ABC Contractors Limited HC Auckland M303im01

[2002] NZHC 898

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY M303im01

UNDER the Companies Act 1993

IN THE MATTER of ABC Contractors Limited (in liquidation)

AND

IN THE MATTER of Notice to set aside voidable transactions under the Companies Act 1993

BETWEEN FLETCHER CONCRETE AND INFRASTRUCTURE LIMITED (t/a Firth Industries Limited)
Plaintiff

AND R L MERLO
Defendant

Hearing: 30 July and 15 August 2002

Counsel:
R Moses for plaintiff
C LaHatte for defendant

Judgment: 21 August 2002

JUDGMENT OF MASTER FAIRE

Solicitors:
Skeates Simpson Dowsett, PO Box 27 240, Auckland for plaintiff
Brian Ellis, PO Box 4516, Auckland for the defendant

[1] The shareholders of ABC Contractors Limited passed a resolution appointing R L Merlo liquidator on 29 September 2000.

[2] Mr Merlo issued a notice to the plaintiff pursuant to s 292 of the Companies Act 1993. The notice seeks to set aside certain payments as voidable payments. The notice is dated 14 March 2001. The plaintiff has issued this proceeding seeking orders that the payments mentioned in the liquidator’s notice be not set aside.

[3] The payments in question are the following:

Date presented	Cheque number	Dollar amount
28.02.00	101228	21,164.00
23.03.00	101267	35,879.95
12.04.00	100007	10,000.00
28.04.00	100014	35.000.00
16.05.00	100021	20,000.00
29.05.00	100033	44,300.00
12.06.00	100063	10,000.00
16.06.00	100069	10,000.00
23.06.00	100071	35,000.00
28.07.00	100117	35,000.00
15.08.00	100121	15,000.00
16.08.00	100122	15,000.00
21.08.00	100128	10,000.00
30.08.00	100132	25,000.00
09.08.00	101321	15,000.00
11.08.00	101322	15,000.00
Total	$351,343.95

[4] With the exception of the payments made on 28 February 2000 and 23 March 2000, the payments were made within the restricted period as that term is defined in s 292(6) of the Companies Act 1993.

[5] The following issues require determination in this proceeding:

[a] Were the payments made on 28 February 2000 and 23 March 2000 paid by ABC Contractors Limited?

[b] Were payments made by ABC Contractors Limited on 9 August 2002 and 11 August 2000 to the plaintiff?

[c] Did each payment, set out in the notice, enable the plaintiff to receive more towards the satisfaction of the debt owed to it than the plaintiff would otherwise have received or be likely to have received in the liquidation?

[d] Did each payment take place in the ordinary course of business?

[e] Did the plaintiff receive the payments in good faith?

[f] Has the plaintiff altered its position in the reasonably held belief that the payments were validly made and would not be set aside?

[g] Is it inequitable to order recovery or recovery in full of the payments received by the plaintiff?

[6] The plaintiff acknowledges that at all material times the company, ABC Contractors Limited, was unable to pay its debts.

[7] The following statutory provisions are relevant in a consideration of the issues to be determined:

“292 Transactions having preferential effect

. . .

(2) A transaction by a company is voidable on the application of the liquidator if the transaction-

(a) Was made-

(i) At a time when the company was unable to pay its due debts; and

(ii) Within the specified period; and

(b) Enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation-

unless the transaction took place in the ordinary course of business.

(3) Unless the contrary is proved, for the purposes of subsection (2) of this section, a transaction that took place within the restricted period is presumed to have been made-

(a) At a time when the company was unable to pay its debts; and

(b) Otherwise than in the ordinary course of business.

. . .

(6) For the purposes of subsection (3) of this section, restricted period means-

(a) The period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed;

296 Additional provisions relating to setting aside transactions and charges

(3) Recovery by the liquidator of property or its equivalent value, whether under section 295 of this Act or any other section of this Act, or under any other enactment, or in equity or otherwise, may be denied wholly or in part if-

(a) The person from whom recovery is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside”

[8] It was acknowledged that the proceedings were issued in accordance with s 294 of the Companies Act 1993. The result then is, that until the Court determines the plaintiff’s application, the payments are not set aside.

