director under ss 135 and 136 were summarised by Clifford J in Jordan v O'Sullivan:56[69] Taken overall, perhaps what can now be said is that, particularly interms of the statutory expression of directors' duties found in ss 135 and 136,directors owe duties to a company, that would appear to be designed, in the overall scheme of the Companies Act, to protect, at least to a certain extent, the position of the creditors of the company at all times. Whether or not, at a particular point in time, the directors are likely to breach those duties will, fairly obviously, depend on the financial position of the company. Where a company is in a strong financial position, adequately capitalised and making sustainable profits, it is most unlikely the directors will be engaging in a course of action (s 135), or incurring specific obligations (s 136), that involve the taking of illegitimate risks. They will, therefore, in all likelihood be meeting the duties they owe to the company which are designed to protect the interests of its creditors. If, however, the financial position of the company deteriorates significantly so that the position of the creditors becomes significantly more risky, the directors may, again by reason of the duties the Act provides they owe to the company, need to pay more attention to the position of the creditors. That need becomes most pressing where a company is insolvent, or near to insolvency, and the directors have the difficult decision to make as to whether to cease trading or, on a rational and reasoned basis having appropriate regard to the interests of creditors, continue trading with a view to returning the company to a sound financial position.[93] In the present case, Mr McKay allowed the company to simply trade onwithout regard to the company's increasing dire tax position. He had no reasonable grounds to believe the company could meet its ongoing tax obligations by allowing the company to continue to trade as it did. From as early as the FYE 2007 the company began defaulting on its tax obligations. The decision to continue to trade despite early failures to meet the company's tax obligations may have initially been justified. However, the ongoing pattern of failure to meet these obligations over such an extensive period, and the associated deterioration of the company's financialsituation, meant Mr McKay had no reasonable grounds to believe the company could meet its further tax liabilities.55 Fatupaito v Bates [2001] 3 NZLR 386 (HC).56 Jordan v O'Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008.[94] From the date on which the company became insolvent Mr McKay had no reasonable grounds to believe the tax liabilities the company was further incurring as a result of the company continuing to trade could be met. That assessment is required to be made having regard to its existing significant overdue debts to Inland Revenue at that time and the accumulating interest and penalties which represented a substantial barrier to the company being able to pay its current obligations, let alone the new tax debts it was accruing.[95] The only reasonable inference to draw from that situation was that Mr McKay could not have honestly believed the company would be able to satisfy its new obligations; at the very least, he had no reasonable grounds for such a belief. It follows therefore that Mr McKay was in breach of s 136 of the Act.Breach of duty of care to the company[96] Section 137 of the Act provides that a director, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise. In making that assessment account must be taken of the nature of the company, the position of the director, and the nature of the responsibilities undertaken by him or her.[97] In the present case the assessment of any breach must be made in the context of Mr McKay as the sole director of a small trading business. As is apparent from the breaches previously identified, I am satisfied that a reasonable director in the position of Mr McKay exercising due care and skill would not have continued to trade the company after 30 November 2009 when it was clearly insolvent and had little apparent means to meet its ongoing tax liability. The breach is therefore established.Compensation under s 301 of the Act[98] In Mason v Lewis, the Court of Appeal outlined the approach to be taken to the assessment of compensation under s 301 for breaches of duties by a director:5757 Mason v Lewis, above n 43.[109] The standard approach has been to begin by looking to the deterioration in the company's financial position between the date inadequate corporate governance became evident (really the "breach" date), and the dateof liquidation.[110] Once that figure has been ascertained, New Zealand courts have seen three factors - causation, culpability, and the duration of the trading - as being distinctly relevant to the exercise of the Court's discretion (see Re Bennett, Keane & White Limited (in liquidation) (No 2) (1988) 4 NZCLC 64,317 per Eichelbaum J; and Löwer v Traveller [2005] 3 NZLR 479, which endorsed those principles).