TOILOLO v REGISTRAR OF COMPANIES [2019] NZHC [1090]

TOILOLO v REGISTRAR OF COMPANIES [2019] NZHC [1090] [17 May 2019]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2018-404-002328[2019] NZHC 1090IN THE MATTER OF A decision of the Registrar of Companiesunder s 385 of the Companies Act 1993ANDIN THE MATTER OF An appeal by Timothy ToiloloHearing: 27 March 2019Appearances: R B Hucker and D L Lang Siu for AppellantS Connolly and T Witten-Sage for Registrar of CompaniesJudgment: 17 May 2019JUDGMENT OF WYLIE JThis judgment was delivered by Justice WylieOn 17 May 2019 at 11.30amPursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/counsel:Hucker & Associates, AucklandCrown Law, WellingtonIntroduction[1] The appellant, Timothy Toilolo, appeals a decision given by Peter Barker, aDeputy Registrar of Companies ("the Deputy Registrar"), under s 385 of theCompanies Act 1993 ("the Act"). The decision disqualified Mr Toilolo from being adirector or promoter of a company, or from being concerned with, or taking part,whether directly or indirectly, in the management of a company, for a period of twoyears and six months.1[2] The decision was made following the liquidation of a company controlled byMr Toilolo – Toilolo & Co Accountants Ltd ("the company"). He was its sole directorand shareholder.[3] The Registrar of Companies ("the Registrar") was initially named as therespondent to these proceedings. This was contrary to r 20.9(2) of the High CourtRules and, by minute dated 26 February 2019, Jagose J removed the Registrar as arespondent. The Judge recorded that the Registrar nevertheless wished to appear andbe heard pursuant to r 20.17, and submissions were made to me on behalf of theRegistrar to assist me in dealing with the matter. The Registrar did not take part in thehearing as a party and Mr Connolly, for the Registrar, was careful to take a neutralrole.Factual background[4] Mr Toilolo was, at all relevant times, a chartered accountant. He incorporatedthe company on 25 November 2011.[5] The company was incorporated one week after another company – ProfessionalAccounting & Taxation Ltd – which was also owned and controlled by Mr Toilolo,was placed into liquidation by the Inland Revenue Department (the "IRD") due tounpaid GST and PAYE. Professional Accounting & Taxation Ltd had carried onbusiness as a provider of accountancy services. Mr Toilolo purchased the business1 Final minute – Section 385 Companies Act 1993 – Salamasina Faleilua Timothy Toilolo – Minuteof Deputy Registrar of Companies, dated 24 September 2018.from Professional Accounting & Taxation Ltd with the consent of the liquidator of thatcompany,2 and the business was transferred to the company.[6] The company's share capital was $100. I do not know whether it was calledup but, in any event, the company needed additional funds. It obtained a $14,000overdraft facility from Westpac Banking Corporation Ltd ("Westpac") in February2012. To support the overdraft, Mr Toilolo and the company entered into crossguarantees in favour of Westpac. The cross guarantees secured not only the overdraftbut also Mr Toilolo's personal indebtedness to Westpac. At the time this indebtednessamounted to approximately $400,000. Mr Toilolo had a term deposit with Westpac of$35,000 which partially offset this and the bank had security as well. It had two homeloan agreements with Mr Toilolo and it held a mortgage over his residential property.To support the cross-guarantee, Westpac took further security by way of a generalsecurity agreement over the assets of the company.[7] The company, through Mr Toilolo, traded as a provider of accountancyservices. It traded poorly from the outset and Mr Toilolo was experiencing personalfinancial problems as well. Difficulties soon emerged.(a) Mr Toilolo defaulted in his mortgage repayments due under the homeloan agreements with Westpac. As a result, in late May 2012, Westpacserved notices under s 119 of the Property Law Act 2007 on bothMr Toilolo and the company. Those notices required Mr Toilolo andthe company to remedy the defaults under the home loan agreements.At that stage the arrears owing to Westpac amounted to $12,500. Thenotices expired, unremedied, on 8 July 2012.(b) In early August 2012, Westpac uplifted the monies held on term depositand applied them to clear the arrears and reduce the principle owingunder the home loan agreements.2 There were difficulties in completing the purchase. Mr Toilolo defaulted in paying part of thepurchase price but the liquidator did not seek recovery. The liquidator considered that it wasuneconomical to pursue Mr Toilolo.(c) There were further defaults and, on 1 March 2013, Westpac issuedletters of demand on Mr Toilolo and the company. The demandsrequired Mr Toilolo, and the company as guarantor, to pay arrears ofprinciple and interest totalling $4,495.70 no later than 7 March 2013.The demand issued against the company advised that failure to remedythe default might result in cancellation of the overdraft facility. Thedefault was not remedied and Westpac cancelled the overdraft facilityand called up the amount then outstanding.(d) The further defaults prompted Westpac to issue fresh Property Law Actnotices. They were dated 3 April 2013 and they were served onMr Toilolo and the company. The amount outstanding under thecompany's overdraft facility formed part of the amount claimed underthe notices. The notices expired, again unremedied, on 15 May 2013and Westpac then proceeded to take the necessary steps to exercise thepower of sale under the mortgage.(e) The company began to accrue PAYE arrears as from May 2013 and thenGST arrears as from July 2013.[8] The mortgagee's sale of Mr Toilolo's residential property under the directionof Westpac was scheduled to proceed by way of an auction on 26 June 2013. On 21June 2013, Mr Toilolo applied for an interim injunction to stop the auction. Thatapplication was dismissed.3 The auction proceeded and the property was sold. Therewere substantial arrears outstanding following the sale and Westpac then obtainedsummary judgment against Mr Toilolo for those arrears in the sum of $159,111.51,together with interest and costs of $20,113.34.4 The judgment debt was not met andWestpac obtained an order bankrupting Mr Toilolo on 7 July 2014.5[9] The company was placed into liquidation at the suit of Westpac on 5 September2014. At the time of the liquidation, the company had outstanding debts of3 Toilolo v Westpac New Zealand Ltd [2013] NZHC 1517.4 Toilolo v Westpac New Zealand Ltd [2013] NZHC 3423.5 Westpac New Zealand Ltd v Toilolo [2014] NZHC 1623.$245,897.03 owing to Westpac under the cross-guarantee and $42,058.24 (comprisingunpaid PAYE and GST) owing to the IRD. There were also two relatively small tradecreditors.[10] The liquidator's final report for the company was released on 28 September2015 and the company was removed from the Companies' Register on 4 November2015.[11] On 9 June 2016, the Official Assignee sent a letter to the Registrar noting thatMr Toilolo had been adjudicated bankrupt, and recording the Official Assignee's viewthat Mr Toilolo "may be a candidate for being prohibited from being a director orconcerned in the management of a company under s 385 of the Act for a period longerthan three years".[12] On 13 June 2016, the Registrar wrote to the liquidator of the company, seekinginformation in relation to Mr Toilolo and the company. The liquidator did not respondpromptly. After various chase ups, the requested information was finally provided bythe liquidator to the Registrar on 6 December 2016.[13] On 26 April 2017, two years and seven months after the company had goneinto liquidation, the Registrar signed a notice pursuant to s 385(5) of the Act, advisingthat he was considering exercising his powers under s 385(3). That notice was servedon Mr Toilolo on 16 May 2017. Mr Toilolo responded to the notice on 30 June 2017.A further letter was sent to him on 5 July 2017 by the Registrar and Mr Toiloloresponded to this letter on 21 July 2017.[14] On 22 August 2017, Mr Toilolo was discharged from bankruptcy.[15] On 9 January 2018, some three years and four months after the company hadgone into liquidation, the Registrar wrote to the Deputy Registrar seeking a decisionunder s 385 of the Act.[16] On 8 February 2018, the Deputy Registrar issued an interim minute setting outhis preliminary views in relation to whether Mr Toilolo should be prohibited unders 385 of the Act.6 On 4 May 2018, Mr Toilolo sent submissions to the DeputyRegistrar in relation to the interim minute.[17] The final minute and notice of prohibition, were dated 24 September 2018, andthey were served on Mr Toilolo on 26 September 2018. This was four years after thecompany had been placed into liquidation. The two year six month prohibition periodran from the date of the notice pursuant to s 385(3).The Deputy Registrar's decision[18] The Deputy Registrar's decision is contained in the final minute dated 24September 2018. The final minute makes a number of references to the interim minuteas well.