Dalton v Avanti Finance Limited
[2020] NZHC 1020
•13 May 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1823
[2020] NZHC 1020
UNDER the Companies Act 1993 IN THE MATTER OF
the liquidation of FABRI-CELL INTERNATIONAL LIMITED
(In Receivership and In Liquidation)
BETWEEN
SIMON DALTON and PETER KEMP
Plaintiffs
AND
AVANTI FINANCE LIMITED
Defendant
Hearing: 11, 12 and 13 May 2020 Appearances:
Kalev Crossland and Jesvin Boparoy for the Plaintiffs Phillip Rice and Nicola Robertson for the Defendant
Judgment:
13 May 2020
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Shieff Angland (Kalev Crossland/Jesvin Boparoy), Auckland, for the Plaintiffs Sanderson Weir (Nicola Robertson), Auckland, for the Defendant
Copy for:
Phillip L Rice, Barrister, Auckland, for the defendant
DALTON and KEMP v AVANTI FINANCE LIMITED [2020] NZHC 1020 [13 May 2020]
Introduction
[1] The liquidators of Fabri-Cell International Ltd sue Avanti Finance Ltd under s 297 of the Companies Act 1993. They say that it has benefited under transactions with Fabri-Cell International Ltd. At closing submissions these were:
(a)it received payments totalling $208,650.37;
(b)Fabri-Cell factored to Avanti Finance Ltd invoices for which it claims a nett sum of $595,107.22; and
(c)it received two forklifts worth $7,500.
The liquidators say that Fabri-Cell International Ltd did not receive any value for any of these transactions and seek an order for payment of $811,257.59.
[2] The case is about debt factoring by Avanti Finance Ltd. Avanti says that it advanced funds on invoices being factored to it. It says that its advances were for more than it received in repayment and it made a net loss. On the other hand, the liquidators say that Fabri-Cell International Ltd received no value under the invoice financing and they can recover to the full extent of the undervalue.
[3]Section 297 of the Companies Act 1993 says:
297 Transactions at undervalue
(1) Under subsection (2) the liquidator may recover from a person (X) the amount C in the formula A − B = C, where—
(a)A is the value that X received from a company under a transaction to which the company was or is a party; and
(b)B is the value (if any) that the company received from X under the transaction.
(2) The liquidator may recover the difference in value (that is, C in the formula in subsection (1)) from X if—
(a)the company entered into the transaction within the specified period; and
(b)either—
(i)the company was unable to pay its due debts when it entered into the transaction; or
(ii)the company became unable to pay its due debts as a result of entering into the transaction.
For the purposes of this section,—
(a)transaction has the same meaning as in section 292(3):
(b)specified period means—
(i)the period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(ii)in the case of a company that was put into liquidation by the court, the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the court was made; and
(iii)if—
(A)an application was made to the court to put a company into liquidation; and
(B)after the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
[4] Fabri-Cell International Ltd was ordered into liquidation on 9 November 2017 on an application filed on 3 October 2017. All the transactions in this case are within the specified period under s 297(3), which began on 4 October 2015.
Background
[5] Fabri-Cell International Ltd, a manufacturer, made disposable gloves and safety protection garments for the medical and industrial markets in Australia and New Zealand and it also made laminated packaging for the export of chilled lamb. It had been operating since 1975. In 2015 and early 2016, Fabri-Cell International Ltd’s sole shareholder was Adava Holdings Pty Ltd, an Australian company. Mr Avon Cook was the sole director. He was also the director of Adava Holdings Pty Ltd.
[6] In June/July 2016, control of Fabri-Cell passed to Mrs Ashika Kant and her husband, Mr Bimlesh Ram. How they came to assume control of the company and the business is not straightforward. I will come to that later. Mrs Kant became the company’s director in July 2016 and held office until September 2017, when Mr Ram replaced her. Mr Ram had a chequered past. He had been discharged from bankruptcy in 2015.
[7] There was another company, JSR Group Ltd. Mrs Kant was the director and shareholder of JSR Group Ltd. It was incorporated in 2015 and up until June 2016 appears to have carried on a small-scale printing business.
[8] Mr Cook lives in New Zealand but has not been called. Inquiries made suggest that Mrs Kant now lives in Queensland. There is no evidence where Mr Ram now lives. None of them has given evidence.
[9] The main events concerning Avanti Finance Ltd and Fabri-Cell International Ltd begin in June 2016 but first I move to a later period. In early 2017, Pacific Finance New Zealand Ltd entered into a debt-factoring agreement with Fabri-Cell and took security over its accounts receivable. It also took a general security over all present and after-acquired property of Fabri-Cell. On 9 October 2017, Pacific Finance New Zealand Ltd appointed receivers. The receivers realised assets including debts payable to Fabri-Cell. At one stage, Avanti Finance Ltd contested the priority claimed by Pacific Finance New Zealand Ltd, but it later accepted that Pacific Finance New Zealand Ltd had first claim on the proceeds realised by the receivers.
[10]Fabri-Cell’s liquidators say that creditors in the liquidation come to
$1,544,544.49. That includes a sum of about $30,000 as a shortfall for Pacific Finance New Zealand Ltd. The Commissioner of Inland Revenue is a preferential creditor although part of the claim may be subject to a GST refund off-set. There are preferential claims by employees of $98,670. The non-preferential unsecured creditors are over $1.1m. Avanti Finance Ltd has not claimed in the liquidation.
[11] As a finance company, Avanti Finance Ltd lends to consumers and small businesses, including on mortgage. As a small part of its business, it used to offer a debt-factoring facility. It no longer does so. Mr Mountcastle, Avanti’s chief executive officer, says that he knew Mr Ram through Mr Ram’s employment with another Avanti customer, Asnet Technologies Ltd, where Mr Ram was the financial controller. Asnet had a factoring facility with Avanti. According to Mr Mountcastle, he understood Mr Ram to be a trusted employee of Asnet. Through that relationship, Mr Ram approached Mr Mountcastle for funding to purchase the business of Fabri-Cell International Ltd. He proposed using JSR Group Ltd to buy the business. Mr Mountcastle knew that Mr Ram was not a director or a shareholder of JSR Group Ltd. Mr Mountcastle was aware of Mr Ram’s prior bankruptcy, but he says that Mr Ram explained to him that he (Mr Ram) had been the victim of circumstances and he had not been bankrupted because of his own business failures. Mr Mountcastle accepted that explanation.
[12] Avanti decided to lend to JSR Group Ltd. The finance was not only to refinance mortgages over properties owned by Ms Kant but also to provide funds to purchase the business of Fabri-Cell International Ltd. While Mr Mountcastle accepted at the time that it was worth offering finance, it emerged in his cross-examination that Mr Ram was a real credit risk. He had a very spotty past and Mr Mountcastle accepted that a proper credit inquiry would have shown a number of red flags.
[13] As the proposal was presented to Mr Mountcastle, JSR Group Ltd was to buy the business of Fabri-Cell International Ltd. It was presented as a profitable company with significant working capital. A summary of financial performance statement for the 12 months ending 31 March 2016 showed a profit after tax of $712,000. A summary of financial position for the same date showed a working capital of $2.2m,
although part of the working capital calculation involved a sum for inter-company advances of some $2m – not a point that Mr Mountcastle noted at the time. Mr Mountcastle was also presented with a business plan and a projected cashflow spreadsheet.
