Blanchett v McEntee Hire Holdings Limited HC Rotorua CIV 2010-463-270
[2010] NZHC 1524
•5 August 2010
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV 2010-463-000270
IN THE MATTER OF the Companies Act 1993
AND
IN THE MATTER OF of a voidable transaction
BETWEEN DAVID MURRAY BLANCHETT AND MALCOLM GRANT HOLLIS Applicants
ANDMCENTEE HIRE HOLDINGS LIMITED Respondent
Hearing: 28 July 2010
Appearances: M D Branch and S J Rawcliffe for the Applicants
N W Woods for the Respondent
Judgment: 5 August 2010
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
05.08.10 at 2:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors/Counsel:
M Branch / S Rawcliffe, Harkness Henry, Hamilton – [email protected]
N W Woods, Rice Craig, Papakura – [email protected]
DAVID MURRAY BLANCHETT AND MALCOLM GRANT HOLLIS V MCENTEE HIRE HOLDINGS LIMITED HC ROT CIV 2010-463-000270 5 August 2010
The application
[1] The applicants are the liquidators of Taupo Paving and More Limited (the Company). They were appointed on 8 December 2008. They wish to recover payments totalling $21,384.35 received by the respondent, McEntee Hire Holdings Limited (McEntee), in the period 31 January 2008 to 12 June 2008. The liquidators invoke the voidable transaction provisions of the Companies Act 1993 (the Act). By those a payment (a transaction) by a company is voidable if it was made at a time when it was unable to pay its debts and if it enabled it to receive more towards satisfaction of a debt than it would have been likely to receive in the company’s liquidation. The voidable transaction provisions enable the recovery of these payments within a period of two years prior to a liquidation (the specified period). Payments received within a period of six months prior to a liquidation (the restricted period) are presumed to be voidable unless the contrary is proved.
[2] In the case of a liquidation by Court order the six month restricted period runs from the date that the application for liquidation was filed. Outside of the six month period i.e. within the two year specified period liquidators must prove the company was insolvent in order to provide a foundation to receive monies paid by a company within that period.
[3] In this case the statement of claim for liquidation of the Company was filed on 28 August 2008. Therefore the six month restricted period began on 29 February
2008 and the two year specified period on 29 August 2006.
[4] In this case the liquidators filed a Notice to Set Aside Voidable Transactions on 22 September 2009, nine months after the date of liquidation. McEntee served its Notice of Opposition on 22 October 2009. On 25 March 2010 the liquidators filed their Setting Aside application with this Court.
Background
[5] The liquidators seek to set aside five payments totalling $21,384.35, those being:
(a) Payment of $2,000 on 31 January 2008; (b) Payment of $5,000 on 15 February 2008; (c) Payment of $3,338.40 on 26 March 2008;
(d) Payment of $10,000 on 28 March 2008; and
(e) Payment of $1,045.95 on 12 June 2008.
[6] When the Company was placed into liquidation creditors’ claims totalled about $368,000 including a preferential claim of about $66,000 due to the Inland Revenue Department. McEntee filed a proof of debt claiming a debt of $2,214.34 outstanding.
Issues
[7] They are:
(a) Whether as McEntee claims the liquidators failed to comply with a statutory obligation to serve their setting aside notice upon McEntee, as soon as practicable;
(b) Whether the liquidators have proved the Company was insolvent pre
29 February 2008 (i.e. before the restricted period began and when payments totalling $7,000 were made to McEntee) and whether (in relation to payments made post 29 February 2008), the presumption of insolvency is soundly based on the evidence available;
(c)Whether McEntee can prove it acted in good faith and that it could not reasonably have suspected and did not have reasonable grounds for suspecting the Company was insolvent, and it gave value/altered its position reasonably in the belief it was entitled to retain the payments received;
(d)Whether for commercial purposes the Company’s and McEntee’s continuing business relationship was a running account where, during its course, the Company’s indebtedness to McEntee increased and reduced as a result of a series of transactions forming part of that business relationship, such that they constituted a single transaction.
