CBA Consulting Group Limited (in liquidation) v Kellaway
[2017] NZHC 1333
•19 June 2017
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2015-419-272 [2017] NZHC 1333
BETWEEN CBA CONSULTING GROUP LIMITED
(IN LIQUIDATION) Plaintiff
AND
ALISON MARGARET KELLAWAY Defendant
Hearing: 24 May 2017 Appearances:
S Rawcliffe for Plaintiff
M Francis for DefendantJudgment:
19 June 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
19.06.17 at 2 p.m., pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
CBA CONSULTING GROUP LIMITED (IN LIQUIDATION) v KELLAWAY [2017] NZHC 1333 [19 June
2017]
[1] The plaintiff company, CBA Consulting Group Limited, was placed into liquidation by order of the High Court on 9 May 2011. It has brought proceedings against the defendant, Ms Alison Kellaway, as a trustee of the Chrysalis Trust (“the trust”). The other trustee is a Ms Christine Bear. The plaintiff alleges that the company made advances to the trustees which were repayable on demand. It has issued these proceedings to recover those demands. The total amount of the claim is
$33,742. The defendant has applied for summary judgment under r 12.2(2) of the
High Court Rules.
Background
[2] The defendant was a solicitor in practice in Hamilton. Ms Bear, the other trustee of the trust, was a client of hers, as was the plaintiff which was the company through which Ms Bear carried on her consulting business.
[3] The liquidators claim that the company has received total claims from creditors of $726,651.95, of which $225,564.47 is a preferential debt.1
[4] The liquidators have produced evidence of the financial accounts of the company which they assert prove the debts that the company now seeks to recover.
[5] The evidence of Mr H D Levin, one of the liquidators, is that the sum of
$21,492 was advanced from the company through the shareholders current account in the financial year ended 31 March 2009. It is further alleged that the financial statements were approved and adopted by the company via its shareholders, with the defendant signing a minute dated 10 February 2010 to confirm that this was so.
[6] The company also claims that, in the financial year ended 31 March 2010, a further $9,850 was transferred to the trust. These payments are evidenced by the company’s bank statements. No financial statements for the financial year ended 31
March 2010 have been produced, although Mr Levin says that draft financial
statements for that period were prepared. The payments making up the advances in
1 That figure is owed to the Inland Revenue Department.
the financial year ended 2009 take the form of automatic payments made out of the plaintiff’s bank account at fortnightly intervals, with each payment being either $750 or $200. That pattern continued throughout the financial year ended 2010. Mr Levin has assumed that the payments were drawings. He says that the defendant “has not suggested that the payments were anything other than drawings”. He further asserts that the company was insolvent at the time the payments were made. The view of Mr Levin is that the company would have reported negative equity of
$136,798, as at 31 March 2009, and negative equity of $714,020, as at 31 March
2010, “if the shareholders current accounts and the advance to the trust are removed
as an asset”.
[7] The plaintiff’s claim is based on the evidence of Mr Levin as follows:
I took the view that the Defendant and Ms Bear are jointly and severally liable for the transfers made to the Trust because they are trustees of the Trust and as such are jointly and severally liable for the Trust’s debt.
[8] The application for summary judgment that the defendant has filed sets out the following grounds:
2.1The Chrysalis Trust deed requires all decisions of the trustees to be made unanimously to be effective.
2.2 The plaintiff’s claim against the defendant is for debts incurred by
the Chrysalis Trust.
2.3The debts claimed by the plaintiff were not incurred with the knowledge, approval or subsequent ratification of the defendant.
2.4 Accordingly, the debts claimed were not incurred by the Chrysalis
Trust nor the defendant.
2.5 Accordingly, the defendant has a complete defence to the plaintiff’s
claim.
[9] The defendant seeks summary judgment and/or strike out orders arising from the operation of s 310 of the Companies Act 1993 (“the Act”). This claim is based on the assertion that, in or about 2010, the Chrysalis Trust and the defendant as trustee guaranteed the plaintiff’s debts to ASB Bank Limited (“ASB”). The guarantee was secured by a first ranking priority mortgage over the trust property. After the plaintiff entered liquidation in 2011, ASB sold the property by mortgagee
sale and applied $441,476.10 of the proceeds it received from the mortgagee sale to the plaintiff’s debt to ASB, which Chrysalis Trust had guaranteed. The key allegation is then made:
4.5By operation of law, the Chrysalis Trust are entitled to an indemnity from the plaintiff in the sum of $441,476.10 being the amount of the property sale proceeds applied against the plaintiff’s indebtedness to ASB (the indemnity debt).
4.6Under s 310 of the Companies Act 1993 the indemnity debt is set off against and extinguishes the debt claimed by the plaintiff in its statement of claim.
[10] The notice of opposition which the plaintiff has filed is uninformative, stating at paragraph 2:
(a) the Defendant is unable to prove that she has a complete defence
to the Plaintiff’s claim;
(b) there is insufficient evidence or dispute as to facts in respect of both of the defences raised by the Defendant;
[11] The proposition of the defendant underlying the summary judgment application is twofold. First, unless it can be shown that the defendant as a trustee of the trust actually consented to the transaction, she will not be bound by it and the trust estate will not be liable to repay the advances made by the company allegedly to the trustees. It is part of the case for the defendant that even acquiescence will not suffice. There must have been affirmative agreement. Second, the defendant contends that she has a right of set-off available which exceeded the alleged debt.
