Dalton v Innes
[2024] NZHC 3775
•11 December 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-1430
[2024] NZHC 3775
UNDER Part 19 of the High Court Rules 2016 AND UNDER
the Companies Act 1993
IN THE MATTER
of the liquidation of Podular Housing Systems Limited (in liquidation)
BETWEEN
SIMON DALTON as Liquidator of PODULAR HOUSING SYSTEMS LIMITED (IN LIQUIDATION)
Applicant
AND
CHARLES LEWIS INNES
Respondent
Hearing: 26 November 2024 Appearances:
B D Gustafson and K K Kommu for Applicant S M Kilian for Respondent
Judgment:
11 December 2024
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 11 December 2024 at 4pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
………………………..
DALTON v INNES [2024] NZHC 3775 [11 December 2024]
[1] Mr Dalton, as the Liquidator of Podular Housing Systems Limited (in liquidation) (Podular), applies to have payments made to the respondent, Mr Innes, between 9 December 2020 and 21 October 2022 set aside as voidable transactions. From 2 February 2021, Mr Innes was the sole registered director of Podular which was incorporated on 28 July 2020. Mr Innes was first appointed a director on 1 September 2020 and was a 50 per cent shareholder from 22 September 2020 but by the time Podular was liquidated by this Court on 12 December 2022, Mr Innes’ shareholding had decreased in stages to five per cent.
[2] The application to liquidate Podular was filed in this Court on 9 December 2022 and dealt with under urgency. On 15 June 2023, Mr Innes was examined under oath in the Auckland High Court by counsel for the applicant. The Liquidator says Mr Innes in his evidence acknowledged Podular was unable to pay its debts when it made the challenged payments to him and that Podular paid him in preference to other creditors.
[3] The payments the Liquidator seeks to recover were categorised within Podular’s Xero’s financial accounts as follows:
Transfers $82,645.00 Owner Drawings $61,187.17 Shareholder Current Account $11,500.00 Wages $299,775.22 Motor Vehicle Expense $4,800.03 Office Equipment $3,203.78 Expenses $13,001.16 Suspense $3,000.00 $479,112.36
[4]The voidable transaction notice included nearly 370 transactions totalling
$493,938.30.
[5]The Liquidator in this proceeding challenges transactions totalling
$479,112.36 — the amount less than in the notice due to the Liquidator identifying date discrepancies and payments not otherwise within s 292 of the Companies Act 1993 (the Act). Nonetheless, there remain hundreds of individual payments challenged by the Liquidator making up the above categories. Neither counsel sought
to examine each and every transaction but were content (with some exceptions) to deal with the payments by category.
[6] Podular was in the business of building and selling architecturally designed modular residential buildings. The buildings were constructed at facilities in Christchurch and Hamilton and when complete were trucked to the purchaser’s property and installed on foundations constructed by Podular.
[7] A Mr Gross, and a company associated with Mr Gross, provided substantial funding to Podular. Podular entered into two General Security Agreements (GSAs) which created a security interest in relation to all of Podular’s present and after acquired property to secure those advances. As at the date of liquidation, the GSAs secured advances of $1,420,000.
[8] Podular’s main source of funding for its business appears to have been deposits and part payments received from purchasers of pods. At the time of liquidation, Podular had received substantial payments from the purchasers of partly completed pods and deposits in excess of $2,300,000 from another 20 purchasers that did not relate to any identified pod under construction in Podular’s facilities.1
The Law
[9]Section 292 of the Act states:
292 Insolvent transaction voidable
(1)A transaction by a company is voidable by the liquidator if it—
(a)is an insolvent transaction; and
(b)is entered into within the restricted period.
(1A) A transaction by a company is voidable by the liquidator if it—
(a)is an insolvent transaction; and
(b)is entered into with a related party of the company within the related party period.
(2)An insolvent transaction is a transaction by a company that—
(a)is entered into at a time when the company is unable to pay its due debts; and
1 Precis of trading history of the company adopted from Francis v Gross [2024] NZCA 528.
(b)enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
(4A) A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.