[8] If the series of transactions were a single transaction then the liquidators are effectively precluded from selecting individual events during the course of the business relationship for the purpose of identifying those as insolvent transactions. In this case there is no dispute that the Company’s and McEntee’s business relationship was in the nature of a running account. The issue concerning the business relationship is whether the nature of that relationship changed prior to liquidation such as to allow the liquidators from the point of change to treat subsequent transactions (payments by the Company to McEntee) as voidable.
The opposition case – and discussion about it
Delay
[9] McEntee’s case for delay concerns the fact the liquidators’ notice to set aside was filed nine months after the date of liquidation. After McEntee responded with a notice of opposition it was a further five months before the liquidators’ Court application to set aside was filed and served.
[10] McEntee relies upon Section 294(1) of the Act. It says:
294 Procedure for setting aside transactions and charges
(1)A liquidator who wishes to set aside a transaction or charge that is voidable under section 292 or 293 must–
(a) file a notice with the Court that meets the requirements set out in subsection (2); and
(b) serve the notice as soon as practicable on–
(i)the other party to the transaction or the charge holder, as the case may be; and
(ii) any other party from whom the liquidator intends to recover.
…
[11] Mr Woods for McEntee submits that an ordinary natural reading of that provision required the liquidators to serve the notice as soon as practicable on McEntee. He submits the provision is prescriptive in that the liquidators must comply and the failure to comply would be a fundamental defect which must nullify the proceeding.
[12] Mr Woods submits there is no room to cure the statutory non compliance and refers for support to the authority of Kirton v Prospecdev Holdings Ltd [1], albeit that case related to Land Transfer Act prescribed periods affecting caveats.
[1] (1990) 2 PRNZ 414
[13] Mr Woods discounts Mr Branch’s interpretation of the statutory provision. He submits the purpose of the changes effected by the Companies Amendment Act
2006 was to streamline the voidable transaction regime and shifted the procedural burden of advancing the challenge to an alleged voidable transaction from the creditor to the liquidator. Accordingly, it is submitted it is reasonable to expect that Parliament also intended the liquidator to file a notice with the Court as soon as reasonably practicable.
[14] It is true that some changes effected by the Companies Amendment Act 2006 did, in important respects, increase the responsibility upon liquidators of challenges to voidable transactions, and not as before upon creditors. However, I do not agree with Mr Woods' interpretation of s 294(1). The provision makes no mention of a requirement to file the notice as soon as practicable, only to serving the notice after it has been filed. Otherwise the preamble to sub paragraphs (a) and (b) would have followed the words “must as soon as practicable - ”.
[15] The obligation provided by the provision is to require liquidators, having made the decision to file the notice, to serve it as soon as practicable.
[16] I accept Mr Branch’s analogy that the interpretation of this provision is consistent with the approach adopted in relation to filing and serving a statement of claim under the High Court Rules. In particular, there is no specific requirement in relation to when the claim must be filed, (a defendant’s interest being protected by the statute of limitations) but when it comes to service there is a requirement that this be done as soon as practicable after a proceeding is filed. (Rule 5.72)
[17] Unlike the Land Transfer Act provisions Mr Woods refers to, the relevant
Companies Act provisions do not prescribe time for statutory compliance.
[18] Regardless, if there was delay the affidavit of Mr Blanchett provides a reasonable explanation for it. A director lived overseas and not all information and records were immediately available because apparently those were with the overseas director.
Insolvency
[19] Mr Woods submits that because the restricted period commenced on 29
February 2008, the payments of $2,000 on 31 January 2009 and $5,000 on 15
February 2008 are outside the restricted period. In relation to those payments the onus rests on the liquidators to prove the Company was not solvent. McEntee’s claim that sufficient proof has not been provided rests upon a number of observations in relation to the disclosure of the Company’s Statement of Assets and Liabilities and Statement of Movements and Equity.