[14] On 14 June Avanti Finance Ltd made a written loan offer to JSR Group Ltd for some $3.4m, $2.16 being ‘mortgage funding’ and $1.2m for ‘business funding’. Avanti Finance would take a first mortgage security over the three properties owned by Mrs Kant. There would be a general security over Fabri-Cell International Ltd and another company, Realestatemove.co.nz Ltd. There would also be a specific security agreement over items of plant (including two forklifts) and over the accounts receivable of Fabri-Cell International Ltd. For the security over the accounts receivable, Fabri-Cell was to provide funding of up to 80 per cent of the qualifying invoice value, with a facility limit of $350,000. Mrs Kant was to guarantee the borrowing. She signed the loan offer on 20 June 2016.
[15] About the same time, Mr Mountcastle received from Mr Ram a signed copy of the sale and purchase agreement for the Fabri-Cell International Ltd business. The cover page of the agreement has the heading “Business Sale Agreement of Fabri-Cell International Ltd (Seller) & JSR Group Ltd (Buyer)”. The agreement was dated 31 May 2016. It provides for the sale of the assets of the business of Fabri-Cell International Ltd. Amongst other things, there is a schedule of plant and equipment to be sold, including two forklifts which are specifically identified by serial numbers. The agreement is not for the sale of shares in the company. The price was $1.2m, with vendor finance of $400,000.
[16] There are, however, problems with the agreement. Apparently Mr Ram prepared it from a form he had obtained off a website. At the start of the agreement, the seller is identified as Avon Cook, not Fabri-Cell International Ltd. The buyer is JSR Group Ltd. On the page where the signatures appear, JSR Group Ltd is shown as “duly authorised for the seller” and Mr Avon Cook’s signature appears under the words “signed by Avon Cook, duly authorised for the buyer”. The liquidators point out that the signature of the person signing for JSR Group Ltd is different from Mrs Kant’s, as her signature appears in other documents in evidence. In the hearing, it was agreed
that Mr Ram signed for JSR Group Ltd, although he was not a director or shareholder of the company.
[17] I do not regard these errors as invalidating the agreement. While something has gone wrong with the language, the agreement can be sensibly interpreted without requiring rectification. The description of Mr Cook as “duly authorised for the buyer” is a misnomer. He was signing as a director of Fabri-Cell International Ltd as seller. Likewise, JSR Group Ltd was the buyer, not the seller. The designation of Mr Avon Cook (rather than Fabri-Cell International Ltd) as “seller”, is not fatal. He signed “as duly authorised for” which is consistent with his acting as agent. But even if he contracted in his own right, as the sole director of the company and as the director of its sole shareholder, he could ensure that title to all the assets of the business could pass to JSR Group Ltd.
[18] There was a drawdown of the loan by Avanti Finance Ltd. The sale of the business went ahead on 29 June 2016. Avanti has not put its loan agreement in evidence and it has not shown that its securities were registered, but it was common ground during the hearing that it registered a general security agreement over all the assets of JSR Group Ltd and a specific security agreement over the plant and over JSR Group Ltd’s accounts receivable. It did not take any security over any assets of Fabri-Cell and did not register any financing statements for Fabri-Cell under the Personal Property Securities Act 1999.
[19] Once settlement was completed, the lawyers acting for JSR Group Ltd paid the balance of the funds advanced by Avanti Finance Ltd into a bank account of JSR Group Ltd. This was a 00 bank account with Westpac New Zealand Ltd. After an overdraft was cleared the account was in credit to $759,000.
[20] Ordinarily when a company has sold its business, it remains in the control of its shareholders and directors. They might distribute the proceeds of sale and have the company wound up or use the funds from the sale to embark on a new business. In this case however, ownership of Fabri-Cell’s shares changed. There were 30,000 shares in the company. According to Companies Office records, on 24 July 2016 24,000 of those shares were transferred to JSR Group Ltd with the remaining 6,000
held by Adava Holdings Pty Ltd. At the same time Mrs Kant became a director of Fabri-Cell and Mr Cook resigned. On 10 February 2017, JSR Group Ltd’s 24,000 shares were transferred to Mrs Kant and on 5 July 2017 Adava’s 6,000 shares were transferred to Mrs Kant, making her the sole shareholder. On 6 September 2017 Mrs Kant transferred all her shares to her husband, making him the sole shareholder. He became the sole director at the same time. The record also shows that a Mr Kumar was a director of the company for one day, but his involvement for this case is peripheral.
[21] I record a qualification about what I have just said as to the changes in shareholding. Adava Holdings does not accept that all the changes of shareholding shown in the Companies Office records reflect the true position. Adava Holdings brought the application which resulted in Fabri-Cell being ordered into liquidation. In its statement of claim, Adava Holdings Ltd alleged, among other things, that Mr Ram and Mrs Kant had manipulated the shareholdings so as not to record Adava as a shareholder.
[22] I come back to the events of June 2016. Mr Mountcastle says that Mr Ram wanted to enter into a debt factoring facility. In his affidavit Mr Mountcastle describes what this involves:
5.13 Invoice factoring is a type of debtor financing in which a business such as Fabri-Cell sells its unpaid invoices to a factor (Avanti) at a discount. The advantage for the business is that it converts its receivables into immediate cash. If the invoice is accepted, the factor pays a percentage of the invoice (in this case 80% of the face value of the invoice) to the business. The invoice customer pays the full amount of the invoice directly to the factor or pays it to the invoice creditor (Fabri-Cell) who passes it on to the factor. The factor then repays itself the advance plus interest and returns any surplus to the business.
[23] On 24 June 2017, Mr Mountcastle visited Fabri-Cell’s factory with another Avanti officer, Mr Seward. As best he recalls, he spoke with Mr Cook, Mr Ram and Mr Deo, Fabri-Cell’s CEO. The invoice factoring facility was discussed. Mr Ram gave Mr Mountcastle some Fabri-Cell invoices to factor. That led to a formal written invoice financing facility agreement between Avanti Finance Ltd as lender, JSR Group Ltd as borrower, and Mrs Kant as guarantor. The background to the agreement includes this:
The Facility is a secured facility. By entering into this Agreement the Borrower grants a security interest over all invoices raised by the Borrower during the Term of this Facility. All invoices raised after the date of this Agreement constitute after-acquired property of the Borrower as a debtor for the purposes of the Personal Property Securities Act 1999. The security interest created by this Agreement is a purchase money security interest as defined by that Act.
[24] In the operative terms JSR Group Ltd gave Avanti a security interest in the “Security Portfolio”:
…namely a security interest over all its present and after-acquired property comprising invoices raised by it during the Term of this Agreement. This security interest is given to secure repayment of all Drawings, together with interest, fees and other charges required by this Agreement.
JSR Group Ltd agreed to repay all drawings, interest charges and fees under the agreement on demand and pending demand in accordance with the terms of the agreement.
[25] Provisions as to the operation of the facility under the agreement include the following:
(a)A duplicate copy of each invoice raised by the Borrower during the term of this Facility is to be given to Avanti. All invoices of the Borrower during this period are secured to Avanti by the security interest created by this Agreement;
(b)If the borrower wishes to make a Drawing under this Facility, it must identify to Avanti those invoices it wishes Avanti to accept for the purpose of calculating the amount of the proposed Drawing;
(c)Avanti may validate the invoice prior to its acceptance including confirming that the invoice meets the Acceptance Criteria. Avanti will notify the borrower when an invoice has been accepted by it.
