New Zealand’s ‘do it yourself’ tradition does not extend to corporate turnarounds. It is a breach of director’s duties to self-manage corporate restructuring where there is no chance of returning to solvency. Leonard Cooper was ordered to pay $280,000 after completing houses under construction by his insolvent company Debut Homes resulting in increased loss to Inland Revenue.
Inland Revenue forced Auckland residential property developer Debut Homes Ltd into liquidation in March 2014 claiming unpaid GST and penalties totalling $450,000. Liquidators Deloitte sued Debut Homes director Leonard Cooper alleging Companies Act breaches for reckless trading and trading whilst insolvent. Mr Cooper claimed he improved the company’s position by finishing projects in hand and getting a better price, rather than quitting which would have resulted in a fire sale of unfinished houses.
Their difference in opinion reached the Supreme Court. It ruled formal mechanisms in company law should be used for workouts by near-death insolvent companies: voluntary schemes of arrangement; statutory schemes of arrangement; and receiverships. In each case, affected creditors get a say and someone independent of the company takes control. If directors self-manage restructuring of an insolvent company, they must at all times keep creditors’ interests at heart, it said. Self-managed restructuring is not an excuse to ‘rob Peter in order to pay Paul,’ said the court.
The court was told Debut Homes was in financial difficulty in late 2012. Mr Cooper decided unilaterally to wind down company activities, completing houses under construction over the next eighteen months before selling them. Unpaid GST of $300,000 was anticipated. Proceeds of sale went primarily to paying off secured debt. GST liability increased beyond earlier estimates. It was left unpaid. Attempts to do a deal with Inland Revenue over unpaid GST came to nothing. Of trade debts incurred during the wind-down period, $28,700 were left unpaid.
It is not legitimate for directors to enter into a course of action to ensure some creditors get a higher return where this is at the expense of incurring new liabilities which will not be paid, the court said. When insolvent liquidation is likely, it is not for directors to carry on trading just to reduce the extent of loss. This only serves to benefit some creditors at the expense of others. By continuing to trade, Mr Cooper threw the loss onto Inland Revenue with unpaid GST accumulating, the court said.
Debut Homes Ltd v. Cooper – Supreme Court (24.09.20)
20.158