[99] The Court of Appeal further observed that claims of this type necessarily have to be approached in a relatively broad-brush way, reflecting the "equitable"character of the jurisdiction to order recompense58Deterioration of financial position[100] Mr Levin gave evidence that the company became insolvent from 30 November 2009, and chronically so by April 2010. As I have already held, the financial position of the company was such that Mr McKay, had he undertaken anobjective "sober assessment" at this stage, ought to have concluded that the company should have ceased trading. By that point it was inevitable that its deteriorating financial position would eventually lead to it being placed into liquidation withsignificant outstanding debts to Inland Revenue. The date of the "breach", for thepurposes of s 301, is therefore the date of its insolvency, being 30 November 2009.Causation[101] It is necessary that a causal link be established between the reckless carrying on of the company's business by the impugned director and the indebtedness of the company for which the director is sought to be held personally liable.59 Mr McKay had sole responsibility for the management of the company and was directly involved in the day-to-day running of its business. He must have been aware of thecompany's financial position, yet he made the decision to continue to trade, permitting himself and Ms McKay to take drawings instead of paying Inland Revenue.58 At [118].59 Löwer v Traveller [2005] 3 NZLR 479 at [70].[102] Furthermore, Mr McKay, as the person responsible for the company'saccounts, permitted the journal entries to be made after the company ceased trading in an effort to deprive the company of the shareholders' current account debt which was its only significant asset.[103] I am satisfied there is a causal link between Mr McKay's breaches of his duties as a director and the loss suffered by the company and its creditors.Culpability[104] This factor requires an assessment of the blameworthiness of the director's conduct. At one end of the range a director's involvement might be described as blind faith or muddle-headedness, while at the other end of the spectrum will lie cases of plain dishonesty. In cases involving a high degree of culpability general deterrence becomes a consideration, and orders are required to be punitive as well as compensatory.60 The liquidators submitted that Mr McKay's actions were at theupper range of culpability because his primary focus was to benefit himself and his family. As a result, he put his personal interests ahead of the company and its creditors.[105] I accept that Mr McKay ought to have recognised the deteriorating financial situation of the company, with its outstanding debts to Inland Revenue and associated penalties and growing interest obligations. He should have appreciatedthat there was effectively "no way back". However, I also recognise that, as a soletrader, Mr McKay would have been preoccupied with attempting to keep his business afloat. While that is understandable, Mr McKay had fiduciary obligations which required him to take an objective and dispassionate view of the company'ssituation.[106] Importantly, had Mr McKay not allowed the company to continue to trade, which appears to have been for the sole purpose of permitting himself and Ms McKay to continue to take drawings, it is the liquidators' opinion that the company would have had the financial resources available to it with which to pay its60 Löwer v Traveller, above n 59, at [83].debt to Inland Revenue. Mr McKay's preference for his personal interests above thatof the company, and therefore its creditors, represents a serious conflict of interest which places his culpability towards the higher end of the range.[107] The resulting losses to the creditors cannot be regarded as simply the result of the commercial risks of trading, nor as genuine but poor business decisions. Mr McKay put his own personal interests and those of Ms McKay ahead of thecompany's interests, and therefore those of its creditors. That course of conduct continued after the company ceased trading, when he approved or allowed the company to pass journal entries which sought to deprive the company of assets that would otherwise be available to it to meet its liabilities.Duration[108] In Löwer v Traveller, the Court of Appeal described the period of wrongfultrading of 2 years and 10 months as "lengthy".61 In the present case, the company traded for a further four years whilst insolvent, which must be considered a significant period of time. During that period the company caused significant losses to creditors in the sum of $320,095.73, yet contemporaneously used the company's bank account to service the director's personal needs and requirements. Relatively,the period of wrongful trading must be classified as lengthy.Quantum of relief[109] The plaintiffs seek, by way of compensation from Mr McKay, both repayment of the current account debt of $293,129 and the total amount of the loss to creditors being $306,548.43.