[9] The plaintiff is a company which carries on business as the supplier of building products and, in particular, concrete products. It supplies approximately 72% of the New Zealand market for concrete blocks. W Stevenson & Sons Limited is the other major supplier and it supplies approximately 16% of the national market.

[10] Mr and Mrs Mason commenced business in 1993. They operated a partnership known as ABC Contractors. In April 1996, an account was opened with the plaintiff. The account was opened with the purpose of supplying ABC Contractors with product for their blocklaying business. On 22 June 1999 ABC Contractors Limited was incorporated. Mr Mason holds 998 shares in the company. Two shares are now held by Mr Kenneth Stewart.

[11] The terms of trade required payment for the product supplied on the 20th of the month following supply. I will explain the pattern of payments in more detail later in the judgment. There were instances of payments made between thirty days and sixty days overdue. There were also instances of cheques tendered in payment being dishonoured. On 27 September 2000, the plaintiff issued a statutory demand against ABC Contractors Limited. The demand was produced. A sum of $157,583.03 was sought pursuant to it. However, following the appointment of a liquidator, the plaintiff filed a proof of debt for $142,583.03.

[12] On 29 September 2000, the shareholders passed a resolution appointing Mr Merlo the liquidator. That appointment was duly advertised on 2 October.

[13] None of the plaintiff’s deponents were cross-examined. The case had to be adjourned due to the illness of the liquidator. Notice had been given for his presence for cross-examination. He was duly called and cross-examined at the second hearing.

[14] I deal with the issues raised in paragraph 5 of this judgment.

[15] The evidence discloses that the payments of $21,164.00 made on 28 February 2000 and $35,879.95 made on 23 March 2000 were payments made from a bank account in the name of Stephen Frank Mason, trading as ABC Contractors. There is no evidence to connect those payments directly to ABC Contractors Limited. Accordingly, those payments are not voidable transactions for the purposes of s 292 of the Companies Act 1993.

[16] With respect to the issue recorded at paragraph 5(b), the liquidator in cross-examination acknowledged that the alleged payments made on 9 August 2000 of $15,000 and on 11 August 2000 of $15,000 in fact were not made. Accordingly, they too cannot therefore be voidable transactions for the purposes of s 292 of the Companies Act 1993.

[17] As a result of those two findings, the payments that I have listed in paragraph 3 of this judgment and which are at issue total $264,300. All are made in the restricted period.

[18] The next issue is that set out in paragraph 5(c) of this judgment. It arises as an issue having regard to s 292(2)(b) of the Companies Act 1993. Examination of this issue is made on the basis that at all material times the company was unable to pay its debts and, of course, all transactions occurred within the specified period and, in particular, the restricted period. When the matter was argued before, I was concerned that there had been no precise examination of proofs of debt by the liquidator. However, the material that was placed before me discloses that a number of creditors have been paid on a percentage basis less for the product supplied than has the plaintiff in this case. In the restricted period, for example, the plaintiff had been paid 64.95% of the invoices it had rendered. The liquidator told me that Hume Pipelines Supplies received 37% of the total sum of its invoices to the company. McCallum Brothers Limited had received 44%. Milburn NZ Limited had received 15% and W Stevensons & Sons had received 9.5%.

[19] The liquidator’s calculation was made from a schedule that he had prepared which was produced as Exhibit 3 and which is headed “Unsecured and Secured Creditors” although, in reality, it relates to unsecured creditors only. Although the liquidator has not specifically analysed each proof of debt and, of course, that position equally applies to the plaintiff’s proof of debt, I am satisfied here, based on the content of the proofs that have been filed and were produced, that the result of the payments paid to the plaintiff in the period under review is to give the plaintiff and advantage and, accordingly, results in other creditors, particularly the creditors that I have referred to in this paragraph being disadvantaged.

[20] Accordingly, I am satisfied that, for the purposes of s 292(2)(b) the plaintiff has received more towards the satisfaction of its debt than it would otherwise have received or have been likely to have received had the payment not been made.

[21] It is now necessary to move on to the issue raised in paragraph 5(d) of my judgment. Section 292(2) exempts a transaction from being a voidable transaction if the transaction took place in the ordinary course of business.

