Decisions by the director of an insolvent property company to box on and complete houses under construction to sell for a better price were made in good faith and did not amount to reckless trading ruled the Court of Appeal, overturning a High Court order that Auckland property developer Leonard Cooper pay $280,000 damages.
Debut Homes Ltd is in liquidation, insolvent. Liquidators allege Mr Cooper’s 2012 decision to trade-on prejudiced Inland Revenue which is owed some $450,000 for unpaid GST plus interest and penalties. The court was told Debut Homes was in financial difficulty by the end of 2012. It had four properties under construction on Auckland’s North Shore. The options were: sell the part-completed houses, put the company into liquidation resulting in forced sales by Debut Homes mortgagees, or complete the properties selling them for a better price. Mr Cooper decided to finish the houses. Extra liquidity was provided by $380,000 of family money lent to the company, most of this an inheritance received by his wife Tracey, a fellow shareholder in Debut Homes. Mr Cooper completed the construction work for no agreed wage or salary. The four properties were sold on completion. Financial returns were less than budgeted because of unanticipated cost overruns. The family advance of $380,000 was not repaid in full; $200,000 was left outstanding. GST on sales was left unpaid.
The Court of Appeal ruled decisions to trade-on did not prejudice Inland Revenue. GST would fall due immediately if the four properties had been sold in late 2012, partly finished. Continuing construction did increase Debut Homes GST liability, but equally a higher sale price for finished homes had the potential to improve returns to creditors, including Inland Revenue. Completing the houses was a reasonable commercial decision, the Court of Appeal said. Costing made at the time could not be criticised. Commercial decisions should not be judged with the benefit of hindsight, the court said. The fact that Mr Cooper worked for some eighteen months without wages and the further fact that family money was put in to improve liquidity all showed Mr Cooper acted in good faith.
While not paid wages, Mr Cooper did take $34,100 in cash drawings from the company. Drawings amount to unsecured borrowing. The court ordered repayment.
Cooper v. Debut Homes Ltd – Court of Appeal (8.03.19)
19.052