[19] The Deputy Registrar started by outlining the background to the decision hehad been asked to make. He recorded his view that there were a number of factorsthat had led to the failure of the company; he was prepared to assume that relevantfactors were that Westpac called up the cross-guarantee it held from the company andthat, as asserted by Mr Toilolo, his residential property had declined in value. Heconsidered that these matters however did not, of themselves, mean that Mr Toiloloshould not be considered as a candidate for prohibition under s 385. Rather, he saidthat if he were to be satisfied that one or more of the allegations of mismanagementmade by Ministry of Business, Innovation and Employment ("MBIE") was made outand was at least partly responsible for the company becoming insolvent, then he hadthe power to prohibit Mr Toilolo.7[20] The Deputy Registrar went on to record that he was satisfied that there weremultiple incidents of mismanagement by Mr Toilolo, which were at least a partialreason for the failure of the company. He held that the fact that Westpac exercised itsright to sell the security it held was a consequence of Mr Toilolo's mismanagement6 Interim minute – Section 385 Companies Act 1993 – Salamasina Faleilua Timothy Toilolo –Minute of Deputy Registrar, dated 7 February 2018.7 Final minute, above n 1, paras [4.1]-[4.4].and the failure by the company and Mr Toilolo to meet their obligations to Westpac,but that it was not the sole cause.8[21] The Deputy Registrar set out the materials on which he had relied in reachinghis conclusions, including information MBIE had obtained from the liquidator,information derived from the various judgments referred to above,9 and thesubmissions which had been filed by Mr Toilolo and MBIE. He observed that theinformation that had been provided to him had to be "sufficient and of sufficientquality to meet a minimum threshold" before he could consider the allegations madeby MBIE.10 He was so satisfied in most, but not all, instances.[22] Dealing with the various allegations of mismanagement made by MBIE, theDeputy Registrar turned first to consider whether or not Mr Toilolo had been involvedin reckless trading, contrary to s 135 of the Act.(a) He summarised various relevant authorities and the submissions he hadreceived, and expressed the view that once a company falls into arrearswith its tax payments, it is insolvent, or at the least, solvency becomesan issue. He expressed the view that once a company cannot meet itdebts when they fall due, a director should immediately conduct a"sober headed" assessment of the company's position.11(b) He noted that the company was incorporated in November 2011, andthat between that date and 31 May 2013, it traded at a loss. Heconsidered that the company was insolvent once it failed to makepayment to the IRD when its tax debts fell due, and that occurred on 31May 2013. He recorded that there was no indication that Mr Toiloloundertook any assessment of the company's solvency, or that if he did,he put a coherent plan in place to deal with it. He was satisfied that thesober headed assessment required could have been completed quickly,because the company's business was simple. He noted that each month8 At [4.5].9 See above, ns 3, 4 and 5,10 Final minute, above n 1 at [5.2].11 At [8.33].that the IRD arrears were unpaid, the debt continued to increase, andthe position of the company continued to deteriorate. There was noprospect of the company increasing its income sufficient to meet thearrears and fresh IRD debt, and that the indications were that thebusiness of the company was being scaled back, rather thanincreasing.12(c) The Deputy Registrar recorded that he had come to his conclusion onreckless trading without reference to the moneys the company owed toWestpac under the cross guarantee, but that the company's liability forthe total debt was another reason why a sober headed assessment shouldhave resulted in the company ceasing to trade. The Deputy Registrarheld that this should have happened by at least May 2012, whenWestpac issued the notices against Mr Toilolo and the company unders 119 of the Property Law Act. He noted that those notices expiredunremedied on 8 July 2012, that there was then an event of default andthat the contingent liability under the cross guarantee then became anactual liability. From that point on, the company was in default toWestpac for a sum in excess of $400,000 and it was "hopelesslyinsolvent". The Deputy Registrar considered that it should have ceasedtrading in mid-2012, and that if this had happened, the IRD would neverhave ended up as a creditor. The Deputy Registrar expressed the viewthat if Mr Toilolo could not recognise the implications for the companyof Westpac's actions from May 2012 onwards, then he was doing nomore than applying a "Nelsonian eye" to the situation.13(d) The Deputy Registrar then turned to consider causation. He noted thats 385(4) of the Act applies if mismanagement was at least partlyresponsible for the company coming within one or more of thecategories set out in s 385(1). While he was satisfied that non-paymentof the PAYE and GST due was mismanagement, he was less certain asto whether this mismanagement was partly responsible for the failure12 At [8.34]-[8.41].13 At [8.43]-[8.45].of the company. He was inclined to the view that it was, but left thepoint open because of the conclusions he reached elsewhere in his finalminute.14(e) When regard was had to the Westpac debt, the Deputy Registrar wassatisfied that the company was insolvent by at least July 2012, and thatthe company should have ceased to trade at that time. He was satisfiedthat the failure to cease trading at that point was mismanagement, andwas at least a partial reason for the failure of the company, and that theposition continued to be increasingly clear cut from 2012 and at thelatest by March 2013. He recorded his view that the mismanagementwas serious.15[23] Secondly, the Deputy Registrar considered the allegation that Mr Toilolo hadfailed to keep proper accounting and company records. Again, he recorded MBIE'sallegations, and Mr Toilolo's response. He referred to ss 189 and 194 of the Act, andto relevant Court decisions. He was satisfied that the company did not comply withthose sections, and that such records if any that the company had, had not been kept atits registered office. He considered that it was Mr Toilolo's responsibility to maintaina satisfactory system of control over the company's records, and that his explanationas to why some records were not available was unsatisfactory. He noted thatMr Toilolo was an accountant, who knew or should have known of the statutoryrequirements. The Deputy Registrar expressed the view that this was a corecompetency component for an accountant, and that Mr Toilolo was in clear breach ofs 189 by not having a complete set of the documents that the company was requiredto keep at its registered office. The Deputy Registrar was satisfied that the inadequaterecords were at least a partial reason for the insolvency of the company, noting that,without accurate financial information, a director cannot ascertain the financialposition of the company at any given point in time, and that if a director cannot do so,the director is more likely to make poor or flawed decisions.1614 At [8.54] and [8.57].15 At [8.53], [8.56] and [8.58].16 At [9.1]-[9.28].[24] Thirdly, the Deputy Registrar considered the allegation that Mr Toilolo hadfailed to act in good faith and in the best interests of the company. Again, the DeputyRegistrar recorded the competing submissions, and the relevant law. He was notsatisfied that some of the allegations made by MBIE were made out, and consideredthat others were not mismanagement by Mr Toilolo in his capacity as a director of thecompany.17 He did not however consider that the entry into the cross guarantee by thecompany was fair to the company. He noted that there was no evidence that thecompany agreed to guarantee the personal liabilities of Mr Toilolo, or that s 161 wascomplied with. He then said that even if the required resolution was passed, theexecution of the cross guarantee was not fair to the company. The maximum benefitthe company could receive under the cross guarantee was $14,000, but in exchange,the company took on a liability of at least $400,000 at the time the cross guaranteewas executed. He considered that this mismanagement was directly linked to thecompany's failure, because it meant that the company had become contingently liablefor approximately $400,000 of Mr Toilolo's personal debt.18[25] Fourthly, the Deputy Registrar briefly considered whether or not Mr Toilolohad breached his duties by allowing a related company – a company involved with hisdaughter's accountancy practice – to take over some of the company's assets. TheDeputy Registrar considered that there were questions around the value of thecompany's business and what had happened to it, but declined to make any finding inthis regard; he considered that to go further would be speculation.19[26] Next, the Deputy Registrar considered whether or not Mr Toilolo was activelyinvolved in the management of the company at relevant times. He concluded thatMr Toilolo was involved for a prolonged period undertaking a course of study atAuckland University, and that that study had distracted him from managing the affairsof the company. The Deputy Registrar considered that Mr Toilolo did not meet thestandard required, that this was another aspect of reckless trading and that Mr Toilolo'sfailure to sufficiently monitor the management of the company was at least a partialreason for the company's failure.2017 At [10.1]-[10.17].18 At [11.1]-[11.21].19 At [12.1]-[12.8].20 At [13.1]-[13.9].