WATTS & HUGHES CONSTRUCTION LIMITED v BIALA [2020] NZHC 3041

WATTS & HUGHES CONSTRUCTION LIMITED v BIALA [2020] NZHC 3041 [17 November 2020]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2018-409-106[2020] NZHC 3041UNDER the Companies Act 1993BETWEEN WATTS & HUGHES CONSTRUCTIONLIMITEDPlaintiffAND VIJAY BIALADefendantHearing: 3 August – 6 August 2020Counsel: D J Jackson for the PlaintiffS Cottrell for the DefendantJudgment: 17 November 2020JUDGMENT OF CULL J[1] A national construction company sues a director of a café and wine company(in liquidation) for $39,629.88 plus interest for reckless trading under s 135 of theCompanies Act 1993 (the Act). It is claimed the director carried on the business of thecompany in a reckless manner and did not make proper provision for the last of theconstruction costs for a fit-out of the company's café and wine bar premises.[2] The construction company, Watts & Hughes Construction Ltd (Watts &Hughes) claims against Vijay Biala, the director of the liquidated company La Di DaExpresso & Wine Bar Ltd (the Company). Watts & Hughes alleges that the Companydid not have the funds to meet the fit-out costs, either at the time it engaged Watts &Hughes or throughout the time of its short trading life. Watts & Hughes claims thatMr Biala carried on the business of the Company in a manner likely to create asubstantial risk of serious loss to Watts & Hughes, because the Company did not havethe funds to pay the construction costs at the time that they were incurred, at the timeof the final invoice on 12 November 2014, or in February 2015 when a new agreementbetween the parties was allegedly reached, and instead paid other creditors inpreference to the pre-existing debts of Watts & Hughes.[3] Mr Biala rejects the allegation that the Company was insolvent at the time itengaged the plaintiff or throughout the construction of the fit-out. By the end of April2015, however, the financial situation for the Company was untenable and it ceasedtrading. Mr Biala says that Watts & Hughes breached its construction agreement byfailing to complete the fit-out by 20 September 2014 and incurred unauthorised costsover and above the contract price. The unexplained delays by Watts & Hughes,Mr Biala says, prevented the Company from trading and caused loss to the Company.Background facts[4] Since 2000, Mr Biala and his family had operated a successful restaurantbusiness known as Maharaja, which was the trading arm of their company Sher-e-punjab Ltd. However, as a result of the Christchurch earthquakes in 2010 and 2011,the Maharaja premises were destroyed. After a period of almost two years of notoperating at all, the Biala's found and moved into a new premises for Maharaja inSeptember 2012.The Company and fit-out[5] On the rebuild in Victoria Street, Christchurch, the Bialas decided that theirfamily business could expand and incorporated the Company on 15 July 2014. Thedefendant, Mr Biala, was the sole director. The Company was operated as a familybusiness, supported by Sher-e-punjab and the Maharaja restaurant business. The Bialafamily located newly built premises in Victoria Street, which required to be fitted out.They completed budgets based on their experience and expected trading, and theysought professional advice in relation to those budgets.[6] The Bialas agreed to lease the new premises from 25 August 2014 for an initialterm of eight years. Sher-e-punjab signed the deed of lease as the tenant and Mr Bialaand his son, Rajiv, guaranteed the lease. They employed Stufkens and Chambersarchitects to design a complete fit-out and engaged them to manage the tender processand assist in the construction of the fit-out. Rajiv had worked on the fit-out for thenew Maharaja premises with Stufkens and Chambers architects. He emphasised in hisevidence that the architects were instructed that the budget and the timeframe had tobe tightly controlled so that the project was completed on time and within budget.[7] Once the designs for the fit-out had been completed, the architects receivedthree quotes from the tender process. Watts & Hughes was the successful tendererwith a tender price of $124,000 plus GST and an expected construction timeframe offour weeks. The completion date was to be 20 September 2014. Rajiv met withMr Pritchard from Watts & Hughes on 7 August 2014, stressing that they did not wantany budget blowout. Although instructions were given by the Bialas to their architectto draw up a contract, the project started without the contract having been signed.[8] From the initial anticipated completion date of 20 September 2014, the fit-outprocess was pushed out to 30 September, then to 17 October with a plan to open byCup Week in November. Cup Week is known as one of the busiest trading times inChristchurch. This did not eventuate. The doors of the café/bar finally opened at thebeginning of December. The parties disagree on the actual date of completion of theconstruction, with Watts & Hughes saying it was completed in November 2014 andMr Biala saying it was December 2014. The Bialas say the delays prevented theCompany from trading and contributed to its financial losses. Watts & Hughes say thedelays were caused by the contractors arranged by Rajiv.