IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2022-404-1424
[2023] NZHC 1233	

BETWEEN	DAVID HENDERSON
Appellant	
AND	THE REGISTRAR OF COMPANIES
Respondent	

Hearing:	9 February 2023	
Appearances:	D W Grove for Appellant
S P Connolly & A M Piaggi for Respondent	
Judgment:	24 May 2023	

JUDGMENT OF PAUL DAVISON J

This judgment was delivered by me on 24 May 2023 at 4.30pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:
Grove Darlow, Auckland Crown Law Office, Wellington

HENDERSON v THE REGISTRAR OF COMPANIES [2023] NZHC 1233 [24 May 2023]

Introduction

[1]	David Henderson (the appellant) appeals a prohibition order made by the Deputy Registrar of Companies pursuant to s  385  of  the  Companies  Act  1993 (the Act), which prohibits him from being a director of a company or being concerned in the management of a company for a period of three years.

[2]	The appellant says that the failure of the company of which he was a director was not a result of his mismanagement, but rather the result of unforeseen matters outside his control. He says that the property development project with which the company was involved was from the outset commercially viable, and having regard to all the circumstances the prohibition order made by the respondent was not justified, and should be quashed.

Background

[3]	On 17 May 2022, the Deputy Registrar of Companies (the Deputy Registrar) issued a notice (the prohibition order) to the appellant relevantly stating:

 PURSUANT to section 385(3) of the Companies Act 1993, I Peter Barker, Deputy Registrar of Companies, hereby prohibit DAVID STEWART HENDERSON from being a director or promoter of, or being concerned in or taking part, whether directly or indirectly, in the management of any company for a period of three years as from the date of this notice.

[4]	The Deputy Registrar’s decision to issue the prohibition order arose from the appellant’s management of Cambridge on the Avon Ltd (the company), of which he was one of two directors, the other being Mr Martin Kells. Mr Kells was the sole shareholder of the company. The company was incorporated on 19 December 2016 and is the trustee of the Cambridge on the Avon Trust (the Trust), which was settled by Mr Kells on 3 February 2017. The company was put into liquidation by order of the High Court on 7 June 2018.

[5]	On 3 May 2017 the company settled the purchase of a property comprising six apartments located at 19 Carlton Mill Road, in Merivale, Christchurch (the property). The company intended to renovate and redevelop the apartments with the intention of on-selling them. The company was nominated as purchaser of the property by Quay

22 Properties Ltd (Quay Properties) which had entered into an agreement to purchase the property from Cranford Entertainment Ltd (Cranford Entertainment) on 22 September 2016, and in February 2017 Quay Properties and the company entered into a deed of nomination pursuant to which the company, as trustee of the Trust, was nominated and became the purchaser of the property.

[6]	The company financed its purchase of the property by borrowings from: the vendor, Cranford Entertainment; No 68 Ltd; and Le Compte No 2 Ltd (Le Compte), the latter being a company associated with the appellant. In each case the company entered into loan agreements and the loans were secured by registered mortgages and personal guarantees from the appellant and Mr Kells.1 The Cranford Entertainment loan was subsequently repaid from proceeds of a further loan from Value Plus Holdings Ltd (VPHL) of $2,100,000 which was secured by a registered first mortgage over the property. The VPHL loan advance was made available on 19 October 2017, and was for a term of six months. The $2,100,000 loan included an establishment fee of $100,000 which was deducted from the loan funds by VPHL on the date the loan was advanced to the company. The VPHL loan was jointly and severally personally guaranteed by the appellant, and Mr Kells.

[7]	In June 2017 the company engaged Smartlift Systems Ltd (Smartlift) to carry out relevelling of the building on the property. Smartlift’s invoices dated 7 July 2017 for $54,774.10, and 31 July 2017 for $91,290.16 were not paid on or before the dates on which they were due, and a dispute arose between the company and Smartlift regarding the overdue payments.

[8]	On 28 September 2017, the appellant obtained a valuation report in respect of the property from Jones Lang LaSalle, Valuation and Advisory (Jones Lang). In their report Jones Lang noted that as at the date of their inspection of the property it was undergoing strengthening and refurbishment work from earthquake damage. They were instructed by the appellant to provide an “as is where is” valuation of the property as well as an “as if complete” valuation for the six apartments, assuming that the

1	Cranford Entertainment Ltd, loan $900,000 term expiring 28 January 2018, secured by registered first mortgage; No 68 Ltd, loan $500,000 for term of 12 months, secured by second mortgage; Le Compte, loan $2,500,000 payable on demand, secured by second mortgage over 19 Carlton Mill Road and a second mortgage over 280 Bealey Avenue Christchurch.

earthquake damage was remediated under engineering supervision and full insurance was obtained. They were also to assume that in conjunction with the earthquake remediation work, the apartments would be refurbished to a professional standard including with new kitchen and bathroom fixtures and fittings. Jones Lang noted in their report that their client had informed them that the cost to complete the refurbishment and earthquake strengthening was $912,525 including GST. They valued the property on an “as is where is” basis at $2,950,000 (inclusive of GST), and their “as if complete” valuation assessed the units once completed as valued between
$900,000 and $975,000 inclusive of GST and $15,000 of chattels. The total valuation of the six “as if complete” apartments was $5,600,000 (inclusive of GST) and chattels of $90,000.

[9]	On 19 October 2017, Smartlift issued a statutory demand in respect of the unpaid amount of its invoices. After the company paid the first of the two invoices the statutory demand was withdrawn. However, Smartlift’s second invoice for
$91,290.16 remained unpaid, and on 13 November 2017 it issued a second statutory demand for that amount.

[10]	The company responded by filing an application in the High Court seeking an order setting aside Smartlift’s second statutory demand. The application was scheduled for hearing in the High Court on 14 February 2018, but on 8 February 2018 the company filed a memorandum requesting the Court to strike out its own application, and accepting that it would be liable for costs. Smartlift however applied to the Court for an order pursuant to s 291(1)(a) of the Act directing the company within three working days from 8 February 2018, to pay the outstanding sum together with default interest. By judgment dated 16 February 2018, Associate Judge Osborne2 made an order dismissing the company’s application to set aside Smartlift’s statutory demand, and directed the company to pay a total sum of $114,737.933 by noon on 23 February 2018, and in default of payment Smartlift could apply for an order putting the company into liquidation.4 However, the company failed to pay the outstanding sum, and Smartlift subsequently applied for an order putting it into liquidation.

2	As His Honour Osborne J then was.
3	The $114,737.93 being the contractual debt of $105,061.93 together with costs and disbursements of $9,676.
4	Cambridge on the Avon Ltd v Smartlift Systems Ltd [2018] NZHC 175.

[11]	On 15 March 2018 the Inland Revenue Department (IRD) approved an application by the company for non-active status. In its letter to the company the IRD explained the effect of the non-active status:

This means you won’t have to file income tax or imputation returns for the company for 2017 and future income years, unless the company stops meeting the non-active company criteria.

[12]	On 26 April 2018, following the Company defaulting on loan repayments, VPHL appointed receivers pursuant to the terms of its security. Following their appointment the receivers appointed a real estate agent to market the property for sale by auction, which was scheduled for 14 June 2018. Prior to the auction the receivers received several pre-auction offers for the property, and they accepted the highest offer of $3,400,000 on 14 June 2018. However, on 7 June 2018 the High Court made an order placing the company into liquidation, and appointed Mr  Geoff  Brown and  Ms Lynda Smart of Rodgers Reidy (NZ) Ltd, as joint liquidators (the liquidators).

[13]	From the proceeds of sale the first and second secured creditors (VPHL and No 68 Ltd) were repaid in full. In an affidavit sworn by Mr Henderson on 5 June 2018 in support of an application by the company for an adjournment of Smartlift’s petition for an order placing the company into liquidation, he stated that Le Compte, which was owed approximately $2 million, had agreed to waive its security so that the sum of approximately $300,000 remaining after payment of the secured creditors VPHL and No 68 Ltd, could be applied to meeting the amounts outstanding to unsecured trade creditors which totalled approximately, $316,000.

[14]	In his affidavit Mr Henderson stated that the development had progressed significantly and there remained approximately $500,000 of further work required to be done before each of the six apartments could be sold. He said that he understood from real estate agents that on completion each apartment would be worth approximately $1 million. And he said that the unsecured creditors of the company were:

(a)	Smartlift, $112,000.

(b)	Trends Kitchens, $63,000.

(c)	Aqua Plumbing, $32,000.

(d)	Stone Mason $9,000.

(e)	Jeremy Claxon Tiler $65,000.

(f)	Tim Whittle Labour and Miscellaneous $35,000.

[15]	However, the company’s application for adjournment of the Smartlift creditor’s petition was declined, and as I have noted, the company was placed into liquidation on 7 June 2018.

[16]	In their second report dated 7 January 2019, the liquidators stated that the unsecured creditors of the company totalled $405,384.80. Following settlement of the liquidator’s sale of the property and payment of the first and second secured creditors, no funds remained available to pay the unsecured creditors who had carried out work on the property.

[17]	On 15 January 2021 the IRD notified the company that the Trust was under audit, and issued a default income tax assessment for the period ending 31 March 2019 of $181,242.27 plus shortfall penalties of $36,248.45. Those amounts were in addition to the unsecured creditors which totalled $405,384.

