CONWAY LEWIS AND ANOR V KAREN BETTY MASON AND JEFFREY PHILIP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LIMITED (IN LIQUIDATION) CA CA676/2008

CONWAY LEWIS AND ANOR V KAREN BETTY MASON AND JEFFREY PHILIP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LIMITED (IN LIQUIDATION) CA CA676/2008 20 July 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA676/2008 [2009] NZCA 306BETWEEN CONWAY LEWIS First Appellant AND JOHANNA LEWIS Second Appellant AND KAREN BETTY MASON AND JEFFREY PHILIP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LIMITED (IN LIQUIDATION) Respondents Hearing: 6 May 2009 Court: Chambers, O'Regan and Ellen France JJ Counsel: P J Davey for Appellants B P Keene QC and C A Murphy for Respondents Judgment: 20 July 2009 at 11.30 amJUDGMENT OF THE COURT A The appeal is allowed. B The orders made in the High Court are quashed. C We make an order that the first and second appellants must contribute the sum of $560,000 to the assets of Global Print Strategies Limited (in liquidation) by way of compensation for their breach of the duty they owed to Global Print Strategies Limited under s 135 of the Companies Act 1993. The liability of the first and second appellants is joint and several.D Costs are reserved. REASONS OF THE COURT(Given by O'Regan J)Table of Contents Para No Introduction [1]Issues [2]Factual background [7]Statutory context [39]The judgment under appeal [41]Did this Court set a cap of $560,000? [43]Did the Judge miscalculate the creditor pool? [60]Did the Judge err in his assessment of causation? [75]Did the Judge err in his assessment of culpability? [84]Should the compensation be reduced because of contributory conduct by Commercial Factors? [99]Result [111]Costs [116]Introduction[1] This is the second time this litigation has reached this Court. The present appeal is against a judgment of Stevens J in which he made orders under ss 300(1) and 301 of the Companies Act 1993 that the appellants, Mr and Mrs Lewis, pay substantial amounts for breaches of their duties as directors of Global Print Strategies Limited (in liquidation) (Global Print): Mason v Lewis HC AK CIV 2003-404-0936 1 October 2008. The respondents, Ms Mason and Mr Meltzer, are the liquidators of Global Print. That decision was on a referral back from this Court (Mason v Lewis[2006] 3 NZLR 225), which had allowed an appeal from an earlier High Court judgment in which the liquidators' claim against the Lewises had failed. This Court remitted the matter to the High Court for the determination of the amount to be paid by Mr and Mrs Lewis.Issues[2] The principal issue on appeal is whether the earlier appeal decision determined that the maximum liability of Mr and Mrs Lewis was $560,000 or left it open to the High Court to determine the appropriate quantum of liability, even if greater than $560,000. [3] We heard argument on that issue first, and determined that $560,000 was a cap on liability. We informed counsel of that decision at the hearing and provided an opportunity for settlement discussions, but these were unsuccessful and we then heard the remaining argument. Counsel for the Lewises, Mr Davey, argued that even $560,000 was too great an amount, and that a lower figure should have been set by the High Court Judge. His arguments gave rise to the following issues: (a) Did the Judge miscalculate the creditor pool? (b) Did the Judge err in his assessment of causation? (c) Did the Judge err in his assessment of culpability? (d) Should the compensation be reduced because of contributory conduct by Commercial Factors Ltd? [4] Stevens J made an order under s 300(1) of the Companies Act that Mr Lewis pay $1,261,330 and Mrs Lewis pay $983,100 as a contribution to the debts of Global Print. He also made an order under s 301(1) that Mr Lewis pay $1,168,330 and Mrs Lewis pay $890,100 by way of compensation to the creditors of Global Print. On our reading of s 301(1), the s 301 order ought to have required the contribution be to the assets of Global Print itself by way of compensation, reflecting the fact thatthe duties breached by Mr and Mrs Lewis were owed to the company not its creditors: see s 301(1)(b). [5] Once it was determined that the maximum award was $560,000, it was apparent that in order to succeed in having the amounts required to be paid by the Lewises reduced to an even lower figure, the Lewises had to establish very significant errors on the part of the High Court Judge. We have approached the case by focusing our discussion on liability under s 301 (ie breach of director's duties under s 135) first, before turning to the s 300 liability if that remains more than moot. [6] Before dealing with the issues identified above, we set out the factual background and the statutory context and summarise the judgment under appeal.Factual background[7] The factual background is described in the previous appeal judgment, and, for ease of reference, we reproduce that summary here. We appreciate that, in several minor respects, this summary is now not entirely accurate as a result of fresh evidence before Stevens J and his findings on that evidence. But this Court's summary remains sufficiently accurate to function as a factual background to the matters we have to resolve in the present appeal. [8] In 1984, Mr and Mrs Lewis set up their own printing business. It traded as Rocon Printing Ltd (Rocon). They were the directors of that company. They have run it ever since. [9] Mr Lewis got to know a Mr Graeme Grant. He was a manager with Communication Arts Ltd. That was a successful business, which had grown from what was described at trial as a "$4 million to a $20 million" business. [10] Nevertheless, Mr Grant decided to leave Communication Arts. He entered into a joint venture with an enterprise called Corporate Express. This was expected to provide an initial income of perhaps $300,000 per month.[11] The vehicle for this enterprise was Global Print. This was a print brokering business which was to be established to service the print management requirements of Corporate Express. [12] Mr Grant invited the Lewises to invest in Global Print. They were shown a memorandum and business plan. They decided to invest $100,000. This "investment" was to be paid back out of profits within the first year of trading. [13] Global Print was incorporated on 4 November 1999. The Lewises invested their $100,000 (which they borrowed from Marac Finance) in $1 ordinary shares. They were appointed as directors, together with Sarah Grant (Mr Grant's wife) and Messrs Shanks, Spier and Carter (employees of Communication Arts who had left that company with Mr Grant). [14] Mr Grant was appointed as the manager of Global Print. He advised Mr Lewis that he could not be appointed as a director because of legal proceedings with his former employer. It was only much later that the Lewises learned that Mr Grant's probity was very much in issue in that dispute. [15] Global Print commenced trading in November 1999. [16] The first board meeting for the company was held in December 1999. No minutes were taken. Mr Lewis did ask at that time if minutes were going to be circulated, but no minutes were ever prepared or circulated for any board