[27] The Deputy Registrar summarised his overall conclusions as to the allegationsof mismanagement. He stated as follows:14.4 The Company was put into liquidation on the petition presented byWestpac to the court. The basis of Westpac's petition was because thedebt owed by the Company to Westpac, which was due and owing,was not paid. The reason it was not paid was because the Companyhad insufficient funds to pay Westpac. That was not surprising. It hadbeen unable to pay the IRD what was due and owing by it. The IRDcontinued to remain unpaid, while further debt became owing, untilthe Company was wound up approximately a year later.14.5 There were several reasons why the Company had insufficient fundsto pay Westpac:(a) Because the Company was trading while insolvent;(b) Because of the cross guarantee;(c) Because the Company's director did not know the Company'sfinancial position;(d) Because the Company's director was not actively involved inits management.[28] Finally, the Deputy Registrar considered the exercise of the discretion vestedin him by s 385(4) of the Act. He was satisfied that the mismanagement was at thehigher end of the scale, and that Mr Toilolo was responsible for it; it was accordinglynot appropriate to exercise his discretion not to prohibit Mr Toilolo. The DeputyRegistrar discussed the term of any prohibition, setting out the main factors that hetook into account – namely the risk to the public, personal factors, the consequence ofprohibition on Mr Toilolo's future work prospects, the intention of the Act, the settingof standards and deterrence, Mr Toilolo's bankruptcy and the maximum period ofprohibition. He expressed the view that the loss suffered by the creditors was at thelower end of the scale, but that the level and the nature of the mismanagement was atthe higher end of the scale. He considered that Mr Toilolo showed little insight intohis mismanagement, and that he had no proper appreciation of his duties andresponsibilities as a director. He took the view that Mr Toilolo represented asignificant risk to the public, and that unless there was a period of prohibition imposed,there would be nothing to prevent Mr Toilolo from becoming a director or manager ofa company. Balancing all of these various factors, he directed that Mr Toilolo beprohibited for a term of two years and six months from being a director or promotorof a company, or of being concerned in, or taking part, whether directly or indirectly,in the management of a company.21The appeal[29] The appeal is brought pursuant to s 370 of the Act. That section provides aright of appeal, and further provides that, on hearing any appeal, this Court mayapprove the Registrar's decision, or give such directions or make such determinationin the matter as the Court thinks fit.[30] The section gives a general and unrestricted right of appeal, which proceeds denovo.[31] Section 385 requires the decision-maker to be satisfied as to a number ofthreshold issues; if he or she is satisfied, the section then confers a discretion toprohibit. The authorities suggest as follows:(a) In regard to the factual findings required before the discretion can arise,the Court must consider the merits of the case afresh. The weight givento the reasoning of the Deputy Registrar is a matter for the Court'sassessment.22 The appellant, bears the onus of satisfying this Court thatit should differ from the decision of the Deputy Registrar, and it is onlyif this Court considers that the decision is wrong that it is justified ininterfering with it.23(b) In regard to the exercise of the discretion, in the event the decision-maker is satisfied as to the factual matters specified, the threshold for asuccessful appeal is more limited. An appellant has to demonstrate anerror of law or principle, or that an irrelevant consideration was taken21 At [15.1]-[16.41].22 Austin Nichols & Co v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]-[5]; Maniv Registrar of Companies [2016] NZHC 3002 at [5]; Davidson v Registrar of Companies [2011]1 NZLR 542 (HC) at [84]; Brand v Registrar of Companies [2018] NZHC 3148 at [33].23 Austin Nichols & Co v Stichting Lodestar, above n 22 at [4]; Brand v Registrar of Companies,above n 22 at [33].into account, or that a relevant consideration was overlooked, or thatthe decision was plainly wrong.24Neither Mr Tucker, for Mr Toilolo, nor Mr Connolly took issue with this hybridapproach and I adopt it.The notice of appeal[32] The notice of appeal is a lengthy document. It alleges that the Deputy Registrarerred in prohibiting Mr Toilolo from being a director of a company or involved in themanagement of a company for a period of two years and six months. Morespecifically, it is asserted that:(a) the Deputy Registrar failed to observe the rules of natural justice.Various particulars were set out in support of this assertion;(b) the Deputy Registrar erred in relying on conduct that related to, oroccurred, during a period more than five years prior to the date of theDeputy Registrar's decision;(c) there were various errors in fact and in law. Twenty one particularswere set out in this regard;(d) the Deputy Registrar failed to give any reasons for deciding to exercisehis discretion to disqualify Mr Toilolo;(e) the Deputy Registrar erred in holding that the maximum period ofdisqualification that was in force at the time of the impugned conductshould not be a factor to be taken into account when assessing thelength of disqualification; and24 Brand v Registrar of Companies, above n 22 at [37]; Kacem v Bashir [2010] NZSC 112, [2011] 2NZLR 1 at [32].(f) the Deputy Registrar did not provide any or sufficient reasons for theperiod of disqualification imposed, nor apply the principle ofproportionality.AnalysisSection 385[33] Relevantly, s 385 of the Act provides as follows:385 Registrar may prohibit persons from managing companies(1) This section applies in relation to a company—(a) that has been put into liquidation because of its inability topay its debts as and when they became due:(3) The Registrar may, by notice in writing given to a person, prohibitthat person from being a director or promoter of a company, or beingconcerned in, or taking part, whether directly or indirectly, in themanagement of, a company during such period not exceeding 10 yearsafter the date of the notice as is specified in the notice. (4) The power conferred by subsection (3) may be exercised in relationto—(a) any person who the Registrar is satisfied was, within aperiod of 5 years before a notice was given to that personunder subsection (5) (whether that period commenced beforeor after the commencement of this section), a director of, orconcerned in, or a person who took part in, the managementof, a company in relation to which this section applies if theRegistrar is also satisfied that the manner in which theaffairs of it were managed was wholly or partly responsiblefor the company being a company in relation to which thissection applies; or(5) The Registrar must not exercise the power conferred by subsection(3) unless—(a) not less than 10 working days' notice of the fact that theRegistrar intends to consider the exercise of it is given tothe person; and(b) the Registrar considers any representations made by theperson.(6) No person to whom a notice under subsection (3) applies shall be adirector or promoter of a company, or be concerned or take part(whether directly or indirectly) in the management of a company.[34] The power to disqualify a person from being a director is both protective andpenal in nature. Prohibition is aimed not at remedying wrongs done to shareholdersand creditors, but rather at protecting the public from unscrupulous or incompetentdirectors in the future, deterring others and setting appropriate standards of behaviour.At the same time, it is recognised that any given director or manager inevitablyexperiences prohibition as a punishment.25[35] Section 385 was first introduced in 1988 by way of amendment to the nowrepealed Companies Act 1955. An extensive analysis of the section was undertakenin Miller J in the first case under the provision to come before this Court – Davidsonv Registrar of Companies.26 Relevantly, he there stated as follows:[94] Section 385 applies to a company that is unable to pay its debts as theyfall due, or on which execution has been returned unsatisfied, or which hasbeen put into receivership, or which has entered into a compromise with itscreditors, or which is in voluntary administration. The theme is businessfailure, evidenced by insolvency.[95] Prohibition may follow where the qualifying company's plightresulted wholly or in part from the manner in which its affairs were managed.(I put the onus to one side for the moment.) So the legislation requires a causalrelationship between management of the company's affairs and its qualifyingcircumstances.