MBIE (Integrity and Enforcement Team) investigation

[18]	In December 2021 the Integrity and Enforcement Team (IET) of the Ministry of Business, Innovation & Employment (MBIE) carried out enquiries and obtained information from the liquidators regarding the company, its management prior to liquidation, and the circumstances which had led to it being placed in liquidation.

[19]	In their response to an MBIE questionnaire which asked the liquidators what events or circumstances had caused the failure of the company, the liquidators said:

The Company appears to have insufficient working capital/ cashflow to fund the development through to completion. In addition to the petitioning creditors claim several creditors also remained unpaid for invoices dating from October 2017 onwards. The Company was placed into receivership on

26 April 2018 under terms of a security agreement and mortgage in favour of Value Plus Holdings Limited. The receivers proceeded to sell the property, originally listing this for sale by auction but then achieving a pre-auction sale at a price higher than valuation. The sale price achieved was sufficient to pay out the first and second registered mortgagees but not the third. No funds remained for payment of the various unsecured creditors who had undertaken work on the property.

[20]	In response to a question as to whether the company maintained sufficient records to enable the directors to ascertain its financial position at any given time, the liquidators said:

I consider that the Directors would have had sufficient information to recognise that there was a cashflow shortage and an inability to pay creditors as the accounts fell due – via provision of supplier invoices however it is possible that they may have considered the Company to be balance sheet solvent by virtue of the likely sale price able to be achieved.

[21]	In response to a question as to whether the company traded or incurred debts or other obligations when insolvent the liquidators said:

Yes, despite the statutory demand being issued by one supplier the company continued to engage other suppliers to undertake work on the property, including tilling work to a cost of $65,482.33 invoiced in February 2018 and kitchen installations at a cost of $67,427 invoiced on 30 December 2017.

[22]	And in response to a question as to whether the company incurred debts for which there was no reasonable prospect of repayment, or without obvious assessment of its ability to repay when they became due, the liquidators said:

We consider that many of the debts of the company were incurred without obvious assessment of the ability to repay when due, the expectation seems to be that contractors engaged to undertake building works would be paid either from further refinancing, or from the sale proceeds from the development rather than in accordance with their ordinary terms of trade.

[23]	On 16 March 2022 the IET served the appellant with a written notice pursuant to s 385(5) of the Act advising him that he had been identified as “possibly meeting the criteria to be prohibited from managing companies under section 385 of the Companies Act 1993.” The notice enclosed copies of a number of relevant documents including correspondence between MBIE and the liquidators and the liquidators’ response to the IET questionnaire, and copies of the appellant’s own affidavits which had been filed in High Court in relation to the company. The notice advised the

appellant that he had 20 working days from the date of service within which to respond to the notice, and said that thereafter and after considering any representations the appellant made and any other information he provided, if the Registrar considered there were grounds to do so he/she may prohibit him from being a director or promoter of a company, or from being concerned in the management of a company for up to 10 years.

[24]	Following the Deputy Registrar granting an extension of time for the appellant to respond, the appellant’s solicitors Aspiring Law, wrote to MBIE on his behalf by letter dated 27 April 2022 submitting that there were no grounds for making a prohibition order pursuant to s 385. They explained that as the company was a trustee and had never traded: there had been no mismanagement by the appellant; there should never have been any claims made by creditors or the IRD against the company; it was not required to file tax or GST returns; and it had non-active status approved by the IRD. Explaining the company’s background, Aspiring Law said:

6.	There appears to be a misunderstanding as to the status of this Company. It was a trustee company only and was the trustee of the Cambridge on Avon Trust (“Trust”). The deed of trust is attached.

7.	The Company, whilst Mr Henderson was a director, did not trade. It did not and was not required to prepare any financial accounts, based on accounting advice. Indeed, the IRD approved non-active status on 15 March 2018, and accordingly it did not have any tax requirements from the 2017 income tax year onwards. Please see attached letter from the IRD confirming this fact.

8.	As such, it was not required to prepare financial statements. All taxable activities, including accounting for GST, was undertaken by the Trust. The Trust’s IRD number is [redacted.

9.	What appears to have happened, and you will need to discuss this with the receivers, was that when it took over the sole asset of the Trust (a property development located at 19 Carlton Mill Road, Christchurch) and the Company was then placed in liquidation, somehow, either the receivers or the liquidators registered it for GST and obtained GST refunds. Clearly, that should not have occurred, however, it was completely outside of my client’s control.

10.	The only purpose of the Company was therefore to have the title of the property in its name, but beneficially that property was owned by the Trust.

11.	You will note that Mr Henderson was never a shareholder of the Company.

12.	Further, as advised to the liquidators, creditors invoiced the Company as trustee to the Trust. Certainly, the GST refund referred to in the liquidator’s report dated 11 January 2022 should not have been received. Again, that is nothing to do with Mr Henderson. Further, the Trust was registered with the IRD for income tax and GST purposes for all its taxable activities. Attached is the letter of 2 March 2017 confirming the same.

13.	My client notes that the receivers report:

a.	Confirms that the Company was a corporate trustee.

b.	States on page 5 that sufficient funds were recovered to pay all secured creditors and that there was a surplus of $5,750 plus GST that was refunded to the liquidator. It would appear clear therefore that all secured creditors have been paid.

14.	There were no further secured debts at that time, including any debts to the IRD.

15.	The Trust was incorporated, Mr Henderson understands, solely to progress the development of the property at 19 Carlton Mill Road, Merivale, Christchurch.

16.	The property was purchased for the sum of $1,860.000 plus GST (if any), with settlement being completed on or about 3 May 2017. Please see the attached settlement statement and deed of nomination.

17.	As at the time of the purchase and finance a detailed valuation was obtained of the property. This is attached.

18.	In essence, this was an existing 6-unit development. It had suffered damage through the earthquake, so the project was to rectify the defects, tidy it up, and sell it.

19.	You will see from the valuation that its value in an as is where is condition was assessed at $2,950.000.

20.	Once completed, however, each of the units were valued as having an aggregate value of $5,600.000. The anticipated costs to complete the remediation and works was $1,500,000 plus GST.

21.	Accordingly, from the outset, and based on the professional valuation evidence, this was to be a profitable development.

22.	You will note that there was a third security to Le Compte Limited. This was an entity associated with Mr Henderson, and it contributed a capital amount in excess of $300,000 to progress that development. As matters worked out, however, those funds were lost.

23.	The difficulty that occurred was that given delays, out of Mr Henderson’s control, completion of the remedial works took longer than expected. To Mr Henderson’s shock, the first security holder funder refused to extend the funding, and instead called the funding up and appointed a receiver. Efforts were made at that time to

refinance the project with a view to competing it. Unfortunately, those efforts were unsuccessful, principally because:

a.	The availability of finance reduced significantly; and

b.	Due to the involvement of Mr Kells, financiers were hesitant to assist.

24.	It was those factors, and those factors alone, that caused the receivership. Please note that when the first security holder called up its loan, the total facility had not yet been used. Accordingly, the Trust was not trading whilst insolvent. It was the actions of the first security holder that led to the Trust’s insolvency.

25.	Mr Henderson cooperated with the receivers, and indeed identified the eventual purchaser of the property. Mr Henderson understands that the development was completed by the purchaser and the units were sold for sums significantly above the valuation.

26.	Accordingly, this project was viable from the beginning, and would have been completed successfully but for the actions of the first security holder. Mr Henderson denies that the Trust was trading whilst insolvent. I note in this regard that there is no suggestion by the liquidators that that was the case.

[25]	Addressing the issue of reckless and insolvent trading, the appellant’s solicitors said:

28.	As advised, tax returns were not required to be filed from the year ended 31 March 2017, as the IRD had approved non-active status for the Company.

29.	The assessment by the IRD, sent to the liquidators, and not [the appellant], are incorrect. That assessment should have been made to the Trust, and not the Company. The Company was not required to file any returns while [the appellant] was a director of the company.

30.	The Company was liquidated on the basis that it was a trustee of the Trust. In fact, the correct process would have been an application to the Court to replace the Company as the trustee of the Trust.

[26]	Regarding the failure to keep proper company records the appellant’s solicitors said:

32.	The liquidators were advised that no financial statements were prepared. That is correct and has been confirmed by the Company’s chartered accountants. The Company itself did not trade. As such, there was no requirement to maintain financial records. The required company records including minutes were kept. No one, and in particular, the liquidators, have asked to see these.

33.	What is critical is that after the Company was placed in receivership and then liquidator Mr Henderson took all steps required of him and answered all questions from the liquidators. He is unaware of any instance in which he was requested to provide further documentation or information to the liquidators. That is confirmed by the fact that the liquidators do not refer in any of their reports to Mr Henderson being uncooperative or failing to provide documentation. Indeed, if the liquidators ask for company documentation now, everything that is available, and was necessary, could and would be provided. The simple fact is that the liquidators have not requested anything further. There has also been no information requested from the Company’s chartered accountants.