[10] The following summary of the legal principles (which were not in dispute) is taken from Mr Gustafson’s submissions which I adopt.
[11] A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.2 The related party period is two years before the date of commencement of the liquidation; in the case of a company that was put into liquidation by the court, the period is two years before the making of the application to the court.
[12] The term “debts”, for these purposes, includes all those liabilities that would be provable in a liquidation if it occurred at the very moment at which the transaction took place: this includes actual, contingent and future debts.3
[13] The company is not able to pay its due debts from its own money if it can do so only by means of money borrowed for that purpose. As noted in Re Amour:4
There is little doubt upon the evidence that the bank obtained a preference over other creditors. Amour said he always had outstanding creditors until he became bankrupt, and it was on the· petition of one of his creditors that he was made bankrupt. There is little doubt also that long before his bankruptcy Amour was in financial difficulties and could not pay his debts as they became due out of his own money.
Mr. Street suggested that upon the evidence I should construe the words "from his own money" as meaning from the money available to the debtor. This I am unable to do. It is one thing to pay one's debts out of one's own money. It is another to pay such debts with borrowed money.
2 Companies Act 1993, ss 292(4A) and (4C).
3 Re Amour (1956) 18 ABC 69.
4 At 74.
[14] In considering the ability to meet due debts, the Court assesses the company's position in its entirety rather than a temporary lack of liquidity, and in particular a company's ability or inability to change its assets into cash sufficient to meet its debts as they fall due.5
[15] As Podular was put into liquidation by the Court, Podular is presumed to be unable to pay its due debts at the time of the challenged payments for the two years before the commencement of the liquidation. The period of two years begins with the making of the application to the Court on 9 December 2022. All the payments challenged by the Liquidator are within the restricted period. Mr Innes did not attempt to rebut the presumption.
[16] The notice of opposition does not expressly assert that Podular was able to pay its debts as they fell due. The high point is para 2.1 of the opposition which says:
The Company had funds that were to be provided from external sources and which were under the control of the other shareholder who was also the shadow director of company;
[17] The bare assertion that Podular could pay its debts from further borrowed money does not, as noted at [13] above, assist Mr Innes. In any event, no such funds were forthcoming.
[18] In any event, Mr Innes’ acknowledgments during his examination would make any claim that Podular was solvent ring hollow. The following admissions as identified by Mr Gustafson were made by Mr Innes under oath:
(a)Admitted to receiving about $3,000 per week from Podular while he was a director.
(b)Admitted to taking over half a million dollars from Podular during the time it was trading.
(c)Admitted that Podular was hopelessly insolvent as of 31 March 2021.
(d)Admitted that Podular had a negative asset position from 30 April 2021 for every month to 31 March 2022.
5 Sandell v Porter (1966) 115 CLR 666 at 670 and 671. See also: Bank of Australasia v Hall
(1907) 4 CLR 1514 (HCA) at 1543; and Re Toowong Trading Pty Ltd [1989] 1 Qd R 207.
(e)Admitted that he knew that from 1 April 2021 to 31 March 2022 that Podular could not pay its due tax, its due wages, and its accounts payable.
(f)Admitted, in hindsight, that he could have appointed an administrator after Podular had continued to incur significant losses of $3.85 million for the six-month period ending 30 November 2022.
(g)Admitted that over the slightly more than 2 years of Podular trading, he ensured that every dollar Podular owed to Mr Innes was paid to him, despite the shortfall to creditors being discovered to be an estimated
$9.288 million.
[19] Mr Kilian, counsel for Mr Innes, did not suggest Mr Gustafson’s summary of what Mr Innes accepted in his examination was inaccurate.
[20] I add here there is an objection to the admissibility of Mr Innes’ evidence from his examination. The suggestion in substance is that Mr Innes did not fully appreciate the nature of the matters being put to him and in effect he was ambushed. I do not accept that is a tenable characterisation of his examination. Once a director gets to the point of being examined under oath on behalf of a liquidator of the company of which for the main part they were the sole director, that director must know that their conduct as director is subject to real concern. Podular went into liquidation hopelessly insolvent owing millions of dollars. It is hard to envisage what else Mr Innes thought he would be examined about.