(d)The Agreed Drawing Amount for each Accepted Invoice will then be deposited by Avanti in the Drawings Account and may be withdrawn by the Borrower at any time. A Drawing is made when this deposit has occurred;
(e)The proceeds of payments by Invoice Debtors of all invoices must be made to the Facility Trust account;
(f)Upon receipt of the daily bank statement for the Facility Trust Account, Avanti will complete a reconciliation of the account and calculate and make adjustments and make payments required for the daily waterfall accounting as set out in clause 4.4 and provide the Daily Statement to the Borrower; and
(g)Any payments due to the Borrower as shown on the Daily Statement will be paid by Avanti into the Drawings Account and may be withdrawn by the Borrower at any time.
[26] There are other terms and conditions. The facility limit was $350,000. The interest charged was 18 per cent per annum. The invoice percentage was 80 per cent. There was an administration fee of $3.00 per accepted invoice to be deducted from the drawings and calculated by reference to the invoice. There were also acceptance criteria. Mrs Kant guaranteed performance by JSR Group Ltd. The agreement does not refer to Fabri-Cell International Ltd.
[27] Avanti Finance Ltd says that this was a “non-disclosed” facility, meaning that the borrower’s customers were not advised that the borrower’s invoices had been factored. They would accordingly pay the borrower in the same way as if the invoices had not been factored, except that payment had to be made to a designated account, the “facility trust account”. That would mean that Avanti could have no recourse against the borrower’s customer if the customer paid its invoices, but the borrower did not account for payments it had received.1 In the event, no facility trust account was arranged for the debt factoring in this case.
[28] Mr Mountcastle says that after settlement it was found that Fabri-Cell had already been operating an invoice factoring facility with another finance company, S H Lock Ltd. S H Lock Ltd was paid out of the funds held in JSR’s Westpac account.
[29] Avanti went ahead with the invoice financing. Fabri-Cell’s customers were to pay debts payable under its invoices to a named ASB account. Mr Mountcastle’s evidence includes copies of communications between Avanti and Fabri-Cell. One is an email by Ms Sarah Ayres (financial accountant) on 29 June 2016 sent to Fabri- Cell’s staff and also copied to others inside Avanti. Her email includes this:
I understand that you are going to be working on weekly drawdowns. We will expect to see the list in excel of the invoices you would like to finance and a copy of that invoice and a signed purchase order. The financed invoices will be paid to you at 80 per cent of their face value less the $3 admin. fee. A report will be emailed to you showing the amount paid on that day.
1 Property Law Act 2007, s 50(3).
On receipt of payment into your bank account you will need to send us a copy of your bank statement and an allocation showing the invoices paid so that we can process this payment correctly in our system. We will confirm the amount expected from you by sending you a spreadsheet showing all outstanding invoices and marking those that have been paid. The funds received will need to be paid over to us but only after receipt (e.g. received 24 June, paid 27 June). We would ordinarily pay the balancing 20% less interest due back to you on request, but if you would like us to do this on a weekly basis then please let us know.
[30] The first factoring of invoices occurred on 5 July 2016. Fabri-Cell emailed to Avanti 10 invoices it wanted factored totalling $21,566.37. Avanti prepared a statement showing a payment to Fabri-Cell of $17,223.10 after deducting 20 per cent and the administration fee.
[31] On 6 July, Avanti emailed Fabri-Cell asking for confirmation of the bank account that the drawing was to be paid into. Mr Ram advised by an email on the same day to pay the money into the account of JSR Group Ltd’s Westpac New Zealand account. That was the account which was holding the $759,000 after settlement of the purchase.
[32]Avanti says that it made five payments to the JSR Group Ltd under this invoice
factoring facility: 5 July 2016 $17,233.10 6 July 2016
$155,251.83
25 July 2016
$80,925.20
29 July 2016
$15,617.96
10 August 2016
$29,639.82
TOTAL:
$298,667.91
[33] All the invoices that were factored were in the name of Fabri-Cell International Ltd. They were all for purchase orders sent to Fabri-Cell International Ltd. None of the invoices were in the name of JSR Group Ltd. All the payments Avanti Finance Ltd made under the facility as drawings by Fabri-Cell were paid into the JSR Group Ltd account. None of the payments went to Fabri-Cell International Ltd.
[34] Avanti Finance Ltd did not make any further advances under the factoring facility after 10 August 2016. Mr Mountcastle said that problems arose because of a lack of transparency with Fabri-Cell. Avanti complained to Mr Ram that it was not getting the bank statements for both JSR Group Ltd and Fabri-Cell. Fabri-Cell’s CEO, Mr Deo, asked Avanti to increase the facility, but that was never actioned. In September, Fabri-Cell requested that the nominated account for drawings be changed to Fabri-Cell’s ASB account. That also was never actioned because there were no further payments under the facility. Nevertheless, invoices continued to be factored. Mr Wetherell explained that invoices were either paid or expired and became stale and they were replaced with fresh invoices, presumably to operate as security for the advances made by Avanti Finance.
[35] Mr Mountcastle said that he and another Fabri-Cell officer met with Fabri- Cell’s representatives - Mr Deo, Ms Ferguson and Mr Ram - at Fabri-Cell’s premises on 11 November 2016 to express their dissatisfaction with Fabri-Cell’s lack of co- operation in the way that the facility was being operated. The particular matter that concerned them was Fabri-Cell was not disclosing payments of factored invoices and was not accounting to Avanti for payments it had received.
[36] I also note again that under the way this invoice financing facility worked, no separate trust account had been established into which customers’ payments were to be paid. All payments went into Fabri-Cell’s ASB account, which was used for its general day-to-day operations. Payments of factored invoices were mixed with other funds.
[37]Fabri-Cell made payments from its ASB bank account to Avanti as follows:
5 August 2016 $21,317.65 22 September 2016
$26,986.31
21 November 2016
$12,882.41
9 December 2016
$26,931.00
12 December 2016
$13,522.63
16 January 2017
$26,137.67
2 March 2017 $80.00 22 March 2017
$26,931.00
11 April 2017
$26,931.00
24 May 2017
$26,931.00
$208,650.67
[38] There was also a payment by JSR Group Ltd to Avanti Finance Ltd on 1 March 2017 of $26,931.00 – the same amount as the last three payments by Fabri-Cell to Avanti Finance Ltd. Avanti witnesses say that this payment was in reduction of JSR Group Ltd’s indebtedness. But I regard that payment as consistent with Fabri- cell payments of the same amount and I treat it as another payment in reduction of the Fabri-Cell debt.
[39] When all the funds that Avanti paid out under its invoice financing facility are taken together, and all the payments it received in reduction from both JSR Group Ltd and Fabri-Cell are added up, Avanti Finance Ltd was worse off by $73,086.24 without taking into account any charges for interest and the like.
[40] In giving these figures, I have relied on bank statements in evidence. The evidence had included copies of bank statements for three accounts:
(a)the JSR Group Ltd 00 account with Westpac;
(b)a JSR Group Ltd 01 account with Westpac; and
(c)Fabri-Cell International Ltd’s 00 ASB account.
The statements cover the period from before JSR Group Ltd acquired the Fabri-Cell’s business to receivership. There are no relevant transactions in the second JSR Group Ltd 01 account. All Avanti’s drawings payments went to the JSR Group 00 account and all payments from Fabri-Cell’s came from its ASB account. apart from the
$26,931.00 on 1 March 2017. The statements do not show any other drawings paid by Avanti and they do not show any other repayments under the invoice financing facility.