[20] Mr Woods submits that no Profit and Loss statement was put in evidence. However, it is clear copies of those were provided to McEntee separately before it engaged the services of counsel in connection with this proceeding.
[21] Mr Woods submits that the Company’s shareholders and directors received
$125,631 in the year 2008. At the same time the Company’s equity position declined by $76,000. It suggests, Mr Woods submits, that the difference, about
$50,000, was returned as profit to the shareholders. Further a statement of profit and loss (subsequently provided) by the liquidators recorded a trading surplus in the
financial year ended March 2008 of $40,321. It records that during that financial year the Company increased its assets including the purchase of vehicles, and substantially increased accounts receivables.
[22] Overall, Mr Woods submits there is no direct evidence as to the cause of the Company’s insolvency late in 2008. Until then, he submits, it was clear the Company’s bank was prepared to extend either new lending facilities or permit a substantial expansion of existing lending facilities during the financial year to March
2008. Therefore, Mr Woods submits that in the absence of a presumption as to insolvency there is no clear evidence before the Court the Company was insolvent during the pre 29 February 2008 (restricted) period when the payments totalling
$7,000 were paid to McEntee.
[23] Concerning the payments made to McEntee within the restricted period (i.e.
29 February 2008), McEntee’s position is it is entitled to the good faith/no reasonable cause for suspicion/value for receipt defence provided by s 296(3) of the Act.
[24] For present purposes I will confine my considerations to claims of solvency as they affect the pre 29 February 2008 (the restricted period) during which presumptions of insolvency do not apply. I think McEntee’s faith in the Profit and Loss statement for March 2008, purporting to indicate a measure of profit rather than insolvency is misplaced. The cause of the Company’s insolvency late in December
2008 appears clear. Too much can be assumed from the fact the Company’s banker continued to support the Company as at March 2008.
[25] The financial accounts of March 2007 and March 2008 show: (a) Current liabilities significantly exceed current assets;
(b) The net current assets deficit increased between March 2007 and
March 2008;
(c) GST payable increased by nearly double from March 2007 to March
2008;
(d)An equity surplus of $3,299 as at 1 April 2007 deteriorated to a deficit of $79,228 by March 2008;
(e)In March 2008 the Company’s assets were valued at about $137,000 while its liabilities totalled about $427,000; and
(f)The balance sheet shows that two modest shareholders’ salaries accounted for the whole of the profit for the March 2008 period.
[26] Regardless, the solvency test does not focus upon profit but rather whether a company can meet its debts as they fall due. In this case the Company earned about
$27,000 but paid out about $100,000 thereby accounting for a significant deficit position as at March 2008.
[27] Notwithstanding Mr Woods’ submissions that I should not, I do accept the affidavit opinion of Mr Blanchett, albeit given as a party to this application, that the company had negative working capital and negative assets as at March 2007 and March 2008 and was unable to pay its due debts from as early as August 2006. The Court knows Mr Blanchett is an experienced liquidator. In this case his opinions have not been challenged by evidence in opposition.
[28] I am satisfied there is clear evidence of the Company’s insolvency in that period pre 29 February 2008 when the two payments totalling $7,000 were paid to McEntee. This view is supported, I consider by McEntee’s issue of a Stop Credit Notice to the Company on 9 January 2008. I will refer to this more fully later in this judgment when I address the s 292(4B) running account exception defence.
Section 296(3) defence
[29] This is the good faith/no reasonable cause for suspicion/value given for money received defence.
[30] Section 296(3) provides:
(3)A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property–
(a) A acted in good faith; and
(b)a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent;
(c) A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
...
[31] Mr Woods acknowledges that this provision is at the key of McEntee’s opposition to the liquidators’ setting aside application.