[21] Nor do I not accept Mr Innes can suggest his answers under oath would have been different had he been “forewarned” of the nature of the questions. It is generally considered that an unprepared witness is likely to be franker and give unvarnished and unalloyed evidence. I reject the challenge to the admissibility of the statement.
[22] As Mr Gustafson, counsel for the Liquidator, points out, s 266(4) of the Act states:
Subject to any directions by the court, a record of an examination under this section is admissible in evidence in any proceedings under this Part, section 383, subpart 6 of Part 8 of the Financial Markets Conduct Act 2013, or section 44F of the Takeovers Act 1993.
[Mr Gustafson’s emphasis]
[23] The voidable transaction provisions are in the part covered by the above subsection.
[24] I am satisfied that the Liquidator is entitled to rely on the presumption that Podular was unable to pay its debts in relation to all of the challenged transactions. There was no real attempt to rebut the presumption. That presumption is more than backed up by the accounting evidence produced by the Liquidator which I do not recite here, given the presumption applies.
[25] Nor is it disputed that the payments permitted Mr Innes to receive more than he would have had he sought to recover the payments in the liquidation.
The need for a debtor/creditor relationship
[26]The Supreme Court in Allied Concrete Ltd v Meltzer said:6
… to be an insolvent transaction there must be a payment made by the company to another in the context of a debtor/creditor relationship,7 which results in the creditor receiving more than it would in a liquidation.
[27]The author of McPherson’s Law of Company Liquidation says:8
Accordingly, a debtor/creditor relationship must exist between the creditor and the company and there must be a transaction, in terms of s 292(3), to which both the company and the creditor, that has received the preference, are parties. It is not the relationship of debtor and creditor that provides the basis for impugning the transaction but the effect produced upon that relationship, which gives to a transaction the character of a preference.
[28] Mr Innes gives evidence only in the most general of terms. Mr Innes says he is unable to give a full evidential account of matters without affecting his fair trial rights as he is facing a criminal trial to be heard in the Auckland High Court in March 2025. Mr Innes, while being aware of the trial at the time of his affidavit affirmed 4 July 2024, on 22 November 2024 applied to adjourn the hearing scheduled for 26 November 2024 on that basis. Gault J, as Civil List Judge, in a Minute of 25 November 2024 declined that application.
6 Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141 at [18].
7 Because s 292(2)(b) requires that there be a debt owed.
8 Andrew R Keay McPherson’s Law of Company Liquidation (3rd ed, Sweet & Maxwell, London 2013) at 317-318.
[29]In Mr Innes’ brief affidavit, he says:
10.1 Some of the payments received were not in the form of a wage but rather reimbursements for payments made to creditors of the company;
[30] Mr Innes suggested that it would be more appropriate for those creditors to be the subject of the voidable transaction notice.
[31]Mr Innes, at para [12] of his affidavit, says:
I can further confirm that I did receive wage/salary for the work that I was doing, it seems inconceivable that the liquidators have not taken into account a wage that an employee would receive for doing the work required as being necessary and as I understand preferential payment. The reliance on not having an employment agreement seems an attempt to mischaracterise the nature of the role and the work that would ordinarily be a role for which someone would be paid, particularly as it is clear I was a shareholder- employee.
[32] Mr Gustafson’s written submissions do not analyse whether Mr Innes was in a debtor/creditor relationship with Podular in respect of each of the categories of payment as set out in [3] above. “Owner Drawings”, for example, would ordinarily give rise to an indebtedness owed by Mr Innes to Podular which the Liquidator could recover as a debt in the ordinary way.9
[33] Given Mr Innes was the sole director of Podular for most of the period when the payments in [3] above were made, and a director for the entire period, he must have had input into approving the classification of the payments in Xero’s financial accounts.