[110] In seeking compensation the plaintiffs placed emphasis on the dicta of William Young J in Mako Holdings Ltd (in liq) v Crimp, where the defendants were ordered to pay a sum that resulted in both the creditors in liquidation being paid in full, and the costs of the liquidation. In taking that approach, the Court considered that the liquidation was effectively the fault of the directors who had chosen to continue to trade. If they had, in accordance with their obligations, ceased trading61 At [86].the liquidation would have been avoided and all creditors paid.62 In the present case the liquidators seek full compensation for both the company's losses and that of its creditors which have been incurred as a result of the director's actions. On theargument presented to me on the formal proof hearing, I am not able to discern any reason why that course should not be adopted, with 100 per cent liability being ordered, as it has in similar cases.63[111] As a result of holding Mr McKay personally liable for both the creditors'losses and requiring him to compensate the company for the current account debt there may be net assets in the liquidation once the liquidators' costs and the creditors claims have been paid. However, I do not consider that bears on the question of quantum. Ultimately, any surplus of funds recovered may result in a distribution to the shareholders themselves. While, as indicated to me, from a practical perspective, the liquidators are unlikely to insist upon the full recovery of the judgment sums, I accept that is a matter for the liquidators, rather than an issue which ought to influence the quantum of the relief.64[112] To the extent there is a risk of double-recovery of the current account debt in the sum of $293,129, judgment will be entered on a concurrent basis to recognise the distinct remedies sought by the plaintiffs under the first and fourth causes of action.Fifth cause of action: Failure to maintain proper records[113] Section 194 of the Act places an obligation on Mr McKay, as the company'ssole director, to maintain proper accounting records:194 Accounting records must be kept(1) The board of a company must ensure that there are kept at all times accounting records that—(a) correctly record the transactions of the company; and62 Mako Holdings Ltd (in liq) v Crimp HC Invercargill CP23/99, 28 November 2000, at [70], [71] and [75].63 Löwer v Traveller, above n 59; Morgenstern v Jeffreys, above n 19; Lakeside Ventures 2010 Ltd (in liq) v Levin, above n 48; Bay Kiwifruit Contractors Ltd (in liq) v Ladher [2015] NZHC 63; and Bay Metal Fabricators Ltd (in liq) v Steenson [2016] NZHC 1634.64 Morgenstern v Jeffreys, above n 19, at [103]; Alpha Box Property Holdings Ltd (in liq) v Wiekart[2015] NZHC 1257; Madsen-Ries v Greenhill [2016] NZHC 3188.(b) will enable the company to ensure that the financial statements or group financial statements of the company comply with generally accepted accounting practice (if the company is required to prepare such statements under this Act or any other enactment); and(c) will enable the financial statements or group financial statements of the company to be readily and properly audited (if those statements are required to be audited)....[114] Under s 300 of the Act, a director may be found personally responsible for all or any part of the debts or other liabilities of the company as a result of failing to comply with his or her duty to keep proper accounting records:300 Liability if proper accounting records not kept(1) Subject to subsection (2), if—(a) a company that is in liquidation and is unable to pay all its debts has failed to comply with—(i) section 194 (which relates to the keeping of accounting records); or...(b) [and] the court considers that—(i) the failure to comply has contributed to thecompany's inability to pay all its debts, or hasresulted in substantial uncertainty as to the assets and liabilities of the company, or has substantially impeded the orderly liquidation; or(ii) for any other reason it is proper to make a declaration under this section,—the court, on the application of the liquidator, may, if it thinks it proper to do so, declare that any 1 or more of the directors and former directors of the company is, or are, personally responsible, without limitation of liability, for all or any part of the debts and other liabilities of the company as the court may direct.(2) The court must not make a declaration under subsection (1) in relation to a person if the court considers that the person—(a) took all reasonable steps to secure compliance by the company with the applicable provision referred to in paragraph (a) of that subsection; or(b) had reasonable grounds to believe and did believe that a competent and reliable person was charged with the duty of seeing that that provision was complied with and was in a position to discharge that duty.(3) The court may give any direction it thinks fit for the purpose of giving effect to the declaration....[115] In order for a claim to succeed under s 300 the following must be established:65(a) that the company is in liquidation;(b) that the company is unable to pay all its debts;(c) there has been a failure to comply with s 194 of the Act; and(d) that this failure to comply resulted in substantial uncertainty as to thecompany's assets or liabilities, or has resulted in the liquidation being substantially impeded, or is otherwise causally linked to thecompany's insolvency.[116] The company is in liquidation and, as I have already found, it was unable to pay its debts from, at the latest, 30 November 2009.[117] The company effectively maintained a cashbook which recorded transactions to and from its bank account until such time as an accountant was engaged to prepare financial statements in 2013 for the previous financial years, from 2010-2013. Mr Levin observed that it is not uncommon for small businesses to conduct themselves in this way. However, such a practice falls short of the requirements of s 194 of the Act, which requires a system to be in place which "correctly records the transactions" of the company so as to facilitate the compilation of financialstatements. It is likely the inadequacy of such minimal recordkeeping may only become material when something goes wrong. In such an event, the need to abide65 Maloc Construction Ltd (in liq) (1986) NZCLC 99,794 (HC); Re Network Agencies International Ltd (in liq) [1992] 3 NZLR 325 (HC); Johnston v Edwards [1992] 3 NZLR 325 (HC).with the statutory obligation to keep proper accounting records will come into stark relief.