[9] The Bialas also dispute the amount claimed by Watts & Hughes. On5 November 2014, Watts & Hughes sent an estimated final account claim with a tradesummary including variations totalling $163,013.89 plus GST to the Biala's architectand Rajiv. The Company's architect queried some of the items in relation to thevariations, expressing a concern that extra items had been listed but credits had not.[10] On 12 November 2014, a revised final account estimate for the fit-outconstruction and installation was sent by Watts & Hughes to both the Biala's architectand Rajiv in the amount of $147,488.93 plus GST. This totalled $169,612.26. Watts& Hughes pressed for payment of the variations and GST.[11] On 8 December, Watts & Hughes advised Mr Biala that the latest payment ofmonies had been received from the third-party financier FlexiGroup and the balanceowing was now $48,021.67. In response, Rajiv queried why the project was overbudget and asked why he had not been advised of variations before proceeding further.On 9 December, Mr Michel from Watts & Hughes, referring to the architect's fouradvice notes, advised the remaining variations were done by emails through thearchitect or through Rajiv.The disputed "agreement"[12] An email exchange between the Bialas and Watts & Hughes on the outstandingpayments is at the heart of Watts & Hughes' claim in this hearing. On 12 February2015, following a meeting with Rajiv, Mr Gamlen of Watts & Hughes emailed Rajivseeking confirmation of his agreement on what was owed and how it was to be met.The proposition was:(a) Silverchef (the financer) is to pay $12,908.19 including GSTimmediately;(b) this left a final account balance of $39,629.88 including GST owing;(c) payments of $4,600 including GST are to be made monthlycommencing 20 February 2015;(d) the balance of the account is to be settled by 20 May 2015;(e) interest is to be charged at two per cent per month on the balance owingfrom 20 December 2014;(f) any collections costs incurred after 20 May 2015 are to be met by theCompany; and(g) Watts & Hughes requires a signed personal guarantee from Rajiv.[13] On 17 February 2015, Rajiv sent an email which read: "Just confirming this isokay".[14] Watts & Hughes relies on Rajiv's email response as an agreement by theCompany to pay $39,629.88 by May 2015 and $12,908.19 immediately. Rajivstrongly refutes that this was such an agreement. At its highest, Rajiv says the emailexchange indicated that the Company would pay, but it was not an agreement or anadmission of the amount remaining payable. The amount is disputed.Summary of payments[15] A summary of the dates of invoices and payments received were agreedbetween the parties and can be summarised as follows:Date Invoice No. AmountInvoicedDate Due Date Paid AmountPaid26.09.14 2196 96,563.90 20.10.1430.10.14 25,000.0003.11.14 20,000.0006.11.14 51,000.0028.10.14 2359 28,979.20 20.11.1405.12.14 28,979.2030.10.14 2464 48,021.67 20.11.1411.02.15 2814 12,908.19 07.12.1427.02.15 12,908.19[16] It is agreed between the parties that the payments made by or on behalf of theCompany total $137,887.21 inclusive of GST. As the table shows, these paymentswere made over the period from 30 October 2014 to 27 February 2015. Two of thepayments were made on behalf of the Company by third party equipment financers,namely $28,979.20 on 5 December 2014 and $12,908.19 on 27 February 2015.[17] On 5 May 2015, Watts & Hughes served a statutory demand on the Companyin the amount of $39,629.88 plus interest, based on the agreement referred to above.On 20 May, a cheque for $5,000 was given to Watts & Hughes but it was dishonouredwhen presented.[18] The Company ceased trading around June 2015 and was placed in liquidationon 1 October 2015 on Watts & Hughes' application. There were two principalcreditors with debts outstanding at the time the Company went into liquidation. Watts& Hughes had around $39,000 outstanding and Sher-e-punjab was owed over$200,000.The claim[19] By a Deed of Assignment dated 16 June 2017, the liquidator of the Companyassigned all rights to Watts & Hughes to bring a claim against the director of theCompany. Notice of the assignment was given to Mr Biala with the High Court'sapproval of the assignment on 8 February 2018.[20] Watts & Hughes issued proceedings on 21 February 2018 against Mr Biala,alleging that he carried on the business of the Company in a manner likely to create asubstantial risk of serious loss to the plaintiff and did not make proper provision to payfor the debt of Watts & Hughes at the time it was incurred. Further, no steps weretaken to arrange for payment during the period of the Company's trading. Watts &Hughes seek compensation under s 301 of the Act for $39,629.88.1Reckless trading[21] Section 135 of the Act is the governing legislative provision for a claim inreckless trading. It provides:135 Reckless tradingA director of a company must not—1 The plaintiff's statement of claim dated 21 February 2018 sought payment of $44,382.96. At thehearing, the claim was for $39,629.88 plus interest and costs.