Farrell v E & E Aps

[2012] NZHC 417

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2011-419-370 [2012] NZHC 417

UNDER  the Companies Act 1993

IN THE MATTER OF     the liquidation of E & E NEW ZEALAND LIMITED (In Liquidation)

BETWEEN  PETER ESMOND FARRELL AND SIMON PAUL ROGAN AS LIQUIDATORS OF E & E NEW ZEALAND LTD (IN LIQUIDATION) Applicants

ANDE & E APS Respondent

Hearing:         7 March 2012

Appearances: K F Shaw for Applicants

P F Dalkie for Respondent

Judgment:      7 March 2012

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Harkness Henry, Hamilton, for Applicants

Email:   [email protected]

Burton & Co, Auckland, for Respondent

Copy for:

P F Dalkie, P O Box 392 Auckland 1140

Email:   [email protected]

FARRELL AND ROGAN AS LIQUIDATORS OF E & E NEW ZEALAND LTD (IN LIQUIDATION) V E & E APS HC HAM CIV-2011-419-370 [7 March 2012]

[1]      This is an application to set aside a voidable transaction under s 294 of the

Companies Act 1993. There are two principal questions:

(a)       How  is  the  transaction  to  be  characterised  under  s  292(3)  of  the

Companies Act?

(b)      What  form  of  relief  should  the  court  order  under  s  295  of  the

Companies Act?

[2]      The two questions are linked.  The parties devoted most of their submissions to the first question.  I will therefore have to give more attention to the first question, but in my judgment the second question is more important.

[3]      The applicants are the liquidators of E and E New Zealand Ltd.  I will call it “New Zealand” for convenience.   The respondent is New Zealand’s majority shareholder.  It is a Danish company with its head office in Copenhagen.  I will call it “Denmark” for convenience.

[4]      Mr Farrell, one of the liquidators, says that New Zealand was established in November 2009 to manage and execute a turn-key project.   This was the establishment of a dairy factory at Arapuni.   New Zealand was to establish the factory on behalf of Denmark, its majority shareholder.  New Zealand’s role was to manage and execute the Arapuni contract.   He says that there was a falling out amongst  the  shareholders  of  New  Zealand.    That  fall-out  resulted  in  Denmark ceasing to fund New Zealand.   From October 2010, New Zealand was no longer involved in the dairy factory project to which it had previously provided consultancy services.   A new  company,  E  and  E  International  (NZ)  Ltd  was  established  in September 2010 and it was anticipated that all the assets and liabilities of New Zealand would be transferred to it.

[5]      One of the shareholders of New Zealand applied to the court for a liquidation order.  The application was made on 23 March 2011.  The court made an order that

New Zealand be put into liquidation on 9 May 2011.  The present applicants were appointed liquidators.

[6]      The transaction which the liquidators seek to have set aside arose out of a deed of 14 February 2011, only a short time before the liquidation application was filed in court on 23 March 2011. The transaction took place well inside the restricted period under s 292(6).  Accordingly, under s 292(4A) there is a presumption that the company was unable to pay its due debts at the time of the transaction.  That is a presumption that can be disproved, but Denmark has not tried to give evidence to the contrary.   Likewise, Demark does not contest that as a result of the transaction it received more than it would have received in the actual liquidation.

[7]      The deed of 14 February 2011 is a deed of assignment of book debt between

New Zealand and Denmark.  Relevant parts of the deed include the following:

BACKGROUND

A.        The Assignee has over the years advanced significant sums to the Assignor in excess of $NZ 1,000,000 (one million New Zealand Dollars).

B.        The Assignor has advanced funds on to other companies by way of loans.

C.       South  Waikato  Processing  Facility  Limited  Company  Number

2234329  having  its  registered  office  at  the  offices  of  Staples Rodway,  Level  45,  Wel  Energy  Building,  corner  London  and Victoria Streets, Hamilton, New Zealand (“the Debtor”) is indebted to the Assignor in the sum of $ NZ 1 million (“the Debt”) pursuant to an Acknowledgement of Debt and subsequent correspondences between it and the assignor.

D.        The Assignee has made demand upon the Assignor for repayment of sums equivalent to the Debt and the Assignor has agreed to assign the Debt to the Assignee upon the terms and conditions set out in this Deed.

OPERATIVE PART

1.        SALE AND PURCHASE

1.1      The Assignor assigns and the Assignee accepts the assignment of the

Debt at and for the consideration of $ NZ 1 million.

1.2The assignment of the Debt shall be deemed to be satisfaction of the requirement by the Assignor to pay the Assignee a sum equivalent to the Debt.

2.        ASSURANCES

2.1On payment of the consideration referred to in clause 1, the Assignor shall (without the necessity for any further documentation or assurances) be deemed to have transferred the Debt to the Assignee absolutely.