[96] There is a sense in which failure always results from management, fora company must act through human agency. However, the section'spurpose is that of disqualifying directors and managers who are not fit andproper persons to act in those capacities; it is aimed at mismanagement. [97] the section is aimed at those who through some want of integrity,skill, judgment or industry are not suitable directors or managers. They maywell have behaved in ways that breach a director's duties and standard of careunder ss 131–137, But ss 131–137 address an individual director'saccountability to shareholders and creditors of a company which the directorhas already served, while s 385 is protective and forward-looking. TheRegistrar's inquiry is addressed initially to mismanagement of the company'saffairs and its causal connection to insolvency, not the behaviour of individualdirectors. Such mismanagement having been identified, all of the company'sdirectors and managers are eligible for prohibition. The power to prohibit themis broad and discretionary in nature. When exercising it the Registrar is not25 Davidson v Registrar of Companies, above n 22 at [91], citing First City Corporation Ltd vDownsview Nominees Ltd [1989] 3 NZLR 710 (HC).26 Above n 22.confined to conduct that caused the company's insolvency; all of theindividual director's attributes and conduct in office may be taken intoaccount.[100] Of course the Registrar does not wield the power against a board andmanagement team collectively; rather, each respondent must be examinedindividually in all the circumstances of the case. The power is discretionary;s 385(3) and (4) both provide that the Registrar "may" exercise it. Like anyother discretionary power, it must be exercised for the statutory purpose, thatof excluding from company management those who are unsuited to it.[103] By way of summary, the Registrar's inquiry should follow thefollowing steps:(a) Does the company, qualify under subs (1)?(b) Was the respondent a director or manager of the company within the 5 years preceding the Registrar's notice?(c) Where there is one qualifying company:(i) was the manner in which the company's affairs weremanaged a contributing cause of its qualifying status;and, if so,(ii) ought the Registrar exercise the discretion to prohibitthe respondent in all the circumstances?(e) Where prohibition is appropriate, what is the appropriateterm?27[36] These observations have been cited with approval in the limited number ofsubsequent authorities dealing with the section.28 I agree with and adopt them.[37] Against this background, I turn to consider the various matters raised in thenotice of appeal and advanced at the hearing. Many of the matters overlap and otherseither lack detail or were not separately advanced at the hearing. I have endeavouredto avoid making this judgment too lengthy by dealing with some matters globally.27 This approach was endorsed in Brand v Registrar of Companies, above n 22 at [45].28 Mani v Registrar of Companies, above n 22; Brand v Registrar of Companies, above n 22; Clarkev Registrar of Companies [2018] NZHC 1608.Did the Deputy Registrar fail to observe the rules of natural justice?[38] I deal with the primary allegation – namely, that the Deputy Registrar failed toobserve the principles of natural justice – and then with a number of the other issueswhich were also raised under this head.[39] Miller J dealt with natural justice issues in the context of s 385 in Davidson.He noted that the legislation says very little about process, but that, in the course ofargument before him, the Registrar acknowledged an obligation to observe theprinciples of natural justice in exercising his powers under s 385. The Judge recordedthe practice that had then been adopted – namely that the National Enforcement Unitof the Companies Office prepares a report and recommendations, that the report isgiven to the respondent with the notice required under s 385, that communications canensue between the respondent and the Unit, and that if the Unit maintains thatprohibition is warranted, the report and the respondent's representations are submittedto a specially appointed Deputy Registrar of Company for decision. The Judge notedthat s 385 does not preclude additional requirements, and he expressed the view thatthe Registrar is a public authority under s 27(1) of the New Zealand Bill of Rights Act1990, given that decisions under s 385 affect the rights, obligations and interests of,inter alia, respondent directors and managers.29 The Judge stated as follows:[107] Accordingly, the Registrar must give the respondent reasonable noticeof the case he or she is to meet. In circumstances where the respondentnormally knows much more about the company's management than does theRegistrar, that requirement is unlikely to be onerous; it may suffice that therespondent knows the general nature of the allegations. But as a practicalmatter, some investigation must normally precede the Registrar's notice;except in the simplest of cases, the Registrar could scarcely act without firstinquiring into the company's circumstances, That investigation is likely toisolate instances of company mismanagement or features of the director'sconduct or qualifications which should be identified when notice is given ifthey are to inform the Registrar's decision.[40] Natural justice issues have also been considered in other cases dealing with thesection:29 Davidson v Registrar of Companies, above n 22 at [104]-[106].(a) In Mani v Registrar of Companies,30 Thomas J discussed the relevantprinciples by reference to the decision of the Privy Council in ReErebus Royal Commission.31 She cited the observations by Miller J inDavidson, and adopted those observations. She noted that the Registrarmust give a respondent reasonable notice of the case he or she has tomeet, and that instances of company mismanagement or features of thedirector's conduct which are of concern should be identified. Shecommented as follows:While identification of specific events is not essential, as amatter of fairness, as much specificity as possible should begiven to the person under investigation to provide him or herwith a meaningful opportunity to make representations to theRegistrar.32(b) Similar observations were made by van Bohemen J in Clarke vRegistrar of Companies.33 He considered that the Deputy Registrar inthat case had followed proper process. The process followed was thatdiscussed by Miller J in Davidson.[41] In the present case, the process discussed and approved in the authorities I haveset out was followed. I note as follows:(a) After it had undertaken preliminary investigations and sourced relevantmaterials, MBIE sent a detailed letter to Mr Toilolo on 27 April 2017.The letter attached the notice required by s 385(5) of the Act. Itenclosed the materials which had been obtained by it (and that whichwere ultimately submitted to the Deputy Registrar). It identified theincidences of mismanagement which MBIE was asserting wereattributable to Mr Toilolo and which were said to have wholly or partlyled to the failure of the company. It particularised reckless trading,trading while insolvent, failing to keep proper accounting and companyrecords, and failing to act in good faith and in the best interests of the30 Mani v Registrar of Companies, above n 22.31 Re Erebus Royal Commission; Air New Zealand v Mahon [1983] NZLR 662 (PC).32 Mani v Registrar of Companies, above n 22 at [30].33 Clarke v Registrar of Companies, above n 28.company. It invited Mr Toilolo to make representations on these issuesand as to why he should not be prohibited, and asked him to ensure thatany representations made by him included all matters that heconsidered the Registrar should take into account, as well as anysupporting documentation.(b) Mr Toilolo responded on 30 June 2017. Detailed submissions werefiled on his behalf. Those submissions were prepared by Mr Toilolo'slegal advisors. They were thorough, running to some 11 pages.(c) A further letter was sent to Mr Toilolo on 4 July 2017. It dealt with theissue of onus and gave Mr Toilolo a further 20 working days to respondin this regard.(d) A submission was filed on Mr Toilolo's behalf in regard to onus on 21July 2017.(e) MBIE responded by email on 21 July 2017, accepting the submissionas to onus made by Mr Toilolo.(f) A further letter and the interim minute prepared by the Deputy Registrarwere sent to Mr Toilolo on 8 February 2018. The interim minute raisedthree further potential acts of mismanagement that the Deputy Registrarthought might be attributable to Mr Toilolo. Mr Toilolo was invited tomake submissions on the interim minute.(g) Further submissions were made by Mr Toilolo in response to theinterim minute on 4 May 2018. Again, those submissions were madeby Mr Toilolo's legal advisors, and again they were thorough.The final minute then issued, setting out the Deputy Registrar's decision and givingdetailed reasons for that decision. The Deputy Registrar itemised the materials he tookinto account in reaching his decision. There is nothing to suggest that any furthermaterials were taken into account by the Deputy Registrar which Mr Toilolo had notseen or not had the opportunity to comment on.[42] I cannot see that there has been any departure from the requirements of naturaljustice applicable in cases of this kind. Rather, Mr Toilolo was given multipleopportunities to make submissions on the relevant materials and on the DeputyRegistrar's preliminary assessment. He took full advantage of those opportunities andthe Deputy Registrar in his decision expressly took into account the submissions whichMr Toilolo had made throughout the process. The assertion that the Deputy Registrarin some way breached the rules of natural justice, in my judgment, has no foundationin this case.[43] I now turn to some of the other issues raised under the rubric of natural justice.