[32] The defence comprises three conjunctive parts. McEntee has the onus of proving all three parts. As to the first it is no longer an issue that McEntee has acted in good faith. There is no such accord concerning the other two elements that McEntee must prove. The second element refers to a reasonable person not suspecting, and McEntee not having reasonable grounds for suspecting insolvency. The words embody two tests, the first wholly or mostly objective. The second element involves an enquiry as to the state of McEntee’s knowledge to the extent Mr McEntee’s affidavit refers to such.
[33] Mr Woods has usefully provided authority about how the Australian Courts have approached the issue of ‘suspicion’. In Queensland Bacon Pty Ltd v Rees [2]
Kitto J at p303 stated:
A suspicion that something exists is more than an idle wondering whether it exists or not. It is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’, as Chambers Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.
[2] (1966) 115CLR 266
[34] In determining whether a creditor has reasonable grounds for suspicion, it is a question at looking at the commercial circumstances at the time, as the parties perceive them to be, and not with hindsight. [3]
[3] The New Australasian voidable preference law: plus Ca change “Brown and Telfer; New Zealand
Business Law Quarterly, volume 13, page 172
[35] Undue weight should not be placed on a late payment, since solvent persons often do not pay debts on time: Sutherland v Eurolinx Pty Ltd [4]. The fact that a company sought and a creditor has agreed to indulge its beyond contractual due dates, is not decisive, but may be a factor in all the circumstances. Nor is the defence precluded necessarily in a situation where a dishonoured cheque has been paid even after the issue of a Statutory Demand [5].
[4] (2001) 37 ACSR 477, Santow J
[5] KEL Builders (Queensland) Pty Ltd v Brett Nash Electrics Pty Ltd [2001] QSC 178.
[36] In support of its defence McEntee claims:
(a)It has not stolen a march on other creditors but rather by providing the hireage services it has added to the pool of assets available to other creditors at the date of liquidation;
(b)It acted pursuant to its usual credit control processes and its issuing of the ‘Stop Credit Notice’ on 9 January 2008 did not bring the trading relationship to a close but rather created the availability of future credit for cash sales;
(c)The issue of the Stop Credit Notice was an effective method to induce trade customers to keep McEntee informed and, as Mr McEntee deposed, enabled the relationship to rebalance in a manner that was comfortable to both it and to the debtor; and thereby it was designed to preserve the trading relationship, not drawing it to a close;
(d)The issue of the Stop Credit Notice is not a reflection of solvency, nor reasonable grounds to suspect such;
(e) Mr McEntee deposed that in cases of suspected insolvency McEntee’s normal process was to refer the debt to Debtworks Limited for collection. He said that did not occur in this case and that it is reasonable to infer there was no suspicion of insolvency;
(f) The subject payments received were not part of any formal repayment arrangement and were received for the purpose of inducing further trade credit;
(g)In fact further trade credit providing for hiring services recommenced on 9 April 2008;
(h)Mr McEntee did not know of the Company’s insolvency nor had any reason to make enquiry about it;
(i)The fact that the Company advised on 14 December 2007 that it was obtaining finance to pay McEntee is excusable, equally as an explanation by a solvent company as it could be by an insolvent company;
(j)McEntee acted pursuant to its usual credit control processes, and not out of the ordinary course of business.
[37] I earlier indicated that the words in s 296(3) require an objective consideration on the part of a reasonable person before considering whether in this case McEntee had reasonable grounds for suspecting.
[38] It is apparent from those factors I have outlined that McEntee places a great deal of faith in the method and purpose of its credit control. It disputes that the issue of a Stop Credit Notice brought the trading relationship to a close even though in this case and following the issue of that notice no business was conducted between the parties for a period of four months, save for one exception, to which I will refer shortly. Before then the trading history of the parties indicated an unbroken history of monthly trading over a period of about three years.