Defendants’ summary judgment principles
[12] High Court Rule 12.2(2) states that “[t]he court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.”
[13] I agree with the following submissions which the defendant’s counsel, Mr
Francis, made concerning the principles applicable to applications for summary judgment by defendants:2
2 Citations omitted.
1.5While the test for defendant’s summary judgment is an exacting one, it must be appropriate where there are no material facts in dispute (as here) and the defendant has a clear defence by operation of well-established legal principles. In this regard, it is worth noting that in a defendant’s summary judgment application:
1.5.1“if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own”; and
1.5.2 “In the end the Court’s assessment of the evidence is a matter of
judgment. The Court may take a robust and realistic approach
where the facts warrant it.”
[14] I also accept the statement of position contained in the submissions made on behalf of the plaintiff by Ms Rawcliffe:3
5It is submitted the essential legal test is set out by the Court of Appeal in Westpac Banking [Corp] v M M Kembla New Zealand [Ltd] where the Court stated:
R[12.2(2)] permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put up the evidence which constitutes the answer so that the proceedings can be summarily dismissed … Usually summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim … The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own.
6It is submitted that summary judgment is not suitable for matters where there needs to be a determination of issues of fact. The learned authors of McGechan on Procedure state at HR12.2.03:
Summary judgment will not be granted where there is a credible dispute since questions of credibility can be determined only when a witness is in the witness-box on oath and cross-examined, and the summary judgment procedure does not normally permit that method of testing allegations.
[15] A defendant will only be granted summary judgment where she has satisfied the court on the balance of probabilities that none of the plaintiff’s claims could succeed.4 This has been described in the authorities such as Jones v Attorney-
General as “an exacting test”.5 It is inappropriate to grant an application for
3 Citations omitted.
4 High Court Rules, r 12.2(2).
5 Jones v Attorney-General [2003] UKPC 48, [2004] 1 NZLR 433 at [10].
summary judgment by a defendant where disputed issues of material facts need to be ascertained by the court and cannot be confidently concluded from the affidavits.6
Where there is both a contest of fact and the “theoretical possibility” of a finding of fact which could lead to the plaintiff’s claim succeeding, then the defendant will not have succeeded.7
The unanimity point
[16] The plaintiff accepts that there is a general requirement of the law that the trustees act unanimously, unless there is a clear allowance by the trust instrument.8
This is a corollary of the principle that a trustee cannot delegate his or her obligations to another trustee.9 Decisions or actions by one trustee taken independently of co-trustees are beyond the trustee’s powers. Any such decision or agreement is invalid.10 Further, because one trustee cannot act on another’s behalf when performing duties which are personal to the trustee, he or she cannot be viewed as being liable on the ground that the other trustee is the agent for the trust.11
[17] The case for the defendant is that the trustee, the defendant, did not agree to the trust receiving drawings from the company. It is therefore said that the unanimity principle has not been satisfied. It is inherent in the argument of the defendant that the payments to the trust would not have been put in place unless one of the trustees had given the necessary authority for that to occur.
[18] The argument for the plaintiff is that the accounts which were drawn up in
2009 for the company were approved by the defendant when she signed a minute to that effect on 10 February 2010.
[19] The defendant has denied that she had any knowledge of the drawings. She said that the trust was closely intertwined with the company and Ms Bear’s business interests. She said that while she endeavoured to fulfil her role as a trustee as best as
possible, in practice, she had very little control of the trust. She did not see bank
6 Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [62].
7 Jones v Attorney-General, above n 5, at [10].
8 Rodney Aero Club Inc v Moore [1998] 2 NZLR 192 (HC).
9 Rodney Aero Club Inc v Moore, above n 8.
10 Rodney Aero Club Inc v Moore, above n 8.
11 Insight Legal Trustee Co Ltd v Stokes [2013] NZCA 148 at [20].
statements for the trust and Ms Bear effectively ran the trust on her own, as part of her other business.
[20] She acknowledged that she would have been provided with a copy of the
2009 financial year end statements when she signed the minute book entry approving those statements, although she does not now have a copy of them.
[21] The defendant further acknowledges that if the financial statements for the year ended 2009 had disclosed a shareholders current account with the plaintiff in the name of the trust, “I would not be surprised”. That is because of the intertwining of the relationship between Ms Bear and her company and the trust.
[22] Her critical testimony is that she did not have any knowledge of the transactions in the trust’s shareholder account with the plaintiff. If that account was in deficit, she says she did not know how that came to be.
[23] In regard to draft accounts which the liquidators say were prepared for the
2010 financial year, the defendant says that she did not recall seeing those. She said that she recalled that Ms Bear contacted her around this time”12 to tell her that she, Ms Bear, had engaged a barrister who specialised in liquidation and insolvency law.
[24] In his submissions for the defendant, Mr Francis in effect invited the court to take the view that the evidence which the defendant put forward could be taken at face value. He pointed out that it had not been directly contradicted by explicit evidence to the contrary and that the plaintiff, in opposing the evidence, effectively relied on inferences to be drawn from the state of the accounts which were prepared in 2009. Mr Francis also referred to the fact that the defendant had no additional documents of any significance which she might disclose to the plaintiff on discovery. He pointed out that the liquidators had all the documents for the company. There was nothing inherently unbelievable about the evidence which Ms Kellaway had
provided, he said.