(a) agree to the business of the company being carried on in amanner likely to create a substantial risk of serious loss to thecompany's creditors; or(b) cause or allow the business of the company to be carried onin a manner likely to create a substantial risk of serious lossto the company's creditors.In interpreting and applying this provision, both Counsel relied on the summary of thecase law in Mainzeal Property and Construction Ltd (in liq) v Yan, which is underappeal to the Court of Appeal.2[22] Since the hearing, the Supreme Court issued its judgment in Madsen-Ries andLevin as liquidators of Debut Homes Ltd (in liq) v Cooper (Debut Homes Ltd).3 TheCourt found that Mr Cooper continued trading in circumstances where he knew thatDebut Homes Ltd was unsalvageable and continued trading would lead to serious lossto creditors. In reaching its finding, the Supreme Court applied the test of "substantialrisk of serious loss" to its consideration of reckless trading, finding that $300,000 wasa "serious loss" and that the loss to creditors "was not merely a "substantial risk". Itwas a certainty."4 The Court also held that s 135 is necessarily forward-looking to lossin the future. As a matter of principle, if a company reaches the point where continuedtrading will result in a shortfall to creditors and that company is not salvageable, thencontinued trading will be in breach of s 135 of the Act.5 The Court did not engagewith the extent to which s 135 may inhibit taking ordinary and legitimate businessrisks or continued trading in the hope of salvage.6 The authorities dealing with suchfactual circumstances were not engaged or overruled.72 Mainzeal Property and Construction Ltd (in liq) v Yan [2019] NZHC 255 at [150]-[168].3 Madsen-Ries and Levin as liquidators of Debut Homes Ltd (in liq) v Cooper [2020] NZSC 100.4 At [70].5 At [69] and [174].6 At [69].7 Re South Pacific Shipping Ltd (in liq): Traveller v Lӧwer (2004) 9 NZCLC 263,570 (HC); and seefootnote 83 in Debut Holmes Ltd, above n 3, at [69] where the Court specifically noted: "We donot need to decide whether William Young J's approach [in Re South Pacific Shipping, thatcontinued trading in the hope of salvage should last a matter of months only] applies to s 135 as itis common ground that Debut was not salvageable."[23] The principles of s 135 have been well canvassed in a number of other leadingauthorities.8 In Mason v Lewis, the Court of Appeal considered whether s 135 isbreached when the company continues to trade when the director knows that it isinsolvent.9 The Court emphasised that it is not mere risk that qualifies. There mustbe a "substantial risk of serious loss."10 The Court went on to define the essentialpillars of s 135 as follows:11[51] The essential pillars of the present section are as follows:• the duty which is imposed by s 135 is one owed by directors to thecompany (rather than to any particular creditors);• the test is an objective one;• it focuses not on a director's belief, but rather on the manner in whicha company's business is carried on, and whether that modus operandicreates a substantial risk of serious loss; and• what is required when the company enters troubled financial waters iswhat Ross accurately described as a "sober assessment" by thedirectors, we would add of an ongoing character, as to the company'slikely future income and prospects.[24] The question of what is a substantial and illegitimate risk has exercised thecourts, with approval being given to O'Regan J's articulation in Fatupaito v Bates.12He said that where a company has little or no equity, directors will need to considervery carefully whether continuing to trade has realistic prospects of generating cashthat will service both pre-existing debt and meet the commitments that such tradinginevitably attracts.13[25] In Re South Pacific Shipping Ltd (in liq) William Young J canvassed the typeof material considerations that may be taken into account in assessing the legitimate8 For example, Jordan v O'Sullivan HC Wellington CIV-2004-485-2611, 13 May 2008; Re SouthPacific Shipping, above n 7; Fatupaito v Bates [2001] 3 NZLR 386 (HC); and Mason v Lewis[2006] 3 NZLR 225 (CA).9 Mason v Lewis, above n 8.10 At [47]-[50].11 At [51].12 Fatupaito v Bates, above n 8, at [67], cited with approval in Mason v Lewis, above n 8, at [50].13 At [67].and illegitimate business risks.14 He emphasised that a company does not have tocease trading the moment it becomes "balance-sheet" insolvent.15No-one suggests that a company must cease trading the moment itbecomes insolvent (in a balance sheet sense). Such a cessation ofbusiness may inflict serious loss on creditors and, where there is aprobability of salvage, such loss can fairly be regarded as unnecessary.The cases, however, make it perfectly clear that there are limits to theextent to which directors can trade companies while they are insolvent(in the balance sheet sense to which I referred) in the hope that thingswill improve. In most of the cases, the time allowance has beenlimited, a matter of months.[26] As noted above, the Supreme Court in Debut Homes Ltd did not engage withor disturb the observation which William Young J made, when he suggested thatcontinued trading in the hope of salvage should last a matter of months only, as theCourt found that the director knew that Debut Homes Ltd was not salvageable.William Young J's approach to s 135 remains applicable therefore, where appropriate.