Deuchrass v Smithson HC CHCH CIV 2005 409 2739
[2008] NZHC 2309
•12 May 2008
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2005 409 2739
UNDER The Companies Act 1993
IN THE MATTER OF the liquidation of J H STATIONERS (TIMARU) Limited (In Liquidation) at Dunedin
BETWEEN WAYNE JOHN DEUCHRASS AND IAIN ANDREW NELLIES
Applicants
ANDRICHARD GREGORY SMITHSON, HARLEY ROBERT SMITHSON AND JENNIFER LEIGH SMITHSON AS TRUSTEES OF HR & JL SMITHSON FAMILY TRUST
Respondents
Hearing: 5 May 2008
Appearances: J Guest for Applicants
R Osborne for Respondents
Judgment: 12 May 2008 at 9.30AM
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
The application to set aside a preferential transaction
[1] The applicants were appointed liquidators of J H Stationers (Timaru) Limited (the company) on 13 February 2006. Two and a half months earlier on the settlement of the sale of the company’s business a payment was made by the
company to Marac Finance Limited (Marac) which included the sum of $200,331.50.
WAYNE JOHN DEUCHRASS AND IAIN ANDREW NELLIES V RICHARD GREGORY SMITHSON, HARLEY ROBERT SMITHSON AND JENNIFER LEIGH SMITHSON AS TRUSTEES OF HR & JL SMITHSON FAMILY TRUST HC CHCH CIV 2005 409 2739 12 May 2008
[2] That sum was the amount remaining to be paid by the H R and J L Smithson
Family Trust, (the trust) of which the respondents are trustees.
[3] The trust borrowed from Allied Finance Limited (taken over by Marac) and advanced the loan proceeds to the company. The company also borrowed some funds directly from Allied Finance Limited.
[4] The liquidators apply to set that payment aside saying it was made to Marac on behalf of the trust. They say it is a “preferential” transaction. Therefore, the trustees should pay to the company the amount of that transaction, along with interest and costs.
[5] The liquidators say that the company, from the sale proceeds of its business, paid Marac back not only what it owed, but what was owed by the trust, which was at all times an unsecured creditor of the company.
[6] They further say the trust, through receiving this relief against its liability to Marac, was no longer a creditor of the company for that amount, and to that extent was fully repaid, whilst there were no assets of any significance to be distributed amongst other creditors.
[7] In opposition to the application the trustees say they received nothing from the company. They say that the company paid Marac and Marac received the sum in question and that the trustees received no part of that payment.
[8] The liquidators claim the payment of the sum to Marac was to the credit of the trust. The trustees claim this misrepresents the position, because the company as between itself and Marac, was the principal debtor, and the payment made by the company to Marac to discharge its debt included the sum borrowed from Marac, albeit by the trustees, for the company’s business.
[9] The trustees rely upon the loan and security documents. In those the company guaranteed repayment by the trust of its loan from Marac. It is usual for such security to provide that the guarantor assumes liability as principal debtor of the
debt. The trustees say that by those documents the company ceased to be treated as a guarantor and is a principal debtor which had a principal obligation to pay the debt, i.e., all that which was owed to Marac. That, they say, is what happened in this case because as between the company and Marac the company was discharging its principal obligation as debtor. That is the legal context in which Marac received the money.
The issue
[10] As it emerged in the course of submissions, the primary issue appears to be whether a payment by a company of a debt owed by a third party can amount to a voidable transaction when the company has guaranteed that third party’s liability.
[11] In the circumstances of this case that issue requires an examination of s 292 of the Companies Act 1993, of the loan/security documentation, and a consideration of counsels’ submissions.
Section 292 Companies Act 1993
Voidable Transactions
292. Insolvent transaction voidable
1) A transaction by a company is voidable by the liquidator if it— (a) is an insolvent transaction;
…
(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
(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.
(3)In this section, transaction means any of the following steps by the company:
…
(e) paying money (including paying money in accordance with a judgment or an order of a court):
The loan and security documents
[12] There are three:
Loan Agreement
[13] This details an advance of $200,000.00 by Allied Finance Limited as lender to the respondents as borrower. It names Mr H R & J L Smithson, Mrs F N Smithson, and the company as guarantors.
[14] That document provided:
4.1The Guarantor unconditionally and irrevocably Guarantees to the lender the due payment by the Borrower of the Guaranteed Indebtedness and the due performance of and compliance by the Borrower with the Guaranteed Obligations.
4.2The Guarantor undertakes that if, for any reason, the borrower does not pay when due…any Guaranteed Indebtedness, it will pay the relevant amount immediately on demand by the Lender
...
5.1As between the Guarantor and the Lender (but without affecting the obligations of the Borrower) the Guarantor is liable under this Agreement as a sole and principal borrower and not as a surety.
[15] Hereafter clause 5.1 shall be referred to as the principal debtor clause. [16] In Schedule 1 the document listed the securities as follows:
(a) Deed of Guarantee and Indemnity provided by the guarantor
(b) Existing first registered mortgage over the property (of Mrs F M Smithson).