12 She does not specify when this was.
[25] Ms Rawcliffe, for the plaintiff, said that the defendant would have had the opportunity to access records both from the trust of which she was a trustee and from the company of which she was a shareholder in her capacity as trustee. While noting what the defendant said about her lack of knowledge of the making of the arrangement for the drawings from the company, Ms Rawcliffe said the plaintiff should not be deprived of the opportunity to challenge this evidence under cross- examination. It was also her submission that the notes on the accounts themselves explicitly explained that the current account represented balances due from the shareholders that were repayable on demand and interest free. The nature of the payments was also explained on another note to the 2009 accounts, which recorded that the plaintiff had advanced funds to the Chrysalis Trust.
[26] She also said that the signature on the certificate by the shareholders amounted to the defendant ratifying the decision for the trust to take drawings from the company, thus giving rise to the current account debt. I will return to the point about the ratification shortly.
[27] My conclusion is that the court could only come to the view that there was no issue of fact to be tried in this matter if it took the view that the evidence which the defendant gave was beyond impeachment. That is to say, the court would have to accept the defendant’s evidence as conclusive that she did not know about the payments or what the nature of the payments were and that they were giving rise to a current account debt.
[28] However, I agree that there is another point of view which the plaintiff is entitled to explore with regard to this evidence. The plaintiff may wish for example to cross-examine the defendant about whether best practice would be for a solicitor/trustee to actually ascertain that the matters in regard to which a certificate was being provided were actually correct. The plaintiff may wish to hear the defendant explain how she came to sign a certificate without properly understanding the accounts to which they related.
[29] I accept that at the present time there is no basis for supposing that, if the proceedings continued past the defendant’s summary judgment application, any
useful documents would be disclosed by the defendant on discovery. On its own, this may not be a point which would justify declining the summary judgment application. As Mr Francis pointed out, if the lack of discovery on its own could defeat an application for summary judgment by a defendant, it is difficult to imagine that summary judgment would ever be available. In nearly every case, it is unlikely that discovery would have been attended to prior to the hearing of the summary judgment application. There is force in this contention.
[30] However, because of the context in which the shareholder certificate was signed by the defendant, I consider that there remain legitimate questions about whether the defendant in fact did not know about the current account deficit that the trust was incurring with the company. If she did know about the drawings and signed the accounts as correct, that would imply that she had agreed, as a trustee, to the making of the advances. Alternatively, it could mean that even if she did not approve the advances, she subsequently adopted them by the process of ratification.
Ratification
[31] The alternative basis upon which the plaintiff put its case was that even if the defendant did not have actual knowledge about, and therefore could not have authorised, the incurring of a current account liability with the company, the defendant had subsequently ratified the actions of her co-trustee when she signed the shareholders minute.
[32] Both parties made submissions on the point of ratification which is the next matter that I will consider.
[33] Both counsel referred to the judgment of the Court of Appeal in Hansard v Hansard, in which the issue of ratification arose.13 In that case, the appellant disputed that a trust, of which she was the trustee with her now estranged husband, had incurred liabilities because there had been no unanimity between the parties. The respondents countered that contention by drawing attention to the fact that the appellant must have had knowledge that transactions of the kind which the
respondents submitted that the appellant had agreed to actually had taken place.
13 Hansard v Hansard [2014] NZCA 433, [2015] 2 NZLR 158.
Financial accounts had reflected that position and the trust had received income pursuant to the alleged arrangements.
[34] In the judgment, Lang J made reference to the authority, amongst others, of
Meeseena v Carr in which Romilly MR stated:14
I had some doubts at first whether, as the discretion was to be exercised by the two trustees and one only had acted, the discretion had been properly exercised; that I have come to the conclusion that as the other trustee approved and sanctioned what was done by the one who made the payments, no breach of trust was committed.
[35] The Court also referred to Niak v Macdonald in which the trustee, Mr Macdonald, had advanced trust funds to himself and used those funds to purchase a yacht.15 The advance was not approved by the other two trustees, and was therefore made in breach of the requirement for unanimity. Mr Macdonald had subsequently granted a security interest over the yacht to a bank to secure certain debts that he owed the bank. Mr Macdonald was removed as a trustee and the remaining trustees seized the yacht and sold it. The issue then arose as to who was entitled to the sale proceeds.
[36] The bank was ultimately held to be entitled to the sale proceeds because it was found not to have knowledge of the breach of trust. The bank had also argued, however, that the remaining trustees were estopped from claiming that the advance was unauthorised on the basis of various actions that they had taken, including the approval of financial statements for the trust that showed the advances. The Court in Niak had stated:
[20] For the reasons given, our conclusion is that Mr Macdonald’s use of the Trust funds to purchase the yacht was an unauthorised use of those funds. He may have believed it was in order to utilise the funds, because no objection had been taken to past dealings, but the fact remains that the Trustees did not in the manner required authorise a loan to him. On the evidence Mr Macdonald clearly purchased the yacht in his own name but in doing so, utilised money which was the property of the Trust which he was not entitled to use. The Trustees did not subsequently authorise or ratify the unauthorised use of the funds.