meeting of Global Print. [17] At some point in early February 2000, Corporate Express terminated its contract with Global Print. This was a hugely significant event in the life of the company. Global Print had hoped to attract other business (and had done so in small quantities), but Corporate Express' work was to be the economic heart of the new venture. [18] Notwithstanding this calamity, the Lewises did not learn of the cancellation of the Corporate Express contract until April 2000. When they did, Mr Grantassured Mr Lewis that Global Print had obtained other clients to replace this loss of business. He said this included a significant amount of work from The Warehouse Ltd. But it is quite apparent that Global Print was in serious financial trouble from the end of March 2000. As only one indicator, PAYE tax was not paid from that point on. [19] Further indications that things were not at all well came when Messrs Shanks, Spier and Carter resigned as directors on 20 April 2000. In May 2000, their shares in Global Print were transferred to Mrs Grant (so that she then owned 80 per cent of the company shares, with the Lewises owning the remaining 20 per cent). Thereafter, Mrs Grant and Mr and Mrs Lewis were the only directors of Global Print. [20] Mr Lewis had been dropping by Global Print's premises from time to time to speak to Mr Grant about the "progress" being made by the company. He claimed that Mr Grant assured him that everything was "under control" and had showed him printouts suggesting an upward trend in income. [21] Nevertheless, things were in fact far from well. On 23 June 2000, there was a meeting attended by Mr Grant, Mr Lewis, Mrs Rowe (an accountant), and a Mr McLaren (who was representing a family trust that had loaned $80,000 to Global Print). There is no hard evidence as to what transpired at that meeting. Counsel for the liquidators contended that it was in the nature of a meeting to discuss the need for the injection of new capital. Counsel for the Lewises contended that it was more of a general meeting, and that most of the meeting seemed to have been taken up looking at the work prospects of the company. [22] However that matter is viewed as to detail, there was plainly a concern as to the financial position of the company. This is borne out by the fact that on 29 June 2000 Mrs Rowe attended a meeting with Mr Grant and Mr Lewis's brother to seek further funding from him. Mrs Rowe had prepared cash flow forecasts for Global Print, which purported to show that positive cash flows would arise from August 2000. This would have been the first time the company was in profitable territory.[23] Mr Lewis's brother had already advanced (through associated entities) a total of $275,000 to Global Print, in sums of $50,000 in December 1999, $100,000 in March 2000 and $125,000 in April 2000. Extraordinarily, the basis on which that funding from the Lewis family had been forthcoming does not appear to have been explicitly articulated. [24] Mrs Rowe was a chartered accountant. But it appears that she was not the "company accountant", in the usual sense of that term, nor was she giving management accounting advice to Global Print. She was in private practice and simply doing the books, as and when required. From time to time, she did some specific calculations for the company, on a fee basis. [25] On 20 July 2000, Mrs Rowe prepared a draft set of accounts for Global Print for the period ending 31 March 2000. These covered a period of approximately five months from November 1999. Those accounts showed a gloomy picture: Global Print had made a trading loss of approximately $376,760 in that period, although it had a small balance sheet surplus of $44,739. [26] Mrs Rowe advised Mr Lewis that Global Print was technically not insolvent, although she appears to have considered that, from a trading point of view, the company was insolvent. [27] On 18 August 2000, the Lewises received debtor and creditor reconciliations (drawn as at 31 July 2000) showing payables of $413,739 and receivables of $392,224. Not only was the company still trading at a loss, but the payables included $93,681 owed to Inland Revenue. And those figures did not include wages. So things had not improved at all. Nevertheless, the company traded on. [28] At the beginning of October 2000, Mr Grant approached Mr Lewis. He now wanted to factor at least some of the company's debts to Commercial Factors. On the advice of his personal accountant, Mr Lewis refused to sign this factoring agreement. Extraordinarily, Mrs Grant signed the agreement as a director of Global Print, although her authority to do so does not appear to have been scrutinised. Mr Grant then proceeded to factor debts to Commercial Factors.[29] That the factoring agreement was signed is, in and of itself, of significant moment. Upon becoming aware that this had occurred, Mr Lewis rang Commercial Factors, but was told that they would not speak to him. This should surely have caused him anxiety as to both Mr and Mrs Grant's actions. There are indications this was indeed the case, as Mr Lewis gave evidence that he had told his accountant that he was concerned that decisions were being made without him being consulted. [30] In late March or April 2001, the Lewises received a letter from Inland Revenue (which had been sent to Global Print, with copies to them as directors) in relation to outstanding tax totalling over $163,000. But even this did not spur the Lewises to any action. [31] Some time later – on 11 June 2001 – Mrs Rowe sent the Lewises a letter which advised that regular updates of the tax arrears were being provided to Mr Grant, and that there had been communications with Inland Revenue. The letter said: "it is expected that the situation will shortly be resolved". [32] Around this time, Mr Lewis considered resigning as a director. But he remained in office out of loyalty to his brother, who had "invested" in the company. [33] Mrs Lewis resigned as a director of Global Print in September 2001. [34] Quite unknown to the Lewises, Mr Grant was totally dishonest. He had been arranging for false invoices to be made out by Global Print to third parties, and these invoices had then been factored to Commercial Factors. [35] On 24 December 2001, Mr Lewis went to the offices of Global Print. He was then informed, for the first time, by a senior staff member of the false invoicing. He sought professional advice, particularly from a Mr Parsons, a forensic accountant, who undertook an investigation of the company's financial records. [36] On 27 February 2002, the Lewises and Mrs Grant signed a shareholders' resolution appointing the appellants as liquidators of Global Print.