[41] Two other bank accounts were referred to in evidence. There was an overdrawn BNZ account. There were no relevant transactions on that account. The indebtedness to BNZ had arisen before Mr Ram and Mrs Kant took control of Fabri- Cell. That indebtedness was put in evidence as going to show the company’s insolvency. Mr Dalton said that Fabri-Cell had another ASB 01 account, but there were no relevant transactions on that account.
[42] There was extensive accounting evidence as to invoices that had been factored, showing some that had not been factored. The evidence went to establishing the face values of the invoices, their factored values and payments that Fabri-Cell had received for those invoices. The evidence came from Mr Wetherell, an accountant with Avanti, and Mr Dalton. Clearly both men have spent many hours trying to establish an accurate reconciliation of the invoices. I do not belittle their efforts. I was grateful to find at the start of the closing submissions that the liquidators accepted the reconciliation made by Mr Wetherell. I am grateful that I have not been required to resolve any outstanding differences in the invoice reconciliations. But, putting aside those reconciliations of invoices, the monetary position remains that Avanti is worse off than if it had not agreed to finance Fabri-Cell’s invoices.
[43] JSR Group Ltd’s 00 account with Westpac shows payments to meet expenses of Fabri-Cell, including wages and other liabilities. It is not possible to establish what all the payments were for. Certainly some payments went to Avanti to pay instalments under the term loans. By September 2016, the funds in the accounts had been basically spent. The accounts also showed reversals of charges for term loan interest instalments because there were insufficient funds to meet the liability to Avanti Finance. While there are some payments made from that 00 account to meet liabilities of Fabri-Cell, it is not possible to say that all the funds drawn out were solely for Fabri-Cell.
The role of Mr Ram
[44] Mr Ram was not a director or shareholder of JSR Group Ltd and he was not recorded as a director of Fabri-Cell International Ltd until September 2017. His wife, Mrs Kant, was director of JSR Group Ltd and she was the director of Fabri-Cell from July 2016 until September 2017. The evidence however shows that she did not take a
prominent part in running either company. Mr Ram was the dominant one and ran the show. While he worked for Asnet, he told Mr Mountcastle to contact him at his Fabri- Cell email address: [email protected]. Mr Ram initiated the proposal to buy the Fabric-Cell business. He approached Avanti Finance Ltd to buy the business. He proposed the invoice financing and he made these things happen. He signed the agreement for sale and purchase of the business. On Fabri-Cell’s side he instigated the debt-factoring. The Fabri-Cell staff fell in with what he had arranged.
[45] Mr Mountcastle says that at the meeting at Fabri-Cell in June 2016, the staff treated him as the boss. While Mrs Kant signed the invoice financing facility agreement on behalf of JSR Group Ltd, that really put the icing on the cake that Mr Ram had baked. There is nothing in the evidence to suggest that Mrs Kant repudiated anything that her husband had arranged or carried out. Mr Ram was clearly acting as agent of both JSR Group Ltd and Fabri-Cell International Ltd in a managerial capacity. He was a directing mind. Mrs Kant’s long acquiescence at everything he did can be taken as ratification of his actions on behalf of both companies. His actions bound both companies. I find that although he was not formally a director, he acted as if he were a director of both companies.
Ownership of the assets of the Fabri-Cell business
[46] It is a curious feature of the case that after JSR Group Ltd bought the assets of Fabri-Cell, the shares in the company also passed to JSR Group Ltd, apparently after a distribution to Adava Holdings Pty Ltd.2 There is no evidence of a separate agreement for the sale and purchase of the shares. After the sale to JSR Group Ltd, Fabri-Cell International Ltd continued in business, albeit with a change in control. Fabri-Cell’s customers continued to deal with Fabri-Cell as they had before, placing purchase orders, receiving supplies, receiving invoices and paying Fabri-Cell for the company’s products.
[47] An explanation was given for the transfer of the shares as well as the sale of the assets. Fabri-Cell had long term supply contracts with customers. Copies of
2 The distribution to Adava Holdings Ltd was later attacked by the liquidators in litigation that was settled.
agreements with Sealed Air (New Zealand) Ltd, InterMed Medical Ltd and Pact Group Holdings (NZ) Ltd are in evidence. To maintain those contracts, it was convenient to keep Fabri-Cell in business with those customers, instead of trying to change the supplier to JSR Group Ltd. Similarly, Fabri-Cell International Ltd leased the premises where they had the business. The lease was not assigned to JSR Group Ltd. It turned out that there were arrears in the rent and no doubt the landlord would have required payment of those arrears before consenting to any assignment of the lease. Instead, matters were left in place with Fabri-Cell International Ltd as the tenant under the lease. The staff continued to be employed by Fabri-Cell, not by JSR Group Ltd.
[48] Fabri-Cell continued in business, supplying its customers as it had before, but using some assets that now belonged to JSR Group Ltd. It was the payee under its invoices, not JSR Group Ltd. An arrangement under which the assets of a business are owned by one entity but operations are carried on by a trading entity is not unusual. The circumstances in this case are close to that. The transfer of both assets and shares is belt-and-braces. The matter is not necessarily binary. The transfer of shares does not mean that there was not also a transfer of the assets of Fabri-Cell. They were made over under the agreement to buy the business, including the two forklifts.
[49] The question of ownership of the assets of the business came up when Pacific Finance NZ Ltd appointed receivers of Fabri-Cell in October 2017. The receivers’ lawyers wrote to Avanti about the matter on 16 October 2017. The lawyers’ letter included this:
They (the receivers) are proceeding on the basis that the assets remain with the Company (Fabri-Cell) and subject to the PFNZ security on the basis that:
They are aware of an affidavit from a Mr Avon Cook sworn on 3 October 2017, which states “the agreement never came into effect and was effectively superseded by a sale and purchase agreement of shares prepared by Wynn Williams in June 2016”.
[50] The receivers’ report for the six months ending 8 April 2018 records that Mr Ram had told them that Fabri-Cell had no assets, and that they had been sold to JSR Group Ltd. They got no further co-operation from Mr Ram. The receivers decided that no sale to JSR Group Ltd was completed. It may be understandable that the receivers did not accept Mr Ram’s explanation. After all, he and his wife must
have had some part in arranging the debt factoring with Pacific Finance and giving it security. It would be fraudulent for Mr Ram to obtain credit for Fabri-Cell on the basis of security over the assets of the business when he knew that Fabri-Cell did not own the assets.
[51] There is however no evidence to support the receivers’ contentions that the sale of the assets to JSR Group Ltd did not go ahead. No agreement by Wynn Williams has been put in evidence and the statements attributed to Mr Cook are hearsay. The liquidators accept that there was an agreement, but they contend that the agreement was not completed. If they accept that there was an agreement but say that it did not carry on to completion, the onus is on them to prove that.
[52] On balance, I accept that there was both a transfer of assets and a transfer of shares. To say that at the end of June 2016 JSR Group Ltd had not taken title to the assets would mean that Avanti was defrauded when it allowed drawdown under its loans to JSR Group Ltd. A lawyer acted on the sale and on the drawdown. It is normal practice for the lawyer to certify to the lender that the conditions for drawdown have been met. It would be startling if the lawyer gave a certificate, when JSR Group Ltd did not own the assets over which Avanti was to have security. In the absence of evidence, I decline to infer that the lawyer would have given a false certificate.