(i) Onus[44] It was common ground that Mr Toilolo's conduct fell for consideration unders 385(4)(a) of the Act.[45] Mr Hucker submitted that, where only one company is liquidated, the onus ison the Registrar to make out the mismanagement alleged. In this regard, he referredto the letter of 4 July 2017 sent by the Prohibitions Unit at MBIE, and to the furtheremail also sent by MBIE to Mr Toilolo dated 21 July 2017, both referred to above.[46] Despite the correspondence from MBIE, the Deputy Registrar does not seemto have been unduly concerned about where the onus lay. Rather, he focused on thematerials before him and whether they were sufficient to establish the matters thesection required him to be satisfied about.34[47] The law is clear, and again it was succinctly stated by Miller J in Davidson.Under s 384(4)(a), there is no onus and indeed no prosecutor on whom any onus falls.The subsection simply requires that the Registrar be satisfied, having given the34 See above at [21].respondent notice and having considered any representations that he or she may make,that prohibition is appropriate.35[48] I am not persuaded that the Deputy Registrar erred in the approach he took.(ii) Standard of proof[49] Mr Hucker went on to argue that the Deputy Registrar erred by failing to applythe correct standard of proof. He submitted that a higher degree of probability thanthe civil standard of proof on the balance of probabilities was required.36[50] In his interim decision, the Deputy Registrar noted that the statutoryrequirement was for him to be satisfied, and that in terms of being satisfied, he had tomake up his mind. He went on to say that in making up his mind, he had to considerall of the information before him which he itemised. He specifically referred to aparagraph in his interim decision where he acknowledged that "higher qualityevidence [might] be necessary in order to be satisfied in terms of s 385(4)".37 Henoted in the final minute that the information provided to him supporting theallegations had to be "sufficient and of sufficient quality to meet a minimumthreshold" before he could consider the allegations, and he expressly reaffirmed theobservations he had made in the interim decision that higher quality evidence mightbe required.38[51] As Miller J noted in Davidson,39 and as Thomas J noted in Mani,40 the wordingin s 385(4)(a) is plain. In order to exercise the power of prohibition the DeputyRegistrar as the decision-maker has to be "satisfied" as to the matters set out in thesubsection.[52] In Z v Dental Complaints Assessment Committee,41 the Supreme Courtconsidered the term "satisfied" in a similar context – the disciplining of a dentist – and35 Davidson v Registrar of Companies, above n 22 at [102].36 Referring to First City Corporation Ltd v Downsview Nominees Ltd, above n 25.37 Interim minute, above n 6, paras [3.22] and [5.3].38 Final minute, above n 1, paras [5.1]-[5.2].39 Davidson v Registrar of Companies, above n 22 at [102].40 Mani v Registrar of Companies, above n 22 at [14].41 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR at [96].its relationship to the standard of proof required in the circumstances of that case. TheCourt commented as follows:42Before it is able to exercise its powers to impose penalties, the Tribunal mustin the present case be "satisfied" that a practitioner is guilty of detrimental actsor omissions, or of professional misconduct. Being "satisfied" in this contextsimply means that the Tribunal has made up its mind that is the case. The term"satisfied" does not require that the Tribunal should reach its judgment havingbeen satisfied that the underlying facts have been proved to any particularstandard. Nor does the Act or any applicable procedural rule stipulate astandard of proof which the Tribunal must apply. That question mustaccordingly be decided on general principles having regard to the statutorycontext.The Supreme Court noted that the common law recognises only two standards of proofthat the balance of probabilities standard generally applies in civil proceedings, andthat there is no intermediate standard between the criminal and civil standards in thiscountry. It did note that the civil standard is flexibly applied, and that there is a naturaltendency to require stronger evidence before being satisfied to the balance ofprobability standard in cases where the allegations are serious.43[53] The Supreme Court's observations are apposite in this case.[54] The Deputy Registrar was clearly alive to these matters, when he held that theinformation provided to him to support the allegations had to be not only sufficientbut also of sufficient quality to meet a minimum threshold before he could considerthe allegations.44 The language he used does not follow that used in Z, but it is to asimilar end. The Deputy Registrar set out the material he had regard to, and heconsidered not only the volume but also the quality of that material. In somesituations, he declined to find mismanagement on the materials before him. In othersituations, he found mismanagement.[55] I do not consider that there is anything in the criticisms levelled at the DeputyRegistrar in this regard.42 At [17].43 At [102].44 Final minute, above n 1, at [5.2].(iii) Quality of evidence[56] In the notice of appeal, it was asserted:(a) that there was no material of probative value on which the DeputyRegistrar could properly base his decision and his conclusions;(b) that the Deputy Registrar relied upon statements that lacked specificitydetail and particularity, and which were conclusory in nature;(c) that the Deputy Registrar wrongly relied on his own assessments ofcredibility on the basis of written documentation before him when itwas unsafe to do so, and that he did not properly test the generalisednature of the allegations against Mr Toilolo;(d) that the Deputy Registrar wrongly relied on hearsay evidence withoutproperly testing the same;(e) that the Deputy Registrar erred in holding that a bare denial byMr Toilolo could not stand against an assertion by the liquidator;(f) that the Deputy Registrar failed to make an assessment of primary factsand instead relied on opinion evidence; and(g) that the Deputy Registrar made findings of credibility based uponwritten materials without the benefit of cross-examination, and withouttaking any steps to make an assessment of the reliability of theevidence.[57] The difficulty with these various assertions is that they were not referenced torelevant paragraphs in the Deputy Registrar's final minute, and Mr Hucker did notprovide further detail in his submissions.[58] Some of the criticisms can be readily dealt with.(a) There were many materials before the Deputy Registrar. He set themout in his final minute. Mr Toilolo had had the opportunity to commenton them. The Deputy Registrar was entitled to consider them and todraw inferences from them. That is part of the fact finding process hewas required to undertake in fulfilling his statutory mandate.(b) There is no prohibition of the admissibility of hearsay.(c) There is no provision for a hearing. Rather, Parliament has establisheda summary process, under which a decision can be made within 10 daysof notification.(d) There is nothing to preclude the Deputy Registrar from taking intoaccount hearsay, generalised statements or even statements which havebeen received from others but which are conclusory. Rather, it is amatter of assessing the probative value of the evidence and the weightto be attributed to it. These matters are for the Deputy Registrar as thedecision-maker to evaluate.45[59] Without further detail, it is difficult to take the general criticisms levelledagainst the Deputy Registrar's decision any further.The period of five years specified in s 385(4)(a)[60] It was alleged in the notice of appeal, and in oral argument, that the DeputyRegistrar made an error of law by relying on conduct that occurred more than fiveyears before the date on which the Deputy Registrar was considering Mr Toilolo'sconduct, and which fell outside the period which could properly consider unders 385(4)(a).[61] With respect to Mr Hucker, the subsection did not preclude the DeputyRegistrar from considering conduct outside a five year period. Rather, s 385(4)(a)provides that the power conferred by the section may be exercised in relation to a45 Mani v Registrar of Companies, above n 22 at [32]-[34].person who is a director of, or concerned, or who took part in the management of thecompany, within a period of five years before notice was given under s 385(5). It isclear that Mr Toilolo was a director and the manager of the company during that fiveyear period. There is nothing in this ground of appeal.Alleged errors of fact and law[62] In his written submissions, Mr Hucker argued that first the liquidator, and thenthe Deputy Registrar, fell into error, because they assessed Mr Toilolo's duties as adirector against the interests of one creditor only, the IRD.[63] With respect to Mr Hucker, the Deputy Registrar did not confine his analysisonly to the IRD. He did consider the company's failure to pay GST and PAYE to theIRD but he went further and expressly took into account the company's obligations toWestpac.