2.2The Assignor will immediately give notification of the transfer to the Debtor as may be required by law including without limitation a notice to the Debtor pursuant to sub part 5 of part 2 of the Property Law Act 2007.

[8]      Under clause 3 Denmark acknowledged that it had made its own independent credit  decision  in  relation  to  the  transfer  of  the  South  Waikato  debt,  and  New Zealand made no warranty or representation as to the creditworthiness of South Waikato or its ability to fulfil its obligations under the assigned debt.  Clause 4 is an entire agreement provision.  There are ancillary provisions in the deed which are not relevant for this decision.

[9]      The liquidators served a notice to set aside a voidable transaction under s 294 in August 2011.  The liquidators identify the transaction which they want set aside as a payment of NZD$1m on 14 February 2011.  Denmark’s lawyers gave a notice of objection under s 294.  The objection said that there was no payment of NZD$1m on

14 February  2011,  but  that  the  transaction  was  an  assignment  of  a  book  debt. Denmark offered to assign the book debt back to the company in liquidation.

[10]     The notice of objection did not claim that New Zealand was solvent at the time and did not deny that the effect of the transaction was to enable Denmark to receive more towards satisfaction of its debt than Denmark would have received in the actual liquidation.  Denmark’s objection has been solely as to the characterisation of the transaction and as to the relief that ought to be ordered.  The issues have not changed in this proceeding.

[11]     While  the  deed  records  that  South  Waikato  Processing  Facility  Ltd  was indebted to New Zealand for NZD$1m - and that this had been recorded in an acknowledgment of debt - there is no evidence that South Waikato was good for NZD$1m.  The liquidators were not prepared to take up Denmark’s offer to take the debt back.  Ms Shaw accepted that the liquidators considered that South Waikato was

not good for $NZ1m.  Denmark is a Danish company.  There is a suggestion that it has New Zealand assets by its shareholdings in New Zealand companies.   If the liquidators obtain a judgment against Denmark they may be able to enforce it by execution on assets held in New Zealand.   But if those assets are unavailing, the liquidators might have to consider other remedies in the state of Denmark. That may be a fraught exercise.   It is not safe to assume that a judgment of a New Zealand court will necessarily be recognised in Denmark.  Denmark may not have the same rules as New Zealand for recognition and enforcement of foreign judgments.   So there may be uncertainty as to how effective a judgment against the respondent for NZ$1m would be.

[12]     Notwithstanding that, the liquidators have chosen to ask for an order for payment by Denmark rather than take back the debt owed by South Waikato.  It is clear that the liquidators have decided that the Danish “bird in the hand” is worth more than the New Zealand “bird in the bush”.   That is relevant to this case because, even though the debt payable by South Waikato is unlikely to realise $1m, the liquidators maintain that the respondent has received that sum of money and are seeking an order that the respondent pay back the sum of NZ$1m.  If the liquidators are successful in their application, they hope to recover more for the company than if the company had never assigned the debt to Denmark in the first place.

How is the transaction to be characterised under s 292(3)?

[13]     Section 292(3) defines a transaction as follows:

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.

[14]     Denmark  says  that  the  transaction  under  the  deed  comes  solely under  s

292(3)(a)  –  that  is,  it  was  solely  a  transfer  of  the  company’s  property.    The liquidators accept that there was a transfer of the company’s property, but they also say that there was a payment of money under s 292(3)(e).  Their case is that as there was a   payment of money, they are entitled to seek a monetary remedy.

[15]     To state the obvious, this deed did involve a transfer of property.  The deed is called a deed of assignment of book debt.  Recital D says that the assignor agrees to assign the debt to the assignee upon the terms and conditions set out in the deed. Before the deed, New Zealand was a creditor of South Waikato for $1m.  After the deed, Denmark was a creditor of South Waikato for $1m and New Zealand was no longer a creditor of South Waikato. The way by which Denmark became a creditor of South Waikato was the assignment under clause 1.1 of the deed.

[16]     Clause 1.2 of the deed provides that the assignment shall be deemed to be satisfaction of the requirement by the assignor to pay the assignee a sum equivalent to the debt, that is, the sum of NZ$1m.  By that provision, the assignment of the debt has reduced New Zealand’s indebtedness to Denmark.

[17]     In saying that the deed also involves a payment by New Zealand to Denmark, the liquidators rely on the decision of the Court of Appeal in Trans Otway Ltd v Shephard.[1]   In that case the parties, Trans Otway Ltd and Newman Carrying Ltd, had mutual dealings forwarding freight throughout the North Island.   Trans Otway claimed that Newman owed it $94,996.73, and it served a statutory demand on Newman for this amount.  Afterwards, the parties negotiated an agreement. Under a written agreement, Newman agreed to sell its business operations to Trans Otway for

[1] Trans Otway Ltd v Shephard [2005] 3 NZLR 678.

