Directors
of owner-operator companies trying to trade out of financial difficulty get to
keep payment of salaries provided it is reasonable for the work done, the Court
of Appeal ruled in the liquidation of an insolvent South Auckland transport
company.
Liquidators from Deloitte failed in their
pursuit of Darrell and Diana Petera for wages paid by their insolvent trucking
company Petranz Ltd. Liquidated in 2009,
Petranz’ main debt was $120,555 owed Inland Revenue. Mr and Mrs Petera were the company’s two
directors. He drove one of the company’s
three trucks; she managed the paperwork.
In the High Court, the liquidators sued
Mr and Mrs Petera for some $453,000: being $132,000 claimed by creditors,
$280,647 for costs of the liquidation and $40,000 for costs of the trial. Justice Lang took to this claim with a large
pruning saw. He ruled that Petranz
should have stopped trading nearly 30 months before it was put into liquidation
but held Mr and Mrs Petera liable only for damages of about $84,700: $64,700 in
taxes unpaid after the point trading should have stopped plus general damages
of $20,000 for failing to keep proper financial records.
The liquidators appealed, arguing the
High Court should have allowed recovery of directors remuneration paid to Mr
and Mrs Petera when their company was insolvent. Insiders should not be paid at a time when
outside creditors are not, they said.
Evidence was given that Mr and Mrs Petera failed to complete Companies
Act formalities in authorising their salaries before taking payment. The Act requires directors to certify that
their salary is “fair” to the company.
At Petranz, salaries were decided informally by the directors. PAYE was deducted on salaries paid.
The Court of Appeal ruled directors of
insolvent companies when deciding levels of remuneration do not have to look
after outside creditors as long as the salary they take is fair in respect of
the services provided. Evidence was
given of Mr Petera working 60 to 70 hours a week overseeing the company’s
operations and Mrs Petera spending about 20 hours a week on company business. The liquidators did not dispute the level of
salaries paid.
The Court of Appeal cautioned its ruling
is not a licence for directors to keep milking money out of a company having no
hope of becoming solvent. Directors owe
a duty to stop trading if there is no chance of profitability. But they are entitled to be paid a reasonable
salary while attempting to turn around an insolvent business.
Madsen-Ries
v. Petera – Court of Appeal (8.04.16)
16.055