[37] Lang J in Hansard continued:16
14 At [45], citing Meeseena v Carr (1870) LR 9 Eq 260 at 262-263.
15 Niak v Macdonald [2001] 3 NZLR 334 (CA).
16 Citations omitted.
[51] Subsequent approval of financial statements may therefore not be sufficient to amount to ratification of actions taken without the unanimous approval of trustees. This is because, in order to ratify a transaction, the person ratifying must know the essential detail of the act or decision in question. It is not sufficient to show that he or she was aware of a change in the trust’s financial position, even if that change carries with it the necessary implication that some sort of transaction must have occurred. For a trustee to validly ratify a decision, it must be shown that there was more than a passive acquiescence to a decision made by another trustee. The ratifying act must show that the trustee considered the exercise of his or her power as a trustee and consented to the action taken.
[38] In this case, the fact that the defendant signed the shareholder certificate means that she is deemed to have approved the transaction for drawings. The significance of the evidence about the certificate is that it may give rise to an inference that the defendant, who was signing the certificate as a trustee/shareholder, impliedly retrospectively approved the state of affairs that the accounts disclosed. Within that state of affairs, the trust had apparently agreed to receive the drawings, which was the basis upon which the trust became a creditor of the company. While this evidence is only of inferential value, it is still evidence that needs to be evaluated by a trial court. It is not so lacking in relevance, or so minimal as to the potential weight that it would carry, that the court can dismiss it as not having any effect on the outcome of a trial.
[39] On the other hand, it could be that the defendant, although not approving of the liability, recognised that it was a fait accompli, in that it showed that advances had actually been made to the company. Such a conclusion would be subtly different from a trustee forming an opinion that it was acceptable to her as a trustee to incur that liability and to form the view that, even though she had not been asked at the time to approve the transaction, she now did so anyway. Even if the defendant did not actually approve the advances being made, it may be that her subsequent signing of the accounts amounted to approval of them. If she actually read the accounts, she would have noted the existence of the shareholders, that is the trusts, current account debt. Given that she was a solicitor/trustee, an inference may arise that it is unlikely she would have signed the accounts without appreciating that the trust was taking drawings from the company, which were recorded as current account debts.
[40] My conclusion is that it would be inappropriate for the court to decide on the basis of the defendant’s summary judgment application that the trust did not approve the drawings from the company and the resultant creation of a current account liability.
Set-off
[41] The alternative position that the defendant takes is that the trustees in any event had a right of set-off against any debt that they owed to the company in liquidation for the amount of a liability that they had discharged on its behalf. The plaintiff’s view is that any notional right of set-off was lost in the circumstances of this case because the defendant cannot prove she did not have reason to suspect the insolvency of the company. Both these main contentions are now discussed further.
[42] The trustees provided a guarantee for the company’s borrowings from ASB
bank when a revised credit facility was taken up by the company on 15 February
2010. A guarantee in support of the liability of the company was executed by the trustees on 24 to 25 February 2010.
[43] On 22 December 2010, the Inland Revenue Department (“IRD”) commenced liquidation proceedings against the plaintiff and an order was made by the High Court placing the company into liquidation on 9 May 2011. Subsequently, ASB made demand on the trust and issued a notice pursuant to s 119 of the Property Law Act 2007 asserting that the company owed it the sum of $225,115.32. On 31 August
2012, ASB exercised its rights under the securities and sold the residential property that the trust owned, over which the mortgage in support of the security had been registered. The proceeds of sale, namely $441,476.10, were applied by the bank to clear the company’s debt to ASB.
[44] The defendant says that the trust, having discharged a liability of the company pursuant to the guarantee to ASB, is entitled to set that amount off against the company debt.
[45] Ms Rawcliffe submitted:
20 In order to obtain the benefit of a set off under s 310 of the Companies Act
1993 Ms Kellaway needs to prove: (a) Mutuality;
(b) When the transaction occurred; and
(c) That she had no knowledge of insolvency at the time of the transaction.
[46] On behalf of the defendant, Mr Francis made the following submissions:17
4.1Insolvency set-off is an exception to the general rule of parri passu treatment of unsecured creditors. The principles relating to insolvency set-off are longstanding, consistently applied throughout the commonwealth, well established and founded in a concept of fairness.
4.2 In Trans Otway the Supreme Court described the background to s310 thus:
“It has long been a general policy of insolvency law that obligations between a creditor and an insolvent are to be assessed on a net basis. Derham traces its origins as far back as an Elizabethan bankruptcy statute, (1570) 13 Eliz c 7. In this country the Statutes of Set-off of
1728 and 1734 (Imp) have always authorized the setting-off of liquidated sums and are preserved by s 3 of the Imperial Laws
Application Act 1988. As developed in the Courts of equity, the
right to assert a set-off encompasses unliquidated claims. It is regarded as unfair that someone who owes an amount to an insolvent person should have to pay it in full while exposed to the peril of receiving only a dividend, or nothing at all, from the estate in respect of an amount owed by the insolvent. It is this policy which is recognized in s310(1), in the requirement that in a company liquidation the balance between the company and its creditor must be taken on a net basis after set-off has occurred …
4.3 For s310 set-off to apply:
4.4the creditor’s claim must be a money claim, provable in and incurred before, the commencement of liquidation;
4.5 there must be mutuality between the parties, i.e. claims must be
between the same parties and in the same right; and
4.6the claims cannot have arisen in the prescribed period if the party seeking set-off had reason to suspect the company was insolvent.