[27]	Following Aspiring Law’s 27 April 2022 letter to MBIE, MBIE requested the appellant to provide any company records created and kept pursuant to s 189 of the Act. And on 9 May 2022 the Deputy Registrar forwarded the appellant a “Preliminary Minute” under s 385 of the Act. In the preliminary minute, the Deputy Registrar noted that the IET had alleged several instances of mismanagement by the appellant, including that he had failed to keep company records and had therefore breached s 189 of the Act. The Deputy Registrar noted that the appellant had previously advised that a minute book and records had been kept, and he requested the appellant to provide him with all of the records created and kept pursuant to s 189 of the Act, so that he would be able to make a determination regarding the IET’s allegation. The Deputy Registrar further noted in his preliminary minute that the IET had alleged that the company had failed to prepare financial statements in breach of s 194 of the Act. The Deputy Registrar noted that the appellant claimed that the company did create and keep certain records in accordance with s 194, and he requested the appellant to provide him with all and any such records, so that he could make a determination regarding the IET’s allegation.

[28]	Aspiring Law responded to the requests made in the Deputy Registrar’s preliminary minute by letter dated 11 May 2022 advising that as the company was not trading, and had IRD approved non-active status, it was not required to keep financial records or prepare any financial accounts. They enclosed a letter written by the company’s accountants, Michael Prasad Group Ltd also dated 11 May 2022 in which Mr Prasad said:

We refer to paragraph 4 of your Preliminary Minute headed “Failure to keep proper accounting records” and more specifically to paragraph 4.1 where you

state “IET also alleges that the Company did not prepare financial statements and it did not comply with s 194”

In our professional view, this allegation has no basis.

The company was a trustee company and did not trade on its own account. On that basis, we made an application to the Inland Revenue Department for “Non-Active Status” for the company. The application for Non-Active status was approved by the Inland Revenue Department on 15 March 2018 (a copy of the approval letter is attached).

You will note from the letter that the approval was from the date of incorporation on 19 Dec 2016 to 31 March 2017, being the first income tax year for the company and also applied for future years. The company was approved by Inland Revenue Department as not having a requirement to file
 any income tax or other returns from the date of its incorporation as it did not undertake any taxable activities on its own account.

On this basis, there was no requirement for the Company to prepare any financial statements and hence it did not any obligation to meet any of the requirements of S194 or meet any of the requirements of the Tax Administration Act (Financial Statements) Order 2014 and more particularly I refer you to paragraph 6 whereby non-active companies are exempt from the minimum requirements for preparing financial statements.

[29]	On 13 May 2022 the appellant’s solicitors provided MBIE (IET) with a number of further documents including a copy of the term loan agreement between the company and No 68 Ltd; the Deed of Nomination dated 3 February 2017 between Quay 22 Properties Ltd and the company as trustee of the Trust; a copy of the term loan agreement between the company and Cranford Entertainment; a copy of a form of registerable mortgage; and a copy of the term loan agreement between the company and VPHL.

The Final Minute of the Deputy Registrar of Companies and the prohibition notice

[30]	On 17 May 2022 the Deputy Registrar issued a “Final Minute” pursuant to    s 385 of the Act. In this document the Deputy Registrar rehearsed the procedural and factual background, and identified the relevant legislation and legal principles, before addressing and determining each of the allegations made by the IET against the appellant. The Deputy Registrar noted that the IET alleged that the appellant had failed to carry out his statutory duties as a director of the company in four respects:

(a)	reckless and insolvent trading;

(b)	failure to keep proper company records;

(c)	failure to keep proper accounting records; and

(d)	failure to co-operate with the liquidators.

Whether the company carried out the development

[31]	In his decision the Deputy Registrar addressed the issue of which party or parties were responsible for carrying out the development at the property. He said:

13.6	It seems to be contended that the Property was being developed by the Trust. However, the work was being undertaken by the Company. It seems to be contended the Company was doing that as a trustee of the Trust. I might have expected that if the Trust was the ultimate owner of the Property, it had a real interest in ensuring the Company was doing what the Trust expected it to do. I might have expected some instructions or direction from the Trust to the Company, but it would appear there is no record of any such communications.

13.7	Once the Company acquired the Property, the units on the Property had to be re-furbished and the Property developed. That required some party to undertake business activity. That had to be either the Trust or the Company.

13.8	I assume it is contended by the Candidate that the Company was carrying out the activity as trustee for the Trust. But just because the Company agreed to be a trustee for the Trust, does not mean that the Company was not also engaging in business activity.

…

13.10 The contract with SSL was accepted by the Company and signed by one of the directors. I consider that while there was a trustee deed in existence the Company was acting in its own capacity and not as a bare trustee. Another way of putting it is that whatever the wording of the Trust Deed, the substance of the transactions is they were being undertaken by the Company in its own name. Someone was undertaking business activity when the Property was being developed and there is nothing to suggest it was the Trust. And insofar as creditors were concerned, they thought they were only dealing with the Company. The Company could be, and was, in a dual role of a property developer and trustee.

…

13.12 The Candidate provided me with a letter from the IRD to the Trustees in the Cambridge on the Avon Trust dated 3 February 2017. It stated the Trustees were registered for GST. I place no reliance on that for a submission that it was the trust carrying out the business activity. The

fact that the trustees were registered for GST does not mean that they were filing GST returns arising from the development work on the Property.

…

13.20	I have not examined whether [Michael Prasad Group Ltd’s] statements are correct regarding [Tax Administration (Financial Statements) Order 2014]. But even if there was no legal requirement to file income tax returns, I consider that the Company and its directors, in carrying out the work on the Property, needed to have financial information before them.

13.21	I noted at paragraph 10.2 above that I must be satisfied that there has been mismanagement. I do not have to be satisfied that the mismanagement breached s 194. I consider that the directors needed to have financial information before them that would enable them to determine the Company’s financial position at any point in time. Without being prescriptive, I would anticipate the financial information before them that would include budgets, cash flow forecasts and reconciliations comparing budgets with actuals. So, whatever the position might be under s 194 it is clear that the Company did not compile the type of financial information that is necessary for directors to determine whether the Company was solvent or not. I consider the failure to have such information is mismanagement.

13.22	[Michael Prasad Group Ltd’s]conclusions depend upon it being correct that the Company did not trade. That is based on a view that it was the Trust that was the entity doing the trading. I consider, based on how the Company conducted itself and its dealings with its creditors, the Company itself was the entity that carried out the work on the Property. It was not doing so on behalf of the Trust. I expand on this below.

13.23	Whatever the position might be regarding the Trust Deed, statements made by the Candidate, on behalf of the Company, in his affidavits, carry more weight. The Company gave various reasons for disputing the SSL debt. But not once did it ever claim that it was the Trust that owed the money and not the Company. I also refer to the passages in the Affidavits that I quoted at paragraph 12.2(o), (s) and (t) above. That was a direct acknowledgement that the parties referred to were creditors of the Company. If the Company thought the liquidation was a mistake, they had an opportunity to test that before the Court when opposing the statutory demand.

…

13.25	I am satisfied the Company undertook business activity in developing the Property and in doing [so] the directors of the Company had the duties as laid down in the Act. I believe that the most favourable position that could be advanced for the Candidate is that the Company was both a property developer and a corporate trustee. That is sufficient for me to come to the conclusion I have. Whatever the form

of the transaction purported to be, in substance it was the Company that carried out the development work on the Property.

13.26	In any event, I am not aware of any provision in the Act, which excuses the directors of any company from having to comply with the duties and obligations imposed on directors under the Act. The directors of a trustee company are not excused from those requirements.

The allegation of reckless and insolvent trading

[32]	In addressing the allegation of reckless and insolvent trading, the Deputy Registrar said:

14.46	There is nothing in the information supplied  by  the Candidate, or elsewhere, to indicate that the Candidate made a sober assessment of the situation once the Company became insolvent. There is nothing to indicate any change of strategy. That means that either the Candidate did not know the situation the company was in, or did, and just deliberately ignored the reality of what was happening. Either alternative is equally damming.

14.47	There is nothing to indicate that the Candidate considered the interests of any of the creditors.

14.48	The accumulated debts of the unsecured creditors were substantial. There were also exacerbating features. The Company traded for less than 18 months and racked up substantial debts. The reality is that the Company had no capacity to repay those debts and no payments will be able to be made to the unsecured creditors.

14.49	I have already dealt generally in paragraph  9  above,  with  the  claim that events took place in the Company which were outside of the Candidate's control. If a loan falls due for repayment it is a reasonable possibility that the loan will not be renewed. That is not a matter outside of the control of the directors. If they choose to take on short term debt, they need to consider in advance what to do if the loan is not renewed.

…

14.51 The circumstances that arose were from operational mismanagement by the directors. These were matters within the control of the directors. I am satisfied that the elements constituting reckless trading have been made out in respect of the Company.

The allegation of failure to keep proper company records

[33]	In addressing the allegation of failure to keep proper company records, the Deputy Registrar said:

15.4	S 189 provides a company must keep certain documents at its registered office, They include:

(a)	Minutes of all meetings and resolutions of the shareholders and directors for the previous seven years;

(b)	Certificates required to be given by directors under the Act for the previous seven years;

(c)	Copies of all financial statements;

(d)	Copies of all accounting records as required to be kept under s 194 of the Act.

