Angry that it was the only outside creditor not paid in full, construction company Watts & Hughes took over from liquidator of Christchurch company La Di Da Ltd the right to sue director Vijay Biala for reckless trading. The High Court found Mr Biala had not traded recklessly.
It is very unusual for unpaid creditors of an insolvent company to take an assignment of liquidators’ rights to sue directors. This right to sue is usually exercised by liquidators alone, acting on behalf of all unpaid company creditors; a right liquidators seldom choose to exercise for economic reasons. Costs of litigation are high, often for little return.
The High Court was told Watts & Hughes tendered for the 2014 fit out of Mr Biala’s new restaurant in Victoria Street, Christchurch. Contract price was $124,000, plus GST. Scheduled completion date was September 2014. The company funded construction by borrowing. Completion ran over two months late. There were disputes over reasons for the delay and whether certain contract variations had been approved. In December, Watts & Hughes claimed $48,000 was outstanding. It pushed La Di Da into liquidation for non-payment. Insolvency Service was appointed liquidator.
Insolvency Service’s investigation raised suspicions that company assets sold by La Di Da just days before liquidation were sold at below market price. Watts & Hughes complained it was hung out to dry, left unpaid at a time when Mr Biala had ensured La Di Da’s trade creditors were paid in full.
Watts & Hughes sued Mr Biala personally as director of La Di Da alleging he had mismanaged the company, trading recklessly. Company law holds directors personally liable for reckless trading.
Justice Cull ruled Mr Biala had not mismanaged his company. La Di da was a new venture. Finance for the fit-out was arranged in advance from both restaurant trade financiers and family sources. There was a reasonable expectation business would trade profitably if the fit-out were completed on time and on budget. Late completion meant the business missed increased sales expected from visitors to Christchurch for ‘Cup Week.’ Cost overruns and disputed variations added financial pressure.
Watts & Hughes Construction Ltd v. Biala – High Court (17.11.20)
20.179