[39] McEntee was firm in its statement that in cases of suspected insolvency its normal practice was to refer the debt to Debtworks Limited for collection. Mr McEntee deposed that did not occur in this case. Despite this the evidence available to the Court suggests that the Company’s debt was referred by McEntee to Debtworks Limited. I earlier referred to the fact that with one exception there had been no trading relationship between the parties for four months from the issue of the Stop Credit Notice on 9 January 2008. That exception refers to an invoice dated 14
March 2008 for $666.92. In evidence to this Court, Mr McEntee stated that invoice was for interest charged to the Company on unpaid accounts. Instead when a copy of that invoice was provided to Mr McEntee for examination by him, it disclosed the charge of $666.92 was for “bad debts – collection costs”.
[40] In short the invoice was not for interest. It was for a payment incurred for referring the Company’s debt to a collection agency – a practice that McEntee asserted would only be done in cases of suspected insolvency. The Court can assume those costs were incurred some time prior to the date of the invoice. On the basis of this evidence the Court can also assume that a reasonable person in McEntee’s position would have suspected the Company was insolvent because McEntee itself did so and that is why it referred the matter to a debt collection agency.
[41] The evidence that McEntee did not have reasonable grounds for suspecting insolvency was provided by Mr McEntee. However, it is clear from the oral evidence he provided to this Court that he did not have the day to day control of trade creditor contact, that instead being left to another employee who has not provided an affidavit to this Court. In answer to a question about whether he accepted that at the time of the Stop Credit Notice the Company could not pay what was owing, Mr McEntee responded that he did not know and was not aware of the Company’s circumstances. In short, the Court has no evidence from McEntee about its reasons for not suspecting that the Company was insolvent.
The third conjunctive part of the s 296(3) defence requires proof from McEntee that it provided value for the payments received. Mr Woods submits McEntee gave value in the form of hireage services for the money received; further that McEntee
altered its position by continuing credit to the Company and by providing further hireage on credit.
[42] Against that view of matters the Court needs to consider that the further hireage services were not provided until the full extent of the outstanding debt to McEntee had been paid by the Company. No credit at all was extended until the full amount owing had been paid which occurred over a period of four months from the Stop Credit Notice and nearly five months from the date of the previous credit hireage transaction. In my view McEntee gave no value for the money received and it has not shown that it altered its position. It gave nothing until its debt was paid it having made clear that was its objective in withholding credit.
Running account exception
[43] Section 292(4B) provides:
(4B) Where–
(a)a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties); and
(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
Then–
(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d)the transaction referred to in paragraph (a) may only be taken to be an insolvent transaction voidable by the liquidator if the effect of applying subsection (1) in accordance with paragraph (c) is that the single transaction referred to in paragraph (c) is taken to be an insolvent transaction voidable by the liquidator.
[44] Perhaps this provision more than any other indicates the reinforcement of what has been described as the “pro-creditor” approach of the New Zealand
Companies Legislation since 1993. Section 292(4B) was added by the Companies Amendment Act 2006. It has replaced the “ordinary course of business” defence. It permits a liquidator to challenge all insolvent transactions during the two year specified period. But, each individual transaction between a company and a creditor must be treated as a single transaction when there has been a continuing business relationship as in a running account situation.
[45] Section 292(4B) is a direct copy of s 588FA Corporations Act 2001 (Aust). Before now only the decision of Associate Judge Robinson [6] has considered whether payments to a creditor within the six month restricted period were part of a “continuing business relationship”. In that case the Learned Judge found that there was nothing in the particular transactions concerned to suggest the payments were necessary to ensure a continuing supply of credit.
[6] Rea v Wolfgram 21/8/09, Auckland CIV 2008-404-5635
[46] Largely, certainly initially, this Court will look to Australian authority for assistance in its appreciation and understanding of the vagaries of the continuing business relationship concept. By the new provision the Court must view one of a series of transactions that are part of the continuing relationship between the company and its creditor as a single transaction when deciding whether that transaction is one “that enables another person to receive more towards satisfaction of a debt owed by the company that the person would receive or be likely to receive in the company’s liquidation”.