[37] A complaint was made to the Serious Fraud Office. Mr Grant was charged with five charges of fraud totalling approximately $1 million, for which he was ultimately convicted and sentenced to two and a half years' imprisonment. [38] Later, the liquidators commenced these proceedings against the respondents for alleged breaches of their duties as directors, ostensibly for the benefit of unsecured creditors in general.Statutory context[39] The liquidators alleged that the Lewises allowed the business of Global Print to be carried on in a manner likely to create a substantial risk of loss to the company's creditors, in breach of their duty as directors of Global Print under s 135(b) of the Companies Act. If the breach of that duty is established, the Court has power under s 301(1)(b) to order the person to "contribute such sum to the assets of the company by way of compensation as the Court thinks just". Section 138 provides a defence for a director who has reasonably relied on others. [40] In addition, the liquidators allege that Global Print failed to comply with s 194 of the Companies Act, which requires that a company must cause proper accounting records to be kept. Under s 300 of the Companies Act, where a company that is in liquidation and is unable to pay all its debts has failed to comply with that section, and the Court considers that the failure has contributed to the company's inability to pay all its debts, has resulted in substantial uncertainty as to its assets and liabilities or has substantially impeded the orderly liquidation of the company, the Court may, if it thinks proper to do so, declare that the directors or former directors concerned are personally responsible without limitation of liability for all or any part of the debts or other liabilities of the company as the Court may direct. Section 300(2) provides a defence for directors who took reasonable steps to secure compliance or believed on reasonable grounds that a competent and reliable person was charged with ensuring compliance.The judgment under appeal[41] Stevens J dealt with the case in the High Court, on its referral back from this Court. Prior to the hearing before him, however, there had been a hearing on a preliminary issue before Harrison J, who decided that the statement by this Court that it would be inappropriate for the Lewises to be held liable for more than $560,000 was part of the judgment of this Court which set out appellate guidelines for a framework within which the parties might negotiate a compromise, but was strictly obiter and did not have any binding effect: Mason v Lewis HC AK CIV- 2003-404-0936 4 April 2007. [42] Stevens J considered that issue afresh and, like Harrison J, found that the decision of this Court was not a formal fetter or limitation on the quantum of the liquidator's claim. He then: (a) Rejected the challenge by the Lewises to the lawfulness of the factoring agreement between Global Print and Commercial Factors, finding that the agreement was properly executed by Mrs Grant as a single director of Global Print. He found that the Lewises knew about the agreement immediately upon its implementation and thereafter were aware that invoices from Global Print to their own company, Rocon, were being factored by Commercial Factors. (b) Rejected a similar challenge to the validity of the debenture held by Commercial Factors: it had not been established that entry into the debenture was a major transaction of Global Print in terms of s 129 of the Companies Act and there was therefore no proven need for a special resolution of the shareholders of Global Print to enter into it. (c) Rejected the Lewises' arguments that the debts of some of those proving in the liquidation were insufficiently proven. The liquidators had accepted, for the purposes of the hearing, that the creditor pool was $2,102,217, which included a debt of $275,082.48 to the Inland Revenue Department (of which $156,512.73 had preferential status).The Judge accepted that figure had been sufficiently established: he found the liquidators had done an entirely reasonable job, "within the constraints of not wishing to waste money on extensive investigation and proof". The total figure comprised the following items: (i) Unsecured creditors (including the total IRD debt): $1,401,275; (ii) Commercial Factors at liquidation: $239,628; (iii) Commercial Factors post-liquidation (including costs): $883,873; (iv) Total recoveries of $422,449 (this sum was deducted from the above amounts to reach the total of $2,102,217). (d) Refused to reopen the issue of causation, saying it had been dealt with by this Court and was not a live issue on the referral back to the High Court. (e) Found, having reviewed the evidence, that this Court's conclusion that the Lewises' culpability was "significant" was entirely justified. The moral culpability of Mrs Lewis was no less than that of her husband as she had never made an effort to inform herself about her obligations under the Companies Act, had never made a proper assessment of Global Print's financial position and took no steps to remedy the increasingly serious financial situation. The Judge also noted that the Lewises "have shown little or no concern for the large number of [Global Print's] creditors" and was critical of them for challenging the amounts proven in the liquidation "even down to the pettiest of disputes". (f) Accepted the liquidator's argument "that there could hardly be a more deserving case for the Court to exercise its remedial jurisdiction".(g) Rejected the contention that recompense should not be ordered in respect of the Commercial Factors debt. He said that advances from Commercial Factors merely changed creditors (from the creditor under the factored invoice to Commercial Factors) and did not increase the liabilities. (h) Rejected, as this Court had in its earlier decision, the contention that the actions of Mrs Rowe should be treated as a mitigating factor. The Judge did not accept that reliance on other parties was of assistance to the Lewises either. (i) Found there was no basis on which he could make any reduction of an award based on the Lewises' lack of financial resources as they had declined to provide the Court with any information as to their personal means. (j) Concluded that the Lewises should be liable for compensation at a figure of 60 per cent of the creditors' pool, excluding costs, both administrative and legal. The precise amounts are set out at [4] above.Did this Court set a cap of $560,000?[43] In this section, we give our reasons for concluding that the liability of Mr and Mrs Lewis was capped at $560,000 by the earlier judgment of this Court.This Court's previous judgment[44] This Court reached the view, contrary to that of the trial Judge, Salmon J, that Mr and Mrs Lewis had breached their duties as directors. Because Salmon J found no breach of duty, he had not addressed the issue of quantum of liability. This Court was concerned to resolve the issue if it could, but determined that it was not possibleto do so and that the matter would have to be remitted to the High Court for determination of quantum. [45] The Court was concerned about the way in which the liquidators had dealt with quantum issues in the litigation to that point. It described the schedules to the statement of claim which purported to list the trade creditors and unsecured investors with Global Print as containing "some surprising entries and some equally surprising omissions": at [93]. It recorded in the same paragraph that counsel then acting for the liquidators "accepted that a fair sum for which the Lewises should be liable was $560,000". Later, at [95], it described the pleadings as "positively misleading" in that the reality was that a secured creditor (Commercial Factors) might be the only beneficiary of an order, yet there was no reference to the secured creditor in the schedules to the statement of claim. [46] The Court then went on to identify a number of matters that would require consideration when the High Court came to determine the quantum of liability. At [108] it framed the general issue for the Court as being: the amount (if any) which the Lewises or either of them should be required to contribute towards the assets of the company (under s 301), or for all "or any part of the debts and other liabilities of the company as the court may direct" (under s 300).