4.7When assessing whether these requirements are met, the Court should look at the transactions in a manner which accords with commercial realities.
Where the requirements are met, the regime occurs automatically. In this
sense, s310 is “self-executing” and will mandate the outcome.
[47] The first issue that arises in relation to the claimed set-off is the question of whether the trustees of the trust, including the defendant, are actually entitled to a
set-off as they assert.
17 Citations omitted.
Disputed entitlement to set-off
[48] Two points arise in regard to the rights of set-off. The first is stated by the plaintiff as involving the issue of whether the defendant, who claims to stand in the shoes of ASB as a result of subrogatory rights, is in fact attempting to obtain remedies which exceed what ASB would have been entitled to had it brought a claim for the unpaid debt owed by the plaintiff itself.
[49] The second point concerns whether the defendant is disentitled to claim a set- off because the transaction fell within the period of six months prescribed by s
310(2) of the Act and because the defendant had reason to suspect that the plaintiff was insolvent. It is necessary to enquire into the additional element of whether the defendant is able to prove that she did not have reason to suspect that the company was unable to pay its debts as they became due.
The claim that the subrogated rights do not permit set-off
[50] The defendant submits she is entitled to a set-off because, as guarantors, they discharged the liability of the company to ASB and, as a result, they have a right to be subrogated to the claim which ASB had against the plaintiff.
[51] Ms Rawcliffe for the plaintiff submitted that the rights that the defendant may exercise are limited to those that would be available to ASB if it was still a creditor in the liquidation. She contended that if ASB’s debt had not been cleared, then it would be an unsecured creditor in the liquidation and it would have no right of set- off. She submitted that there is insufficient mutuality for a set-off as between the claim owed by the company to ASB and any debt owed to the company (including by the defendant). The key part of the submission was:
24.If ASB’s debt had not been cleared then it would be an unsecured creditor in the liquidation and it would have no right of set off. It is submitted that there is insufficient mutuality for a set-off as between the claim owed by the Company to ASB, and any debt owed to the Company (including by Ms Kellaway). If a set off is allowed in relation to ASB’s claim, ASB would have in effect received repayment of its claim in full ahead of other unsecured creditors. This would give an elevated priority to ASB’s unsecured claim, given the company’s outstanding PAYE and GST debts owed to the IRD.
25.It is therefore submitted that Ms Kellaway having subrogated to ASB’s position cannot seek to assert any better right than what ASB had and accordingly cannot claim a right of set off.
[52] I do not accept that submission. While I agree that the subrogated party cannot have a better claim than the original claimant, the effect of what the defendant is seeking in this case does not infringe that requirement. The defendant is asserting no more and no less than credit for the amount of the liability which the company owed to ASB and which the defendant satisfied.
[53] The important point is that the defendant is not trying to make a claim which is different from what ASB would have had against the company. Any difference results from two different relationships that she has with the company, which affects how that claim is to be treated by the company. Those differences are attributable to the law of set-off and not to any excessive claim on the part of the defendant/trustees. It is the law set-off which entitles the defendant/guarantors to take advantage of the situation where, at least up to the extent of the debt that is owed to the company, the defendant/guarantors in substance receive more than a pari passu entitlement. The fact that such an outcome results can provide no justification for ignoring the statutory right to set-off.
Set-off defeated by suspicion of insolvency?
[54] The examination of the facts concerning this point involves two points. First, it needs to be established that the transaction took place inside the specified period.
[55] In this case, the liquidation of the company came about through an application to the court. The specified period therefore commences six months prior to the commencement of the claim for a liquidation order.18
[56] Before that question is delved into, it is necessary to record that the underlying transaction which the defendant relies upon is the entry into the guarantee that the trustees provided to ASB which was supported by a mortgage. It was this
transaction which gives rise to the subrogation rights upon which the defendant now
18 Companies Act, s 310(6)(b).
relies. There is no doubt that the claim for compensation arising out of subrogation can give rise to a right which the debtor is able to offset against the company in liquidation.19
[57] In the first place, this is not a case where the defendant as claimant for set-off gave credit to the plaintiff. If it is a transaction which comes within s 310 of the Act, that must be because the claimed entitlement arose from “mutual dealings” between the parties.
[58] The only dealing which occurred between the parties was that the trust, through its trustees, entered into a tripartite arrangement. The parties were ASB as the creditor, the plaintiff as the debtor and the defendant as the guarantor. ASB as creditor also acquired a mortgage over the property which was owned by the guarantor as security for the obligations contained in the guarantee which the trustees executed.
[59] Subsequent events affected the rights of the parties between each other. Some of those events were attributable to contractual powers which were conferred on ASB by the other parties at the time when the revised credit facility was entered into on 16 February 2010. Thereafter, ASB exercised rights that had been conferred on it by the mortgage and recovered its debt. When that occurred, at a date that was admittedly after the commencement of the liquidation of the company, a right of subrogation arose - not out of any further dealing between the parties, but by operation of law.
[60] It is correct that the event that gave rise to the quantification of the liability under the guarantee, and therefore the subrogation claim, only occurred after the date of the liquidation of the company.