[53] While settlement of the purchase took place at the end of June 2016, the shares were not transferred until later. Control of the business had already passed before any share transfers. If there were only a transfer of shares, it is unlikely that the seller would have allowed control of the business to pass, or that the buyer would part with the purchase price without taking title to the shares at the same time.
[54] I summarise this part. JSR Group Ltd took ownership of Fabri-Cell’s plant and equipment in June 2016, but Fabri-Cell continued in business using those assets. The lease of the premises was not assigned to JSR Group Ltd. Fabri-Cell continued to employ the staff that it had before, and it remained the supplier under the supply contracts. Fabri-Cell was the payee under the invoices it issued, and those accounts receivables belonged to it, not to JSR Group Ltd. The position taken by the receivers cannot retrospectively affect the legal position of the transactions in June and
July 2016. Later, Avanti agreed with the receivers not to make a claim to the receivers’ realisation from the sale of the Fabri-Cell business. That was in the context of the receivers recognising that Avanti had security over the forklifts. Mr Mountcastle said that they chose not to contest the matter for commercial reasons. The fact that Avanti chose not to litigate the matter does not bar it in this proceeding from showing in this case that JSR Group Ltd took title to Fabri-Cell’s plant and equipment.
Characterising the invoice financing
[55] There are competing arguments how the transactions between Avanti and Fabri-Cell are to be characterised. The liquidators say that Fabri-Cell paid Avanti
$208,650.37 between August 2016 and May 2017, but Fabri-Cell received nothing in return. They acknowledge that Avanti paid JSR Group Ltd $298,697.91 between 4 July 2016 and 10 August 2016, but they say that those payments were independent of Fabri-Cell. They were instead advances by Avanti to JSR Group Ltd which were repayable on demand, but were not recoverable from Fabri-Cell International Ltd. They say that Fabri-Cell did not obtain any value or any benefit from Avanti’s payments to JSR Group Ltd. As Fabri-Cell got nothing for its payments to Avanti, the transactions were at an undervalue under s 297.
[56] At least at one stage, Avanti Finance Ltd says that the invoice financing was made under the invoice financing agreement, to which JSR Group Ltd was a party. In other words, it relies on the written agreement. Avanti’s position has changed somewhat - and I will come to that shortly. I do not regard either of those characterisations as accurately representing what happened in this case.
[57] I want to make it clear that I am describing the legal effects of what the parties did. Part of the liquidators’ submissions made sound points about what Avanti could have done or should have done to better protect its position. They pointed out that no separate trust account was set up; a prudent lender in Avanti’s position would have made sure that it had a written agreement with Fabri-Cell International Ltd and that it had security taken over assets of Fabri-Cell in addition to any security over the assets of JSR Group Ltd; it would have taken care to register financing statements under the Personal Property Securities Act to ensure that its securities were perfected; and it
would have given notice of the arrangements to Fabri-Cell’s customers. Those matters are all sound. I am sure that, even now, Avanti Finance would recognise that if presented with the same circumstances it would do matters differently. Here I want to establish the legal effects of what the parties did. The fact that matters could have been done better does not mean that what was done had no effect at all. What they did may have some legal effect, even if it was not standard practice.
[58] Fabri-Cell is not a party to the written invoice financing facility agreement. JSR Group Ltd is the borrower. Under that agreement, only JSR Group Ltd’s invoices can be factored. It is not possible to treat Fabri-Cell International Ltd as the same as JSR Group Ltd under that agreement. They are distinct entities. One was the majority shareholder of the other, and a shareholder does not own the company assets.3 Even though JSR Group Ltd bought assets of Fabri-Cell International Ltd, Fabri-Cell carried on business as a separate legal entity albeit using assets now owned by JSR Group Ltd. No invoices of JSR Group Ltd were factored under the written invoice financing agreement.
[59] On the other hand, it is clear that Fabri-Cell intended to borrow from Avanti Finance Ltd under an invoice financing arrangement. The company had factored invoices before with S H Lock Ltd. The proposal for Avanti Finance to provide a debt factoring facility to Fabri-Cell was initiated by Mr Ram, who was part of Fabri-Cell’s governing structure with real influence in the management of the company. Before any debt factoring took place, there were communications between Avanti (with Ms Sarah Ayres) and Fabri-Cell staff (Mr Molera and Ms Ferguson) explaining how the factoring facility would work. Afterwards, on 5 July, Mr Ram advised Mr Seward of Avanti that new invoices would be sent for factoring and Avanti made the advances, calculating the amount of the advances by references to the terms of the written invoice financing facility agreement between Avanti and JSR Group Ltd. It paid the amounts of the advances to the JSR Group Ltd’s Westpac account, as Mr Ram had directed.
3 Mahon v The Station at Waitiri Ltd [2017] NZCA 387, (2017) 18 NZCPR 760 at [33]-[37].
[60] Avanti Finance Ltd would not have paid the drawings to JSR Group Ltd unless Fabri-Cell International Ltd had requested them by providing invoices to be factored. That was not done under the agreement between Avanti Finance Ltd and JSR Group Ltd. Instead, the parties dealt with each other in the same way as if the terms of the invoice financing agreement with JSR Group Ltd applied to Fabri-Cell. That can be seen not only in how the invoices were factored and the drawings were calculated and paid, but also in Fabri-Cell’s request to increase the facility limit, in Avanti’s complaints that Fabri-Cell was not complying because it did not provide records of payments it had received from customers; in Fabri-Cell’s request to change the account for payment of drawings to its own account; and also in the promises that Mr Ram had made in a meeting in November 2016 to send daily statements. Avanti held Fabri-Cell to the terms of the agreement and Fabri-Cell accepted that it was bound. There was then an agreement by conduct.
[61] It is well established that agreements can arise by conduct. The classic example is Brogden v Metropolitan Railway Company,4 where a written contract had been prepared for the supply of coal but was not signed. One party supplied the coal and the other paid for it. It was held that the parties had contracted in terms of the draft agreement although it had not been signed. The contract arose through conduct. A consensus ad idem was found notwithstanding the absence of a signed written agreement. Lord Hatherley said:5
… the course of dealing and conduct of the party to whom the agreement was propounded has been such as legitimately to lead to the inference that those with whom they were dealing were made aware by that course of dealing that the conduct which they had propounded had been in fact been accepted by the persons who so dealt with them.
[62] The same can be seen in the Supreme Court’s decision in Savvy Vineyards 3552 Ltd v Kakara Estate Ltd,6 where agreements were held to have been novated by conduct, even though “deeds of assignment” had been prepared but not executed. The original agreements had provisions that there was to be no variation unless it had been agreed in writing. That was held not to bar novation in that case.
4 Brogden v Metropolitan Railway Company (1877) 2 App Cas 666 (HL).
5 At 682.
6 Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281.
[63] Another case is Bank of New South Wales v R7 where the court found that there had been an equitable assignment by way of charge as security for funds payable under a building contract which were to be security for a bank’s overdraft. This was a floating security which operated as successive sums became payable under the building contract. There was no written contract between the borrower and the bank. The assignment arose under a course of dealing. It was upheld as prevailing over the rights of other creditors of the company.
[64] The agreement by conduct between Avanti Finance Ltd and Fabri-Cell International Ltd was not a variation or a discharge of the written invoice financing facility agreement between Avanti and JSR Group Ltd. That agreement remained in force although it was never put into operation. My finding that there was an agreement by conduct between Avanti and Fabri-Cell does not mean that the written agreement with JSR Group Ltd was displaced. Here, the written agreement with JSR Group Ltd provides the terms (apart from the parties) on which Fabri-Cell and Avanti Finance Ltd operated. Under those terms, Fabri-Cell requested advances of drawings which were calculated by reference to the invoices factored to Avanti Finance Ltd. Avanti Finance paid those advances to JSR Group Ltd in accordance with Fabri-Cell International Ltd’s direction.