[47] Then, at [121], the Court imposed a number of conditions on the revised hearing. In particular, the hearing would not be a "de novo hearing" and would instead be limited to a determination of the appropriate orders to be made on the basis of the following findings: (a) The Lewises were in breach of s 135 from September 2000; (b) Section 138 does not provide them with a defence; (c) Proper accounting records were not kept at any stage; and (d) The defence under s 300(2) is not available to the Lewises.[48] The Court then turned to express its hopes that the parties would settle. To this end, it noted what it considered "the outer limits of liability":[123] While there are still unknown factors, it is difficult to see how the Lewises' contribution, either to the company or to the creditors, could be less than a minimum of $100,000. At the other extreme, it would be inappropriate for them to be held liable for more than $560,000. That was the sum sought by the liquidators on the appeal before us. It may be, as we discussed at the hearing, that this figure considerably understates the indebtedness which flowed from the Lewises' defaults, which is likely well over $1m. But given that the remission is in large part a result of the liquidators' failure properly to plead this matter, it would not be right for the Lewises now to be exposed to a greater sum than they would have had to pay had we been able to determine the case ourselves, and found in accordance with the liquidators' submissions in this Court. At the same time, that sum of $560,000 is merely a cap on quantum for the particular reasons we have given. The culpability of Mr or Mrs Lewis may still be right up to that sum if the Court, having heard relevant evidence, so determines. (Emphasis added)[49] The figure of $560,000 was not merely the product of a concession by counsel for the liquidators made during oral argument at the hearing. This was in fact the sum explicitly sought by the liquidators in their written submissions at the appeal hearing (specifically $800,000 less 30 per cent for contingencies and relative culpability). It was, therefore, the upper limit of liability to which the appellants were exposed at the first appeal hearing. [50] In the result, the Court remitted the proceeding to the High Court to determine: (a) Whether a declaration should be made under s 300 of the Companies Act and, if so, its terms; and (b) Whether an order should be made under s 301(1) of the Companies Act and, if so, its terms.Harrison J's decision[51] During the period between the first High Court judgment and the remission ordered by the Court of Appeal, Salmon J (the trial Judge) retired. The case wasthen assigned to Harrison J. In a judgment dated 4 April 2007, he considered whether this Court's decision capped the liquidators' claim at $560,000. [52] Harrison J considered this Court's decision and concluded at [18] that the comments made at [122] – [123] were "no more than appellate guidelines for a framework within which the parties might negotiate a compromise". These guidelines were, in his opinion, "strictly obiter" and could not operate either as a cap on the liquidators' clam or as a limit on the High Court's jurisdiction to make orders. He concluded that guidelines could, however, be legitimately considered by the Court when exercising its statutory discretion to fix compensation. Accordingly, he declined to make an order that the liquidators were bound by the cap of $560,000.Stevens J's decision[53] Stevens J also considered, as a preliminary issue, whether the figure of $560,000 should operate as a cap. He agreed with Harrison J's characterisation of the Court of Appeal's guidelines as "strictly obiter". He noted that those observations were made without the Court having had the benefit of either the final form of the pleadings for the quantum hearing or the evidence actually led at it. [54] The Judge pointed out that the Court of Appeal had indicated the importance of hearing new evidence on quantum and one reason for the admission of new evidence was "the need for fairness to the unsecured creditors as well as to [Commercial Factors]": at [18]. The picture presented at the quantum hearing was, in his opinion, "totally different" to that before the Court of Appeal: at [19]. Having heard the additional evidence, he concluded at [18] that to limit the quantum to $560,000 "would be entirely unjust". [55] At [20] Stevens J noted the concession made by counsel for the liquidators at [92] of the Court of Appeal's judgment that "a fair sum for which the Lewises should be liable was $560,000". He pointed out at that any such concession was made on the basis of information that the Court had found to be incomplete and/or uncertain. Accordingly, he concluded that to cap the liquidators' claim would "result in a manifest injustice to the parties and to the creditors": at [21]. He insteadproposed to treat the Court of Appeal's concerns with the liquidators' pleadings and conduct of the case as a discretionary factor in reaching his ultimate decision on quantum. However, there is no indication in his later analysis that he did, in fact, do so.Our analysis[56] Our reasons for concluding that $560,000 was a cap can be stated briefly. [57] The only reason the case had to be remitted to the High Court by this Court was because of the difficulties caused by the inadequate pleading by the liquidators. But for that factor, this Court would have dealt with the matter on the basis of the arguments and evidence then before it and it is notable that the claim, as then formulated, was for an award under ss 300 and 301 of $560,000. So that is the best outcome that the liquidators could have achieved if the case had been determined at the initial Court of Appeal hearing. It is not correct to describe the $560,000 figure as a concession: it was, in fact, the amount which was actually claimed by the liquidators at the first hearing in this Court. This Court was, in a sense, being kind to the liquidators in allowing them to call further quantum evidence and to patch up their pleadings, as the hearing before Salmon J had been a quantum hearing as well as a liability hearing. Given that the liquidators were being accorded this indulgence, it seemed only fair that they should not be able to claim on the rehearing more than they had in fact sought, on the basis of the existing pleadings and evidence, in the Court of Appeal. [58] We do not consider that the statement in this Court that $560,000 was the maximum which the liquidators could claim was an obiter dictum, as Harrison and Stevens JJ categorised it. It was not a finding by the Court or a step in its reasoning, so the distinction between obiter dicta and ratio decidendi was not apposite. Rather, the terms on which this Court remitted the matter to the High Court included a stipulation that the liability of the Lewises was not to exceed $560,000. That was a condition on which the case was remitted rather than a step in this Court's reasoning.