Xian Peng was ruled personally liable for $342,600 of his Taupo restaurant’s debts after continuing to trade for four years with his business insolvent; liable as director for Companies Act reckless trading.
The High Court was told Mr Zeng set up business in 2017, trading as No. 1 China Restaurant.
It was an ‘asset-free’ business; the landlord provided both premises and equipment.
Within a year, it was clear his restaurant was in difficulty. It was not generating enough income to pay its bills, specifically its tax liabilities. Despite this, Mr Zeng continued operating his restaurant business at a loss for a further four years. Unpaid taxes increased.
In 2022, Inland Revenue put his company into liquidation.
Mr Zeng told liquidators his restaurant had been severely affected by covid-19 lockdowns.
In the High Court, Justice Walker ruled Mr Zeng had traded recklessly.
The Companies Act holds directors liable for company debts should they continue trading when there is a ‘substantial risk’ of loss to creditors.
When aware their company is insolvent, directors are entitled to a reasonable time to take stock of the situation and get professional advice, Justice Walker said. But they cannot continue trading without a carefully thought-out strategy having a good prospect of success, she said. Directors should not be using creditors’ money, gambling that business will improve.
Liquidators told the court Mr Zeng kept no accounting records. There was no evidence Mr Zeng sought advice on how to improve profitability. He did not put in extra cash when his company got into difficulty. He did not discuss with Inland Revenue a possible repayment schedule to clear his company’s tax debs.
It was clear to Mr Zeng by September 2018 that his company was insolvent, Justice Walker said. He made no attempt in the following few months to work through a potential rescue strategy.
Mr Zeng was held personally liable for his company’s net financial deterioration from December 2018 to date of liquidation; about $342,600.
New Zealand LJ Food Express Taupo Ltd v. Zeng – High Court (4.09.24)
24.221