[27] From the authorities, the following can be gleaned:(a) the threshold of s 135 is high;(b) the way in which the business of the company is undertaken,particularly when the company is insolvent, must be "likely" to giverise to a "substantial" risk of "serious" loss to the company's creditors;(c) the "substantial risk of serious" loss includes a consideration oforthodox commercial practices;16(d) if a company is not salvageable and continues trading, resulting in ashortfall to creditors, such trading will be in breach of s 135; and(e) section 135 is forward-looking to future losses.14 Re South Pacific Shipping, above n 7, at [125].15 At [125(3)].16 Re South Pacific Shipping, above n 7, at [125(4)]; and Mainzeal, above n 2, at [165].[28] Here, the consideration involves the commercial realities of a start-upcompany. I found the summary of the authorities by Clifford J in Jordan v O'Sullivanto be of assistance when he undertook his assessment of the risks associated with astart-up business.17 He reminded himself of the difference between negligence (whatreasonable directors would have done or foreseen) and reckless trading, which isdeserving of a penalty.18 The Judge concluded in that case:19 the directors did undertake a sober assessment of the business decisionsinvolved in the entering into each of the Specified Leases. They did investigateeach of the car parking sites involved, they reached a view as to the revenuethe sites could generate – based admittedly on their own assessment of likelysupply and demand factors – and they negotiated the terms of the leases ineach case over some period of time. That in hindsight they under-estimatedthe risks involved in the start-up phase of each of those lease operations isnot, in my judgment, a sufficient basis in this case to conclude that theybreached the duties they owed to Condrens. In reaching that conclusion, andas regards the capitalisation of Condrens, it is important here that the directorshad, very recently and in their capacity as shareholders, demonstrated awillingness to support the company's trading by the provision of furthercapital.[Emphasis added]Issues for determination[29] The parties were agreed that the following are the issues for determination:(a) Did Mr Biala at any time agree or cause or allow the business of theCompany to be carried on in a manner likely to create a substantial riskof serious loss to the Company's creditors, in breach of s 135 of theAct?(b) If Mr Biala was in breach of s 135:(i) did that cause the plaintiff loss?(ii) if so, was that loss "serious" for the purposes of s 135?17 Jordan v O'Sullivan, above n 8.18 At [46].19 At [254].(iii) if so, should an order for compensation be made under s 301 ofthe Act?[30] Each of the issues are canvassed below.Was Mr Biala in breach of s 135?[31] Mr Jackson for Watts & Hughes submits that s 135 applies from the inceptionof the Company and that both balance sheet and cash flow insolvency is made out onthe agreed facts. He submits that solvency, or rather a lack of it, is central to the causeof action in s 135, because a director who takes risks in "troubled waters" is riskingthe creditor's money, not the shareholder's capital.20 The Company, he says, couldnot pay its debts as they fell due and in this case, Mr Biala made a deliberate decisionnot to make provision to pay the plaintiff, whilst electing to fund the Company to payits immediate and trade creditors only. He submits this is the classic "reckless trading"case where the Company, whilst in troubled waters, was managing to pay itsimmediate and trade creditors but was otherwise ignoring the significant liabilityalready incurred to the plaintiff.[32] Mr Cottrell for Mr Biala submits that s 135 is only engaged where risk-takingby the Company is causative of serious loss. That risk, he submits, will arise onlywhen potential insolvency is an issue. Here, the critical decision by Mr Biala was thedecision to open the new restaurant and engage Watts & Hughes to complete the fit-out of the restaurant, which occurred before the Company started trading. He submitsthe decision was reasonable in all the circumstances and was made with the benefit ofappropriate professional advice and with sufficient financing in place. There isnothing out of the ordinary in these circumstances which takes this case to the highthreshold of reckless trading in s 135.[33] The Court's assessment involves a start-up company. The starting pointtherefore is Mr Biala's decision to open a new restaurant, sign a lease, and undertakethe new Company's operation in new premises. As the authorities emphasise, the testis an objective one, which focuses not on the director's belief but on the manner in20 Mainzeal, above n 2, at [164].which a company's business is carried out and whether that creates a substantial riskof serious loss.21 The question is whether the director undertook a sober assessmentas to the company's likely future income stream and whether there were reasonableassumptions underpinning the director's forecast of future liquidity.22 In order toundertake this assessment, it is important to view the facts objectively and in context.Relevant facts[34] The Bialas were experienced business people in this area. They had run asuccessful restaurant business until the premises were destroyed by the earthquakes.They knew what they were doing and had recovered with another successful business,Maharaja, run through their company Sher-e-punjab.