[34] But for the issue of whether the payments summarised in [3] above were debtor/creditor payments which I now address, I am satisfied that the Liquidator has met the requirements of s 292 of the Act.
9 Jindal v Orange Capital Ltd (in liq) [2022] NZCA 540.
The suspense account
[35] The narration in respect of this payment is: “Banking transfer to personal account. Coded to Sanders Manufacturing/Podular Group”. Apparently, Sanders Manufacturing computer systems were related to that operated by Podular.
[36] Mr Gustafson accepted that for the purposes of this application, it was arguable this payment did not arise from a debtor/creditor relationship and it was not pursued. The Liquidator’s application in respect of this payment is declined.
Shareholding current account
[37] At the start of the two year period in issue in this proceeding, Mr Innes’ current account was in credit by $4,494. Mr Innes received current account payments of
$11,500. The difference of $7,006 is what Mr Innes owes to Podular under his current account but I find that Mr Innes received a preference when he was paid the credit balance of his current account being $4,494.
[38] Accordingly, I find that the payment to Mr Innes of $4,494 of his current account credit balance is voidable.
Expenses
[39] This and the two following categories appear to represent Mr Innes’ having personally paid amounts owed by Podular for which he then received reimbursement from Podular. Mr Innes claiming reimbursement from Podular is him claiming he is owed money by Podular, that is, he is a creditor by virtue of having met Podular’s debts on the basis Podular would reimburse him for those amounts.
[40] As the expenses category of $13,001.16 involved a debtor/creditor relationship, I find payment of this amount involved voidable transactions.
Office equipment
[41] The narration for this payment is: “Referenced as computer/printer for Christchurch. Purchased in Auckland”.
[42] Again, this is Mr Innes being reimbursed for an expense he personally met for Podular. Mr Innes recovered this amount on the basis that Podular owed him this money as a debt. This is also a voidable payment and I so find.
Motor vehicle expenses
[43] The various payments that are included in the motor vehicle expenses are in the same category as expenses and office equipment. The descriptions in the codings for these payments inadequate. However, Mr Innes must stand by the coding he as director authorised. Mr Innes could have had these amounts recorded against his current account or otherwise as drawings if they were not reimbursements of costs he had met. I conclude these payments were similar to the other reimbursement payments, that is, pursuant to a debtor/creditor relationship and therefore voidable.
Owner Drawings
[44] This is a more problematic category for the Liquidator. The bulk of this payment is made up by a transfer of $51,000 which, on the records available to the Liquidator, was paid to Mr Innes. Mr Innes disputes receiving this sum. At the hearing on 26 November 2024, counsel agreed they would file further evidence in respect of this payment once it had been traced. Leave is reserved for this issue to be addressed should the need arise but if it was received by Mr Innes, the Liquidator will need to explain why this sum is not recoverable as debt from Mr Innes in the same way as his current account.
[45] However, Mr Innes in his evidence says that in this category are two reimbursements of expenses being $1,000 in part as reimbursement for a payment he had made to South Pacific Timber and the payment of $2,000 for reimbursement of repairs to the car he was using. These payments are therefore in the category as the other reimbursement payments I have already dealt with.
[46]There is an order that this category is voidable to the extent of $3,000.
[47] Mr Gustafson sought to develop an argument that once Podular resolved to make the “owner drawings” payments to Mr Innes, at that moment there was
a debtor/creditor relationship because the resolution created an obligation on Podular to pay. Mr Gustafson relied on the old case of Re Severn and Wye v Severn Bridge Railway Company, which concerned whether dividends declared outside the limitation period were still recoverable.10 The Court held that the limitation defence was valid saying:11
The dividends in question were declared and became payable more than twenty years before the present claims were made, and constituted debts due to the shareholders for which they could have sued at law…
[48] Mr Gustafson submits that, by analogy, that when the company resolved to pay the owner drawings to Mr Innes, a debtor/creditor relationship arose in the same way.