[61] In general, it is correct that claims arising after the date of liquidation are not admissible as set-off claims. However, it is also clear that while the liquidator must
prepare accounts as at the beginning of the liquidation, it does not necessarily follow
19 McCullough v Basecontrol Ltd (in liq) HC Auckland CIV-2008-404-3375, 27 March 2009 per
Allan J.
that all of the information that is required will be available at that date. The process of settling the accounts may, in other words, contain retrospective elements. This allows for the situation such as that which occurred in Gye v McIntyre.20 In that case, the High Court of Australia considered that the contingent claim which the bankrupt had to damages for fraudulent misrepresentation against the creditor could be set-off, even though liability and the quantum of damages had not been determined as at the date of bankruptcy. The Court stated:21
Provided they exist as contingent at [the date of bankruptcy] and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirements of this section may be satisfied in relation to them.
[62] The position concerning the entitlements of the trustees of the trust (including the defendant) is correctly stated in Brookers Insolvency Law and Practice as follows:22
a. Subrogation of guarantor
A guarantor or other surety of a debt owing by a company in liquidation who pays out the principal creditor in full whether before or after the date of the liquidation (but before the principal credit or has lodged its proof in the liquidation) becomes subrogated (or stands in the place) of the principal credit or in relation to the debt: s
53C, sub-pt 5A of the Property [Law] Act 2007.
[63] I consider that this statement of the law is correct.
[64] It was not suggested in this case that the principal creditor, the plaintiff, has lodged any proof in the liquidation.
[65] I further agree with the conclusions reached in Finnigan v He:23
[30] The case law makes it clear that in the case of company liquidations, the claims giving rise to the mutual credits, mutual debts and other mutual dealings must exist at the date of liquidation. But no money need be payable by that date. Provided the liability or obligation exists at the date of liquidation, it can mature into a debt at a later stage …
20 Gye v McIntyre [1991] HCA 60, (1991) 171 CLR 609.
21 At 624.
22 Brookers Insolvency Law and Practice (online looseleaf ed, Brookers) at [CA307.04].
23 Finnigan v He [2010] 2 NZLR 668 (HC). Citations omitted.
[66] While the cause of action which the claimant for the set-off relies upon does not survive the commencement of the liquidation, and cannot be therefore assigned, it nonetheless is regarded as remaining in existence for the purposes of taking of accounts between the parties which involves ascertainment of the quantum of the claim which the set-off claimant puts forward.24
Time at which reason to suspect company was unable to pay its debts as they become due
[67] The relevant provision of s 310(2) provides as follows:
(2) A person, other than a related person, is not entitled under this section to claim the benefit of a set-off arising from—
(a) a transaction made within the specified period, being a transaction by which the person gave credit to the company or the company gave credit to the person; or
(b) the assignment within the specified period to that person of a debt owed by the company to another person—
unless the person proves that, at the time of the transaction or assignment, the person did not have reason to suspect that the company was unable to pay its debts as they became due.
[68] There is no issue that the defendant is not a “related person” and therefore it
is not necessary to consider the succeeding subsection, s 310(3).
[69] Section 310(2) introduces the term “transaction”. It is therefore not phrased in identical terms to s 310(1), which speaks of “mutual credits, mutual debts, or other mutual dealings”.
[70] The objective behind the enactment of s 310(2) was described by the Court in Trans Otway Ltd v Shephard:25
[17] The reason for this qualification of the general rule in s
310(1) is to prevent a creditor from taking opportunistic advantage
over other creditors by engineering a situation in which it also becomes a debtor of the company at a time when it must be taken to have appreciated the company’s insolvent position. Derham
24 Stein v Blake [1996] AC 243, [1995] 2 WLR 710 (HL) at 716 per Lord Hoffmann.
25 Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2 NZLR 289. Citations omitted.
comments that the qualification, which is of long-standing, has the effect:
“… of discouraging dealings in debts owed by the bankrupt or the company, as the case may be, in a way that would negate the principle of a pari passu distribution of the bankrupt’s or the company’s property.”
[71] It is however notable that two different expressions are used in s 310, namely
“mutual dealings” in s 310(1) and “a transaction made” in s 310 (2).
[72] It is only the creditor who is able to claim set-off. It was not intended to be for the benefit of the company. In that circumstance, it is not altogether obvious at first reading why there should be included in s 310(2) a reference to a transaction by which “the company gave credit to the person”.
[73] The reason for the provision being drawn in that way, in my view, is that the process of setting off involves entries on both sides of the ledger. It is possible that the “mutual dealings” between the parties include a number of transactions. One component of those dealings may be the establishment of a governing agreement. The other component may involve the actual transactions entered into pursuant to that agreement. In my view, it would not do violence to the language of s 310(2) to enquire whether, at the time when the set-off claimant received a benefit under the dealings between the parties, it did not have reason to suspect insolvency. In the context of this case, that would mean that the question of knowledge of solvency arises at the time when drawings were taken from the company (and therefore at which the company gave credit to the person within the meaning of s 310(2)).
[74] That would mean that an enquiry will need to be made into the state of mind of the set-off claimant, the defendant, on each occasion when a drawing was taken out of the company. It is impossible on the state of the present evidence to come to a firm view.
[75] However, where the parties, as in this case, enter into a transaction which is contingent and may, but not will, give rise to a debt being incurred by one of the parties, then the date when the transaction is entered into is when the die is cast. It is from that date when the parties have entered into binding contractual arrangements.