[35] They then saw an opportunity in Victoria Street, Christchurch, an up-and-coming area at the time, and decided that their business could expand. It was a familyoperation. They decided the new business would be supported by the existing businessand would be operated by a family member. They found a brand new premises, whichwas available for lease, but it needed to be fitted-out. They completed budgets basedon their experience and the expected future trading. They sought professional adviceon budgets and architectural design.[36] The Bialas agreed to lease the new premises for an initial term of eight years,with a commencement date at the end of August 2014. They were committing to along-term operation, and the agreement to lease was entered into by their existingcompany, Sher-e-punjab. Plainly, if the Company was to trade as a wine bar and café,it needed the commercial lease to conduct its future trading.[37] Before commencing the Company's operation, they took professional advice.Although the Bialas were experienced in the restaurant trade, they had no experienceas builders and with an empty shell requiring a complete fit-out and kitchen, theysought professional help. They engaged Stufkens and Chamber architects to managethe tender process and to assist in the construction process. As noted, they instructed21 Mason v Lewis, above n 8, at [51].22 At [48].the architects that they wanted the budget and schedule to be tightly controlled so therewould not be budget or timeframe blowouts. They accepted Watts & Hughes' tenderprice of $124,000 plus GST. Their intention was to have the Company trading inSeptember 2014.The start-up decision[38] A matter of contention between the parties was whether there was a sufficientfunding facility or finance for the Company to access sufficient capital funding tonegate the risk of serious loss to creditors. The Bialas arranged finance throughFlexiGroup and Silverchef, financiers used in the restaurant trade. Silverchef agreedto provide a facility of up to $80,000, and Watts & Hughes invoiced Silverchef directlyin relation to that facility. The FlexiGroup facility was up to $35,000 and it too wasdedicated to the fit-out work. Sher-e-punjab also had a $40,000 facility with ANZ thatwas able to be drawn down and was intended to be used to pay part of the fit-out costs.[39] At the time of making the decision to fit out the leased premises then, Mr Bialaand the Company had at least $155,000 worth of finance available. In addition, afurther facility of up to $60,000 was organised with AABAAS finance and Sher-e-punjab supplied over $200,000 to the Company. As described above, Watts & Hughesreceived $137,000, which is almost the original tender price plus GST.[40] It is not disputed that the Company became insolvent and ceased tradingaround June 2015, although the exact date is not agreed by the parties. The questionis whether, prior to that point, Mr Biala carried on the Company in a manner likely tocreate a substantial risk of serious loss to its creditors. In other words, did the potentialinsolvency become an issue such that the Company's continued trading entered intothe "troubled waters" of insolvency, near insolvency or doubtful solvency where acontemplated payment or other cause of action would jeopardise its solvency.2323 Mainzeal, above n 2, at [164]; and Nicholson v Permakraft (New Zealand) Ltd (in liq) [1985] 1NZLR 242 (CA) at [249].[41] The only evidence relating to the Company's solvency at the time of makingthe decision to engage Watts & Hughes is from the Company's accountant, Mr Shi.He said:At the start of the venture the Company is certainly solvent in terms of thefunding that's available to it, comparing to the budgeted construction costs,budgeted fit-out costs. Later on, because of the delays and the budget blowout, it may have put the business into a more difficult trading situation.[42] Mr Shi described the Bialas as ready "to grab onto an opportunity they saw."He noted the Company sought accountancy advice in terms of its business focus plans,cash flow and funding options, which in his opinion did not equate to Mr Biala chasinga "dream". He rejected Mr Jackson's proposition that the Company accessing loansfrom a third-tier finance company was "desperate". Mr Shi reinforced that there is norequirement to choose a banking institution for the source of funding and said it is"typically quite difficult for even [those with an] established history in the hospitalityindustry" to get funding for a new venture.[43] Mr Shi concluded that on the basis of the funding received and the initial priceof the fit-out, as well as significant amounts of shareholder support from Sher-e-punjab, appropriate planning was undertaken to pay for the fit-out work with a marginfor buffer. He conceded that with the benefit of hindsight it is apparent a biggercontingency margin was required, but Mr Shi did not consider Mr Biala's actions tobe reckless.