[59] As noted earlier, we gave the parties an opportunity to settle after we informed them of our decision that there was a $560,000 cap on liability. However, Mr Davey indicated that his clients wished to proceed with the appeal on the basis that they could establish that the appropriate quantum of liability was less than $560,000; this, notwithstanding that the High Court Judge had quantified liability at over twice the amount of the cap. We now turn to address the matters raised by Mr Davey's arguments.Did the Judge miscalculate the creditor pool?[60] In this Court's previous decision, it referred to the "standard approach" to cases involving ss 300 and 301. That approach begins by looking at the deterioration in the company's financial position between the date inadequate corporate governance became evident and the date of liquidation. Once that figure has been ascertained, the Court then considers three factors: causation, culpability and the duration of the trading. [61] This approach was referred to by Stevens J at [62]. Counsel for the Lewises, Mr Davey, took no issue with the approach itself, but said that the Judge had not correctly applied it. As noted earlier, we consider this issue in the context of s 301 rather than s 300. [62] The Judge took as a starting figure, for the purpose of this exercise, the $2,102,217 from the statement of claim. Mr Davey said this was wrong because: (a) It included interest claimed by Commercial Factors in the period after the liquidation commenced; (b) It failed to deduct debts that had been incurred shortly after the company commenced trading; (c) It failed to make allowance for debts that had not been properly proved.Post-liquidation interest[63] Mr Davey said that the Judge had wrongly included interest payable to Commercial Factors in relation to the period after the liquidation of $506,214. He said this was wrong because the "standard approach" was to focus on the loss actually suffered by the company when the directors stopped trading and the estimated loss that would have been suffered had they stopped trading earlier. He said interest which was payable after the company stopped trading and the liquidators were appointed did not come into that calculation. He accepted that interest under a security was a provable debt but said that secured creditors can prove in the liquidation for interest up to the date of liquidation. Thus, any interest after that period should not come into the calculation for present purposes. [64] We fail to see the logic of this argument. The secured creditor will have a claim ranking ahead of the unsecured creditors for both principal and interest, whether it proves in the liquidation or not. The fact that the interest payment obligation will continue post-liquidation will be obvious to directors, and will be a relevant factor in deciding whether continued trading is consistent with the s 135 duty. [65] As Mr Keene rightly pointed out, it would be odd if post-liquidation interest payable to a secured creditor were ignored. If the Court determined that the directors were responsible for 100 per cent of the creditor pool assessed without including post-liquidation interest payable to a secured creditor, its intention of ensuring that all creditors were paid in full would be frustrated by the fact that the secured creditor would then be able to claim the post-liquidation interest in priority to the amount payable to the unsecured creditors. [66] We see no reason to establish a precedent for such an illogical outcome. [67] We uphold the Judge's decision to include the post-liquidation interest in the calculation.Debts not adequately proven[68] Mr Davey said that Stevens J had wrongly refused to make any allowance for debts that had not been properly proven as being debts of Global Print. He said the Court had to be conservative in its approach: Löwer v Traveller [2005] 3 NZLR 479 at [80] and [81] (CA). Mr Davey said that the expert witness called by the Lewises, Mr Parsons, had highlighted a number of creditors' claims that he considered did not contain adequate information to confirm that they were debts of Global Print. He said this was important in this case because Mr Grant was operating other companies so there needed to be clarity as to which company owed a particular debt. [69] Stevens J described Mr Parsons' evidence as attempting "to second-guess the liquidators and put them to proof of all debts". The Judge said that the liquidators had done a reasonable job, "within the constraints of not wishing to waste money on extensive litigation in proof". [70] The conservatism suggested in Löwer v Traveller has to be tempered in the present case by the reality that one of the claims made out against the Lewises is the failure to keep proper accounting records. That failure can hardly be the basis on which they avoid or reduce their obligations under ss 135 and 301. [71] We consider that the approach taken by the Judge was reasonable in the circumstances. The evidence adequately established the existence of the debts for the purpose of assessing liability under s 301 (and, for that matter, s 300).Inclusion of pre-September 2000 debts[72] Mr Davey said that, in calculating the pool from which the calculation of liability under s 301 is to be made, debts which were incurred by the company when trading prior to the s 135 duty being infringed (in this case, prior to September 2000) should have been, but were not, excluded. [73] Mr Keene said that the parties had agreed that there should be a reduction from the overall creditors' figures of $155,000 to reflect debts that were already inexistence at September 2000. This is alluded to by the Judge at [107] of his judgment. Mr Davey said that the figure of $155,000 was to deal with liabilities other than those owed to two major creditors, which needed to be considered separately: a $119,536.28 debt owed to the Inland Revenue Department and $210,242.25 owed to Western Mailing Limited, a company associated with Mr Lewis's brother, which made significant advances to Global Print. [74] It is difficult to tell from the evidence in the case on appeal exactly when those liabilities were incurred, and it is equally difficult to tell what the agreement between counsel recorded in the High Court's judgment covered, given that Mr Davey denies the agreement was in the form recorded by Stevens J. We would have thought that if the Judge had recorded an agreement that counsel had not made, an application for recall of the judgment would have been made. Be that as it may, we are now left with a dispute which is difficult for us to resolve. Rather than attempt to do so, we will, for the purposes of the calculations we need to make in this appeal, accept Mr Davey's position on a provisional basis, and revisit it at the end of the judgment when it is able to be determined whether it would affect the outcome, given the $560,000 cap.Did the Judge err in his assessment of causation?