[65] Insofar as this agreement provided for the lending and repayment of money, there are no requirements as to form. I note however that there may be formal requirements if third parties are to be bound. If Fabri-Cell’s customers are to be bound by the assignments of the accounts receivable, they had to have actual knowledge of the assignments otherwise they would be discharged by paying Fabri-Cell.8 And if Avanti wanted its security to take priority over the securities of other creditors, it had to ensure that its security attached and was perfected under the Personal Property Securities Act. But the absence of those steps does not mean that the arrangements between Avanti and Fabri-Cell were not contractually binding.
[66] The next aspect is that Avanti paid the drawings to JSR Group Ltd and not to Fabri-Cell itself. That does not however excuse Fabri-Cell from repaying the drawings
7 Bank of New South Wales v King [1918] NZLR 945 (SC).
8 Property Law Act 2007, s 51.
which it had requested. It is common enough under a loan contract for a borrower to request the lender to pay the monies drawn down to a third party rather than having the funds paid to itself directly. That can happen when a property is bought with borrowed funds and the borrower requests the funds, secured by mortgage, to be paid to the vendor. It can happen on refinancing – the proceeds of a loan are paid to a creditor whose debt has been discharged. A more common example is an overdrawn bank account. A customer drawing on an overdrawn bank account can direct the money be paid to a third party either by electronic payment or by drawing a cheque on the account. Just like the bank customer who has paid third parties with cheques drawn on an overdrawn account, Fabri-Cell is liable to repay the drawings to Avanti even though the drawings were paid to JSR Group Ltd at its request.
[67] To put the matter another way. If Fabri-Cell had requested that the drawings be paid to it, and it paid the money to JSR Group Ltd, there would be no reason why it should not repay Avanti. It could make no difference if it directed Avanti to pay JSR Group Ltd directly instead of it paying JSR Group Ltd.
[68] Accordingly, the liquidators’ characterisation does not fit. Their description ignores the facts that Fabri-Cell wanted to operate a debt factoring facility and wanted to use its invoices to arrange for the advances. That was through Mr Ram who directed that the drawings be paid to JSR Group Ltd. There was then a good reason for Fabri- Cell to pay Avanti Finance Ltd. It repaid advances that it had requested. It was reducing its indebtedness to Avanti under the facility.
[69] I will shortly consider the effect of the invoices, but for this part of the analysis not too much needs to be made of them. They were a means by which to calculate the amounts of the advances. The factoring of the invoices was secondary. What counts is that a creditor/debtor relationship was established between Avanti and Fabri-Cell.
[70] Before I move on, I record that Mr Crossland raised a pleading point about my analysis. He contended that Avanti had not adequately pleaded the agreement by conduct that I have found established. Mr Rice, on the other hand, contended that the matter had been adequately pleaded. The statement of defence pleads a variation of the invoice financing facility agreement as part of its defence that Avanti gave Fabri-
Cell more value than it received. It pleads details of that variation in paragraph 44 of the statement of defence. Those are matters of fact which I have found established on the evidence. Paragraph 45 says:
[45] Fabri-Cell adopted the term of the agreement (as varied) on 5 July 2016 (if not beforehand) when it commenced factoring its invoices with Avanti.
It goes on to plead the value received from Fabri-Cell. There is also a pleading of estoppel with the estoppel pleading relying on the same words and conduct.
[71] The liquidators have been on notice as to the matters of fact on which Avanti wished to rely to uphold the arrangements it entered into with Fabri-Cell International Ltd. A point might be taken that a variation was pleaded, whereas I have found that there was not a variation but an entirely new agreement. That is pedantic. The main thing is the facts pleaded in paragraph 44 which I have relied on to show that binding arrangements were entered into between Fabri-Cell and Avanti. I do not uphold the pleading point taken by Mr Crossland.
Section 297 and the payments
[72] The next matter is to see how s 297 applies to these contractual arrangements. The liquidator’s case is that payments totalling $208,650.37 are transactions under s 297 of the Companies Act. Under that section, “transaction” has the same meaning as the definition in s 292(3) of the Companies Act:
292 Insolvent transaction voidable
…
(3) In this section, transaction means any of the following steps by the company:
(a)conveying or transferring the company’s property:
(b)creating a charge over the company’s property:
(c)incurring an obligation:
(d)undergoing an execution process:
(e)paying money (including paying money in accordance with a judgment or an order of a court):
(f)anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
[73] It is necessary, however, to take some care with that definition. While that definition serves its purpose well in the context of s 292, in s 297 it is used in a different context. Section 292 deals with voidable insolvent transactions. These are transactions by which an existing creditor receives more towards satisfaction of a debt than the creditor would receive in the company’s liquidation. Transactions under s 292 about reducing existing indebtedness involve no more than a one-way transfer of value from the company to the creditor. There is usually no corresponding transfer of value back to the company (or, if there is, it is usually netted out, as under s 292(4)(b)). Transactions under s 297 are different. The section is directed at transactions between a company and another party, under which there is an exchange. but the exchange is not of equal value. That therefore involves more than one transaction as defined in s 292(3). There may be a payment by one side and the transfer of something of value to the other. The section requires that the difference in value between the two transactions be measured. Generally, where a statute provides a definition of a word the court must apply that definition. But where the context clearly requires that another meaning be adopted, the court is not required to apply the statutory definition.9 That is the case, even if the statute does not expressly have the saving: “unless the context otherwise requires”. Accordingly, to apply the definition of “ transaction” sensibly to s 297 requires accepting that the section applies when there is more than one “transaction”. It requires looking at both sides of an exchange. “Transaction” refers to the entire exchange, not just to what the company paid or transferred. Nor need the exchange be contemporaneous. One side may transfer value ahead of the other, as under a loan contract, under which a lender advances funds and the borrower later repays an equivalent sum plus interest.
[74] What I have said is, I suggest, consistent with a statement by Miller J in Kings Wharf Coldstore Ltd v Wilson, where he said:10
I conclude that a transaction for the purposes of s 297 comprises at a minimum a disposition of a company asset to another person. It may also take the form of a contract or arrangement, or a series of them, where the series properly
9 Police v Thompson [1966] NZLR 813 (CA) at 818.
10 Kings Wharf Coldstore Ltd v Wilson [2005] 2 NZCCLR 1042 at [79].
characterises a single transaction. That results in property of a company being transferred to another person. In such a case persons other than the recipient of the asset may be parties to the transaction. Because the section is concerned with the transfer of property, the better view is to use “party to” in a narrower sense of one side of the contract or litigation or, in this case, to a disposition or arrangement forming part of the transaction under which the property was transferred.
[75] If Avanti had paid the drawings directly to Fabri-Cell, there would be no argument. Fabri-Cell would have received something of value from Avanti – the
$298,667.91. The value of Avanti’s advances would be more than what Fabri-Cell paid Avanti and there would not be an under-value transaction under s 297(1). In this case, however, Avanti paid the drawings to JSR Group Ltd. Avanti certainly gave value. The question is whether Fabri-Cell “received value”.
