Three accused over firm’s failure

Directors continued to trade when internet provider was insolvent and in debt for more than $1.1m, court told

Aformer Forsyth Barr investment adviser who poured $460,000 into a nowcollapsed internet provider failed to impose discipline on the company and his funding meant the business’ failure was larger than it otherwise would have been, the company’s liquidator has told the High Court.

Rowan Kenley Johnston is one of three men being chased by NZNet Internet Services’ liquidators for compensation after the company collapsed in 2011 owing creditors more than $1.1 million.

NZNet was an internet provider set up in the 1990s that boasted “stateof-the-art network infrastructure’’ offering “business grade’’ performance to its customers.

But according to its liquidators, NZNet was unable to pay its due debts from 2008.

The liquidators, Damien Grant and Steven Khov, have alleged that Johnston — with fellow NZNet directors Stephen Andrews and George Thomas — elected to trade while the company was insolvent.

The three men are accused of reckless trading, of failing to exercise the skill and diligence of a reasonable director and of failing to keep proper accounting records.

Before proceedings had even begun yesterday, Andrews’ lawyer told the High Court at Auckland that his client was withdrawing his defence to the liquidators’ claim.

The liquidators’ lawyer Brent Norling then told Justice Brendan Brown that his clients were claiming $338,000 from Johnston, $1.387 million from Andrews and $130,000 from Thomas.

These amounts are allegedly the debts which were incurred by the company at the time the men were directors. Andrews had been a director of the company for almost its entire life. Thomas, on the other hand, was a director for only a matter of months in 2011. Johnston became a director in 2009 and resigned two months before liquidation. He invested $460,000 in the firm.

The largest debt owed by NZNet is to Inland Revenue, which Norling said the company had problems paying from July 2007.

Two witnesses gave evidence for the liquidators. The first was Jocelyn Crosby, who worked in an accounting and payroll position at NZNet for a few months during 2011.

Crosby said that it was clear the company was not making a profit during the period she worked there.

Towards the end of her employment, the company was struggling to pay staff, she told the court.

Crosby said Andrews did not keep proper records and that invoices were “scattered across his desk in complete disarray”.

Grant was the other witness called yesterday and said that at one point before it went into liquidation NZNet had to use a diesel generator because it had not paid its power bill.

Responding to questions from Justice Brown, Grant said the company probably would have failed even if Johnston had $460,000.

Johnston’s money was used to allow the business to become much bigger and Grant said its failure was then larger than it otherwise would have been.

“In some ways this ship was always going to sink, the only question was how far out from shore it was when it did and it was a long way out when it finally did go down.”

Asked during cross-examination specifically what part of Johnston’s conduct was reckless, Grant said the director became aware of “underlying problems” at the business but failed to put the structure in place to fix this.

“It was that failure to impose any sort of financial discipline on the company, that allowed the company to trade for so long,’’ Grant told the court.

The case continues today.

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