[49] This submission begs the question of what prompted the owner drawings that were paid to Mr Innes, that is, what was his entitlement to this money? A holder of a share where a dividend is declared is entitled to receive that dividend as an incidence of being a shareholder. What was it that entitled Mr Innes to receive the owner drawings? Mr Gustafson says it is Mr Innes’ decision to take the money. In my view, there is a circulatory in that reasoning which makes it untenable and I do not accept this submission.
[50]The balance of the Liquidator’s application as it relates to this category is
adjourned.
Transfers
[51]The narrations in respect of the matters coded in Xero as “Transfers” are varied.
[52] Mr Gustafson submits that Mr Innes considered that these payments, indeed all payments, were debts owing to him relying on the following passage from his examination:
Q:… During that time, it seems that you ensured that every dollar that this company owed you, you made it pay you. Was that fair?
A: Yes.
10 Re Severn and Wye v Severn Bridge Railway Company [1896] 1 Ch559.
11 At 564.
Q. Do you not think –
A. If it didn’t pay me, it would have paid someone else I guess.
Q: You are serious about that statement?
A:Well I mean I agree with you, yes, every – the company did pay every dollar.
Q: Owed to you?
A: Correct.
Q: And only you?
A: Correct.
[53] As can be seem from the above analysis, this evidence can only be taken so far as an admission that all the money received by Mr Innes was the payment of a debt owed by him by Podular. There are included in the “Transfers” category, some reimbursement claims. The transfers category can be contrasted with the drawings and shareholder current account categories which do not create a debtor/creditor relationship.
[54] I conclude that the transfers category are in the same category as reimbursement. Had they not been in repayment of amounts owed to Mr Innes, he would have included them in his current account or as drawings.
[55] Ultimately, responsibility for classification of the payments rested with Mr Innes as the sole director for most of the period in issue. While the onus is on the Liquidator to demonstrate that these payments stemmed from a debtor/creditor relationship, the Liquidator can only work from the records inherited from Podular controlled by Mr Innes. As I have said, Mr Innes did not choose to classify transfers as part of his current account or his drawings. It was Mr Innes who would have given instructions as to how the payments were to be coded in Xero if indeed he did not do it himself. At the end of the day, if the payments are not voidable then they are recoverable as a debt due under Mr Innes’ current account, so it is doubtful there is any prejudice to Mr Innes in this approach albeit I accept the absence of prejudice does not result in a payment being voidable if it does not satisfy s 292 of the Act.
[56]I therefore conclude that the transfers amount are voidable in the sum of
$82,645.00.
Wages
[57] In respect of wages, it was implicit in Mr Innes’ evidence that he considers he had an entitlement to wages, that is, Podular owed him the money. A claim for wages can be brought in a liquidation. Whether the Liquidator would admit such a claim given Mr Innes’ failure to comply with s 161 of the Act is another matter, but given the breadth of definition of ‘debt’ in s 303 of the Act:
303 Admissible claims
(1)Subject to subsection (2), a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages, may be admitted as a claim against a company in liquidation.
(2)Fines, monetary penalties, sentences of reparation, orders, and costs to which section 308 applies are not claims that may be admitted against a company in liquidation.
I am satisfied that in respect of wages that there was a debtor/creditor relationship between the company and Mr Innes.
[58] While s 161(5) of the Act means that a payment made to a director where s 161 is not complied with can be challenged by the company, the fact that the Liquidator has that ability, in my view, does not prevent the Liquidator seeking to demonstrate wages received by a director were voidable transactions.
[59] The evidence shows Mr Innes’ wages were the equivalent of $130,000 per annum plus a further purported car allowance of $1,000 per week for the financial year ending 31 March 2021.
[60] As Podular also provided Mr Innes with a company vehicle, it is unclear what the purpose of the “car allowance” was. However, from 30 January 2021 to 17 November 2021, “car allowance” was only taken sporadically, but it was taken more regularly between 24 November 2021 to 26 January 2022.
[61] In a real sense, Mr Innes cannot be heard to say that he did not consider that he had a contractual entitlement to what he has clarified as wages. For him to do so would be to acknowledge that these amounts should have been debited to his current account. Mr Innes certainly does not assert there was not a debtor/creditor relationship between him and the company in relation to wages including the so called ‘car allowance”.