[44] Mrs Brewster, the accountant for Watts & Hughes, assessed that the Companywas trading while insolvent. It did not have access to sufficient capital funding, in herview, to negate the risk of serious loss to creditors. Her evidence was that the absenceof a shareholder current account confirms the lack of shareholder capital introducedand the reliance on terms of finance brought the business conduct into question. Shesays that it must have been plain to the Company that it did not have the funds to payWatts & Hughes and this is evidenced by having to access expensive finance early on,such as from the third-tier lender Quick Finance, secured by two second mortgagesover properties. While the Company met its immediate trade and supply creditors, itsreliance on debt funding and its lack of capital support meant that the risk to creditorsof non-payment was real. Mrs Brewster says this was borne out by the Company'sultimate failure. In summary, her evidence is that the Company entered into "troubledwaters" when it was forced to apply for equipment and third-tier finance in order topay the first payment claims from Watts & Hughes and those submitted thereafter.[45] Mrs Brewster also rejected the suggestion that the delays in the fit-outcompletion, which meant the Company could not trade at the most profitable time inChristchurch, contributed to the Company's ultimate failure. The Company had"bitten off more than it could chew", to use Mr Jackson's wording, and this shouldhave been obvious to Mr Biala when the Company was looking at third-tier lenders topay part of the first payment claim, namely 67 per cent of the fit-out costs to Watts &Hughes.[46] On questioning, Mrs Brewster could not comment on the Company's solvencyat the time the initial decision was made to open the wine bar and café, but qualifiedher evidence to say that her view of the insolvency of the Company was limited to the31 March 2015 balance sheet date.[47] Both accountants agreed, however, that there was nothing in the bankstatements or other records of the Company to indicate recklessness or the sort ofbehaviour that might otherwise be of concern, like large amounts of funds beingremoved from the business, extravagant lifestyle expenses or expensive vehiclefinance.[48] The decision to engage Watts & Hughes to enable the new Company tocommence trading was a decision that involves ordinary and legitimate business risks.In contrast to the director's decision in Debut Homes Ltd to continue trading when itwas a certainty that there was going to be serious loss to creditors, this case does notcompare. The decision that incurred the loss to Watts & Hughes was not a decisionthat was reckless in these circumstances. This was a start-up company and, as inJordan v O'Sullivan, Mr Biala's conduct did not depart markedly from orthodoxbusiness practice involving extensive or unusual risk to creditors.24 For that reason, Ido not find the start-up decision to be reckless.24 Jordan v O'Sullivan, above n 8.[49] This Court in Mountfort v Tasman Pacific Airlines of New Zealand Ltdobserved:25The obligation to maintain solvency could not be absolute, because that woulddestroy the very justification for limited liability which requires the protectionof directors who, acting reasonably and in good faith, are unable to preventfailure that is both a regular fact of business life and the justification forlimited liability.This accords with the evidence of Mr Shi, who considered that the Company was notchasing a "dream" without an assessment and calculation of the future risks.[50] The Biala family were experienced restauranteurs and had planned for andcalculated the most profitable trading times for the Christchurch hospitality industry,based on their experience. With the financial support from Sher-e-punjab, theCompany had sufficient funding available to pay for the fit-out on the tender pricethey accepted. They stipulated to the architect that the end-date was important as theywanted to start trading at the most beneficial time of the year, from Cup Week toChristmas. They accepted Watts & Hughes' pricing and completion date on that basis.[51] I consider, therefore, that the decision to commence this new small businessand to commission Watts & Hughes to complete the fit-out was not likely to create asubstantial risk of serious loss to creditors, such that it was "reckless" in terms of s 135.I reject the plaintiff's claim that the Company was in "troubled waters" at the outset.Mrs Brewster could not support that contention at the time of the initial decision,although she was critical of the Company's lack of capital support and its fundingarrangements. Mr Biala made a calculated assessment of future risk, relied on theback-up support of the related family company and started a new venture. This wasnot reckless. The business ultimately failed, but applying the principles from theauthorities, that does not equate to reckless trading.The decision to continue trading[52] To complete my assessment, I now turn to the allegation by the plaintiff thatthe Company was insolvent on both a balance sheet and a cash flow limb basis and the25 Mountfort v Tasman Pacific Airlines of New Zealand Ltd [2006] 1 NZLR 104 (HC) at [20].decision of the Company to continue trading, after the initial start-up decision wasmade, was reckless. The allegation essentially is that the Company was ignoring aliability incurred to the plaintiff when it was continuing to trade and pay its tradecreditors.