[22] The issue which I must consider here was examined by the Privy Council in Countrywide Banking Corporation Ltd v Dean [1998] 1 NZLR 385, 394 where the Privy Council said:

“Plainly the transaction must be examined in the actual setting in which it took place. That defines the circumstances in which it is to be determined whether it was in the ordinary course of business. The determination then is to be made objectively by reference to the standard of what amounts to the ordinary course of business. As was said by Fisher J in the Modern Terrazzo Ltd case [1998] 1 NZLR 160, the transaction must be such that it would be viewed by an objective observer as having taken place in the ordinary course of business. While there is to be reference to business practices in the commercial world in general, the focus must still be the ordinary operational activities of businesses as going concerns, not responses to abnormal financial difficulties. Their Lordships respectfully agree with the Judge’s conclusion by reference to the policy of the section at p 175:

‘Whether a payment should be regarded as commercially routine at a day-to-day trading and operating level will turn at least in part upon a comparison with the practices of the commercial community in general. But equally, the way in which the particular company has acted in the past, and its dealings with the particular creditor, would seem pertinent. That the payment was simply a repetition of past patterns of behaviour would make it more difficult to argue that it represented special assistance to an insider or the result of special enforcement measures or a situation in which the subject creditor ought to have investigated before extending credit. So at a policy level there is something to be said for the view that relevant considerations should extend to the prior practices of the particular company.’

The section therefore requires examination of the actual transaction in its factual setting (excluding the intent or purpose of the company save as required by subs (4)). Because the examination is undertaken objectively by reference to the standard of the ordinary course of business, there may be circumstances where a transaction, exceptional to a particular trader, will none the less be in the ordinary course of business - as for example its first transaction of a particular type. It may be that transactions undertaken in the past will, because of changed circumstances, no longer be considered as in the ordinary course of business. The payment of some accrued indebtedness may be within the ordinary course of business as may the payment of moneys owing under a lease to secure a lessor’s consent to an assignment of the lessee’s interest. The particular circumstances will require assessment in each case.”

[23] Following the Privy Council’s advice the Court of Appeal in Waikato Freight and Storage (1998) Ltd v Meltzer [2001] 2 NZLR 540, 550 said:

“In our view the judicial approach has become over-complicated and over-refined. The question is whether, at the time it was made, the relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned. So too is the previous commercial relationship between the parties. The observer spoken of in the Privy Council is in reality the Court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether on the evidence before the Court the transaction or payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?”

[24] In considering the question of whether the payments were made in the ordinary course of business the following specific points are noted:

[a] The payments concerned were made over a period of time and whilst the plaintiff was continuing to supply product to the company;

[b] The account ran overdue for all of the period concerned;

[c] Payments appear to be made for fixed sums and without reference to particular invoices;

[d] In May the plaintiff advised it would stop supply if a payment was not made. A payment was made some eight days later although not the full amount due;

[e] The plaintiff, records disclose that its officer expressed a concern to the officer of the company in March that there was a rumour in the market place that the company was facing “the wall”. The record of the discussion records that the company’s officer denied that was so. He advised that he was awaiting a payment from one of his clients. He went on to indicate when further payments would be made;

[f] The plaintiff’s records disclose that there had been a number of contacts made by its staff with the officer of the company concerning payment of the accounts;

[g] There is evidence throughout the period of the dishonour of cheques. Precisely what happened is not revealed. It would seem that the cheques were represented.

[25] Additional matters are relevant to the inquiry. Evidence was produced that:

[a] A large percentage of blocklayers are slow payers. The reason for this is that they have little or no working capital. They are therefore unable to pay for their product until the head contractor pays for it. That often means that payment is made well outside the terms of credit;

[b] The pattern of overdue payment in the particular case was not inconsistent with what was happening with a number of other major blocklayers;

[c] As an industry, blocklayers seemed to be involved in the physical aspects of their business and do not have the reputation of being up to date with their bookkeeping responsibilities and, in particular, the payment of their accounts;

[d] Blocklayers tend to operate on the basis that accounts are rolled over. Payments are made on a fixed sum basis that may not necessarily relate to the invoice issued;

[e] Because the block supplier is the significant creditor of blocklayers, the tendency seems to be for taxes and wages to be paid first and then for the balance to be available to pay the supplier. It is not unusual in that climate for the cheques of the blocklaying contractors to be dishonoured when first presented.