15.5	The records must be kept at the registered office of the company and they must be kept in written form or in a manner that they are easily accessible and convertible to written form.

My decision

15.6	I have already determined that once the Company owned assets and it entered into contractual relationships it was carrying on business. Therefore, the Company was  obliged  to comply  with s 189. In any  event there  is nothing in  the  Act which says  that s 189 does not become operative until the Company starts to carry on business.

…

15.9	It is common ground that the Company made a deliberate decision to not keep financial records. That is necessarily a breach of s 189(1)(h) and (i). But I make no further comment on that because the substantive breach is under s 194. I deal with that in paragraph 16 below.

15.10	There is nothing to indicate that the minutes and resolutions referred to in the Further Information were actually kept at the registered office as required by the Act. It is also apparent that the Further Information was not given by the directors to the liquidators.

15.13	It is an important matter. I consider the holding of meetings, and keeping a record of such meetings is not just administrative neatness. It is part of the cornerstone of good governance. The holding of director meetings is crucial for the proper running of a company. It allows the directors to set the strategy and monitor what was happening. The recording of resolutions; declarations of interest, issuing of certificates etc helps focus a director's mind in separating their personal interests from what is in the best interests of the company, for example. Without these disciplines it becomes easier for mismanagement to flourish. And with mismanagement comes the greater risk of company failure.

Conclusion

15.14	I am satisfied there was at least a technical breach of s 189. But because of the decisions I have come to elsewhere I have decided to suspend making any decision on the allegation. Accordingly, I have not taken this allegation into account.

The allegation of failure to keep proper accounting records

[34]	Addressing the allegation of a failure to keep proper accounting records, the Deputy Registrar said:

16.12	The Candidate says that financial records as contemplated by s 194 were never created and so were never kept. The Candidate says the Company was justified in making that decision. But even if the Company had solely been a corporate trustee, it was still obliged to comply with s 194. In any event my earlier comments regarding the trust company, are applicable here. These failures amount to mismanagement. If a company does not have reliable, accurate and up to date financial information the director is in the same position as a ship's captain in reef infested waters without accurate and up to date charts.

16.13	That means such lack of information is likely to cause, or contribute to the failure of a company and I am satisfied that is the position here.

Conclusion

16.14	I am satisfied IET’s allegations are correct; that it amounted to mismanagement and it was at least a partial reason for the failure of the Company.

The allegation of failure to co-operate with the liquidators

[35]	Addressing the allegation of a failure to co-operate with the liquidators, the Deputy Registrar said:

17.9	I am satisfied the allegation has no substance. The liquidators may not have got all the active assistance that they thought should be given. But in part that might be, because of the position adopted by the Candidate regarding the Company being a corporate trustee, there was not much to give.

17.10	I consider the Candidate's inter-actions with the liquidators does not fall into the category of active assistance; like that which the Candidate says he gave to the receivers (which I refer to below). But the Candidate did what was required of him when the liquidators asked him.

Conclusion

17.11	I treat the Candidate's dealings with the liquidators, as a neutral factor when considering the exercise of my discretion, and determining an appropriate period of prohibition.

The Deputy Registrar’s decision regarding prohibition of the appellant

[36]	Having considered the issue of whether the company was involved in or conducting the property development venture, and each of the four allegations made by the IET against the appellant, the Deputy Registrar then turned to consider whether to prohibit the appellant from being a director and if so what period. He said:

19.8	I have already noted Davidson and that it considered that the setting of standards, and deterrence, are important factors. All persons who are directors or manage a company must have it reinforced for them that they must exercise proper governance and not ignore the basic duties imposed on them. They must be held accountable for their actions. It is also important that there is consistency in treatment of candidates so as to be fair to all candidates.

19.9	In addition, I consider that s 299 of the Insolvency Act is analogous to s 385. Henderson [2017] NZHC,474 considered the purpose of s 299 of the Insolvency Act and it followed and approved Davidson. At [29] Associate Judge Osborne stated:

“- there is a public interest in protection. This goes beyond that section of the public who may be involved in a particular company or in potential dealings with the former bankrupt and from the most obvious group to be protected. There is also a public interest in deterrence.”

…

Risk to the public

19.11 Another important factor to take into account is the protection of the public. The public requires protection from incompetent, stupid, misguided and irresponsible directors as well as the unscrupulous and dishonest director. If the Candidate was ever a director or manager of a company in the future is therea risk that he could mismanage a company and that insolvency would result in a loss to creditors.

…

19.15	The personal attributes of a candidate are also relevant but unless there are exceptional circumstances the risk to the public is likely to outweigh the risk of possible adverse circumstances to the candidate. A candidate is likely to incur some adverse publicity from a notice of prohibition and may suffer reputational harm.

It is likely that prohibition will cause difficulties for a candidate and his or her family. But that is an inevitable consequence of being prohibited and is an element of the deterrent factor. That,  of itself, is not a valid reason to not impose a period of prohibition. I deal with the issue of future work prospects below.

Consequences of prohibition on future work prospects

19.16	I note that a notice of prohibition does not necessarily prevent a person from taking up paid activity. It simply restricts the scope of those activities. For example, in most circumstances being an employee of an organisation would not breach a notice of prohibition.

19.17	Furthermore, a notice of prohibition will not necessarily prevent a person from carrying on their own business provided it is unincorporated. It is true that without the privilege of limited liability the individual becomes personally responsible for the debts of the business but that just reinforces the principle that a sober assessment should be undertaken each time the business is about to enter into significant commitments. In addition, it would not be too different from operating a company because nearly all banks, and many trade creditors, require a director of a company to personally guarantee a company's debt.

…

My consideration of all the factors referred to in respect of the Candidate

…

19.30	The Candidate (with his fellow director) was directly responsible for the mismanagement. I make the following comments on the specific acts of mismanagement:

(a)	The trading on of the company while it was insolvent, and the entering into contracts without even considering the interests of the creditors, or ever taking stock of a deteriorating financial situation, was very serious.

(b)	I do not consider the failure to have adequate financial records and accounts as being just some sort of “technical” breach. Having up to date financial information, and utilising it, is a financial plank of good governance. Insolvency practitioners often say the failure to have adequate financial records is one of the most common reasons behind the failure of a company. I am satisfied that the Candidate’s reason for not having financial records was specious. And, the Candidates continued insistence that he was justified in taking the position he did indicates he would still do the same thing today.

(c)	I consider the nature of the mismanagement to be at least reckless. And I am satisfied that there were no other reasons for the Company’s failure which did not involve mismanagement, or were outside the control of the Candidate.

(d)	I note the somewhat enigmatic statement that the Candidate was not a shareholder of the Company. That of course is correct. I am not sure whether it is meant to imply that the Candidate was a non-executive director who did not personally benefit from the mismanagement. If that was the intention then the Candidate would have had to be more explicit. It is clear that the Candidate was closely involved in the Company. Any return that he might receive from the project was not going to be limited to director’s fees. If this factor was going to determine my ultimate decision, I might have sought more information. Because it was not, I did not.

Even if the Candidate could be classified as a non-executive director the Candidate was closely involved in the operations of the Company. The SSL quotation was originally sent to the Candidate personally. The Candidate was the face of the Company in court in relation to the SSL proceedings as can be seen from the First Affidavit and Second Affidavit. I again refer to paragraphs 18.6 – 18.13 of this final minute.

(e)	It is an aggravating feature that the mismanagement commenced almost from the time the Company was formed and that the Company’s indebtedness grew to such a substantial amount over a very short period of time.

(f)	There was not one error of judgement leading to serious consequences. There were separate multiple instances of mismanagement over a period of time.

19.31	I consider that having regard to the nature and scale of the mismanagement, the Candidate is a risk to the public. I consider the Candidate either does not recognise the duties and responsibilities required of a director or decided to ignore them. Either alternative is equally damming. He shows no remorse and he shows no understanding of the position of the creditors. The Candidate blames the Company's failure on others, or on events for which he takes no responsibility. Because the Candidate is not prepared to recognise, or understand, where he went wrong then there is a high risk of further mistakes in the future.

19.32	In making this assessment I have taken into account, so far as I can, the Candidate’s past performance before the mismanagement occurred. Overall, it is a positive assessment. I am assuming, without making inquiry, and having no information to the contrary, that there have been no previous business failures where mismanagement has been alleged. And the mismanagement has been only in respect of one company.

19.33	Another aspect in considering the risk profile of the Candidate is what has been the performance of the Candidate subsequent to the

Company going into liquidation. The Candidate is currently a director of 6 companies. Because these companies have not been placed in liquidation can be regarded as a positive factor and that it lowers the Candidate’s risk profile.

19.34	There is a limit as to how much weight I can give this factor. 4 of the Companies [sic] have been operational for about 2 years or less. That is not much of a proven track record. I also note that for one of the longer operating companies there has been another director as well.

…

19.37	I have taken into account the overall purpose of the Act. But there is no absolute right for any person to be a director of a company. If a person abuses that role or does not understand what is required of a company director then it is right proper that person that person is restricted from undertaking that role. In any event the purpose of the limited liability company is to allow a business person, as a shareholder, to invest capital into a venture but have no personal liability beyond that. Prohibition as a director does not prevent the Candidate from investing his money into a venture, as a shareholder.

