26 September 2024

Reckless Trading: Boaden v. Mahoney

 

Owed unpaid rent and the cost of clearing debris from an Auckland site, commercial landlord Drew Boaden did not roll over when learning he would receive no cents in the dollar on liquidation of tenant, Civil Underground Ltd.  He sued Civil director Tim Mahoney, getting a court order that Mahoney personally pay him $89,400 because of Mahoney’s reckless behaviour in continuing Civil Underground’s business operations whilst it was insolvent and unable to pay its debts.

Setting up commercial operations under the Companies Act is oft touted as insulating owners from personal liability for unsecured business debts.  These debts are debts of the company; not debts of the directors or the shareholders.

But trading as a corporate is not a licence to cheat creditors.

If directors recklessly trade their company whilst it is insolvent, Companies Act allows courts to order directors tip funds into the liquidation as compensation for all creditors harmed.

When a liquidator sues, the liquidator is prime beneficiary.  Liquidation fees and costs are first claim on any insolvent company’s assets.  Creditors get only what is left over.

The Companies Act also allows individual unpaid creditors to take the same legal action as a liquidator, recovering what the company owes by suing directors personally.

The High Court was told Mr Boaden’s problems developed after he gave tenant Civil Underground notice in early 2020 to vacate a 5.5 hectare site in Glen Eden used as a storage yard for Mr Mahoney’s earthmoving equipment.  The yard had been sold.

Civil stopped paying rent and failed to clear all debris and rubbish stored on site.  Mr Mahoney subsequently put his company into liquidation.

Learning that unsecured creditors would get nothing on liquidation, Mr Boaden sued Mr Mahoney directly, alleging reckless trading in breach of the Act.

Justice Tahana ruled Civil Underground was insolvent from late 2018.  Unpaid debts were accumulating.  Mr Mahoney’s expectations of profitable work on the horizon for Civil Underground were unrealistic.

Lockdowns imposed during the covid-19 pandemic did not contribute to Civil Underground’s insolvency, Justice Tahana said.  Civil was insolvent long before.

As director, Mr Mahoney was ordered to pay Mr Boaden $89,400 for unpaid rent and rubbish disposal costs, company debts accruing after he failed to stop trading when it was clear that immediate liquidation was required.

Mr Mahoney was barred from defending Mr Boaden’s reckless trading claim.  This was a court-imposed penalty for Mr Mahoney’s earlier failure to hand over company records.

Mr Mahoney said these records had been lost, with his desktop computer and laptop stolen from his car and his mobile phone junked after it stopped operating.

Boaden v. Mahoney – High Court (26.09.24)

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