[26] I take from the summary that by-and-large the payment pattern seems to be a repetition of patterns of behaviour that have been followed, not only by the company but by its director, when he was operating the business under the style of a partnership and by other blocklayers. There does not seem to be any exceptional arrangement or any special contracting providing special terms of credit between the plaintiff and the company. It is perhaps significant to record that the biggest loser in the company’s liquidation appears to be this plaintiff. That is not surprising as it clearly was the principal supplier of products to the company.

[27] In addition to the matters that I have referred to, Mr LaHatte drew attention to the fact that a statutory demand was served. Whilst that is true, no payment was made as a result of or subsequent to the service of that statutory demand. Indeed, it took place some month or so after the last payment was made by the company. In the instant case, it does not assist me in the determination of whether the payments that were made prior to the issue of the statutory demand were made in the ordinary course of business.

Conclusions

[28] The conclusion I reach, applying the authorities which I have mentioned earlier in this judgment is that the payments in fact were made in the ordinary course of business. I can find nothing in the circumstances which I have extracted from the evidence which takes the payments made outside what was a pattern of operation that was not dissimilar to many others in the industry.

[29] Having reached that decision then it is strictly speaking unnecessary to go to consider the final three issues raised in paragraph 5 of this judgment. Suffice to say, they are directly related to the application of s 296(3) of the Companies Act 1993. On the first issue, that of good faith, it is noteworthy that the plaintiff’s deponents were not cross-examined and certainly did not admit to any direct knowledge of an impending failure. Mr LaHatte did, as I have already observed, emphasise that there was a concern recorded in one of the plaintiff’s officer’s notes in March. However, the answer given by the officer of the company satisfied the plaintiff’s officer. The pattern of supply and payment simply continued. Good faith, in the context of s 296(3), requires the recipient to have honestly believed that the transaction would not involve any element of undue preference. I can find nothing in this case to suggest that the plaintiff knew that its actions were granting it an undue preference.

[30] So far as the next issue is concerned, this is one of those cases where, no doubt, there would not have been a continuation of supply if no payment had been made as opposed to the rounded up payments that were made. It seems to me, the position is really no different to that which was considered by Gallen ACJ in Firth Industries Ltd v Gray (1998) 8 NZCLC 261,751. In short it fits within the pattern referred to by Tipping J in re Bee Jay Builders Ltd [1991] 3 NZLR 560 and commented upon particularly by him at page 566. Accordingly I hold that the plaintiff did alter its position by continuing to supply. It would not have continued with the supply if the payments to it were to be set aside.

[31] When it comes to the final requirement, the interesting observation that could be made in this case is that if the plaintiff was required to make a repayment of all the sums paid, then of all the creditors it would be both in real terms and on a percentage basis, in the worst position of any creditor of this company. Although, I cannot be precise in making a finding as to exactly which the percentage position is, what is apparent from the evidence is that this creditor without any recovery of the moneys it has been paid being ordered, is still a creditor to the extent of $142,583.03.

[32] One other creditor is recorded as having been owed $104,073. The next highest sum due to a creditor, that of Milburn NZ Ltd is $69,408. If I set the transactions aside, then the plaintiff would become a creditor in the liquidation for some $407,883. All of that would arise simply out of the supply of product. When I consider the position in the light of the above facts. I am led to the clear view that this is a case where it would be inequitable to order recovery of the payments that have been made, that is the $264,300.

Orders and directions

[33] Accordingly, I order that the transactions set out in the liquidator’s notice and which are referred to in paragraph 3 of this judgment, between the dates 12 April 2000 and 30 August 2000 be not set aside.

[34] I confirm the ruling that I have earlier made in this judgment that the payments dated 28 February 2000 and 23 March 2000 were not payments made by the company. They are not voidable transactions.

[35] I also confirm my earlier ruling that the payments alleged to be made on 9 August 2000 and 11 August 2000, I find were not in fact paid. They also are not voidable transactions.

Costs

[36] The plaintiff has been successful in its claim. The plaintiff is entitled to costs which I fix based on 2B together with disbursements as fixed by the Registrar. Such costs shall be paid by the defendant.