[75] In its previous decision, this Court said at [111] that causation: appears to cause us no difficulty in this case, insofar as there is a clear link between the Lewises allowing the company to carry on trading beyond August 2000 and the indebtedness to creditors which subsequently arose. And even on a "generous" view to the Lewises, the relevant trading period was clear enough, as being from August 2000 to the end of 2001, or say 15 months.[76] Mr Davey argued that, notwithstanding this expression of view by this Court, Stevens J ought to have, but failed to, consider whether the breaches of duty by the Lewises caused loss to Global Print and, in particular, failed to assess whether Global Print would have continued to trade whether or not the Lewises had complied with their duties.[77] Mr Keene said that Stevens J had been right to observe at [67] that there was no warrant for opening up argument on causation as the Lewises sought to do. He said that this Court had made it clear at [121] of its earlier decision that the hearing in the High Court on quantum should be limited to material that was relevant to remedies and should proceed on the basis that the Lewises were in breach of s 135 from September 2000 and the defence under s 138 (reliance on others) was not available to them. [78] Mr Davey argued that causation was an issue which arose in connection with quantum, rather than in connection with liability, and so was properly before the High Court on the referral back from this Court. [79] In relation to s 301 liability, Mr Davey relied on a decision under s 321 of the Companies Act 1955 (a similarly worded predecessor to s 301), Re Maney and Sons De Luxe Service Station Ltd, Cowan v Maney [1968] NZLR 624 (SC). In that case, proceedings were brought against two directors of a failed company, a father and his son. The father had been a fraudster and was personally liable for all of the company's debts. In relation to the son, however, who was apparently unaware of his father's fraud, Wild CJ found that there should be no liability. He said (at 630): the breach of duty must have caused pecuniary loss to the company. Upon consideration of the evidence I cannot say that [the son's] inactivity must have had that result. The real cause of the loss to the company was the fraud of [the father]. The inactivity of [the son] did not cause that loss but rather, I think failed to prevent its continuing. On that ground I hold that [the son] cannot be dealt with under s. 321. His conduct was deplorable but the section does not empower the Court to fine a director for misconduct. The facts must fall within the words of the section.[80] Mr Davey's argument was that there was nothing that the Lewises could have done in the present case, other than resign from office, which would not have prevented the losses suffered by creditors from occurring. The logical extension of that argument is that the Lewises would not be liable at all. That would be an unexpected outcome in a case referred back from this Court for assessment of quantum where the Court had found that liability existed, that the range of quantum was from $100,000 to $560,000 and that causation did not cause any difficulty.[81] Even if the issue of causation was still a live issue on the referral back, we can see no basis on which Mr Davey's argument could have been accepted by the Judge. This Court set out in some detail at [60] – [75] what the situation was, and what should have been done. Once the former employees of Mr Grant's former company had resigned in April 2001, Mr and Mrs Lewis constituted the majority of the board. It is simply untenable for them to say that they could do nothing to manage the company because they did not have a majority shareholding: that ignores the respective roles of directors and shareholders and, if the Court accepted that submission, it would allow all directors to wash their hands of their duties except where they held a majority of the shares. That is plainly untenable. [82] It is not right to say that the Lewises could have done nothing in this case. They could have obtained advice about how to manage the dire financial position into which the company had fallen. They could have resolved that the company would stop trading. They could have taken steps to ensure further debts were not incurred in circumstances where the company was not able to pay them. The reality is they took no meaningful action at all. They cannot throw their hands in the air and say it was not their fault. [83] We are surprised that Mr Davey persisted with this argument in both the High Court on the referral back and in this Court in the second appeal, given the very clear statements that were made by this Court in the first appeal. It is speculative to say that, if the Lewises had caused the board to resolve to cease trading, they would have been removed from office as directors, or to say that they could not "control the board", when they had the majority of the seats on the board.Did the Judge err in his assessment of culpability?[84] Mr Davey said that the Judge erred in his assessment of culpability by: (a) Not taking into account the Lewises' reliance on Mrs Rowe; (b) Taking into account his observations of the Lewises at the remitted hearing and their lack of remorse;(c) Relying on the opinion expressed by one of the liquidators, Mr Meltzer, about the level of reckless trading; (d) Making factual errors in respect of the evidence and failing to take into account other material factual matters. [85] We will consider these in turn.Reliance on Mrs Rowe[86] Again, the attempt to re-litigate this issue, given the strong views in this Court's previous judgment at [80] – [83] was ambitious. Stevens J did consider this issue (contrary to Mr Davey's submission). He concluded at [101] that, in light of this Court's conclusions and Mr Lewis's acknowledgement that his confidence in Mrs Rowe's assurances was so low that he contemplated resigning as a director (but in fact did nothing), reliance on Mrs Rowe was not properly to be seen as a mitigating factor. We agree.Conduct at the hearing/lack of remorse[87] Stevens J made a number of observations at [93] – [95] of his judgment about the conduct of the Lewises. He noted that they were evasive in their evidence, unwilling to assist the Court, tried to blame others or deflect responsibility to others, and made concessions only when faced with incontrovertible facts. He said they showed little or no concern for the creditors of Global Print and did not show remorse. He was critical of their witness, Mr Parsons, who attempted to challenge proofs of debt "even down to the pettiest of disputes". [88] This led the Judge to conclude at [95] that "there could hardly be a more deserving case for the Court to exercise its remedial jurisdiction". [89] We see nothing exceptional in these observations by the