[47] An assessment needs to be made whether the company receives an ongoing supply of goods and services for better reason than simply to extract a creditor’s forbearance from taking action to liquidate the company. In Airservices Australia v Ferrier [7] the High Court of Australia summed up the principles of the “running account/continuing business relationship as follows:
[7] (1996) 185 CLR 483
If a payment is part of a wider transaction or a “running account” between the debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the
debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under s 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact. ...
To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors. ...
If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.
[48] The existence of a continuing business relationship is predicated upon an assumption that the relationship of purchaser and supplier would continue as would the relationship of debt and creditor. That affect therefore is such that payments “in” are so integrally connected with payments “out” that the ultimate effect of the course
of dealings shall be considered to determine whether the payments are preferences.[8]
[8] Explanatory memorandum for the Corporate Law Reform Bill 1993 (Aust) which introduced s
588FA explaining the concept of “continuing business relationship”.
[49] What is required is an examination of the circumstances in which the payment is made by reference to its business purpose and the character of the overall relationship [9]. It is a matter of looking to see what the parties do and how they act towards each other over the relevant period. Objective analysis is required to discern whether its purpose was as the creditor claims. But it is clear that if that analysis of mutual assumption and of payment and reciprocal supply is to survive, then it must have done so throughout the relevant period. Also the payments must continue to
have the mutual purpose of inducing further supply and not to be subordinated to the predominate purpose of recovering past indebtedness [10].
[9] Queensland Bacon Pty Ltd v Rees (supra).
[10] Sutherland v Eurolinx Pty Limited (supra).
[50] There is Australian authority for the proposition that even the knowledge or suspicion of insolvency may not of itself necessarily lead to the termination of a
running account of the continuing business relationship [11]. But, as the authors of Brookers Insolvency Law and Practice note, the Australian Authorities are not uniformly consistent. In Olifent v Australian Wine Industries Pty Ltd [12] it was suggested that actual suspicion or knowledge of insolvency will bring the continuing business relationship to an end. There appears no clear answer in principle. The provision by a creditor of goods or services usually will assist and benefit the company and therefore it is arguable the creditor should not have to repay what it has received.
[11] In Rothmans Exports Pty Ltd v Mr Mistmorn (1994) 12 ACLC 936 at 946, Santow J
[12] (1996) 14 ACLC 510
[51] When then does a single transaction (as s 292(4B) contemplates), begin? The Court is required to determine whether or not the single transaction is an unfair preference. The process involved entails a comparison of the company’s net indebtedness at one point in the continuing relationship with its net indebtedness later in the relationship when that relationship is determined – usually by Court order.
[52] It is a process described by H Bolitho as follows:
… [it] requires a series of transactions to be reduced to a single monetary figure, the artificially created ‘single transaction’, which is either a net increase or a net reduction of the indebtedness. That monetary figure is then assessed to see whether it is an [insolvent transaction]… If the figure is a net increase in indebtedness then there is no debt in respect of which the creditor has received payments so there is no [insolvent transaction that would be voidable by the liquidator]. If the result is a net reduction in indebtedness then presumably this net reduction is to be treated as a debt in respect of which the company has received full payment and thus the net reduction constitutes an [insolvent transaction] [13]
[13] Continuing Business Relationships – 8E Questions in Search of an Answer (1998) 16 Company and
Securities Law Journal 581, at p 592.
[53] Because s 292(4B) does not expressly direct a liquidator to that point or date at which the opening balance of the single transaction is to be determined when comparing that opening balance with the balance applying at the end of the relationship, it is arguable the liquidator can choose any date during the statutory period to show from that point on there was a preferential payment. In the outcome if during that period there has been an increase in indebtedness to the creditor it
usually means there is no voidable insolvent transaction. On the other hand a net reduction in indebtedness to the creditor would normally indicate the opposite.