[76] Avanti has tried to show that Fabri-Cell did receive value through the payments made to JSR Group Ltd, because the drawings allowed JSR Group Ltd to make various payments, some of which were for the benefit of Fabri-Cell International Ltd, including payments of wages. I will deal with the factual aspects of that shortly, but I do not necessarily accept that that enquiry is required. It tends to confuse the benefit, if any, that Fabri-Cell obtained from the use of the drawings, with the value of those drawings.
[77] The point can be seen by again taking the example of an overdrawn bank account. If a company takes money out on overdraft, it receives value to the extent of the drawings. If it repays the overdraft with interest (at normal rates), a liquidator would not think of challenging the repayment under s 297. Suppose instead that the customer pays third parties by electronic payment or by cheque. The customer has obtained the use of the funds to the extent that it has increased its overdraft. That is the value it has received. If the company repays the overdraft, a liquidator has no claim under s 297. The repayment is not at an undervalue to the company. Suppose that the company does not make good use of the funds it has withdrawn on overdraft. The benefits it obtains are less than the value of its drawing. That should not make any difference. The value of the money it has used is unchanged. The repayment of the overdraft cannot be an undervalue transaction. If the liquidator considers that the company was unwise in its use of the funds it withdrew from the bank, and there was an undervalue exchange with the third party who received the
drawing from the bank, the liquidator can make any claim under s 297 against the recipient of the payment. It would be unthinkable for the liquidator to take the bank to task because the company used its overdraft unwisely. No one would think to require the bank to justify the customer’s use of its overdraft.
[78] Avanti’s position is comparable. At its customer’s direction, it paid JSR Group Ltd. Fabri-Cell obtained the use of the funds it requested when it factored its invoices. That is the value it received under the drawing. It would be wrong to require Avanti to vouch for the benefits to Fabri-Cell from the payments to JSR Group Ltd. If the benefits from the drawings on the invoice factoring facility were at an under-value for Fabri-Cell, the liquidators’ remedies are to pursue JSR Group Ltd, not Avanti Finance Ltd. Fabri-Cell did obtain value for the drawings of $298,697.91. It has not repaid in full. As a result, Avanti is worse off by some $73,086.24. Accordingly, the liquidators’ claim for the payments fails because the transactions were not at an under-value to the company.
[79] In any event I accept Avanti’s argument that Fabri-cell did benefit from its payments to JSR Group Ltd. The evidence shows these payments by JSR Group Ltd from the Westpac 00 account:
29 June 2016 $20,000.00 to pay Fabri-Cell’s wages; 29 June 2016
$39,288.74
to pay Du Pont New Zealand Ltd, one of Fabri-Cell’s suppliers;
30 June 2016
$184,782.00
to pay Fabri-Q International Ltd, a company associated with Mr Cook, repayment of a loan recorded in the statement of financial position as at 31 March 2016;
1 July 2016
$229,873.41
SH Lock - for settlement of Lock’s factoring facility;
20 July 2016
$107,500.00
Inland Revenue – taxes
August 2016
$122,739.63
Wages payments.
Total:
$704,183.78
There may be others, but those ones are plainly payments of debts incurred by Fabri- Cell International Ltd.
[80] When JSR Group Ltd paid Fabri-Cell’s debts and expenses, it became a creditor of Fabri-Cell. The conventional treatment is to treat those payments as advances by JSR Group Ltd as shareholder. Mr Dalton recognised that point in his evidence when dealing with the company’s insolvency. The question was raised whether the company became temporarily solvent because of the $759,000 held by JSR Group Ltd which enabled Fabri-Cell to meet its creditors. Mr Dalton made the point that the payment of overdue taxes by JSR Group Ltd did not cure Fabri-Cell’s insolvency because one creditor had been substituted for another. In a small closely- held company, it is standard to treat shareholders’ payments to a company or meeting its expenses as advances which are repayable.11 There is nothing to suggest that that does not apply here.
[81] Accordingly, the effect of Fabri-Cell’s drawings under the factoring agreement was to reduce its debt to JSR Group Ltd. The liquidators cannot sensibly say that the reduction in indebtedness was worth less than the amounts of the drawings. The liquidators did criticise the payments to JSR Group Ltd as an attempt by Mr Ram to reduce his wife’s exposure under her guarantee of JSR’s obligations to Avanti. It is true that directors of insolvent companies are more motivated to pay debts that they have personally guaranteed than to pay other creditors, but that is beside the point. The liquidators cannot deny that Fabri-Cell’s indebtedness to JSR Group Ltd was reduced. If the liquidators consider that the payments to JSR Group Ltd were a preference under s 292 they can take that up with JSR Group Ltd.
[82] I refer to three authorities that were cited: Ruscoe v McKeown Group Ltd,12 Monocrane NZ Ltd (in liq) v Moncur13 and Apollo Bathroom and Kitchen Ltd v Ling.14
[83] Ruscoe v McKeown Group Ltd was a case under s 297 of the Companies Act. In that case, the company paid a fuel supplier. The amounts of the payments were more than the value of the fuel supplied. The fuel supplier applied the overpayment towards an indebtedness that had been incurred by an earlier company that carried on the same business as the company in liquidation. Mander J commented that for claims
11 Jackson v Wynyard Group Ltd (in liq) [2018] NZHC 1283.
12 Ruscoe v McKeown Group Ltd [2015] NZHC 789.
13 Monocrane NZ Ltd (in liq) v Moncur [2016] NZCA 139, [2016] NZFLR 455
14 Apollo Bathroom and Kitchen Ltd (in liq) v Ling [2019] NZHC 237.
under s 297 the value must have been sourced from the company that goes into liquidation. That was to deal with an argument by the fuel supplier that the overpayment came from a director who was also liable under a personal guarantee. That case does not block my analysis. Here, the case is straightforward. There was value given by Fabri-Cell in the payments it made but it had received value in return, the advances paid to JSR Group Ltd. It received that value in the same way as if it had received those payments. It would stultify the law if that commercial reality were ignored.
[84] In Monocrane NZ Ltd (in liq) v Moncur an estoppel operating against the company was also held to bind a company in liquidation when the liquidators brought a proceeding to enforce a shareholder’s current account. The Court of Appeal found that there was an estoppel that bound both the company and accordingly also the liquidators, which would make it unconscionable to sue on a current account. Those circumstances are quite different from the present case.
[85] In Apollo Bathroom and Kitchen Ltd v Ling, Jagose J dealt with a case where a company had paid the defendant’s tax bill of $400,000. The liquidators successfully claimed under s 297. The defendant said that she was due unpaid salary and wages, but Jagose J dismissed that evidence and held that there was no value under the transaction. He held that while the defendant’s tax had been paid, in the light of her evidence she was not entitled to anything. His comments as to value under the transaction are consistent with what I have said so long as it is borne in mind that the transaction has the more extended meeting that I have set out above.
The liquidators’ claim for the invoices
[86] Now for the invoices. The liquidators claim that not only did Avanti Finance Ltd receive value under the payments received, but it also received value in terms of the invoices. I have so far used the word “factoring” generally. It is necessary to see what was meant by “factoring” in this case. From one point of view, the invoices can be treated as counters or tokens to calculate the amounts of advances. Indeed, it might be considered that the arrangement was no more than an invoice financing facility
without any actual debt factoring. If that is the case, no interest in the invoices passed to Avanti Finance Ltd and this part of the liquidators’ claim falls away.