19.38	Even if risk to the public had been absent, I consider that on the basis of deterrence and setting appropriate standards of commercial behaviour, that is another reason for exercising my discretion to impose a period of prohibition. The Candidate’s failings were at a basic level. Directors need to have it re-enforced to them that there is no place for directors who lack the basis understanding of what is required of a company director.

…

19.41	I recognise that the Candidate could have been influenced by his professional advisors in taking certain positions. Hypothetically speaking, it is possible that directors misunderstand what they are told, or might even get poor advice. I have determined there is no defence under s 138 for the Candidate’s actions. However, to put the best possible slant from the Candidate’s perspective I have taken this potential factor into account in the exercise of my discretion.

19.42	The Candidate says that he actively co-operated with the receivers “and indeed identified the eventual purchaser of the property”… The Candidate had personally guaranteed the debt owed by the Company. It was in the Candidate’s personal best interests that the Property sold at a good price to clear his personal liability. It was a sensible decision, from a personal perspective, for the Candidate to take the action he did. Nevertheless, he did so. It benefitted the Company. It is a positive feature and I have taken it into account.

19.43	I also recognise, if I understand the Submissions correctly, that the Candidate lent money to the Company through LCL.5 It has lost all of that money and so the Candidate has suffered financial loss as a creditor, as well as the unsecured creditors.

5	Le Compte No 2 Ltd.

…

19.45 After taking into account all the matters referred to in paragraph 19 above, and considering the statutory purpose of s 385, I have determined that I should exercise my discretion to impose a period of prohibition.

…

20.11 When I considered the different factors at play in deciding whether to exercise my discretion it came down to an either or decision. In considering the period of prohibition I have a wider range of one to ten. I have given the positive factors I referred to in paragraph 19 full weight, and my decision reflects this.

21.1 After taking all matters into account, and the particular mix of factors in this case, I direct that the Candidate is prohibited for a term of three years (to take effect from the date of the section 385(3) notice) from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of a company.

[37]	The Deputy Registrar issued a Notice pursuant to s 385(3) of the Act, prohibiting the appellant from being a director or promoter of a company or being concerned in or taking part in the management of a company for a period of three years.

Submissions

The appellant

[38]	As noted at the commencement of this judgment the appellant’s grounds of appeal are that:

(a)	the failure of the company was due to unexpected matters outside his control as a director;

(b)	the property development project was from its outset commercially viable and a good business opportunity; and

(c)	the failure of the company was not caused by the appellant’s mismanagement, or alternatively a sufficient degree of mismanagement to justify the making of a prohibition order.

[39]	Mr Grove for the appellant submits that in reaching the decision to make a prohibition order, the Deputy Registrar erred by misunderstanding the nature and function of the company which was a non-trading entity and corporate trustee of the Trust. He submits that it was the Trust, and not the company, which was carrying out the property development project at 19 Carlton Mill Road, Christchurch.

[40]	Mr Grove says that a non-trading company such as Cambridge on the Avon Ltd, could only be mismanaged and prepare financial accounts if it was actually trading. He submits that it is significant that the company had been approved by the IRD as having non-active status, meaning that it was not required by the IRD to file income tax or imputation returns from 2017. He notes that all taxable activities relating to the development project, including accounting to the IRD for GST, were undertaken by the Trust which had its own IRD number, and complied with its financial reporting obligations. He says that although the appellant provided the respondent with the Trust’s IRD number, the respondent did not request the Trust’s financial and management records, and he says that had such a request been made, those records could have been provided.

[41]	Mr Grove notes that the appellant had previously obtained professional legal and accounting advice from his solicitors and Mr Prasad respectively, in which he was advised that the company was not required to prepare and maintain financial statements and did not have any obligation to meet any of the requirements of s 194 of the Act. He submits that the appellant was entitled to rely on that advice in deciding how he was required to conduct the management of the company and discharge his duties as a director. He submits that the respondent failed to consider the implications of this situation before making the prohibition order and prohibiting the appellant from being a director of a company for three years.

[42]	As regards the viability of the property development project, Mr Grove says the comprehensive Jones Lang valuation of the property demonstrates that it should have been extremely profitable, and he notes that the purchase price was $1,860,000 and the “as is where is” valuation was $2,950,000. He notes that the valuation of the completed project was $5,600,000, and the estimated cost of completing the

remediation work was $1,500,000. He submits on that basis it is clear that it was a commercial and profitable development.

[43]	Mr Grove says that as a result of delays which arose in getting the remediation work completed the project took longer than had been expected. The first security holder VPHL which was principally funding the development refused to extend the term of its loan, called it up and appointed receivers. Following their appointment the receivers moved swiftly to arrange a sale of the property and the company was placed into liquidation. Mr Grove says that the appellant had taken active steps to avoid that happening approaching alternative funders so as to pay out the creditors and complete the development. He notes that on 5 June 2018 Acumen Finance confirmed that it was putting a finance package together for a loan totalling $4.0 million for a nine month term to be advanced to another company associated with the appellant to enable the outstanding creditors of the company to be paid and the Carlton Mill project to be completed. However, before that could be progressed the company was placed in liquidation by the Court. Mr Grove also notes that the appellant had arranged for the third security holder, Le Compte, to waive its security so that any surplus funds following repayment of the first and second secured creditors could be applied towards paying the company’s unsecured creditors.

[44]	Mr Grove also notes that shortly prior to the High Court making the order placing the company into liquidation, the company received a written offer from an unrelated party for the purchase of the property for $3,400,000. The party who made the offer subsequently purchased the property from the receivers.

[45]	Mr Grove further submits that as not all of the loan funds available to the company under the VPHL loan had been drawn as at June 2018, the company had funds available to it which it could have applied towards paying the unsecured creditors, and accordingly it was not trading whilst insolvent.

[46]	As regards the allegation that the appellant as the director of the company failed to maintain proper accounting records, Mr Grove submits that any such failure did not cause or contribute to the failure and liquidation of the company, and does not justify the making of a prohibition order. He submits because the appellant was well

aware of the amounts owed to the unsecured creditors and the secured borrowings, this is not a case of a director continuing to operate a company where the absence of proper accounting records means that they did not know the correct financial position of the company. Mr Grove submits that the IET allegation that the appellant had mismanaged the affairs of the company by reason of not maintaining financial records, was not made out.

The respondent

[47]	Mr Connolly for the respondent submits that the appellant bears the onus of satisfying this Court that it should differ from the Deputy Registrar’s decision. He says the appellant must demonstrate an error of law or principle, or that a relevant consideration was overlooked, or that the Deputy Registrar’s decision was plainly wrong. He says the appellant has not discharged that onus in this case.

[48]	Mr Connolly says the Deputy Registrar was correct to find that two types of mismanagement occurred and were at least a partial reason for the failure of the company: reckless and insolvent trading; and a failure to keep proper accounting records. In relation to the former, Mr Connolly says Mr Henderson caused the company to enter into short term lending arrangements that were not sufficient to finance the project through to completion and ensure that trade creditors could be paid in accordance with their ordinary terms. He says the short-term nature of the funding arrangements meant the company would need to rely on refinancing being available, and when it was not, there was no contingency plan. Further, he says the company continued to incur obligations to creditors after it had defaulted in its obligations to Smartlift and had been issued statutory demands.

[49]	In relation to the second ground of mismanagement, a failure to keep proper accounting records, Mr Connolly highlights that no financial records were kept by the company. In responding to Mr Henderson’s submission that the company did not need to keep accounting records because it was only the trustee of the Trust and did not trade on its own account, he says the Act’s requirement to keep proper accounting records pursuant to s 194 does not contain an exemption for corporate trustees. He further notes that ss 135 and 136 of the Act that impose directors’ duties, and s 385

that empowers the Registrar to prohibit persons from managing companies, also do not contain exemptions for corporate trustees. Mr Connolly says the appellant’s position misunderstands the legal nature of a trust and the status of a trustee, as the company acting as trustee remains directly liable in its own right for liabilities incurred by third parties. Accordingly, the directors of such a company must maintain proper accounting records to be able to determine the financial position of the company, to assess its solvency on an ongoing basis and ensure that it does not engage in reckless or insolvent trading. Mr Connolly submits that the absence of any accounting records for the company meant that Mr Henderson was not readily able to assess and monitor the company’s financial position accurately and, as a consequence, he was not able to discharge his duties once the company encountered financial difficulties. Further,  Mr Connolly says the “non-active” status of the company for tax purposes is a red herring. He says this fact simply reflects the position in tax law that the Trust, despite not being a separate legal entity, is treated as a separate taxpayer and so tax returns are filed in the name of the Trust. This does not exempt the company or its directors from complying with the Companies Act. Therefore, Mr Connolly says the Deputy Registrar was correct to conclude that reckless and insolvent trading and the failure to maintain proper accounting records constituted instances of mismanagement and were at least a partial cause of the company’s failure.

