The court testimony by tiny home company director Charles Innes stunned a veteran lawyer of some of New Zealand’s largest and most notorious business failures, writes Ben Leahy.
Tiny home builder Charles Innes made sure he cashed his $3000 pay cheque each and every week.
In just over two years as director of tiny home building company Podular Housing Systems, he paid himself more than half a million dollars, liquidators allege.
The families owed money by Podular haven’t been so lucky.
One couple paid more than $750,000 for a home that was never finished. Another paid $157,000 for a home that was never started, liquidator evidence shows.
Parents were left stranded in caravans with their children, others are stuck paying mortgages for homes the company didn’t deliver.
Tradies, Podular staff and the taxman are all out of pocket.
But “you ensured that every dollar that this company owed to you, you made it pay you”, FortyEight Shortland lawyer Bret Gustafson asked Innes in the High Court at Auckland last week.
“Yes,” Innes said simply.
Liquidator: A spectacular failure, how did it happen?
Innes had entered the courtroom smiling that morning, appearing to scan for friendly faces.
When he didn’t find any, his face closed over, showing little emotion.
Podular liquidator Gerry Rea Partners had called the cross-examination to hunt for answers as to why the company failed so spectacularly during its two years of trading from about October 2020 to November 2022.
They especially wanted to press Innes on why he had not shut Podular down before it racked up millions in debt.
Innes hasn’t been charged with any crime or found guilty of any wrong-doing.
The hearing’s primary purpose was information gathering – no judgments or rulings were delivered afterwards.
But as sole director of two companies - Podular and another called Sanders Manufacturing – Innes oversaw a more than $10m collapse, one of the largest failures in New Zealand’s tiny home and cabin sector.
Podular tiny home builder director Charles Innes is now living in Australia after leaving New Zealand shortly before Podular went into liquidation.
Speaking to the liquidator’s lawyer Gustafson from the witness stand, he said he at first hadn’t understood the “gravity” of Podular’s precarious finances.
That’s because the company’s accounting books were in such a mess, he said.
When he did understand the seriousness, Innes claimed he wanted to close Podular down but others stopped him from doing so.
Over the course of four hours, he gave hesitating, apparently contradictory testimony at times.
He admitted to deliberately lying to some customers.
And when referred to a bulging folder of documents laid before him by Gustafson, Innes’ recollections were often vague.
“Not off the top of my head … for argument’s sake, I will say yes … I can’t recall the conversation … I couldn’t tell you what that was,” he said to various questions.
From the gallery a stony-faced Podular customer and Inland Revenue tax representatives listened in.
There was also something Innes didn’t do while on the stand: apologise.
Young Wairarapa dad Eli Thomas said he is not surprised.
Thomas claims he handed over $350,000 in progress payments to Podular for a small home.
The company promised to build the home in its factory before delivering it to Thomas’ picturesque Martinborough property, about 80km north of Wellington.
But Podular never finished the home before going into liquidation.
Thomas said Innes had previously claimed in public he would reach out to those devastated by Podular’s collapse to apologise.
But Thomas - who couldn’t make it to last week’s hearing - said he never heard from the builder.
“That was pretty disappointing that we didn’t even get an email or even a text message. It just seems like he’s only looking after one person and that’s himself.”
Gustafson told the Herald after the hearing finished he was struck by what he heard.
He has worked on some of New Zealand’s largest and most notorious insolvencies over the last 33 years, he said.
That includes among others: Equiticorp, a saga involving $327m in complex money exchanges that led to a businessman being jailed and criticism of the then Labour Government, Goldcorp in which a gold investment company collapsed leaving 1600 customers out of pocket, and Levenes in which a large homeware retail chain failed after being sold.
“I cannot recall ever seeing a company that was so obviously and fundamentally insolvent from its first months of trading and a director of that insolvent company continuing to trade it and incur increasingly large amounts of un-repayable debt for years,” Gustafson said about Podular and Innes.
He also cannot recall a director paying himself every dollar of “unsecured” debt he was owed ahead of all other creditors, Gustafson said.
So how did it get to this?
Lawyer: A history of poor business practice and record keeping?