[54] As noted in Brookers Insolvency Law and Practice (at CA 292.06) this rule by which the liquidator is permitted to choose the single transaction starting point (known as the ‘peak indebtedness’ rule) has consistently been applied in Australia.
[55] It is not in dispute in this case that the relationship between the parties was in the nature of a running account. The issue here concerns whether the continuing business relationship endured from its beginning in 2005 through to the Company’s liquidation, as McEntee claims. During that period the total amount of the transactions involved was $58,390.67. The amount unpaid at the date of liquidation was $1,524.96. Throughout, the level of indebtedness has increased and decreased and involved 528 invoices/cash sales issued on 237 different dates and for which 20 receipts/payments were received.
[56] In this case the liquidators have chosen the date of 9 January 2008 for their purpose of isolating the five subsequent payments to McEntee. Mr Woods submits, the liquidators have “cherry picked” the transactions they think should be subject to the s 292(4B) test. In Mr Woods’ view, the liquidators should have regarded all transactions within the two year voidable period to determine the difference between the level of indebtedness at the beginning and the level of indebtedness at the end (being 29 August 2008 when the liquidation application was filed). By Mr Woods’ calculation there is a difference between the supply and payments during the voidable period of $6,270.68. Mr Woods submits this sum less the debt owing for which proof was filed of $2,214.34 reduces the alleged voidable figure to $4,056.34 at most.
[57] If on the other hand the liquidators have correctly ascribed a starting date of
9 January 2008 for the single transaction period which ended on 29 August 2008, then for McEntee it is submitted:
(a) The Stop Credit Notice did not bring the trading relationship to a halt;
(b)Payments were made for the purpose of inducing further supply as well as for payment of existing debt;
(c)Payments were made as part of a series of transactions carried out in good faith, for the purpose of clearing the indebtedness and procuring further supplies, and
(d)The cessation of credit was not a cessation of the trading relationship because the commercial reality is that a Stop Credit Notice in this industry is not a reflection of insolvency and is not a good reason to find a continuing trading relationship at a close.
[58] Therefore it is submitted for McEntee that the period 9 January to 29 August
2008 cannot be considered in isolation from those same factors by which the nature of the parties’ pre-existing business relationship is viewed. The fact of any change which occurred from 9 January 2008 ought to be viewed in the same context as the earlier period of relationship.
[59] The liquidators’ position is that the parties’ continuing business relationship came to an end on 9 January 2008 and from then the liquidators have formulated their claim of payments totalling $21,384.35. Therefore, they claim those payments should be set aside.
[60] Alternatively if the Court was to find that there was a continuing business relationship for the whole period that the parties traded then Mr Branch submits the liquidators are entitled to select the start date for the “one transaction”. Further it is proper for the liquidators to choose 9 January 2008 which is the date when the Stop Credit Notice was issued. If that date is used then the “one transaction” resulted in a preference to McEntee in the sum of $18,124.12 being the difference between the balance at the opening and the balance at the close of the period 9 January 2008 to
29 August 2009.
[61] In summary the liquidators contend that the continuing business relationship ceased as at 9 January 2008 and since then there have been insolvent transactions
totalling $21,384.35. If instead the relationship ceased at liquidation then the insolvent transaction is limited to $18,124.12 being the amount of indebtedness reduction from that date (9 January 2008) chosen by the liquidators as the single transaction starting point.
[62] The issue remains whether the liquidators have the ability to “cherry pick” the date from which the single transaction period is considered to run, appreciating of course that liquidators will choose a date which will maximise the extent of the preference received by the creditor. In short, they will pick a date that will maximise the difference between a high indebtedness starting point in comparison to the level of indebtedness at that date an application for liquidation is filed with the Court.
Conclusions
[63] There has been no delay in the service of the liquidators’ Notice to Set Aside, in fact or in breach of the s 294(1) requirement for service as soon as practicable after the filing of the Notice.