[50]	Mr Connolly says the Deputy Registrar correctly exercised his discretion pursuant to s 385 of the Act. He says that the Deputy Registrar took into account factors that were correct and appropriate, including: the nature of the mismanagement and the role of Mr Henderson in relation to that; the purpose and intention on the Act generally;  the  purpose  of  setting  standards  and  specific  deterrence;  the  risk   Mr Henderson poses to the public; factors personal to Mr Henderson; the consequence of prohibition on future work prospects; the extent of the loss and its effect on creditors and investors; timeliness; and market conditions. Finally, Mr Connolly submits that the period of prohibition of three years imposed by the Deputy Registrar was appropriate and reflects a correct and reasonable exercise of the Deputy Registrar’s discretion, in line with other relevant decisions.

[51]	Mr Connolly says that costs should follow the event.

Law

The appeal

[52]	The appeal is brought pursuant to s 370 of the Act, which provides:

370 Appeals from Registrar’s decisions

(1)	A person who is aggrieved by an act or decision of the Registrar under this Act may appeal to the Court within 15 working days after the date of notification of the act or decision, or within such further time as the court may allow.

(2)	On hearing the appeal, the court may approve the Registrar’s act or may give such directions or make such determination in the matter as the court thinks fit.

[53]	An  appeal  under  s  370  is  a  hearing de novo.6	In Toilolo v Registrar of Companies, Wylie J referring to s 385 of the Act explained:7

[31]	Section 385 requires the decision-maker to be satisfied as to a number of threshold issues; if he or she is satisfied, the section then confers a discretion to prohibit. 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 given to the reasoning of the Deputy Registrar is a matter for the Court’s assessment. The appellant, bears the onus of satisfying this Court that it should differ from the decision of the Deputy Registrar, and it is only if this Court considers that the decision is wrong that it is justified in interfering with it.

(b)	In regard to the exercise of the discretion, in the event the decision-maker as to the factual matters specified, the threshold for a successful appeal is more limited. An appellant has to demonstrate and error of law or principle, or that an irrelevant consideration was taken into account, or that a relevant consideration was overlooked, or that the decision was plainly wrong.

Section 385 Companies Act 1993

[54]	Section 385 of the Act relevantly provides:

385 Registrar … may prohibit persons from managing companies

6	Toilolo v Registrar of Companies [2019] NZHC 1090 at [30].
7	Toilolo, above n 6 (footnotes omitted).

(1)	This section applies in relation to a company –

(a)	that has been put into liquidation because of its inability to pay its debts as and when they became due:

(2)	…

(3)	The Registrar or the FMA may, by notice in writing given to a person, prohibit that person from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of, a company during such period not exceeding 10 years after the date of the notice as is specified in the notice. Every notice shall be published in the Gazette.

(4)	The power conferred by subsection (3) may be exercised in relation to—

(a)	any person who the Registrar or the FMA is satisfied was, within a period of 5 years before a notice was given to that person under subsection (5) (whether that period commenced before or after the commencement of this section), a director of, or concerned in, or a person who took part in, the management of, a company in relation to which this section applies if the Registrar or the FMA is also satisfied that the manner in which the affairs of it were managed was wholly or partly responsible for the company being a company in relation to which this section applies; or

…

(5)	The Registrar or the FMA must not exercise the power conferred by subsection (3) unless—

(a)	not less than 10 working days’ notice of the fact that the Registrar or the FMA intends to consider the exercise of it is given to the person; and

(b)	the Registrar or the FMA considers any representations made by the person.

(6)	No person to whom a notice under subsection (3) applies shall be a director or promoter of a company, or be concerned or take part (whether directly or indirectly) in the management of a company.

(7)	Where a person to whom the Registrar or the FMA has issued a notice under subsection (3) appeals against the issue of the notice under this Act or otherwise seeks judicial review of the notice, the notice remains in full force and effect pending the determination of the appeal or review, as the case may be.

[55]	The prohibition of directors under s 385 is both penal and protective in nature.
As Miller J observed in Davidson v Registrar of Companies:8

[91] …. As I explain below, the legislation initially examines mismanagement contributing to insolvency, without focussing on the conduct of any given director. Causation having been established, the Registrar may prohibit anyone falling into the class of directors and managers. Prohibition is aimed not at remedying wrongs done to shareholders and creditors of the insolvent company but at protecting the public from unscrupulous or incompetent directors in future, deterring others, and setting appropriate standards of behaviour. At the same time, any given director or manager inevitably experiences prohibition as a punishment; it is an adverse consequence of an inquiry into his or her involvement in an insolvent company.

[56]	In his detailed analysis of s 385 Miller J said:9

[94]	Section 385 applies to a company that is unable to pay its debts as they fall due, or on which execution has been returned unsatisfied, or which has been put into receivership, or which has entered into a compromise with its creditors, or which is in voluntary administration. The theme is business failure, evidenced by insolvency.

[95]	Prohibition may follow where the qualifying company’s plight resulted 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 causal relationship between management of the company’s affairs and its qualifying circumstances.

[96]	There is a sense in which failure always results from management, for a company must act through human agency. However, Mr Rennie accepted that the section’s purpose is that of disqualifying directors and managers who are not fit and proper persons to act in those capacities; it is aimed at mismanagement. Both counsel assumed that, for a director, some departure from the standard of care, diligence and skill set by ss 137 and 138 of the Act will be required.

[97]	I take a somewhat different view. I accept that the section is aimed at those who through some want of integrity, skill, judgement or industry are not suitable directors or managers. They may well have behaved in ways that breach a director’s duties and standard of care under ss 131 - 137, and the Registrar must recognise that under s 138 a director is entitled to rely on others. But ss 131 - 137 address an individual director’s accountability to shareholders and creditors of a company which the director has already served, while s 385 is protective and forward-looking. The Registrar’s inquiry is addressed initially to mismanagement of the company’s affairs and its causal connection to insolvency, not the behaviour of individual directors. Such mismanagement having been identified, all of the company’s directors and managers are eligible for prohibition. The power to prohibit them is broad and discretionary in nature. When exercising it the Registrar is not confined

8	Davidson v Registrar of Companies [2011] 1 NZLR 542 (footnote omitted).
9	Footnote omitted.

to conduct that caused the company’s insolvency; all of the individual director’s attributes and conduct in office may be taken into account.

…

[100] Of course the Registrar does not wield the power against a Board and management team collectively; rather, each respondent must be examined individually in all the circumstances of the case. The power is discretionary; s 385(3) and s 385(4) both provide that the Registrar “may” exercise it. Like any other discretionary power, it must be exercised for the statutory purpose, that of excluding from company management those who are unsuited to it.

…

[103] By way of summary, the Registrar’s inquiry should follow the following steps:

a)	Does the company, or do the companies where there were more than one, qualify under subsection (1);

b)	Was the respondent a director or manager of the company or companies 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 were managed a contributing cause of its qualifying status; and, if so

ii)	ought the Registrar exercise the discretion to prohibit the respondent in all the circumstances?

…

e)	Where prohibition is appropriate, what is the appropriate term?

[57]	The steps outlined by Miller J in Davidson were subsequently adopted by Cull J in Brand v Registrar of Companies,10 and also by Wylie J in Toilolo.11 I shall consider the appellant’s grounds of appeal with reference to the four steps described by Miller J as are relevant where one qualifying company is involved, and as applicable to the present case. And as Miller J explained in Davidson, once the decision-maker is satisfied that the company is a qualifying company within s 385(1) and also satisfied that the person to whom the notice was addressed was a director (or concerned in the management) of the company, the initial focus is on whether there was mismanagement of the company’s affairs, and if so whether the mismanagement

10	Brand v Registrar of Companies [2018] NZHC 3148 at [45]–[47].
11	Toilolo, above n 6, at [35]–[36].

contributed to the insolvency, rather than to the conduct of individual directors. Should the decision-maker be satisfied that mismanagement occurred which had causal connection to the company’s insolvency, the power to prohibit a director is broad and discretionary in nature. The power to make a prohibition order is not aimed at remedying wrongs done to shareholders or creditors of the insolvent company, but at protecting the public from incompetent or unscrupulous directors in the future, deterring others and setting appropriate standards of director conduct. When exercising that discretionary power, the decision-maker is not confined to considering conduct that directly caused or contributed to the company’s insolvency, and all aspects of an individual director’s conduct in office may be taken into account. That includes making an assessment of a director’s conduct in relation to the mismanagement found to have occurred, and the decision-maker can also take into account a director’s individual qualities and their contribution to the failure of the company.12

Analysis

Did the company carry out the development project?

[58]	A preliminary issue arises as to whether, notwithstanding its position as a trustee for Trust, the company carried out or was involved in carrying out the apartment development project. The company purchased the property and borrowed funds to complete the purchase including vendor finance. It also borrowed the funds it required to carry out the construction and to undertake the planned refurbishment of the apartments. On behalf of the company Mr Henderson as director signed the Smartlift quotation. It is clear that it was the company which undertook the purchase of the property and which was carrying out the apartment reinstatement and refurbishment project. The fact that the company was a trustee does not legally insulate it or preclude it and its directors from compliance with the provisions of the Act. And I agree with the Deputy Registrar that the company was carrying out a dual role both as developer and trustee.