[53] The timeframe for this allegation is December 2014, when the Companycommenced trading. From the factual chronology set out at [9]-[11], the revised finalaccount claim by Watts & Hughes was sent on 12 November 2014, with furtherpayment being received by 8 December leaving a balance owing of $48,021.67. TheCompany's architect had queried some of the items that were sent in the originalestimated final account claim on 5 November 2014. Although that account wasupdated in the revised final account claim of 12 November, by December Rajiv andWatts & Hughes were still not clear on the amounts claimed for the variations.[54] This uncertainty led to the disputed agreement of 12 February 2015, describedat [12]-[14] above, in which Mr Gamlen from Watts & Hughes emailed Rajiv seekingconfirmation of this agreement on what was owed and how it was to be met. I dealwith this agreement in more detail in the next section.[55] For present purposes, the decision to engage Watts & Hughes had been madein August 2014 and it is accepted that the Company paid a total of $137,887.21 overthe period of 30 October 2014 to 27 February 2015, as the table at [15] above shows.The variations to the fit-out construction price had already occurred by November2014, before the Company had started trading in December. In my view, this is notthe "classic reckless trading" as alleged by the plaintiff. The Company commencedtrading and as the timeline shows, the Company paid Watts & Hughes in October, priorto trading, and in December and February, while trading.[56] Unfortunately, trade was less than expected during December 2014 to February2015. For whatever reason, be it delays in the opening of the café/wine bar or lack ofcustom that caused the Company to cease trading and become insolvent, the questionfor the Court is whether Mr Biala carried on the Company in a manner likely to createa substantial risk of serious loss to its creditors.[57] The timeline of events in my view does not support the plaintiff's case. If theCompany did not commence trading or ceased trading in December, including thepayment of its trade accounts, this would have increased the risk of loss. The debt hadbeen already been incurred by November when Watts & Hughes confirmed the finalinvoice. I accept Mr Cottrell's submission that halting the fitout mid-way through and"throwing in the towel" was not an appropriate option when there was a reasonableexpectation that the new business would trade profitably.[58] Further, the evidence from Mrs Brewster on the Company's insolvency waslimited to the 31 March 2015 balance sheet. It was acceptable for the Company topress on from December to trade in the hope that it would flourish. Such trading in adifficult or insolvent position in the hope things would get better, where no furtherlosses are created, was considered to be permissible by William Young J in Re SouthPacific Shipping Ltd.26 Here, no further loss was caused by the continued trading, andI do not consider such trading to be reckless in terms of s 135.[59] For completeness, Sher-e-punjab contributed $200,000 worth of funds toenable the Company to trade. This demonstrates the Bialas' willingness to support theCompany's trading, which Clifford J found was a critical factor in Jordan v O'Sullivannegating the existence of reckless trading.27 I consider Mr Biala's focus was ontrading to meet creditors, with a potential for future income and prospects, as Mr Shiconfirmed. All of this shareholder support has been lost by the Biala family, withobvious adverse financial consequences for them.Conclusion[60] I find that Mr Biala did not carry on the business of the Company in a recklessmanner. The decision of Mr Biala to engage Watts & Hughes in August 2014 was notmade recklessly but was a planned and calculated risk, assessed from Mr Biala'sexperience in the industry. Nor was the decision to continue trading, as there was areasonable expectation that the new business would trade profitably. Neither decision26 Re South Pacific Shipping, above n 7, at [125(3)].27 Jordan v O'Sullivan, above n 8, at [254].departed "so markedly from orthodox business practice and involved such extensiveand unusual risk to the creditors" as to be considered reckless.28[61] This was a start-up business that ultimately failed. In order for the Companyto start trading, it required a fit-out of an empty shell to set up the café and wine bar,as many start-up businesses do. Trading did not meet the expectation for whateverreason. Even if the Bialas had under-estimated the risks involved in the start-up phase,they demonstrated a willingness to support the Company's trading by providingfurther capital through their company Sher-e-punjab.