Liquidator Gerry Rea Partners had taken lengthy steps to get Innes to appear in court last week.
Innes had flown out of New Zealand in October last year - one month before Podular went into liquidation.
That led liquidators to seek and gain a judge’s order to force Innes to fly back from Australia to give testimony.
Eli Thomas and Sophie Annen with daughter Charlie-Rose pictured last year at their South Wairarapa property while waiting for the delivery of their Podular home. Photo / Dave Lintott
With Innes back in the country, Gustafson began last week’s hearing asking if the businessman understood that directors are meant to turn over a company’s books and financial records to the liquidator.
“Yes, absolutely,” Innes replied.
Gustafson then pointed Innes to the liquidators’ reports of three companies he had previously served as sole director at.
Called Maroochy, Installers Group, and Installers, they all went into liquidation.
Liquidators noted in all three cases their efforts had been hampered by Innes’ poor business records and failure to hand over either some or all documents, Gustafson said.
Why didn’t you hand over the records, Gustafson asked Innes in the case of Maroochy.
“I don’t know. I’ve got no answer to that,” he replied.
Liquidator: You paid yourself half a million dollars?
“The liquidators haven’t been able to put their hands on an employment contract. Do you have one,” Gustafson asked, now turning to the salary Innes drew from Podular.
“Ah, no,” Innes replied.
Innes had just come out of bankruptcy when he founded the Podular business in 2019 with fellow shareholder Ilan Gross.
Innes signed off on the financial books as sole director, but both men were shareholders the majority of the time.
Not long after in late 2020, they spun off the tiny home-building business into new company Podular Housing Systems, which Gerry Rea Partners are now liquidating.
The original company was renamed to Sanders Manufacturing. It mainly focused on building fences and decks but is now also in liquidation owing money.
Innes told the court that as business director he was paid $3000 per week.
Two years of $3000 per week payments should total just over $300,000.
But liquidators compiled what they said is a record of $520,000 in payments going from Podular to Innes in just over two years.
Innes said he doubted he’d been paid $520,000.
“But there is a reasonable proportion of that which is for expenses incurred and all the receipts for those are sitting in Xero,” he said, explaining he’d paid some Podular expenses out of his own pocket but put all receipts for his claims in the company’s accounting software.
“Well, no, they’re not,” Gustafson said, pointing out liquidators had been unable to find the receipts.
Innes countered, now in a louder voice, claiming that if that is the case, they must’ve been removed after he left the country by someone with access to the records.
Gustafson reminded Innes that an associate judge had earlier ordered him to hand over all records related to the company. That included his personal bank statements showing all transactions on which he had claimed expense payments back from Podular.
Innes eventually accepted he would need to hand his bank statements over.
“Okay all right, I will,” he told Gustafson.
Lawyer: ‘Why didn’t you stop trading?’
Gustafson early in the hearing reminded Innes directors are legally obliged to not trade recklessly.
Trading a company when it is insolvent and unable to pay its bills or deliver services can be a crime.
Gustafson then noted that within just six months of trading, Podular had $522,000 of bills and just $45,000 cash to pay them.
A Podular home as shown on social media. Photo / Facebook
He asked why Innes didn’t immediately shut the company down to avoid racking up more losses for customers and suppliers.
Innes said he only kept trading because Podular’s account books were in such a state of mess he didn’t understand the “gravity” of its financial position.
The business’s Xero accounting software still contained a mix of the finances of two companies – the new Podular Housing Systems company and the older Sanders Manufacturing, he said.
“It was hard to decipher … what was what,” he said.
It was not until about one year later in 2022 when he hired professional accountants to clean up the books that he understood, Innes said.
That meant it was only in 2022 that he truly understood 2021′s finances, he explained.
After the morning break, Gustafson turned to the company’s financial situation in 2022, beginning a more aggressive line of questioning.
He noted that in the 12 months to March 31, 2022, Podular’s “actual losses” were $2.38m and the situation only got worse, later increasing to more than $6m in losses, according to the company’s own records.
“Surely during this year you became aware that this company was losing money massively and putting creditors at risk,” Gustafson asked.
“Yes,” Innes said quietly, looking down towards the ground from behind dark-rimmed glasses.
