Director was 'reckless' but liability is nil

Liquidators went to the High Court at Auckland seeking the full amount of the company's debts. Photo / File

A former Forsyth Barr broker on the board of a failed internet provider acted recklessly but does not have to pay anything to the company's liquidators, a High Court judge has ruled. Another director and shareholder of the firm, however, has been deemed personally responsible for the failed firm's $1.1 million of debt.

Auckland's NZNet - which claimed to be the first internet service provider in New Zealand - ceased trading in November 2011, more than three years after the point liquidators believed it would have failed the solvency test.

It had operated since 1995 under the direction of Stephen Andrews, who approached then-Forsyth Barr stock broker Rowan Johnston to put money into the business and join its board in 2009.

By the time he had resigned in September 2011, Johnston had poured $460,000 into NZNet.

Liquidator Damien Grant believed it was Johnston's financial help that allowed the company to grow, making its subsequent failure all the more catastrophic.

Johnston had known Andrews for 30 years and continued to work at Forsyth Barr after joining the NZNet board. He is no longer employed by the brokerage firm.

Grant and co-liquidator Steven Khov accused Andrews, Johnston and another NZNet director, George Thomas, of reckless trading, breaching duties and failing to take the appropriate care.

Grant and Khov went to the High Court at Auckland seeking the full amount of the company's debts from Andrews, $334,675 from Johnston, and $126,688 from Thomas.

Andrews did not defend the claim and Justice Brendan Brown said, in a decision released on Monday, that the director caused and allowed the business to be carried on "in a manner likely to cause substantial risk of serious loss to the company's creditors".

But the judge did not accept the liquidators' argument that Johnston was put on notice "from day one" about serious issues the company was facing.

...he failed to exercise care, skill and diligence of a reasonable director.

Justice Brendan Brown

Justice Brown, however, said that from April 2011, the director should have realised all was not well at the business.

"From that point in time in my view, he failed to exercise care, skill and diligence of a reasonable director."

The judge said Johnston had acted recklessly between July 26 and September 15, 2011.

"Certainly at that point [in July] Mr Johnston should have taken steps to stop the company trading."

While the judge said Andrews ought to contribute to the full $1.1 million of the company's debts, he said that the $243,000 incurred when Johnston was a director should be offset by the amount he put into the business.

Because that was $460,000, Johnston's liability was nil, a point which the liquidators intend to take to the Court of Appeal.

Thomas was ordered to contribute $83,841.