[64] Next it was argued that the Deputy Registrar had erred because there had beenno "aging" of the creditors and debtors in assessing the extent to which there wasreckless trading, and that the Deputy Registrar had failed to consider whether allowingthe IRD debt to accrue was in fact the incurring of an obligation by the company.[65] In my view, the Deputy Registrar was not required to consider issues such asthe aging of debts or whether allowing IRD debt to accrue was the incurring of anobligation.[66] The Deputy Registrar's role was relatively straightforward. Relevantly, he wasrequired to be satisfied, first, that the company had been put into liquidation becauseof its inability to pay its debts as and when they became due. Secondly, the DeputyRegistrar was required to determine whether or not Mr Toilolo was a director ormanager of the company within the five years preceding the notice given unders 385(5)(a). Thirdly, the Deputy Registrar was required to consider whether the wayin which the company's affairs were managed was a contributing cause to it beingplaced into liquidation.4646 Davidson v Registrar of Companies, above n 22 at [103], cited in [35] above.[67] The Deputy Registrar confined himself to these issues and in my judgment, hedid not err in so doing.[68] There can be no dispute that the company qualified under s 385(1). It was putinto liquidation on 5 September 2014.[69] Similarly, and as noted in [61], there can be no dispute that Mr Toilolo was adirector of the company within the period of five years prior to the notice being givenunder s 385(5). The notice was dated 26 April 2017 and it was given to Mr Toilolo onor before 16 May 2017. He was a director of the company from the date of itsincorporation on 25 November 2011 until it was removed from the Register on 4November 2015. Accordingly, Mr Toilolo's management of the company fell forconsideration under s 385(4)(a).[70] The Deputy Registrar's approach was first to consider why the company wasput into liquidation, then to determine whether or not there were instances ofmismanagement, and then, to consider whether one or more of the identified instancesof mismanagement was a contributing cause to the company going into liquidation.[71] The Deputy Registrar was prepared to assume that the calling up of the cross-guarantee by Westpac, and declining property values, were relevant factors in thecompany being placed into liquidation.47 What was at issue was whether the way inwhich Mr Toilolo managed the company was a contributing cause to it being placedinto liquidation. As the Deputy Registrar acknowledged, the test set out in s 385(4)(a)is met if the decision-maker is satisfied that the manner in which the affairs of thecompany were managed was wholly or partly responsible for the company becominga qualifying company under s 385(1).[72] The submission was made for Mr Toilolo, that the liquidation of the companywas caused not by any mismanagement that can be attributed to Mr Toilolo, but ratherbecause Westpac proceeded against the company under the cross-guarantee. It wasargued that if Westpac had not decided to enforce the cross-guarantee, the companywould not have been liquidated.47 Final minute, n 1 at [4.3].[73] To my mind this argument misses the point. There can be no doubt that theimmediate reason the company was placed into liquidation was because Westpac tooksteps to liquidate it. For my part, I discount the suggestion that declining propertyvalues played a part. There was no evidence to support that assertion made byMr Toilolo and it seems to me to be an ex post facto rationalisation designed to distractfrom his management of the company. This aside, the Deputy Registrar wasendeavouring to determine why the company got itself into a situation where Westpaccould place it in liquidation and whether it got itself into that situation as a result ofmismanagement by Mr Toilolo.48 On the facts of this case, this was clearly the correctapproach. The rather blunt analysis suggested for Mr Toilolo has a distinct air ofunreality. Mismanagement by directors would never fall for analysis under s 385 ifattention is directed only to the immediate trigger for the liquidation.[74] I start by analysing the Deputy Registrar's decision in relation to the fact thatthe company entered into the cross-guarantee in favour of Westpac. Chronologicallythis seems to me to be the best place to start.[75] On 14 February 2012, Mr Toilolo is in his personal capacity, and the companyfor itself, entered into cross-guarantees in favour of Westpac. Under the cross-guarantees Mr Toilolo personally guaranteed the debts of the company and thecompany guaranteed the personal debts of Mr Toilolo. At the time the guarantee wasentered into, Mr Toilolo personally owed Westpac approximately $400,000 under ahome loan facility. The company did not owe anything to Westpac, but it was seekingbanking accommodation up to a maximum sum of $14,000. Under the cross-guaranteeit became contingently liable, not only for the $14,000 it needed to borrow, but alsofor Mr Toilolo's personal indebtedness of $400,000, together with any further moneysthat might become owing by Mr Toilolo to Westpac.[76] In considering whether Mr Toilolo's actions in allowing the company to enterinto the cross-guarantee were mismanagement, the Deputy Registrar had regard toss 131 and 161 of the Act. Broadly, s 131 requires a director to act in good faith inwhat the director believes to be the best interests of the company, and s 161 contains48 At [4.4]-[4.5].specific requirements that must be satisfied where a company proposes entering intoa transaction of this type. First, the Board may only authorise entering such atransaction if it is satisfied that to do so is fair to the company. Secondly, theparticulars of the transaction must be entered in the interests register. Thirdly, thedirectors voting in favour of authorising the transaction must sign certificates statingthat, in their opinion, the transaction is fair to the company and the grounds for thatopinion.[77] As the Deputy Registrar noted, there was nothing to suggest that Mr Toilolocaused a resolution under s 161 to be passed.49 The Deputy Registrar furtherconsidered that even if a resolution had been passed, the cross-guarantee wasnevertheless unfair to the company, because the maximum benefit available to thecompany under the cross-guarantee was $14,000, but in exchange it took on a liabilityof at least $400,000.50[78] The Deputy Registrar in his final minute addressed submissions made onbehalf of Mr Toilolo, and repeated in the hearing before me, namely:(a) that the transaction enabled the company to increase its assets, and thatan improving property market would have resulted in a greater returnto the company; and(b) that the transaction was standard practice.[79] The Deputy Registrar rejected these submissions. In my view, he was correctto do so.(a) In regard to the first argument, there was no evidence as to whether theproperty market was declining or improving. More importantly, thecompany did not increase its assets by entering into the cross-guarantee.It did not at any stage acquire an interest in Mr Toilolo's home or in theterm deposit. The only thing that increased was the company's liability.49 At [11.9].50 At [11.10].Initially it was a contingent liability. When default occurred it becamean actual liability.(b) As to whether or not the transaction was standard practice, the DeputyRegistrar considered that the more usual practice would have been forMr Toilolo to personally guarantee the indebtedness of the company,including if necessary by offering security. Such transactions arecommonplace and, in my view, the Deputy Registrar was right in thisobservation. He went onto say that there was a different dimensionwhen the company was required to guarantee the existing personalindebtedness of its director. 51 I agree.[80] The Deputy Registrar concluded that the entry into the cross-guarantee by thecompany was not fair to it, and was in breach of ss 131 and 161. He considered thatMr Toilolo's actions in causing the company to enter into the cross-guaranteeconstituted mismanagement. Further, the he concluded that this mismanagement wasdirectly linked to the company's failure. He observed as follows:11.18 Irrespective of whether the Company was solvent or not at the time itexecuted the Cross Guarantee, there was mismanagement because thetransaction was unfair to the Company and in breach of s 161. Thatmismanagement is directly linked to the Company's failure. It meantthat the Company became contingently liable for approximately$400,000 of Mr Toilolo's personal indebtedness.11.19 It was certain that if the contingent liability became an actual liabilitythe Company was never in a position to be able to satisfy that debt andthe Company would be wound up as a result. Because the guaranteealso operated as an indemnity Westpac was not required to seekrecovery from Mr Toilolo first and then get the balance from MrToilolo. Westpac could seek recovery of the full debt owed under theCross Guarantee from the Company, or from the Company and MrToilolo at the same time. And in fact demands were made by Westpacon the Company and Mr Toilolo contemporaneously. The failure tomeet the demands ultimately resulted in the Company being woundup.Accordingly, the Deputy Registrar concluded that the causation requirement ins 385(4)(a) was satisfied in relation to this aspect of mismanagement.51 At [11.11]-[11.15].