12	Brand v Registrar of Companies, above n 10, at [177]; and Toilolo, above n 6, at [102]–[103].

[59]	The non-active status approved by the IRD on 15 March 2018 did not have the effect of excusing the directors of the company from compliance with their obligations under the Act. It simply meant that the company was not required to file annual income tax or imputation returns for the period commencing with its incorporation unless it ceased to satisfy the non-active company criteria. Moreover, by 15 March 2018 which was coincidentally the date on which the receivers were appointed by VPHL, the company had been underway with the work on being undertaken since June 2017 when Smartlift commenced its levelling work, and the several other contractors who had been engaged by the directors of the company had also carried out work on the apartments but had not been paid.

[60]	Irrespective of the non-active status approved by the IRD in March 2018, the directors of a company, which was trading and engaged in a commercial activity to redevelop the property and apartments which included borrowing funds and engaging contractors to carry out the work required on the apartments, needed to know the financial position of the company in order to meet their obligations and those the company had to third parties such as the contractors the company engaged to perform work on the apartments. Without maintaining proper financial records the directors would not be in a position to plan and monitor the financial position of the company to ensure that it was solvent and able to meet its obligations to contractors which it engaged to carry out work on the project.

Does the company qualify under subs (1)?

[61]	The company was put into liquidation by order of the High Court on 7 June 2018 on the application of a creditor, Smartlift, after it had failed to satisfy a statutory demand for payment of a debt. I am accordingly satisfied that the company qualifies and falls within s 385(1).

Was the appellant a director of the company within the five years preceding the Deputy Registrar’s notice?

[62]	The appellant does not dispute that he was a director of the company within a period of five years prior to the notice being given to him by the Deputy Registrar. And I note that a Company Extract issued by the New Zealand Companies Office

dated 10 May 2022 produced in evidence, records the appellant as being one of the two directors of the company.

Was the manner in which the company’s affairs were managed a contributing cause of its qualifying status?

[63]	Section 385(4)(a) requires the Registrar to be satisfied that the manner in which the company’s affairs were managed was wholly or partly responsible for the company being a qualifying company under s 385(1). Relevantly in this case, the Registrar must be satisfied that the manner in which the company’s affairs were managed was wholly or partly responsible for it being unable to pay it debts when they fell due and consequently put into liquidation.

[64]	The two types of mismanagement identified by the Deputy Registrar as having caused or contributed to the failure and liquidation of the company were reckless and insolvent trading, and failure to keep proper accounting records.

Reckless and insolvent trading

[65]	The venture by which the property was acquired for the purpose of being repaired, refurbished and then resold was undertaken by the company on the basis of the directors’ estimate of the time required to complete the work, and then market the units for sale, and settle the sales. The borrowings arranged by Mr Henderson on behalf of the company to finance the purchase of the property and the work required to put the apartments into a saleable condition, were in each case for relatively short periods. These short terms meant that it was crucial for the company to complete the redevelopment and sell the apartments within the time frame provided by the terms of the loans it had arranged, or if delays were encountered, be in a position to refinance the original borrowings so as to be able to meet the company’s obligations to third parties, including the contractors it had engaged to do the work on the apartments.

[66]	It is clear that soon after Mr Henderson, acting on behalf of the company, engaged Smartlift to undertake the foundation releveling work required to rectify the damage caused to the apartments by the Christchurch earthquake, the company did not have funds with which to pay for the work Smartlift undertook. On 29 May 2017,

Smartlift submitted a quotation for $158,765 plus GST for the repair and levelling work required on the property. The written quotation was addressed to Mr Henderson personally and was accepted by Mr Henderson on behalf of the company on 12 June 2017. The terms of trade included with Smartlift’s quotation stated that payment for the work was to be pursuant to a payment schedule, and payments were required to be made within seven days of the date of an invoice. The payment schedule required payment of 20 per cent  of  the  quoted  price  upon  acceptance  of  the  quotation, 30 per cent once all the lifting pads were poured, and 50 per cent on completion of all Smartlift’s work. The quotation further stipulated that no work would commence until the quote and formal conditions had been signed. The quotation also provided that unless expressly forming part of the work covered by the quotation, all other works required were excluded from the quotation sum.

[67]	As Smartlift commenced work in June 2017 it appears that the company paid the initial 20 per cent component due on acceptance of the quotation. However the Smartlift invoice dated 7 July 2017 for $54,774.10 was not paid within seven days and nor was the Smartlift invoice dated 31 July 2017 for $91,290.16. The company’s failure to pay these invoices as they became due, so soon after the work on the project had got underway, provides a clear indication that only two months after having settled its purchase of the property on 3 May 2017, by early July 2017 the company did not have the capital or access to funding with which to meet its obligation to pay its trade creditors. However, the company’s inability to pay Smartlift did not prevent it from engaging other contractors to undertake plumbing work, to construct kitchen cabinets, and to undertake stone masonry and tiling.

[68]	On 19 October 2017 the $2,100,000 loan from VPHL was available to be drawn down and on that same day the Cranford Entertainment loan of $900,000 was repaid. The company’s borrowing from VPHL was arranged by Mr Henderson and he and Mr Kells signed the loan documents as directors of the company and also in their capacity as personal guarantors of the loan. This loan was for a term of only six months, expiring 19 April 2018 and at a very high interest rate of 16.75 per cent per annum. The term of the Cranford Entertainment loan expired on 28 January 2018, and so the net effect of the VPHL borrowing was to provide the company with funds to repay the Cranford Entertainment loan; to extend the date for repayment to 19 April

2018 and following repayment of the Cranford Entertainment loan provide approximately $1 million with which to meet the construction and other costs of completing the development. The comparatively short term of the VPHL loan and the high interest rate that was charged, shows that the directors of the company were proceeding on a very short-term high-risk basis in terms of the project funding, and were running a risk that completion of the building work, marketing and selling of the apartments and settling of the agreements for sale and purchase entered into with purchasers, could all be achieved within the six month term of the VPHL loan.

[69]	Despite arranging the VPHL loan funds  which  were  available  to  it  from 19 October 2017, the company failed to pay Smartlift’s first statutory demand, coincidentally issued that same day, 19 October 2017. In its first statutory demand Smartlift sought payment of its 7 and 31 July 2017 invoices totalling $146,064.26 within 15 working days from service of the notice. Subsequently on 13 November 2017, Smartlift issued a second statutory demand seeking payment of $91,290.16 it had claimed in its invoice dated 31 July 2017. Once again, the company failed to make any payment.

[70]	As I have earlier noted Smartlift’s creditor’s petition was initially set down to be heard  in  the  High  Court  on  14  February  2018.  In  his  affidavit  sworn  on  27 November 2017 and filed in support of the company’s application to set aside the Smartlift  statutory  demand, Mr Henderson said  that  at  that  time the company had
$250,000 in its solicitors’ trust account. Having applied on 27 November 2017 for an order setting aside Smartlift’s 13 November 2017 statutory demand, on 8 February 2018 the company withdrew and abandoned its application, and on 16 February 2018 the  High  Court  made  orders  directing  the  company  to  pay  Smartlift  a  total  of
$114,737.93, by midday on 23 February 2018. Once again no payment was made.

[71]	From this sequence of events it appears that despite holding funds of $250,000 in its solicitors’ trust account, and despite having arranged the VPHL loan the funds of which were available from 19 October 2017, and despite the orders made by the High Court 16 February 2018, the company failed to make any payment to Smartlift, leading to Smartlift filing a creditor’s petition seeking an order for liquidation of the company.

[72]	By June 2018 the VPHL loan was two months overdue for repayment, and the Smartlift invoices and those of the other trades who had worked on the apartments totalling approximately $405,000 remained unpaid. VPHL had not been willing to extend the term of its loan which by 5 June 2018 amounted with interest to approximately $2,350,000. The second mortgagee, Number 68 Ltd, was owed approximately $850,000, and Le Compte, was owed approximately $2,000,000.

[73]	In his affidavit sworn on 5 June 2018 in support of the company’s application for an adjournment of Smartlift’s creditor’s petition, Mr Henderson said that the development project was at a stage where approximately $500,000 of further work was required before the apartments could be marketed for sale. Facing an application for an order for the winding up and liquidation of the company, Mr Henderson said that Le Compte had agreed to waive its security so that the surplus proceeds of the receiver’s sale could be applied to paying the unsecured creditors. Mr Henderson said that the company was seeking alternative funding and that a conditional offer of funding of $4,000,000 was being negotiated.

[74]	Despite Mr Henderson’s efforts, no alternative funding was arranged and the order putting the company into liquidation was made by the High Court on 7 June 2018.

[75]	This summary makes it clear that at the time when the company embarked on the apartment development project, the viability of the project and the company’s ability to fund the purchase of the property, the cost of the remedial work and improvements, and the marketing of the apartments, entirely depended on the work being completed and the apartments sold within the time frame prescribed by the terms of the loan funding which had been arranged. The directors of the company could not be confident that the project would not encounter delays and they could not reasonably or prudently proceed with the project and incur debt by engaging contractors and suppliers in the expectation that the parties loaning the funds required for the project (other than Le Compte with which Mr Henderson was associated), would on request by the company readily agree to extend the term of their loans in the event that the project encountered delays.