(c) Specific Security Agreement over the existing life policy of H R Smithson.
Deed of Guarantee and Indemnity
[17] This identified the names of the guarantors of the trust’s loan from Allied Finance Limited. The guarantors were Mr H R & Ms J L Smithson, Mrs F M Smithson, and the company.
[18] That document provided:
3.1As between the guarantor and the lender (but without affecting the obligations of the borrower) the guarantor is liable under this deed as a sole and principal borrower and not as a surety.
General Security Deed
[19] It is an agreement providing for an all obligations undertaking to pay the company’s debt to Allied Finance Limited. It is a fact that in conjunction therewith a separate advance of about $45,000 was made by Allied Finance Limited to the company.
Loan document execution
[20] The liquidators identify concerns regarding the loan documents upon which the trustees rely.
[21] The trustees have been unable to place copies of executed loan documents before the Court. Those provided are unsigned and undated. At face value it is not clear they were ever executed. On the other hand, Mr Williams, a solicitor for the respondents, recalls the documents were executed. As he said, he could not have provided his solicitor's certificates if they were not.
[22] I will deal with the documents as if they were executed.
Overview
[23] The loan documentation provides that the sum in question was borrowed by the trust. The remaining parties referred in the documentation are identified as guarantors, including the company.
[24] The contemporary record includes the company’s last set of accounts to 31
March 2005. Those show the trust has been treated as a creditor for $200,000. Marac’s settlement statement requiring payment from the sale proceeds identified an amount of $200,000.00 on account of the trust, and a separate amount on account of the company.
[25] Section 292 deals with a situation where a creditor receives an advantage by receipt of a payment, as compared with the situation that would have occurred for the liquidation if such payment has not been earlier made.
[26] Regarding the issue of this “advantage” or as it is referred to in s 292 a “preference”, all a liquidator must show is that the creditor received a greater payment than he or she would otherwise have received in the liquidation. The test for preference need not show what the payee would have received on a hypothetical liquidation on the date of payment.
The trust’s case
[27] Mr Osborne invites me to accept that the purpose of the loan arrangements was to provide funding for the company business. The funds borrowed from Marac were all intended for use by the company. The Court can infer that the trust became involved because inadequate security was available from the company alone.
[28] It is in this context, Mr Osborne submits that s 292 needs to be considered. He says the liquidators are relying upon s 292 (3) (e) in support of their contention that what has been paid to Marac amounts to an insolvent transaction, in as much as it may have, incidentally, settled the trust’s account simultaneously.
[29] As Mr Osborne observes, in the conventional situation where such a payment is made, it is usual to chase the monies to that party to whom the funds were paid. In
this case that would be Marac, but as it clear this proceeding provides no attack upon
Marac. It has not been claimed Marac was wrong to take the payment it did.
[30] Regarding the principal debtor clause contained in the security documents, Mr Osborne submits the purpose of it was to ensure Marac was entitled to take payment directly from the company. After all, the purpose of the borrowing was to assist the company. The reality is that all the parties entering the transactions including all guarantors, knew that Marac’s funds were being applied for the company’s purposes. Therefore, they realised that Marac would have to be paid if their securities were to be released.
[31] Mr Osborne submits that by the terms of the principal debtor clause in the security documents, the company was no longer a surety of the trust’s borrowing and, therefore, Marac was entitled to look directly to the company as an indemnifier. Therefore, it could make no difference whether Marac had made demand or not, or whether instead the debt was paid because the company said that they wanted to clear all of these securities, including those offered by the trust as collateral.
[32] Mr Osborne suggests that if it was otherwise, then the principal debtor clause would have no effect at all.
[33] Accordingly, when Marac received the payment it did, it did not receive it on account of any other party, but from a principal debtor in payment of a debt.
Considerations
[34] As earlier identified, the security documents include:
(a) A loan agreement relating to an advance of $200,000.00 to the respondents.
(b) A Deed of Guarantee and Indemnity from Mr H R and Mrs J L Smithson, from Mrs F M Smithson, and from the company as guarantors of the advance to the respondents.
(c) A general security deed from the company to Allied Finance
Limited.
[35] Mr Osborne submitted that the general security deed was the primary security because it was intended that all borrowings, including that by the trust, would be utilised for the company’s purposes.
[36] I do not consider it was the primary security. Rather, just one of a range of securities that Marac held against guarantors. Also, it dealt with the $45,000.00 advanced to the company. In terms of value advanced, the much greater sum of
$200,000.00 was provided by the guarantee and securities given by the trust’s guarantors.
[37] Mr Osborne submitted that the liquidators’ purpose of seeking a refund from the trust was an unconventional application of s 292. That is so in so far as there appears to be no case authority dealing with an attempt to recover as a voidable transaction a payment made on behalf of a third party (here the trust) rather than paid to that third party. It does not follow, of course, that because there is no precedent available s 292 does not apply to it.