[62] I find that s 135 of the Act has not been breached.The plaintiff's loss[63] Even if I had found Mr Biala to have carried on the business of the Companyin a reckless manner and was considering an order for compensation under s 301 ofthe Act, the plaintiff's loss is both uncertain and not "serious".[64] The outstanding amount of $39,629.88 to be paid to Watts & Hughes was re-calculated in February 2015 in the disputed "agreement", three months aftercompletion of the fit-out. It is not clear how this sum was reached. The re-calculationdid not detail specific amounts in the relevant invoices, including any amounts ofinterest or GST. Mr Gamlen accepted in cross-examination that interest at two percent per month was included in the February demand and was compounding fromDecember to February. However, he was unable to clarify how the sum of $39,629was reached. Even at the hearing before me, Mr Jackson for the plaintiff was unableto identify the makeup of the $39,629. Mr Cottrell for Mr Biala assessed the additionalcosts of the variations and GST to be approximately $34,000, and on my calculationsit appeared to be closer to $32,000. The final sum and how it was made up remainsuncertain.[65] Mr Jackson, however, pointed to "the agreement" reached between Rajiv andWatts & Hughes on 17 February, following the email exchange as conclusive evidence28 At [254].of the sum to be paid. As noted, the email exchange between Watts & Hughes and theCompany on 12 and 17 February 2015 is disputed. Watts & Hughes says the Companyagreed to pay $39,629.88 with $12,908.19 being paid immediately, whereas theCompany says the email exchange "indicated" that it would pay but it was not anagreement or an admission of the amount remaining payable.[66] I am not satisfied that the email exchange was an agreement by the Bialas topay those sums in their entirety. Although he questioned the amounts sought by Watts& Hughes on 8 December, Rajiv nevertheless tried to obtain funding to meet them.Watts & Hughes had been pressurising the Bialas for payment. Rajiv told the Courthe was placed under pressure and confirmed "the agreement" was okay.[67] I am unable to find this was a binding agreement. Under pressure, Rajivorganised for a further payment of $12,908 on 27 February 2015. This was themaximum that was obtainable from the third-party financier. No further monies wereextended by that financier. Rajiv then questioned Watts & Hughes about the natureand extent of the increased variation amounts and no further payments were made bythe Company.[68] Mr Cottrell drew my attention to the fact that the variations were neverformally signed off by the Company as a variation to the original contract oragreement. I note that the original contract was never formally drafted or executed.However, when Watts & Hughes forwarded the scope of the first set of variations toRajiv and the architects on 4 September 2014, Ms Fisk from Stufkens and Chamberssent an Architect/Designer's Advice Notice to Watts & Hughes, responding to theproposed variations with this caveat:The following items have been brought to the attention of the Architect andthe following details are provided to the Client as a suggestion only. If theContractor [Watts & Hughes] believes that the information presented in thisadvice note will result in a variation to the contract they shall inform thePrincipal [Rajiv Biala] as per the conditions of their signed contract oragreement.There was no formal sign-off by Rajiv, although the 4 September email from Watts &Hughes was sent to him.[69] Further, the amount outstanding for the variations appears to include GST andinterest, although the amounts of each was unclear. The actual loss to Watts & Hughesis difficult to quantify with any certainty.[70] Despite the uncertainty, I consider the plaintiff's loss cannot be considered"serious". Watts & Hughes is a national construction company, which has been inoperation for over 30 years. An outstanding account of $39,000 or less is a small sum.When pressed, Mr Gamlen conceded that this was not a significant loss to Watts &Hughes. While a relatively minor financial amount may be serious for some creditors,it plainly did not meet the threshold of serious loss here, as contemplated by s 135 ofthe Act.[71] Finally, I add that in oral arguments, Mr Cottrell raised the issue of a creditorseeking recovery of its own losses from a director of a liquidated company, as opposedto the losses of the company's creditors as a whole. I did not hear full argument onthis issue and in light of my findings, nothing turns on the issue in this case and I takeit no further.Conclusion[72] The plaintiff's claim has been brought under s 135 of the Act only and I havefound that the Company was not trading recklessly. Accordingly, no order is made forcompensation under s 301 of the Act.Result[73] The plaintiff's claim is dismissed.[74] The defendant is entitled to costs. If Counsel cannot agree, memoranda of nomore than five pages are to be filed within 20 working days of receipt of this decisionby the defendant and a further working 10 days by the plaintiff.Cull JSolicitors:Davidson Legal, Christchurch for the PlaintiffGCA Lawyers, Christchurch for the Respondent