Companies are an excellent structure to ring-fence liability for a trading enterprise. Such a structure provides that the liability of the directors and shareholders are limited. This corporate shield can be useful if things do not go to plan and the company fails.

I am a firm believer in hoping for the best but preparing for the worst. If you fail to prepare, prepare to fail!

Cautionary tale

On a number of occasions, I have acted as Counsel on behalf of liquidators who are pursuing directors for breaching their duties. A recent example is the case of Central Tyres Waipukurau Limited (in Liquidation) v Pallesen.

In that case the liquidators alleged that Mr Pallesen:

  1. had an overdrawn current account and was obligated to repay it;
  2. failed to keep proper accounting records;
  3. traded the company recklessly; and
  4. was negligent in his duties as a director.

At the commencement of the proceeding, we obtained a freezing order over the assets of Mr Pallesen, including two properties. This freezing order ensured that the assets would be available to the liquidators for sale if their claim was successful.

Overdrawn current accounts are commonplace in NZ. If the account is overdrawn, the company (or a liquidator acting as its agent) can demand repayment. Further, if appropriate resolutions are not completed for remuneration of a director, salaries can be treated as loans repayable on demand! It is common for liquidators to claw back salaries going back six years because appropriate resolutions were not completed pursuant to s 161 of the Companies Act 1993 (“the Act”). Accordingly, a small amount of compliance with the Act can have a huge impact on director liability.

In this case the liquidators were successful in obtaining judgment for the overdrawn current account.

The liquidators were also successful in all other claims in respect of Mr Pallesen’s failures and breaches of duties as a director. As a result, Mr Pallesen was held liable to all the creditors of the company, and for the liquidators’ fees and legal costs.

As a result of the judgment and their pre-existing freezing order, the liquidators are now in the process of selling the properties of Mr Pallesen.

Key lessons

Director’s liability is only limited if they comply with all of their obligations as directors. Failures may result in personal liability.

Having a background in pursuing directors for their failures gives me a unique perspective in terms of company structures, compliance, governance and asset protection.

It is important that directors assess their corporate structure, governance practices and reconcile this with the potential liability that may flow on from this.

The key lessons to be drawn from Mr Pallesen’s story are as follows:

  1. Make sure that you have your finger on the pulse of the business. If you don’t know precisely the financial position of your company, take immediate steps to find out. Talk to a professional adviser who may be able to assist you in that regard.
  2. Make sure that you prepare proper accounting records that comply with your minimum financial reporting obligations.
  3. Insure against your risk! Directors and Officers insurance may have assisted Mr Pallesen.
  4. Put your personal assets in a secure trust.

I say ‘secure’ trust because the Supreme Court in Clayton v Clayton has recently decided a case that may result in many New Zealand trusts being venerable to attack. Such an attack, if made, could result in many trusts being busted and their assets being clawed back and available for distribution to creditors of the settlors.

Too many of us have a ‘she’ll be right’ attitude that results in large disputes down the line.

I recognise that this is not an easy topic to think about, or discuss. But, it is smart business practice to ensure that proper structures are in place to protect you against unforeseen events.

How we can help you

We are happy to conduct a number of heath checks in respect of:

  1. Trust Deed checks to ensure that your trust is secure from attack;
  2. Governance checks to ensure that you are operating your company in full compliance with your obligations as a director.
  3. Shareholder structures to ensure that the appropriate agreements are in place between shareholders.

We also recognise that cash is king! We have a debt collection and security enforcement practice which is able to collect your debt efficiently to ease your cash flow demands.

We are advocates for transparency. As such, where possible we will fix our fees so that you know the cost upfront.

For more information as to the services that we provide head to www.norlinglaw.co.nz or please do not hesitate to contact me for a no obligation discussion by emailing brent@norlinglaw.co.nz or phoning 021 744 247. We are here to help you get the best from your business.

Brent Norling – Director
Norling Law Limited