[62] Despite Podular’s clear and obvious financial difficulties, Mr Innes increased his “wages’ to the equivalent of $240,000 per annum from 2 February 2022.
[63] This reduced to the equivalent of $180,000 from about 7 September 2022 and reduced further from 19 October 2022 to $130,000 — that is, shortly prior to liquidation.
[64] Mr Kilian, counsel for Mr Innes, submitted that Mr Innes must have some entitlement to have remuneration recognised for the work he did for Podular. However, as Mr Innes has no employment agreement and did not comply with s 161, this submission runs up against s 161(5) of the Act already noted which provides:
(5)Where a payment is made or other benefit provided or a guarantee is given to which subsection (1) applies and either—
(a)the provisions of subsections (1) and (4) have not been complied with; or
(b)reasonable grounds did not exist for the opinion set out in the certificate given under subsection (4),—
the director or former director to whom the payment is made or the benefit is provided, or in respect of whom the guarantee is given, as the case may be, is personally liable to the company for the amount of the payment, or the monetary value of the benefit, or any amount paid by the company under the guarantee, except to the extent to which he or she proves that the payment or benefit or guarantee was fair to the company at the time it was made, provided, or given.
[65] Nor is Mr Innes in respect of this category entitled to any allowance or discount for wages or salary being preferential. Anyone who was, during the 12 months before the commencement of the liquidation, a director of the company in liquidation is not entitled to the preference given to employees by cl 3(4)(b) of sch 7 of the Act.
[66] I am satisfied that the Liquidator has established that the payments received by Mr Innes as wages are voidable transactions.
No running account defence
[67] Mr Innes does not assert a running account defence and Mr Gustafson submits such would not have been available to him in any event. Mr Gustafson submits that the purpose of the running account defence is to encourage suppliers to continue to do business with a company.12 Mr Innes did not need such payments to continue his involvement with Podular. The reality is Mr Innes’ involvement with Podular resulted in Podular going into liquidation with a $9,000,000 shortfall.
[68] Mr Innes claimed his ability to defend this application was prejudiced by not having access to Podular’s documentation. Mr Dalton deposes that Mr Innes has had read-only access to Xero. Mr Innes does not offer even basic evidence to explain the transactions. Mr Kilian submitted the reason for that was Mr Innes wished to maintain his fair trial rights in relation to the criminal proceeding but, with Gault J having declined Mr Innes’ application for an adjournment, I have to deal with the proceeding on the evidence as it stands. Mr Innes left his application for adjournment to the eleventh hour so he essentially ran the risk the hearing would proceed on the limited material he had filed.
Orders
[69] There is an order in favour of the Liquidator as sought at paragraph [1](a) of the application dated 3 June 2024 save that the value of the transaction set aside is
$407,920.19 made up as follows:
Shareholder Current Account: $ 4,494.00 Expenses: $ 13,001.16 Office Equipment: $ 3,203.78 Motor Vehicle Expenses: $ 4,800.03 Owner Drawings: $ 3,000.00 Transfers: $ 82,645.00 Wages: $299,775.22 $410,919.19
12 See the discussion of the basis for the running account defence in Galvanising (HB) Ltd v Fisk
[2015] NZCA 529, (2015) 14 TCLR 204 at [52] - [59].
[70]There is an order that Mr Innes is to pay that sum to the Liquidator.
[71]There is also an order that Mr Innes is to pay costs to the applicant.
Costs
[72]Counsel were not heard on costs.
[73] Absent memoranda on costs being filed within 10 working days (not more than five pages) there will be an order that Mr Innes is to pay the Liquidator costs on a 2B basis together with disbursements as fixed in respect of this application.
Associate Judge Lester
Solicitors:
Crimson Legal, Auckland (Applicant) Kilian & Associates, Auckland
Copy to counsel:
B D Gustafson and K Kommu, Barristers, Auckland (for Applicant)
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