[64] Information from the available financial records show that the Company did not have the ability from its own resources to meet its debts as they fell due. It is not a matter of reference to a Profit and Loss account, nor for that matter by measuring assets against liabilities at a particular time. It is a matter of inquiry into the ability of a company to promptly provide cash from non cash assets. In this case despite a high trade turnover the Company only had an ability to provide for modest salaries to its shareholder owners and at the same time the previous year’s modest trading surplus was converted to a significant trading deficit.
[65] Subject to the availability of a defence under s 292(4B) I am of the view that the continuous business relationship between the company and McEntee terminated on 9 January 2008 and as a consequence all payments (totalling $21,384.35) made subsequently were a preference to McEntee by having been paid when the Company was proved to be insolvent or deemed to be insolvent without proof to the contrary. At that point the commercial relationship experienced a significant change of character. A new relationship of a quite different type then began.
[66] If I am wrong in that assessment that the continuous business relation came to an end on 9 January 2008, and instead it inured until 29 August 2008 when an application for the Company’s liquidation was filed, then I uphold the liquidators choice of the date upon which the single transaction period of the continuing business relationship is deemed to have begun i.e. on 9 January 2008. Applying the recognised process by which the extent of preference is measured i.e. by comparing the extent of the Company’s net indebtedness at the beginning of that period with its indebtedness to McEntee at the end of that period on 29 August 2008 the extent of the preference is measured at $18,124.12 being the amount by which the Company’s indebtedness to McEntee was reduced during that period.
[67] I have also determined that the cumulative elements of the s 292(4B) defence do not avail McEntee. Accepting its position was taken in good faith I am of the clear view the defence fails because a reasonable person in McEntee’s position would have suspected that the company was or would become solvent. In particular I reach this conclusion because of the issue of a Stop Credit Notice but also because the Company’s debt had been referred to debt collectors for collection, against a background of a policy that this was only done when a debtor’s solvency was an issue.
[68] I have also discounted claims that McEntee did not have reasonable grounds for suspicion of insolvency because Mr McEntee’s evidence indicated a lack of any relevant knowledge at all regarding the Company’s financial situation.
[69] In my judgment a liquidator has an option to choose the starting point of a transaction period for the purpose of an assessment of the extent of a creditor’s preference; that liquidators ought to be able to cherry pick a date that best suits the general body of creditors because s 292(4B) does not limit a liquidators ability to do so and if the liquidators ability was to have been limited then the Act should have done that. Also, the creditor has access to the good faith/no reasonable cause of suspicion/value for payment defence. It makes sense that if that defence fails a liquidator should retain the ability to act in a manner that benefits all creditors of the liquidated company.
Summary
[70] In this case when the Company was clearly insolvent, and when the creditor knew or ought to have known that, the creditor received payments from a point in time when the parties’ commercial relationship changed, and from which time the creditor’s trade deficit was significantly reduced. From that point in time the liquidators had a right to recover any payments made to the creditor because they have reduced the value of the Company’s assets available for distribution to all creditors.
[71] But for the change in the commercial relationship, it would, by way of option, have been proper for the liquidators to choose a starting date for the (single transaction) period to assess the extent of the reduction, if any, of the Company’s indebtedness to the creditors, for, if a reduction did occur, it would almost certainly be a preference and would be liable for repayment.
Costs
[72] Counsel for both parties have requested the opportunity to provide further submissions over the question of costs in the outcome of this application. Certainly there is a degree of novelty about the matters raised upon the application. The changes effected to sections 292(4B), 296(3) and 294 have not been considered by this Court since their introduction by the Companies Amendment Act 2006.
[73] Those considerations notwithstanding indeed perhaps because of the degree of novelty involved it seems unfair to punish the loser to any greater extent than a costs award usually provides.
Judgment
[74] The liquidators’ application to set aside five payments totalling $21,384.35 is granted.
[75] Costs are awarded to the applicants on a 2B basis together with disbursements approved by the Registrar.
Associate Judge Christiansen
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