[87] However, I have found that Fabri-Cell and Avanti operated the financing facility in accordance with the terms of the invoice financing agreement with JSR Group Ltd. That agreement provides for the grant of a security interest. To that extent, I accept that an interest was created in favour of Avanti Finance Ltd. It was not, however, an absolute assignment, as defined in s 48 of the Property Law Act 2007.15 It operated by way of charge only. Nor was the assignment in writing. There was therefore not an assignment under s 50(1) of the Property Law Act.
[88] Any assignment could operate only in equity. But for an assignment to operate in equity, there must be valuable consideration or the assignment must be complete. That was the position under the general law and is now stated in s 50(5) of the Property Law Act 2007. Once it is accepted that there was valuable consideration for the advances, the liquidators’ case collapses for the invoices, as they have to accept that some value was given for the invoices, whereas their case is that no value was given.
[89] The assignments were not complete under s 50(5). In saying that an assignment has to be complete I mean that no further steps need to be taken to complete the assignment. Here, I follow the approach of Windeyer J in the High Court of Australia in Norman v Federal Commissioner of Taxation.16 As the requirements for writing were not met, this was not a complete assignment.
[90] The point remains that the interest taken was no more than a security interest, that is, by way of charge only. A security interest does not by itself, confer any value on the security holder. This point becomes clear once the English decision, Re MC Bacon Ltd,17 is considered. That was a decision under s 238 of the Insolvency Act 1986 (UK), the British equivalent of s 297 of the Companies Act 1993. In that case, the company had given a floating charge to a bank to secure an overdraft facility.
15 Property Law Act 2007, s 48, relevantly reads as follows:
absolute, in relation to an assignment, means—
(a) not conditional; or
(b) not by way of charge only
16 Norman v Federal Commissioner of Taxation [1963] HCA 21, (1963) 109 CLR 9 at 28.
17 Re MC Bacon Ltd [1990] BCC 78 (HC).
The liquidators contended that the overdraft facility was given when the company was insolvent and that was an undervalue transaction. Millett J rejected that. He said about the British provision:
It requires a comparison to be made between the value obtained by the company for the transaction and the value of the consideration provided by the company. Both values must be measurable in money or money’s worth and both must be considered from the company’s point of view.
In my judgment, the applicant’s claim to characterise the granting of the bank’s debenture as a transaction at an under value is misconceived. The mere creation of a security over a company’s assets does not deplete them and does not come within the paragraph. By charging its assets, the company appropriates them to meet the liabilities due to the secured creditor and adversely affects the rights of other creditors in the event of insolvency. But it does not deplete its assets or diminish their value. It retains the right to redeem and the right to re-sell or re-mortgage the charged assets. All it loses is the ability to apply the proceeds otherwise than in satisfaction of the secured debt. That is not something capable of valuation in monetary terms and it is not customarily disposed of for value.
In the present case the company did not suffer that loss by reason of the grant of the debenture. Once the bank had demanded a debenture the company could not have sold or charged its assets without applying the proceeds in reduction of the overdraft. Had it attempted to do so, the bank would at once have called in the overdraft. By granting the debenture, the company parted with nothing of value, and the value of the consideration which it received in return was incapable of being measured in money or money’s worth.
[91]The terms of the British statute are different, but their effect is the same as s
297. The definition of “transaction” in s 292(3)(b) includes any charge given by a company but it is important to recognise that the inquiry is whether any value has been transferred. Millett J’s analysis in Re MC Bacon Ltd applies equally under s 297. It cannot be said any value has been transferred by the mere grant of a security interest over the unpaid invoices of Fabri-Cell International Ltd.
[92] I also point that even though there was no value in granting a security interest over the invoices it appears that there would be little value, if any, if there were any attempt to enforce the security now. When the company went into receivership it appears that the receivers enforced the rights of Pacific Finance which had a general security agreement. They could collect not only debts factored to Pacific Finance but also other accounts receivable of the company. It should also be kept in mind that the liquidators in this case have taken into account the invoices that are paid. To say that Avanti received value according to the value of the unpaid invoices only has to be
stated to be seen as nonsensical. Consider what a book of unpaid invoices might sell for on the open market. For the problems in treating the face value of a debt as its actual value, see Farrell v E & E ApS Ltd.18.
[93] Accordingly, I find that Avanti Finance did not receive any value when it took a security interest under the invoice factoring arrangements.
The forklifts
[94] Under its term loans to JSR Group Ltd, Avanti Finance Ltd took specific security over two forklifts described as:
(a)1 x Hyundai HBR1511 forklift
(b)1 x NYK FBP8 TC120-450TZ forklift
[95] While the financing documents were not in evidence, it was accepted that this security was perfected by registration under the Personal Property Securities Act 1999. The question about the forklifts came up after Pacific Finance NZ Ltd put Fabri-Cell International Ltd into receivership. Lawyers instructed for the receiver, wrote to Avanti Finance Ltd on 15 October 2017, setting out a proposal for the sale of assets of Fabri-Cell International Ltd but for the proceeds of sale to be held until the priority issue between Avanti and Pacific Finance was resolved. The letter included this:
6.2 The two forklifts (over which Avanti has a specific security and which are the subject of serial numbered financing statements) are excluded from the sale.
There was correspondence where Avanti’s position as entitled to the forklifts was confirmed.
[96] I have found that the forklifts were the property of JSR Group Ltd. That was on the basis that JSR Group Ltd took title to them under the agreement to buy the business of Fabri-Cell. They were not an asset of Fabri-Cell after the settlement of the
18 Farrell v E & E ApS Ltd [2012] NZHC 417, (2012) 11 NZCLC 98-004, a case under s 292 as showing why it may be a mistake to give effect to the face value of an assigned debt.
purchase. In other words, Fabri-Cell has already received value for the forklifts under the agreement for sale and purchase. There is nothing to suggest that the purchase price for the business was at an undervalue.
[97] The arrangements made between the receivers and Avanti in October 2017 do not amount to a transfer of the forklifts. They recognised that Avanti had already established its rights in the forklifts. Avanti had taken security over the forklifts. In Re M C Bacon Ltd,19 the creation of the security did not deplete the assets of the entity that gave the security. So, taking the security could not have been at an undervalue. In any event, Avanti has effectively disclaimed the security. While the receivers made the forklifts available to it, Avanti took no steps to assume control. It decided it would not be cost-effective to go to the trouble of uplifting the forklifts and selling them. That position is analogous to that of a secured creditor who surrenders a charge to the liquidator for the general benefit of creditors. The security such as it was, was of no value to Avanti even after the receivers had said that Avanti could exercise its powers of a secured creditor. Accordingly, the forklift claim fails also.
Outcome
[98] I have dealt with the three matters which are said to amount to undervalue transactions. In all of them I am satisfied that there was no undervalue transaction to the detriment of Fabri-Cell International Ltd. Those findings are sufficient for me to dismiss the proceeding.
[99] The case did raise other issues. The question of insolvency was contested. Avanti maintains it is a secured creditor, but I do not regard that as relevant to the issues here. There was also a defence under s 296(3) of the Companies Act. As liability under s 297 has not been established, it is not necessary to consider the defence under s 296.
[100]The liquidators’ claim is dismissed.
19 Re M C Bacon Ltd [1990] BCC 78.
[101] The liquidators are to pay Avanti’s costs on the proceeding. I trust that counsel will be able to confer and agree on costs but if they are unable to do so, memoranda may be filed. The liquidators are to file their memorandum on costs within five working days of Avanti filing its memorandum on costs.
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Associate Judge R M Bell
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