It is at that point that they should be required to responsibly consider whether a result of their transaction might be to put them in competition with other creditors of the company in circumstances where there will be insufficient money available on liquidation to pay all creditors out completely. A party in the position of the defendant in this case is not required to carry out some calculation to try and estimate whether there will be sufficient funds to meet all creditors at some point in the future after the transaction is entered into. But the claimant is required to advert to the question of whether the company appears to be solvent or not at the point where the transaction is entered into. If the company is showing signs of insolvency at that point, fairness requires that a creditor who proceeds with the transaction should take the risk of a deficiency. The corollary of that consideration is that such a creditor should not be able to put itself in a better position than the other creditors of the company.
Knowledge of insolvency
[76] Mr Francis formulated the issue for decision in the following passage from his submissions:
2.3.2Iin respect of the s 310 defence – whether Kellaway had reason to suspect CBA was unable to pay its debts as they became due (a mixed fact and legal issue, but one that can be resolved on the affidavit evidence before the Court). It should also be noted that this issue only applies to funds advanced after the specified period began on 22 June 2010, being $1,200 of the tranche 3 debt.
[77] It will only be if the court is able to conclude that there is clearly no factual dispute about whether the defendant may have subjectively known that company was insolvent at the relevant time, that the court can resolve that issue on a summary judgment basis. The court needs to be able to conclude on the balance of probabilities that the defendant did not, at the time of the transaction, have reason to suspect that the company was insolvent.
[78] The liquidator of the plaintiff, Mr Levin, makes reference to a number of aspects of the evidence in support of his view that the company was in fact insolvent. He first of all refers to an accumulating debt owed to the IRD. He says that there is
evidence by a letter which the IRD sent to the company on 24 May 2011. However, there is no evidential basis for concluding that the defendant ever saw that letter.
[79] He also expresses the view that the company was reporting negative working capital of $474,294, and negative equity of $455,205, in the draft accounts prepared for 2010. There is, however, also no evidence that the defendant sighted those documents.
[80] He says that the company has no realistic prospect of turning around the negative equity of the company which the accounts report was $136,798, as at 31
March 2009, and $714,020, as at 31 March 2010. He says that these figures result if the shareholders current accounts and the trust advance are removed as assets.
[81] Again, there is no evidence that the 2010 draft accounts were ever shown to the defendant. The question of whether the defendant ought to have ignored the current account and trust advances when making her assessment of the company’s solvency is not a straightforward issue to resolve. The accounts overall, as at March
2009, do not appear to be in a poor financial position. It appeared to be operating its business profitably, having achieved an operating surplus before tax of approximately $181,000. The statement of accounting policies showed that the tax expense was the expected income tax payable. The tax expense for 2009 was shown as being approximately $60,000 but, even after allowance was made for that, there was still a surplus of approximately $121,000 approximately. There does not seem to have been any other reference in the financial statements to the accumulated tax position.
[82] It is correct that Ms Bear’s shareholders current account was approximately
$180,000 in deficit. The evidence of the defendant is that she understood that Ms Bear did not recognise distinctions between the company and the trust when it came to operating her business. The trust owned a substantial property, which is evidenced by the fact that it was able to clear the mortgage debt to ASB at $441,000, although I appreciate that did not occur until August 2012.
[83] However, the overall picture from a common sense point of view showed that this was a company which was trading profitably and earning good profits. Most of the property that is owned, though, was accounts receivable. The shareholder’s current accounts indebtedness, to which I have just made reference, was approximately $202,000. Against that, the trust appears to have owned a substantial property which was at least able to cover the bank balance of approximately $200,000, shown in the balance sheet as at 31 March 2009.
[84] Mr Francis also made the point that if the company was showing signs of insolvency, it may have been surprising that someone in the position of the defendant would give a guarantee which she did on 15 February 2010. It is likely, though, that the liability of the defendant was limited to the assets of the trust and there may not therefore have been a significant element of risk present, which would be brought about by her signing the guarantee.
[85] If the evidence now before the Court was the sum total of the evidence, it would seem to be unlikely that the plaintiff would be able to improve the quality of the evidence which it could produce on the question of what state of mind the defendant must have had at the time that the matter is to be judged. It is to be assumed, as Mr Francis submitted, that the liquidators have all of the documents belonging to the company in their possession and were able to refer to them when producing evidence for the summary judgment application. The defendant has provided, in her initial affidavit, a list of the documents that she retains relating to this matter. She contends that none would cast any light upon her state of mind at the time when the guarantee was executed.
[86] The plaintiffs wish to cross-examine the defendant. Some points that might arise in cross-examination can be surmised. The defendant may be asked how detailed an appreciation she had of the company’s financial position as disclosed in the 2009 accounts, given that she had signed a certificate confirming the financial statements in her capacity as a shareholder. If there was room for the contention that the financial statements showed that the company was at risk, she could at least be asked for her explanation about those matters. In particular, the recoverability of the shareholders current accounts may have been an issue that might have influenced the
judgment about the solvency of the company. That is because if the company could not recover the balances in the current accounts, it would then be in the position where its total liabilities exceeded its assets. If the current accounts could not be recovered, the current liabilities of the company would not be covered.