“Well, it’s one that you’re going to have to answer,” Gustafson said.
Innes said his fellow shareholder, Ilan Gross, had developed plans with a large New Zealand construction company to sell the business.
Innes believed this would “recapitalise” the business and keep it going, he said.
“It’s not a lack of capital that is killing this business, Mr Innes. It is making systemic losses. It’s fundamentally flawed. Do you not understand that,” Gustafson countered.
Innes also claimed that from about May 2022 he wanted to shut down Podular but was stopped by Gross, who wanted to keep it going.
But Gustafson was not satisfied with this explanation.
He said Innes as director had the legal power to put the company into liquidation or to resign as director and thus remove himself from liability if he chose.
Innes said he didn’t know he could do that.
With hindsight he would’ve probably done things differently, he said.
Later, when shareholder Gross found out the true state of the company’s finances, it was him who decided to put the company into liquidation in November 2022 rather than Innes, Gustafson argued.
He pointed to a phone text message Innes had sent to Gross at the time in November last year.
“Do not liquidate. Just hold fire for a few days, please, working on something,” Innes wrote in the message.
In response, Innes told Gustafson he wasn’t trying to stop Gross from closing the business, he instead wanted time to shop around for a different liquidator because he had heard Gerry Rea Partners were not “friendly”.
Lawyer: You told customers something you knew to be untrue?
Gustafson turned to some of the cases in which customers lost hundreds of thousands of dollars.
One customer signed up for a home with Podular in December 2021, paying $157,000 in progress payments.
However, 11 months later when Podular went into liquidation, staff had not done any work on the house, Gustafson asked.
Innes agreed that was true.
Gustafson then asked Innes if he ever told customers that the deposit money they paid for their houses would be held separately and only ever used to fund their specific builds.
Innes said in “some instances yes” he had told customers that.
He next admitted that he instead used these deposits as cash-flow to fund Podular’s day-to-day expenses.
“So when you told these people that, you knew you were telling them something that was untrue,” Gustafson asked.
Gustafson mentioned another customer, John Meehan.
Meehan told liquidators Innes contacted him on September 27, 2022 seeking a $45,000 progress payment - just one month before Innes went overseas and two months before Podular went into liquidation.
Innes at first denied speaking about payments with Meehan, saying: “I think you’ll find it is someone else that spoke to him about that”.
Then under further questioning, Innes said he couldn’t recall exactly what was said in the conversation.
Surely at this point you knew there was no chance of Meehan getting a completed home, Gustafson asked.
“Are you going to pay [them] the money back,” Gustafson said.
“I don’t have the means to,” Innes concluded.
Almost broke us apart: Young couple’s $400,000 nightmare dealing with Podular
Podular almost broke young parents Eli Thomas and Sophie Annen’s family apart.
The 35-year-old Thomas thought he was setting his young family up for life when he ordered a modular home from builder Podular Housing Systems.
He made $350,000 in home progress payments to Podular as well as more than $25,000 in interest payments on his bank loan.
Podular had promised to build the house in its Hamilton factory before delivering it to Thomas’ Martinborough property, about 80km north of Wellington.
It was supposed to have arrived in February, ahead of the April birth of Thomas and partner Sophie Annen’s daughter Charlie-Rose, he said.
But Podular never finished the home before collapsing.
Eli Thomas and Sophie Annen with daughter Charlie-Rose. Photo / Dave Lintott
Thomas said at the time he had poured 20 years of life savings in and it was heartbreaking to lose it and be forced to spend months in a cabin with a newborn.
The experience almost “separated me and my partner’s relationship”, he said.
“It’s a horrible position to be in for us, both financially and more-so emotionally.”
Podular liquidators went to court to decide who owned the unfinished homes sitting in the company’s factories – customers or the liquidator.
In a precedent-setting decision, the judge ruled the customers do.
Thomas managed to borrow $30,000 more from the bank to transport his unfinished home on to his property.
He now will have to scrap and scrape even more money together to put the home’s pieces together and lay foundations for a home that is supposed to have already been paid for and delivered.
Working on the home at nights after 50-hour working weeks will be a grind, he said.
