Premature Proceedings Create Mess, Not Success
Benjamin Franklin once said that “by failing to prepare, you are preparing to fail.”
While it is true that there is no way to guarantee success in a legal proceeding, Norling Law advocates that meticulous preparation is the only way to put forward your client’s best chance of succeeding in their case. But what happens when proceedings are brought prematurely, without adequate preparation?
A recent case that Norling Law acted in demonstrates this. In Another Orange Service Centre Limited (In Liquidation) v Vincent [2021] NZHC 2135, the liquidator of the Another Orange Service Centre Limited (In Liquidation) (the Company), Mr Noyce, brought a claim against the sole director and shareholder of the Company, Mrs Vincent. The claim was for repayment of the Company’s shareholder current account, which had allegedly been overdrawn by $914,612 at the point of liquidation. The claim was brought via summary judgment application in the High Court.
The claim
Prior to its liquidation, the Company operated a motor vehicle repair shop. Mrs Vincent withdrew sums of money from the Company’s account, in her role as a shareholder. When the Company went into liquidation, the liquidator investigated the books of the Company. When calculating the claimed amount, he added payments that had been made from the Company’s bank account to Mrs Vincent’s personal bank account, and what appeared to be payments of Mrs Vincent’s non-business-related expenses by the Company.
The liquidator claimed that he had assessed the Company’s records and could not locate any evidence that Mrs Vincent complied with the requirements of s 161 of the Companies Act 1993 when she made these payments. As such, the payments were presumed to be personal drawings, and therefore repayable on demand.
For an in-depth discussion on s 161 of the Companies Act 1993, see an earlier article that Norling Law published, here. In summary, where payments are not recorded under the requirements of s 161, the payments retain a status as advances or drawings that are repayable on demand. The director or shareholder that withdraws the sums becomes personally liable to repay those monies to the company, unless they demonstrate that the payments were fair to the company.
Summary judgment
In a summary judgment application, the applicant must prove that the respondent has no arguable defence to the claim. That is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty that the application ought to be granted. As soon as there are disputed facts and the dispute is genuine, a judge will not usually engage in granting summary judgment.
In this case, the onus was on the liquidator to prove that Mrs Vincent had withdrawn the claimed sums as personal withdrawals, and at the very least, that she did not comply with the requirements of s 161.
There is more to a dispute than what is first disclosed
Prior to the commencement of the proceedings, the liquidator wrote to Mrs Vincent on 25 March 2021, attaching his nearly 900-page analysis of the Company’s accounts. He requested that Mrs Vincent review and identify any incorrectly allocated payments to her, by 29 March 2021, just 4 days later.
Norling Law was engaged at the point Mrs Vincent received the 25 March 2021 letter. However, there was no response from the liquidator when Norling Law requested further time so that it could properly analyse the information that the liquidator had provided.
On 30 April 2021, the liquidator made a demand for full payment of $914,612 from Mrs Vincent. Shortly after this, summary judgment proceedings were commenced in the High Court. This was just over one month after the first demand to Mrs Vincent was made.
Upon filing the claim, the liquidator filed a supporting affidavit. However, he did not exhibit in this affidavit the Excel Workbooks (containing his analysis), or the source documents upon which the analysis was based. The liquidator filed draft financial accounts from the Company but provided very little detail of the methodology he adopted to distinguish personal and business expenses. He explained that providing this information would require more than 900 pages of his accounting analysis.
Further, the liquidator did not provide these source documents or analysis in his second affidavit. This is surprising as Mr Turner, an independent expert for Mrs Vincent, had challenged the validity of the liquidator’s assessment for Mrs Vincent’s liability on several bases. As noted by Associate Judge Paulsen, the liquidator’s response to Mr Turner’s evidence was ‘superficial’. Further, Associate Judge Paulsen said that in circumstances where the applicant’s claim is founded upon the liquidator’s analysis, it is to be expected that all of that would be provided.
On behalf of Mrs Vincent, Norling Law argued that the applicant failed to produce sufficient evidence to establish the claim, and consequently, that Mrs Vincent had an arguable defence to liability against the whole sum.
Associate Judge Paulsen was not satisfied that the liquidator had calculated the sum owing correctly. It was noted that a decision could not be made in the absence of evidence.
Furthermore, the liquidator was found to have not given his evidence in compliance with rule 9.43(2) High Court Rules 2016, and the code of conduct for expert witnesses. His Honour found that on the evidence provided by Mrs Vincent, Mr Turner and Mr Noyce, a large portion of the sum claimed must have been drawings, however, the exact amount could not be determined. Consequently, Associate Judge Paulsen entered judgment for the liquidator against Mrs Vincent as to liability but found that quantum could only be determined following a further hearing and there was no immediate obligation to pay any amount.
Discussion
The difficulty with this case is that there was little evidence before the court to make a judgment from. Associate Judge Paulsen had no choice but to divide the issues into liability and quantum as there was no way that quantum could be decided. It is this writer’s observation that if this matter had been pursued as a standard proceeding, both parties would have had more time to file and respond to evidence. Accordingly, the outcome could have been vastly different.
While the liquidator had the onus of submitting evidence to prove their case, Associate Judge Paulsen thought that both parties had ample time to file further evidence from the beginning of the proceedings until the time it was heard before him.
Our thoughts
In summary, Norling Law believes that this case was not suitable for summary judgment, as the evidence to succeed in the application was not put before the court. We submit that it is an inefficient use of resources to have progressed the matter through this path, without meticulous preparation having taken place. We believe that it would have been more efficient to have this case heard in full through ordinary proceedings from the beginning.
While liability has been found, quantum is yet to be decided.
With more time, and meticulous preparation, who knows, the liquidator may have walked away with more than partial success.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
Anna practices in the area of commercial litigation and has appeared as Counsel in the District Court, High Court and the Court of Appeal, having successes in all Courts. Anna has a special interest in corporate, insolvency and relationship property law.