Judge. As Mr Keene pointed out, the Judge acknowledged lack of dishonesty on the part of the Lewises, and was entitled as a balancing factor to take into account their steadfast refusal toacknowledge fault and their lack of remorse. There is nothing to indicate that the Judge improperly weighed those matters in the balance: indeed, he was careful to exclude any punitive element from his assessment of the amount payable under s 301.Mr Meltzer's observation[90] Mr Meltzer made an observation when giving evidence that this was the worst case of recklessness he had seen. Mr Davey said the Judge had given this undue weight and that, in fact, it was not a particularly bad case because the Lewises' lack of commercial acumen meant that their actions were not as culpable as defendants in other similar cases. [91] We see nothing in this point. There is no indication that the Judge was led to overstate the culpability of the Lewises by reference to Mr Meltzer's comment. The Judge had before him the alternative expert view of Mr Parsons and was well placed to make his own assessment. It is notable that the Judge's exchange with Mr Meltzer on this topic was in the context of his consideration of whether a punitive award was justified. In fact, as noted earlier, the Judge specifically decided against making a punitive award.Alleged factual error[92] At [75] of his judgment, the Judge referred to the financial statements to March 2000, prepared by Mrs Rowe, disclosing only $2,185 revenue for five months trading, and the dissipation of virtually all of the $421,000 of "shareholder loans", which was Global Print's only working capital. The Judge noted how this was an extraordinary shortfall against projected revenues of $2.48 million for the period from January to March 2000. Even on those projected revenues, Global Print would still have been suffering losses. The Judge then observed:Despite receipt of this financial information the Lewises made no meaningful attempt to assess the information. They did not take independent advice or seek outside professional assistance.[93] Mr Davey was very critical of this aspect of the judgment. He said that it was not true that Mr and Mrs Lewis did not take independent advice. [94] We think that this concern is unfounded. We can see nothing wrong with the Judge's observation that there was no "meaningful attempt to assess the information". We accept that Mr Lewis's evidence was that he and his accountant met with Mrs Rowe, and that he relied on the assurances Mrs Rowe gave him. His evidence is not specific about when this occurred, or whether it was at the time that the March 2000 accounts became available to him. He does not say that his own accountant gave him independent advice, but the fact that his accountant was involved indicates that he did seek some sort of outside professional assistance. [95] There was also evidence that Mr Lewis's accountant later wrote to the proposed company accountant for Global Print asking for further information. [96] We accept therefore that, if taken at face value, the last sentence of [75] is inconsistent with the evidence. However, we are satisfied that the Judge's reference to a failure to make any meaningful attempt to assess the information was a fair observation, and we do not see that the incorrect statement in the last sentence of the paragraph is of great moment in the overall assessment made by the Judge. The Judge himself acknowledged at [91] that Mrs Lewis had made independent enquiries of her own accountant, so it is clear that he was not operating under a misapprehension, at least in respect of Mrs Lewis.Difference in culpability[97] Mr Davey said that the Judge was wrong to conclude that the culpability of Mrs Lewis was the same as that of Mr Lewis. His submission in this regard was:Essentially, she became a director at the instigation of her husband. In the circumstances, her culpability was less than Mr Lewis.He did not elaborate on that submission.[98] The Judge assessed Mrs Lewis's position at [88] – [92]. Having considered all of the evidence, the Judge concluded that Mrs Lewis's moral culpability was no less than that of her husband. He had particular regard to the fact that she made no effort at all to inform herself of her obligations at any time, never made any proper assessment of Global Print's financial position and took no steps to remedy the increasingly serious financial situation at Global Print. We see no reason to differ from the Judge's assessment. Even if we did, any reduction of Mrs Lewis's liability would not bring it below the $560,000 cap, which makes this issue of little practical import.Should the compensation be reduced because of contributory conduct by Commercial Factors?[99] Mr Davey said that the Judge did not consider the position of Commercial Factors. He said the Judge should have taken into account the following: (a) Commercial Factors is likely to be the only creditor which benefits from the proceedings; (b) Commercial Factors ought to have been aware that no directors' meeting had authorised the execution of the factoring agreement and debenture; (c) Commercial Factors' conduct in factoring particular debts where Mr Grant may have acted fraudulently and in paying sums into the accounts of related companies rather than Global Print itself. [100] Mr Davey said that the Judge concluded that payments made by Commercial Factors to companies other than Global Print would have resulted in satisfaction of Global Print's creditors, but he was wrong to have done so.Only creditor[101] It may well be that Commercial Factors is the only creditor which benefits from the proceeding. But if that is the case, it will be because of the operation of the rules applying to distributions from companies in liquidations, which require that debts owed to secured parties be paid in priority to those owed to unsecured creditors rather than because the Court makes an order in its favour. As noted at [4], the order made by the Court under s 301 should be an order to contribute a sum to the assets of the company, reflecting the fact that the director has breached a duty owed to the company. In this case, Global Print is the beneficiary of the order: the creditors benefit indirectly in accordance with the rights they have as creditors. We therefore do not attach the same significance to the fact that Commercial Factors will, as a matter of practicality, be the only party which receives a payment from the company as a result of the litigation, as Mr Davey asks us to.The Commercial Factors agreement and debenture[102] The Judge found that the factoring agreement and debenture were validly executed, despite the circumstances in which Mrs Grant signed the factoring agreement. Mr Davey did not challenge this, but said that the Judge should have taken into account "the contributory conduct" of Commercial Factors. We will consider that further below, but it does not seem to us that there is any possible argument that the circumstances in which an agreement and debenture were (as the Judge found) validly executed could be held against the counterparty to those documents.Fraudulent invoices[103] Mr Davey argued that some of