[38] Concerning Mr Osborne’s submissions regarding the principal debtor clause, I accept the purpose of the clause is to enable the lender to be repaid directly by a guarantor. That fact, I think, does not change the character of the original contracting obligations. In my view, the principal debtor clause is a contractual provision that applies between the guarantor and the lender, and is limited to that extent. But, if I am wrong in that, and if the company can by its guarantee be considered the principal responsible for payment of the debt, I do not think it follows that the company has not, by its payment, paid the debt of the trust. As between itself and the trust that payment achieved that outcome.
[39] The position might be different if the company and the trust were co- guarantors for the same sum of money jointly inter se. That is not the case here. The trust and the company have separately contracted to borrow different sums of money. These are separate debts, separately documented, notwithstanding the
perceived overall purpose to benefit the company. Also, and unlike the company, the trust has provided a range of valuable securities in support of the guarantees as I earlier noted.
[40] A decision to pay Marac was not prompted by any demand for repayment. Rather, I infer, the opportunity to achieve repayment was provided by a sale of the business. The company was under no obligation to repay Marac at that time.
[41] The trust maintains that when the company paid the business sale proceeds to Marac, the trustees received no part of that payment. But the issues attendant here are not about the trust being paid the money, but whether there has been a transaction by which the trust got more than it would have got in the company’s liquidation. Clearly, although the trust did not receive any cash, it did receive the benefit of the arrangement by which they got more, i.e., because their debt was paid, and their securities discharged.
[42] The trust claims that when the company paid Marac direct, it did so as a principal debtor paying off its debt. I have already commented upon that analysis. I do not agree with it as a matter of law, or as a matter of fact. As a matter of law, the company guarantor has paid the debt of the trust borrower. As a matter of fact, at the time the payment was made the trust’s debt was not then due and owing. The company made the choice to pay when it did. In law and in fact, in paying Marac the company was paying the debt of the trust. The existence of a principal debtor clause did not change that. It did not mean that the trust’s debt is the company’s debt. The principal debtor clause is a means by which, if needs arise, a lender can approach a guarantor directly for payment. As between the company and the trust, one is the guarantor and the other is the debtor, and the principal debtor clause does not change that.
[43] Mr Osborne’s submissions concerning s 292 focus as on the novelty of the present transaction and on the purpose of funding being to benefit the company.
[44] In my view, the focus should not be upon the payment, but upon the transaction. Here, there was a single transaction which occurred shortly prior to the company’s liquidation which benefited the trustees and their trust.
[45] Although the matter appeared not to have been pursued in Mr Osborne’s submissions, the issue of whether or not the trust, by the payment to Marac, benefited to a greater extent than it would have in the company’s liquidation needs to be referred to briefly.
[46] I accept the evidence of the liquidators and the submissions of Mr Guest, show that, indeed, the trust by the company’s payment, did achieve a benefit to a greater extent that it would have in the company’s liquidation.
[47] The liquidators’ evidence is that if they had been handling the sale of the business, they would have required Marac not to discharge the securities it held, but to have assigned those in favour of the liquidators.
[48] The liquidators state that having taken an assignment of Marac’s securities it would then have been their duty to pursue the remedies contained in them, and that would have permitted recourse against the trust. In that outcome, the trust would have been in a worse position compared with the payment of the debt as occurred in the consequential discharge of the securities.
[49] This outcome can be demonstrated also by considering the position of rights as between co-guarantors. A co-guarantor is entitled to stand in the place of a creditor in order to pursue recovery from a principal debtor, or any co-security surety. I accept the liquidators’ argument that if the company had gone into liquidation prior to the sale, and the liquidators had been forced to pay the trust’s debt on the sale of assets, the liquidators would then have had a right to pursue the trust for reimbursement. This is a right that would only have arisen after the date of the liquidation. Therefore, the trust would have been in a worse position than if those events had occurred, compared with its position as a result of a transaction that did occur.
[50] As Mr Guest pointed out, these hypothetical situations assume the liquidators would have sold the business and in that outcome be required to pay the trust’s debt with Marac. As he stated that was not a necessary outcome. Who knew what the business might have looked like by the time of the liquidation? The liquidators might have disclaimed. They may also have negotiated with Marac as to repayment, noting that Marac had other guarantors and security.
[51] In summary, the payment by the company to Marac is a transaction that enabled the trust to benefit to a greater extent than it would have in the company’s liquidation. Accordingly, I direct the transaction be voided and, further, that the trust be directed to repay the money representing the benefit it received, together with interest.
Judgment
[52] The liquidators’ application to set aside the transaction by which the respondents debt was repaid in the sum of $200,331.50, is granted. Further there is an order requiring the respondents to pay that sum to the applicants, together with interest at the statutory rate, from the date of its payment to Marac Finance Limited.
Solicitors
Downie Stewart, Dunedin for the Applicants
Crerar Williams, Rangiora for Respondents
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