[76]	Within a matter of weeks after work on the apartments was commenced, the company failed to pay Smartlift in accordance with the terms agreed to when accepting the quotation, and its failure to do so shows that it was insolvent from mid-July 2017 and remained insolvent throughout the period which ended with the Court putting the company into liquidation on 7 June 2018. From this review of the company’s history, I am well satisfied that in his role as a director, Mr Henderson conducted and managed the affairs of the company in a reckless manner. During that period and on behalf of the company Mr Henderson engaged Smartlift and the several other contractors to undertake work on the apartment building and did so in circumstances in which he knew the company was insolvent and unable to meet its obligations to pay for the work, unless it could borrow to do so which was at best an uncertain prospect.

[77]	As the Deputy Registrar noted, there is nothing in the evidence to show that the directors of the company considered the interests of the company’s creditors or undertook an assessment of the financial position as the project proceeded and delays were encountered. And I agree with the Deputy Registrar’s observation that the directors’ failure to do so means that they either did not appreciate or realise the situation the company was in, or if they did they failed to act in response to the situation. Either explanation for what occurred demonstrates reckless and insolvent trading, and I find that Mr Henderson was central and instrumental to the making of decisions and to the management of the company during the extended period of its insolvency prior to liquidation.

[78]	As a director of the company, Mr Henderson was required to comply with the provisions of ss 135 and 136 of the Act which relevantly and respectively provide that a director of a company must not cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors, and must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. I find that the manner in which Mr Henderson caused or allowed the company’s apartment development project to be carried on was such as was likely to create a substantial risk of serious loss to the company’s creditors, and that there was no reasonable

grounds on which Mr Henderson could have believed at the time when it entered into its obligations, that the company would be able to perform its financial obligations to its creditors when they were due.

Failure to keep proper records

[79]	It is accepted by Mr Henderson that the company failed to keep financial records, and Mr Grove submits that as the company was not trading and was accepted by the IRD as being “non-active” and not required to file annual returns, it was not required to do so. I reject that submission.

[80]	Irrespective of whether the company was required to file annual returns and financial statements with the IRD, as the company was engaged in a property development project which involved financing it with borrowings and engaging contractors and other third parties to perform work to carry out the project, the directors needed to maintain financial and accounting records so as to be able to monitor the financial position of the company, and be able to readily assess its solvency to ensure that it was solvent, and would be able to meet its obligations to creditors. Section 194 of the Act requires the board of a company to ensure that accounting records which correctly record the transactions of a company are kept at all times. There is no dispensation from this requirement for a company such as Cambridge on the Avon Ltd which  was  functioning  as  a  corporate  trustee,  and Mr Henderson and his fellow director, Mr Kells, failed to ensure that any accounting records were kept by the company. The failure to maintain proper accounting records meant that as a director Mr Henderson was not able to readily assess the financial position of the company and thereby not in a position to discharge his statutory duties under ss 135, 136, and 137 of the Act.

[81]	The administrative discipline involved in the preparation and maintenance of financial accounts and records would have clearly shown the company to be insolvent during the period commencing around early July 2017 through until liquidation in June 2018, and the availability of that financial information would obviously have informed the directors’ decisions regarding the project and its funding. It is also clear that in his role as a director, Mr Henderson made no provision for the real possibility that VPHL

would not agree to extend the term of its loan beyond 19 April 2018 and how the project would be funded and completed should that happen. From the evidence it appears that rather than taking pro-active steps to anticipate and address the financial pressure the company would be under, the directors were content for the company to endeavour to “ride out” the financial pressure and demands for payment being made by Smartlift and the other unsecured creditors, in the hope that the project would be completed and apartments sold before legal action was taken by either the secured or unsecured creditors which would result in the very outcome that has eventuated, namely losses being suffered by unsecured creditors and liquidation of the company.

[82]	And I am accordingly satisfied that the directors’ failure to maintain proper accounting and financial accounts for the company caused or contributed to the failure and ultimate liquidation of the company.

Did the Deputy Registrar err in the exercise of the discretion to prohibit the appellant from being a director in all the circumstances?

[83]	I have found that the Deputy Registrar did not err in his finding that the directors of the company were required to comply with the relevant provisions of the Act notwithstanding that the company was a corporate trustee, and “non-active” for the purposes of filing annual financial accounts with the IRD.

[84]	I also agree with the Deputy Registrar’s finding that Mr Henderson’s claim that the failure of the company was the result of matters beyond his control cannot be sustained.

[85]	It is apparent that Mr Henderson and his fellow director proceeded with the apartment development project at least from around early July 2017 notwithstanding that the company was insolvent. The short term borrowing from VPHL in October 2017 to repay a vendor finance loan provided by Cranford Entertainment to complete the reinstatement and refurbishment of the apartments meant that unless the project was completed within the six month term of that loan, the company was likely to be under considerable financial pressure. VPHL’s subsequent refusal to extend the term of its loan ought to have been anticipated and that possibility provided for by the

directors, and it cannot be considered to be a factor outside the directors’ control which resulted in the company’s failure.

[86]	I am also satisfied that the Deputy Registrar undertook a thorough and well- informed assessment of the circumstances and factors causing or contributing to the failure of the company, which included a detailed consideration and assessment of the actions of Mr Henderson as having contributed to it. And Mr Henderson’s position that the causes of the company’s failure were due to matters beyond his control demonstrate that despite the benefit of a hindsight examination of the company’s performance and the matters leading to its failure, he appears to have no insight into how his own actions and decisions contributed to the failure. Having failed to acknowledge his contribution to what occurred, Mr Henderson remains a risk of repeating such commercial mismanagement. I agree with the Deputy Registrar that this is a significant factor in the assessment of whether to prohibit Mr Henderson as a director for a period. Furthermore, the Deputy Registrar’s assessment of the risk posed by Mr Henderson to the public and the objective of deterrence and the maintenance of standards of governance and/or management undertaken by directors, well justify his conclusion that a prohibition of Mr Henderson is both necessary and appropriate.

[87]	For these reasons I am satisfied that in reaching his decision the Deputy Registrar did  not  err,  and  his  decision  to  exercise  the  discretion  to  prohibit  Mr Henderson from being a director of a company was well founded having regard to the factual background and Mr Henderson’s conduct which caused or contributed to the failure of the company.

If prohibition was appropriate, did the Deputy Registrar err in imposing a three year term?

[88]	I am also satisfied that the Deputy Registrar did not err in deciding to impose a three year term of prohibition. The three year term can be usefully compared to the two and a half years imposed in Davidson. In that case the Court noted that although

specific deterrence was not needed, the objectives of standard-setting and general deterrence were factors warranting prohibition. Justice Miller said:13

[142] But for the reasons I have just given, standard-setting and general deterrence do matter in this case. They call for a substantial period of prohibition if the sanction is to be meaningful. I agree with the Deputy Registrar that the maximum period of five years is not reserved for the worst possible cases; on the contrary, there may be many cases in which a substantial period is needed.

[89]	In deciding to prohibit Mr Henderson for a period of three years, the Deputy Registrar considered the nature of Mr Henderson’s mismanagement of the company and he considered that rather than a single act of mismanagement there had been a number of separate acts of mismanagement. Referring to Davidson the Deputy Registrar noted:

20.10 The Candidate is different from Mr Davidson. He seemingly had  either no understanding of the basic duties of a company director or else he deliberately ignored them. The Candidate’s level of competence is different to that of Mr Davidson. Mr Davidson was not considered to be a risk to the public but I consider the Candidate to be a risk to be the public. The Candidate ranks below Mr Davidson, in terms of his competence and conduct.

[90]	The Deputy Registrar also took Mr Henderson’s personal background; his history as a director of companies involved in property development with no prior business failures; the likely effect of prohibition on him; and the nature of his mismanagement of the company, and concluded that having regard to the statutory purpose of s 385, the appropriate term of prohibition was three years.

[91]	I find that the Deputy Registrar did not err in his decision to fix the three year term of prohibition. I am satisfied that the Deputy Registrar took all relevant considerations into account and did not consider or take account of any irrelevant considerations. The three year term of prohibition is comparable and distinguishable from the term imposed in Davidson and the reasonableness of that term is also to be assessed by reference to the possible maximum of 10 years provided by s 385(3).

13 Davidson v Registrar of Companies, above n 8, at [142]. The five year maximum period was amended and increased to 10 years effective 1 April 2014, by s 150 of the Financial Markets (Repeals and Amendments) Act 2013.

Conclusion

[92]	The appellant has failed to show that the Deputy Registrar erred in his decision imposing a three year prohibition on him being a director or promoter of a company or being concerned in or taking part in the management of a company.

[93]	For these reasons, I shall dismiss the appeal, and the Notice of Prohibition issued to the appellant by the Deputy Registrar and dated 17 May 2022 is upheld and shall remain in force for three years from the date of the Notice.

Result

[94]	The appeal is dismissed.

[95]	The respondent having succeeded in opposing the appeal is entitled to an order for costs and reasonable disbursements.

[96]	In the event that the parties are unable to agree costs, I direct that they file and serve costs memoranda not exceeding three pages in length, excluding the title page and any schedule or disbursement related documentation. The respondent’s costs memorandum is to be filed and served by 5.00 pm on 7 June 2023. The appellant’s costs memorandum is to be filed and served by 5.00 pm on 21 June 2023. Following the Registrar’s receipt of the parties’ costs memoranda, I shall determine the order for costs on the papers.

Paul Davison J