the invoices which had been factored by Commercial Factors were fraudulently created by Mr Grant, and also said that Commercial Factors had made some payments to companies associated with Mr Grant when they should have been made to Global Print. He said this negligenceon the part of Commercial Factors meant it was undeserving of the benefit of a s 301 award. [104] In addition, Mr Davey said it was wrong that the Lewises were made to pay money which would end up benefiting Commercial Factors when Mr Lewis had attempted to prevent Global Print's entry into the Commercial Factors arrangement. [105] All of these matters were carefully considered by Stevens J, who had the benefit of hearing evidence from Mr Lewis and from Mr Haddon of Commercial Factors. Stevens J concluded that the amount owing to Commercial Factors was essentially the same as the amount Global Print would have owed if no factoring arrangement had been entered into. We see no error in that finding. In our view, that makes the position of Commercial Factors essentially neutral. [106] Even if that were not so, we doubt that the conduct of a creditor should lead the Court to decline to make an otherwise proper award under s 301 in favour of the company concerned. Mr Davey referred us to Day v Mead [1987] 2 NZLR 443 at 462 (CA), where Cooke P accepted the proposition that a solicitor's liability for breach of fiduciary duty could be reduced to take into account the contributory conduct of the client to whom the award was made. We do not see that case as applying where a breach of duty to the company has occurred, and the Court is directing payment to the company under s 301. The fact that a creditor will then make a claim on the company does not alter the fact that the company is not guilty of contributory conduct and the award is to recompense the company for the breach of the duty owed to it. [107] Mr Davey also relied on Nippon Express (New Zealand) Ltd v Woodward(1998) NZCLC 261,765 at 261,777 (HC) where Anderson J considered a case much more similar to the present. Anderson J said he did not exclude the theoretical possibility of liability being reduced by reason of contributory negligence on the part of a creditor, but, for the reasons we have just given, expressed doubt about the circumstances in which that could occur.[108] In Walker v Allen HC NEL CP13/00 18 March 2004, Ellen France J took into account the conduct of the major creditor of the company in that case (the New Zealand Customs Service) in determining how much ought to be payable under s 301. This was one of a number of factors taken into account by the Judge. It is not clear how much impact it had on the final award. [109] There will be obvious difficulties in taking into account the conduct of one creditor, and thereby reducing a s 301 award, if the impact of that is to reduce the amount that would be received by other (innocent) creditors. That was the situation facing Stevens J, because the award he made exceeded the amount owed to Commercial Factors, so any reduction in the award to reflect the conduct of Commercial Factors would have adversely affected the unsecured creditors. We can see that there is a stronger case for taking into account the contributory conduct by a creditor where that creditor will be the only beneficiary of an award and any reduction in the amount that would otherwise be awarded has no effect on other creditors. That will be the case now because of the impact of the cap of $560,000, given that the debt to Commercial Factors is considerably greater than that sum. Conduct of a creditor may also be relevant where the s 301 proceedings are instigated by a creditor seeking an order under s 301(1)(c) that money be paid to the creditor. We leave that open for consideration in a case where the point has been argued. [110] However, even if it is permissible to take into account the conduct of a creditor, we do not see it as being appropriate to do so in this case, given the Judge's conclusion that the involvement of Commercial Factors did not have the effect of increasing the overall indebtedness of Global Print, albeit it had the effect of converting what would otherwise have been unsecured debts into a secured debt. In those circumstances, we see no reason to reduce the amount which would otherwise be payable to take into account the conduct of Commercial Factors.Result[111] As noted earlier, the Judge found that Mr Lewis's liability under s 301 was $1,168,330 and that of Mrs Lewis was $890,000. In Mr Lewis's case, the Judgetook as a starting point the creditor pool of $2,102,217, deducted the agreed figure of $155,000 for debts in existence at September 2001 when trading while insolvent began (see [73] above) and made an award of 60 per cent of the resulting amount. In Mrs Lewis's case, the methodology was the same but the starting point was $1,638,500, being the creditor pool at the time she resigned from office in September 2001. [112] We have upheld the Judge's assessment of the conduct of Mr and Mrs Lewis in almost all respects. We agree that the setting of the level of compensation at 60 per cent of the debts incurred after the time at which Global Print should have stopped trading is a fair outcome. [113] We now revert to Mr Davey's submission that the Western Mail and IRD debts of $210,242 and $119,536 respectively were wrongly included in the calculation of the creditor pool: see [72] - [74] above. If we accepted Mr Davey's submission, the creditor pool for the calculation of Mr Lewis's liability would reduce from $2,102,217 to $1,772,439 and that for Mrs Lewis from $1,638,500 to $1,308,722. Applying the methodology described in [111], the liability of the Mr Lewis would be $970,463 and that of Mrs Lewis would be $692,233. In both cases that exceeds the $560,000 cap so the outcome is unaffected, whether or not the submission is accepted. [114] In those circumstances, the amount payable by Mr and Mrs Lewis under s 301 should be $560,000. We see no purpose in making a duplicate award under s 300: the cap makes any such award of no practical significance. [115] As noted earlier, we consider the award should be made in terms of s 301(1)(b)(ii). We therefore order Mr and Ms Lewis to contribute the sum of $560,000 to the assets of Global Print by way of compensation for their breach of the duty they owed to Global Print under s 135 of the Companies Act.Costs[116] The appellants have succeeded in this Court, though their arguments other than in relation to the cap have been unsuccessful. Mr Keene mentioned a Calderbank letter, which may impact on any costs award. We therefore reserve costs. If the parties cannot agree, the appellants should file and serve a memorandum dealing with the costs issues that the Court must resolve within 15 working days after the date of this judgment, the respondents should do likewise within another ten working days and any reply from the appellants should be filed and served within another five working days. We will deal with costs on the papers unless either party asks for a hearing and convinces us that one is necessary.Solicitors: Gill, Coutts & Co, Auckland for Appellants Shieff Angland, Auckland for Respondents