[81] I cannot see any basis on which to criticise the Deputy Registrar's decision inthis regard. It is clear that Mr Toilolo was involved in the management of the company.The company was what is commonly known as a one-man company. Mr Toilolo wasinvolved in all its policy and decision-making in relation to its business affairs.52 Hewas its driving force, and he was directly responsible for it entering into the cross-guarantee with Westpac. He was also responsible for ensuring that it complied withits obligations contained in ss 131 and 161. On the evidence, he failed to do so. Therewas nothing to suggest that entering into the cross-guarantee was fair to the company.[82] The evidence before the Deputy Registrar was, in my judgment, more thansufficient to allow him to be satisfied that Mr Toilolo was responsible for themanagement of the company, that his management of the company, by causing it toenter into the cross-guarantee, was mismanagement, and that that mismanagement waswholly or partly responsible for the company ultimately being liquidated. Mr Toilolobears the onus of persuading me that the Deputy Registrar was wrong, and that I shoulddiffer from his decision. He has failed to discharge that onus.[83] The Deputy Registrar also dealt with the fact that PAYE and GST wereaccruing to the IRD as from May 2013 and July 2013 respectively. Thereafter thecompany made no GST payments and only nominal PAYE payments.[84] The Deputy Registrar's decision in this regard is – to my mind – slightlyconfusing – perhaps because he considered the tax defaults before he considered theWestpac debt. The Westpac debt preceded the tax defaults and logically it fell to beconsidered first. Nevertheless, and this aside, the Deputy Registrar concluded that thenon-payment of GST and PAYE was serious mismanagement, noting that the natureof GST and PAYE is such that there is a degree of trust involved, because the amountsare only ever intended to be held by a company for a short term before being accountedfor to the IRD. Nevertheless, he stated as follows:8.57 It is less clear as to whether this mismanagement was at least partlyresponsible for the failure of the Company. I am inclined to the view52 Commission of Corporate Affairs (Vic) v Bracht (1988) 14 ACLR 78 (VSC) at 733 to 734 and 736;Thompson v District Court at Christchurch [2002] 9 NZCLC 262,824 (HC); Mani v Registrar ofCompanies, above n 22 at [85]-[94].that it does. Because of the conclusions I have reached elsewhere Ihave decided to leave that point open. [85] I am not persuaded by the Deputy Registrar's decision in this regard. I acceptthat the IRD was not the petitioning creditor. Nevertheless, in my view, non-paymentof the PAYE and GST indicated that the company was in even more trouble than itwas as a result of the Westpac default. The inability to pay raised yet again the redflag of insolvency.53 I agree with the Deputy Registrar that non-payment of the PAYEand GST was serious mismanagement. The tax owing to the IRD was a debt owingby the company. The company was placed into liquidation because it was unable topay its debts. The accrued debt to Westpac was the trigger, but the company's inabilityto comply with its tax obligations was part of the problem as well. The company wasequally unable to pay the debt owing from its compliance with those obligations.[86] This leads into the issue of reckless and insolvent trading.[87] MBIE was alleging a breach of s 135 of the Act. Broadly, it provides that adirector of a company must not agree or cause to allow the business of the companyto be carried on in a manner likely to create a substantial risk of serious loss to thecompany's creditors.[88] Here, the Deputy Registrar commented that the solvency of the companyshould have been under consideration before the company got into difficulty with theIRD. I agree.[89] It is clear from the factual material that the company traded at a loss from theoutset. It may or may not have been insolvent when it entered into the cross-guarantee.It was certainly insolvent once the contingent liability under the cross-guaranteebecame an actual liability in July 2012, when the notices issued by Westpac unders 119 of the Property Law Act expired unremedied. There was then an event of defaultunder the loan documents. From that point onwards, the company was indebted toWestpac for a sum in excess of $400,000. It was, as the Deputy Registrar noted,53 Syntax Holdings (Auckland) Ltd (in liq) v Bishop [2013] NZHC 2171 at [12]; Whisk Deli Co Ltd(in liq) v Williams [2016] NZHC 2345; Superior Blocklayers Ltd (in liq) v Bacon [2016] NZHC2601, (2016) 14 TCLR 425 at [42]-[48]; Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014]NZHC 1483 at [111]; Clarke v Registrar of Companies, above n 28 at [14]-[15].hopelessly insolvent and it should have ceased trading. There was no evidence tosuggest that Mr Toilolo gave any consideration to the situation. Rather, he allowedthe company to continue trading, and thereafter, the IRD obligations started to accrue.Mr Toilolo breached s 135.[90] Had Mr Toilolo carried out the sober headed assessment referred to by theDeputy Registrar, he must have appreciated from an early stage and at the latest byJuly 2012, that the company's position was going from bad to worse. If he had actedin accordance with his obligations as a responsible director, he would have caused thecompany to cease trading. His failure to do anything about the company's mountingindebtedness was, in my view, a factor which led to the company's liquidation.Mr Toilolo allowed the company to continue trading when it was insolvent. This wasserious mismanagement. I agree with the Deputy Registrar's decision in this regard,and again Mr Toilolo has not persuaded me that the Deputy Registrar's decision waswrong.[91] The failure to keep proper accounting and company records was alsomismanagement.[92] In this regard, the Deputy Registrar referred to ss 189 and 194 of the Act, whichrequire various documents to be created and kept at the registered office of thecompany, and also that various accounting records be kept by the company.[93] The liquidator was unable to find many of the documents which should havebeen kept by the company. Mr Toilolo asserted that he had some of them at his privatehome, but he was unable to produce them.54[94] The Deputy Registrar was, in my judgment, entitled to infer that the documentsdid not exist. He was also entitled to find that they had not been kept as required bythe Act. As the Deputy Registrar observed, the keeping of accurate records is a corecompetency issue for an accountant, and as noted Mr Toilolo was an accountant.5554 At [9.1]-[9.8].55 At [9.19].[95] In my judgment, the evidence before the Deputy Registrar was sufficient toenable him to be satisfied that Mr Toilolo's failure to keep, and/or to keep in the properplace, the proper company records was at least a partial reason for the insolvency. Iagree with the Deputy Registrar when he noted:9.23 I am satisfied that inadequate records is at least a partial reason for theinsolvency of the Company. Without having accurate financialinformation on a regular and up to date basis, a director cannotascertain the financial position of a company at any given point intime. If a director cannot properly assess the financial position adirector is more likely to make poor or flawed decisions. Once thathappens it is likely those poor decisions will impact on the financialperformance of a company and that will in turn adversely affect itscontinued existence. It is similar to a ship's captain having to navigatereef infested waters without accurate charts.Again, Mr Toilolo has failed to persuade me that the Deputy Registrar erred in hisdecision in this regard.[96] Finally, in this regard, the Deputy Registrar determined that another instanceof mismanagement was that Mr Toilolo did not sufficiently monitor the managementof the company, and that this was at least a partial reason for the company's failure.He referred to a statement which Mr Toilolo made to the liquidator – namely that heundertook further study at Auckland University, and that this distracted him frommanaging the affairs of the company. It has not been suggested that this statement wasnot made, or that it was recorded inaccurately by the liquidator.[97] It was argued for Mr Toilolo that the Deputy Registrar did not "demonstrate"(by which I assume was meant consider and find) any causal link between Mr Toilolo'sattendance at Auckland University, and the losses suffered by the company. Withrespect, that submission again misses the point. What was at issue was whether or notMr Toilolo "took his eye off the ball", and whether the fact that he did so, assumingthat the Deputy Registrar was to so find, was wholly or partly responsible for thecompany being put into liquidation.[98] Here, the evidence from Mr Toilolo, was that he undertook a prolonged periodof study at Auckland University, and that that period of study distracted him frommanaging the affairs of the company. Mr Toilolo was solely responsible for themanagement of the company. There was no-one else looking after its affairs in hisabsence. The company's affairs were in a dire state. The Deputy Registrar wasentitled to conclude that Mr Toilolo did not sufficiently monitor and manage thecompany, that this was mismanagement and that this was a partial reason for thecompany's failure. Again, Mr Toilolo has not persuaded me that the Deputy Registrarerred, or that I should differ from his decision in this regard.