[87] The loss of the right to cross-examine is a ground of opposition that would be potentially available in every defendant’s summary judgment. On its own, it does not justify such applications being dismissed. Of itself, it does not establish that such a cross-examination would elicit evidence advantageous to the plaintiff’s case. It is often a neutral factor. However, there must be a possibility that a cross- examination would require the defendant to give evidence about matters that she has
not covered in her evidence in chief.26 Similarly, it is argued that the plaintiff ought
to be entitled to discovery before the matter goes to trial. The plaintiff would be denied that procedural step if summary judgment were now to be granted.
Conclusion
[88] In determining the present application, it is important in my view to keep in mind the statements of the Court of Appeal in Kembla and, in particular, the position the Chief Justice summarised in her judgment:27
[64] … At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.
[89] Another way in which the approach to summary judgment was described can be found in the House of Lords decision of Three Rivers District Council and Others v Bank of England (No 3):28
[95] I would approach that further question in this way. The method by which issues of fact are tried in our courts is well settled. After the normal processes of discovery and interrogatories have been completed, the parties are allowed to lead their evidence so that the trial judge can determine where the truth lies in the light of that
26 That is, in her affidavits in this proceeding.
27 Westpac Banking Corp v M M Kembla New Zealand Ltd, above n 6.
28 Three Rivers District Council v Governor and Co of the Bank of England (No 3) [2001] UKHL 16, [2001] 2 All ER 513 at [95]. Citations omitted.
evidence. To that rule there are some well-recognised exceptions. For example, it may be clear as a matter of law at the outset that even if a party were to succeed in proving all the facts that he offers to prove he will not be entitled to the remedy that he seeks. In that event a trial of the facts would be a waste of time and money, and it is proper that the action should be taken out of court as soon as possible. In other cases it may be possible to say with confidence before trial that the factual basis for the claim is fanciful because it is entirely without substance. It may be clear beyond question that the statement of facts is contradicted by all the documents or other material on which it is based. The simpler the case the easier it is likely [to take] that view and resort to what is properly called summary judgment. But more complex cases are unlikely to be capable of being resolved in that way without conducting a mini-trial on the documents without discovery and without oral evidence. As Lord Woolf said in Swain v Hillman, at p 95, that is not the object of the rule. It is designed to deal with cases that are not fit for trial at all.
[90] There will be some defendants’ summary judgment cases where it can be legitimately submitted that it is unlikely that there will be any further evidence which could be disclosed at trial that would affect the outcome. In such cases, the unsupported averment of the defendant may be enough to lay a foundation for the submission that there can be no answer to the factual position upon which the defendant relies. In the present case, there are two factual subjects which are in issue. The first is the question of whether the defendant agreed to the drawings from the company for the trust. There may be additional evidence which cast light on that question. Any agreement would have been with Ms Bear. She has not been heard from at this point in the case. As well, it would not be unreasonable for the plaintiff to challenge the position of the solicitor/trustee in this case that she certified the account is correct without apparently familiarising herself with the contents - at least not in any detail. The intrinsic factual circumstance suggests there may be more than one answer to the outcome of any enquiries into this aspect of the matter. It is therefore not fatal that the plaintiff cannot put up the evidence which directly contradicts the defendant on this issue.
[91] The second issue concerns the assertion by the defendant that she did not have reason to suspect that the company was insolvent. The fact is that the IRD commenced liquidation proceedings some three months after the last of the drawings
was allegedly taken from the company.29 Then there is the circumstance that the defendant, says Ms Bear, told her early in 2011 that the services of an insolvency lawyer were being sought for the company. That would be some five months or so from the date of the last drawing. The explanations that the defendant puts forward for her lack of knowledge of the deteriorating situation of the company may ultimately be accepted. But the factual context in which these matters are clear means that it is impossible to say that there is no justification for an enquiry in the form of a trial to proceed.
[92] An issue does arise concerning whether the defendant, as the solicitor for and trustee of business entities linked with her client Ms Bear, did not have reason to suspect that the company was unable to pay its debts as they became due at the time when the drawings were taken from the company and paid to the trust. If the defendant was pressed in cross-examination on the issue of the company’s potential financial frailty, it may be that inroads could be made into her case that she did not have any ground to suspect that the company was unable to pay its debts. Conversely, the Court at this stage cannot conclude with confidence that there was simply no issue about insolvency. It is not a case of the plaintiff being able to point to any particular aspect of the evidence which disproves what the defendant has said. Rather it is inherent in the evidence overall which has been put before the Court that the case is not closed on the issue of whether the company might not have been able to pay its debts.
[93] I acknowledge that the matter is reasonably finely balanced. In such a circumstance, the interests of justice require that the plaintiff be given the opportunity to explore the matter further by way of discovery interrogatories and trial.
[94] That is to say, I cannot exclude the possibility that the plaintiff at trial would fail to prove the matters that she is required to establish on the balance of
probabilities pursuant to s 310(2) of the Companies Act.
29 The last fortnightly payment was taken on 16 September 2010 and liquidation proceedings commenced on 22 December 2010.
[95] In all the circumstances of this case, it is my assessment that the factual enquiry in this matter would end prematurely if summary judgment were to be entered.
Result
[96] The result is that the summary judgment application is dismissed. Costs are reserved.
J.P. Doogue
Associate Judge
0
4
1