[118] The inadequacy of the accounting records and financial statements to accurately record the company's true financial position was effectively conceded by Mr McKay when he admitted at an earlier stage in the proceeding that the accounts and financial statements were not correct. While he, as with Ms McKay, disputed that the current account debt was in error to the extent claimed by the liquidators, it is apparent from their position that the accounting records and financial statements which are available are not accurate.[119] Because of the demonstrable inadequacy of the recordkeeping, the financial statements failed to reflect the company's true position, and prevented the company'strue financial position from being able to be determined with reasonable accuracy at any given time. There existed substantial uncertainty as to the assets and liabilities of the company.[120] Mr Levin, in his evidence, explained how the failure by Mr McKay to maintain financial statements and supporting documentation recording the true position of the company in accordance with his obligations as a director substantially impeded the orderly conduct of the liquidation, requiring the liquidators to spend significant time and cost by having to go behind the financial statements to ascertainthe company's true position. It was not until the McKays served their amended statement of defence that they formally acknowledged that they owed a debt to the company.[121] Mr Levin explained that the irregularities in the company's financialstatements was made more difficult by the failure to keep proper records and caused substantial uncertainty as to the assets of the company available to its creditors. The significantly increased cost of the liquidation will likely be to the ultimate detrimentof the company's creditors in the absence of those costs being able to be recoveredfrom Mr McKay, as the company's director responsible for maintaining accurate accounts.[122] Accordingly, because of the associated difficulties and resulting costs arisingfrom the director's failure to comply with his obligations under s 194 of the Act to keep and maintain proper accounting records, I accept the liquidators are entitled to compensation under s 300 for the expenses attributable to this failure.[123] Mr Levin estimates that had the McKays repaid the current account following demand, and had financial statements and supporting documentation been kept recording the true position of the company been available to the liquidators from the outset, he estimates the liquidation costs would have been around $20,000-$30,000 (excluding disbursements). However, as matters have unfolded Mr Levin deposed that the costs of the liquidation as at the date of filing the amended statement of claim amount to $96,499.50 (excluding disbursements such as legal costs).[124] The liquidators are entitled to recover the costs attributable to the failure by Mr McKay to keep proper accounting records, which resulted in substantial uncertainty as to the assets of the company and impeded its efficient liquidation. The estimated costs associated with that failing, which can be causally linked to thecompany's insolvency, amounts to the difference between the costs that wouldordinarily have been incurred as a result of the company's liquidation and the additional expenditure. On the basis of Mr Levin's estimated figures of $20,000- $30,000 had the liquidation proceeded in the ordinary way and the actual costs incurred of $96,499.50, I make an award for the difference in the sum of $70,000. In my view that accords with the approach that has previously been taken by this Court, where the failure to keep proper records has created uncertainty in relation to thecompany's assets and liabilities and impeded the orderly liquidation of a company.66Result[125] I enter judgment as follows:(a) On the first cause of action, the McKays are ordered to pay the company the amount owing under the joint current account in the sum of $293,129.66 Blanchett v Keshvara [2011] NZCCLR 34 (HC) at [90]; Madsen-Ries & Anor v Petera [2015] NZHC 538.(b) In respect of the fourth cause of action, in compensation for breaches of his duties as a director, Mr McKay is ordered, pursuant to s 301 of the Act, to pay the company:(i) the sum of $306,548.43, representing creditor losses; and(ii) the sum of $293,129, representing the loss of the current account. Judgment is entered concurrently with that entered against him on the first cause of action. The sum is payable only once.(c) In respect of the fifth cause of action, Mr McKay is ordered to pay the company, pursuant to s 300 of the Act, the additional costs incurred in the liquidation of the company in the sum of $70,000.[126] Interest is awarded at the prescribed rate under the Judicature Act 1908 in respect of each sum for which judgment has been entered from the date the proceedings commenced until judgment.[127] I further order the McKays to pay the plaintiffs' scale costs on a 2B basiswith reasonable disbursements (as fixed by the registrar).Solicitors:Meredith Connell, AucklandSaunders & Co, Christchurch