[99] In summary, I am not persuaded that the Deputy Registrar's factual analysis orfactual findings were wrong. I now turn to the exercise of the discretion.Discretion[100] The discretionary powers conferred on the Deputy Registrar, fall to beexercised for their statutory purpose – namely to exclude from company managementthose who are unsuited to it.56[101] Here, the Deputy Registrar broke his consideration of the discretion down intotwo parts – first, whether or not he should impose a prohibition at all, and secondly,what the term of any prohibition should be. In both contexts, the Deputy Registrarsaid that there was no limit to the factors he could take into account.[102] The Deputy Registrar can take a wide range of factors into account inexercising his discretion whether or not to prohibit. As long as the consideration isconfined to the statutory purpose, all of the director's attributes and conduct in officecan be taken into account.57[103] The Deputy Registrar's assertion that there was no limit to the factors he couldtake into account in deciding whether to prohibit Mr Toilolo cannot be correct. It isonly those matters which are relevant to the statutory purpose which can be taken intoaccount. The statutory purpose is wide. It allows for a number of matters to be takeninto consideration. The Deputy Registrar was not confined to the conduct that resultedin the company's insolvency; he was entitled to take into account all of Mr Toilolo'sattributes and his conduct in office.56 See Davidson v Registrar of Companies, above n 22 at [91], [97] and [100].57 At [97].[104] Unfortunately, the Deputy Registrar, after stating that there was no limit to thefactors he could take into account, did not elaborate. Rather, he said that "many" ofthe factors he took into account were set out "in the paragraph below".58 Theparagraph below itemised as factors the nature of the mismanagement (which theDeputy Registrar concluded was at the higher end of the scale), and that Mr Toilolowas responsible for it. It also referred to the risk to the public, deterrence and standardsetting.59 It would have been more helpful if the Deputy Registrar had set out allfactors that he took into account, but I do not consider that exception can be taken tothose factors he did identify.[105] The Deputy Registrar repeated his mistake when he turned to consider the termof the prohibition he had decided to impose. Again, he stated that there was no limitto the factors he could take into account.60 For the reasons I have set out above, in myjudgment, that statement was in error. The discretion has to be exercised in accordancewith the purpose set out in the Act. Again, the range of matters that might be relevantto the term of a prohibition order is wide-ranging. In my judgment, relevant factorscan go beyond conduct in office. For example in this case, in my view, in consideringthe term of any prohibition, the Deputy Registrar could properly consider Mr Toilolo'sprevious business failures, his financial competence in business matters, hisbankruptcy and the like. All of these matters go to what period of prohibition wasappropriate in fulfilling the statutory purpose.[106] In my view, there can be no criticism of the factors set out by the DeputyRegistrar in his decision in this regard – namely risk to the public, the consequencesfor Mr Toilolo, the purpose of the Act, the setting of standards, deterrence, the loss tocreditors, Mr Toilolo's bankruptcy and the maximum period of prohibition permitted.[107] I do however consider that the Deputy Registrar erred in some significantrespects.58 At [15.9].59 At [15.10].60 At [16.1].[108] First, the Deputy Registrar said that he did not see any lack of timeliness inimposing the prohibition as being relevant.61 I disagree. As I noted above at [13]-[17], there was considerable delay in bringing the proposed prohibition before theDeputy Registrar for consideration. The company was placed into liquidation inSeptember 2014. At that point the company qualified under s 385(1) and Mr Toilolo'smanagement of the company became open for investigation under s 385. Theliquidator's final report was released on 28 September 2015, and the company wasremoved from the register on 4 November 2015. This notwithstanding, nothing thenhappened for seven months. The liquidator delayed, but the Registrar then delayedfurther in signing and serving on Mr Toilolo the notice pursuant to s 385(5) of the Act.Only in January 2018 did the Registrar write to the Deputy Registrar seeking hisdecision. The Deputy Registrar responded promptly, but that does not cure the earlierdelays. The final minute was only issued some four years after the company wasplaced into liquidation. There is no explanation for these delays, and to my mind, theytell against any argument that risk to the public, deterrence and standard setting wereparticularly important factors in this case. If these had been important matters, theproposed prohibition should have been pushed on for determination much morequickly.[109] Secondly, in my view, the Deputy Registrar erred in law in his considerationof the fact that Mr Toilolo was prohibited from being a director of a company whilehe was a bankrupt. The Deputy Registrar noted that the control of bankrupts and thecontrol of persons prohibited under s 385 is under different legislation with differentpurposes. That is undoubtedly correct, but the reality remains that Mr Toilolo wasprohibited from being a director while he was bankrupt.62 As was noted by the OfficialAssignee in the letter which started the s 385 enquiry, the intention at the outset seemsto have been to increase the period of prohibition beyond the three years covered bythe bankruptcy – see above at [11]. It was only after Mr Toilolo was discharged frombankruptcy that he was required to face a further investigation, arising out of the samecompany collapse. As a result of that further investigation he has been prohibited frombeing a director for a further two and a half years. The Deputy Registrar did say thatthe "period of bankruptcy" was relevant and that it should be taken in to account, but61 At [16.17].62 Companies Act 1993, s 151(2).he did not elaborate further.63 In my view, it was an important factor in this case, andit is not obvious that the Deputy Registrar made any allowance for it.[110] Finally, in my view, the Deputy Registrar erred in his consideration of themaximum permitted period of prohibition. He stated that the maximum period ofprohibition he could impose was one of 10 years.64 Mr Toilolo's conduct in managingthe company occurred over the period November 2011 through until September 2014.For almost all of that period, the maximum period of prohibition available under s 385was five years. The maximum was only increased to 10 years as from 1 April 2014by the Financial Markets (Repeals and Amendments) Act 2013. The Deputy Registrarseems to have been aware of the issue. He stated that even if the maximum period ofprohibition available had been only five years, that would only have had relevance ifhe had wished to impose a penalty of a period of prohibition exceeding five years. Heseems to have considered that the change in the legislation was irrelevant, because hewas proposing a period of prohibition of less than five years. I do not follow this logic.In determining what period of prohibition was appropriate, it was, in my view,necessary to consider what was the maximum available at the time of themismanagement, and then determine to what extent the mismanagement foundrequired prohibition, within the ceiling then imposed by the legislation. In myjudgment, the Deputy Registrar should have taken into account the fact that most, ifnot all, of Mr Toilolo's conduct occurred when the maximum permitted period ofprohibition was five years, and he should have approached the exercise of hisdiscretion as to term by reference to that five year limit. He should also haveacknowledged that Mr Toilolo had been precluded from being a director of a companywhile he was a bankrupt, and that the additional prohibition of two and a half yearsthat he proposed would, in effect, result in a total period of prohibition of some fiveand a half years. He did not so, and in my judgment, he erred in law in this regard.[111] Taking these various matters into account, I am not persuaded that any furtherperiod of prohibition beyond that consequent on the bankruptcy was required.Mr Toilolo was prohibited from directing a company while he was bankrupt. Hisbankruptcy lasted for three years. The maximum permitted period when most, or if63 At [16.40].64 At [16.18].not all, of the acts of mismanagement occurred was one five years. The Registrar wasguilty of considerable delay in putting the matter before the Deputy Registrar fordecision, and to my mind, that undermines any argument that there was a risk to thepublic, that deterrence was required, or that further prohibition was relevant tostandard setting in this case.Result[112] The appeal is allowed in part. The period of prohibition of two and half yearsput in place by the Deputy Registrar is set aside.[113] Issues as to costs do not arise. As noted above, the Registrar did not appear asa party. There is no order as to costs.____________________________Wylie J