$371,000 plus GST.   It was also agreed that Newman would sell Trans Otway its client list for $94,996 inclusive of GST.  The parties agreed that on settlement Trans Otway would pay Newman $371,000 plus GST, and would pay Newman also the

sum of $94,996.73 for the client list.

[18]     It is helpful to set out certain conditions in that agreement.  Clause 2 of the agreement said:[2]

[2] Ibid, at [16].

The vendor (Newman) agrees to sell and the purchaser (Trans Otway) agrees to purchase the client list for the sum of $94,996.73 including GST.

[19]     Clause 5(e) provided that on settlement:[3]

[3] Ibid.

[20]      The purchaser (Trans Otway) will pay to the vendor (Newman) the sum of $94,776.73 including GST for such client details, such payment to be made  by  the  purchaser  acknowledging  that  the  vendor  has  made  full payment of all sums due and owing to the purchaser.

[21]     In the High Court[4] and in the Court of Appeal,[5] the transaction was held to be a case of payment by set-off.  Trans Otway was a creditor of Newman for the sum of

[4] Trans Otway Ltd v Shephard HC Auckland, CIV 2003-404-15409, 30 April 2004.

[5] Trans Otway Ltd v Shephard [2005] 3 NZLR 678.

$94,996.73 (the amount under the statutory demand), but Newman was a creditor of Trans Otway for the same sum under clauses 2 and 5(e) of the agreement for the sale of the client list.  As each party owed a debt to the other, there was a payment by setting one debt off against the other. That was a payment within s 292(3)(e).

[22]     In coming to its decision, the Court of Appeal distinguished the decision of Morris J in Moller Johnson Motors (Hawera) Ltd v  RD and SM Taplin Contracting Ltd.[6]   In that case a creditor had accepted the delivery of logs in partial satisfaction of a debt.   The Court of Appeal accepted that Moller Johnson involved a simple transfer of physical assets in reduction of an outstanding debt and held that the case before it was distinguishable as involving debts being set-off against each other.

[6] Moller Johnson Motors (Hawera) Ltd v RD and SM Taplin Contracting Ltd HC New Plymouth, M54/97, 30 March 1998.

[23]     Reynolds v HSE Holdings Ltd[7]  is a case similar to Moller Johnson.   I held that medical equipment had been transferred in reduction of an outstanding debt and

[7] Reynolds v HSE Holdings Ltd HC Whangarei CIV-2009-488-738, 17 September 2010.

that that did not involve any payments.

[24]     The issue here is whether the assignment of debt is like the transaction in Trans Otway Ltd v Shephard  that is, involving payments,  or is like the transactions in Moller Johnson Motors and Reynolds v HSE Holdings Ltd where assets have been applied against outstanding debt.

[25]     For their argument that the deed of assignment of debt involved more than a transfer of an asset in reduction of indebtedness, the liquidators say that not only was New Zealand indebted to Denmark, but also Denmark was indebted to New Zealand. It was the mutual discharge of those obligations by set-off that amounts to payment.

[26]    The liquidators rely on the wording of the deed.   They accept that the characterisation of the transaction is a matter of construction.   They point to the heading to clause 1, “Sale and Purchase”, and they say that that refers to an exchange of money for a transfer of an asset.   They refer to clause 1.1 as providing for a consideration  of  NZ$1m.    They  also  refer  to  the  words  at  the  beginning  of clause 2.1: “On payment  of the consideration  referred  to  in  clause 1  ...”.   Their analysis is that Denmark bought the South Waikato debt for an agreed consideration of NZ$1m and Denmark became the debtor of New Zealand for that sum of $1m. There was then a set-off for the purchase price of the assignment of the debt against New Zealand’s indebtedness for $1m.

[27]     I make a preliminary observation.  If Denmark was a debtor of New Zealand it was an unusual form of indebtedness.  Before the deed was entered into Denmark was a creditor of New Zealand but New Zealand was not a creditor of Denmark. New Zealand owned the debt owed by South Waikato.   After the deed had been entered into, Denmark owned the debt owed by South Waikato.   Denmark was a creditor of New Zealand but the amount of the debt had been reduced by $1m.  New Zealand was a debtor of Denmark but it was not a creditor of Denmark.  All that has changed is that the South Waikato debt has been transferred, and the amount New Zealand owed Denmark was reduced by NZ$1m.    But to say that in the meantime – that is, between the moment before and the moment after entering into the deed – Denmark has became a debtor of New Zealand for the sum of $1m and that debt was discharged by set-off is to rely on indebtedness that was extinguished at the same

time that it was created.  It was a stillborn obligation.  It is not a promising basis on which to found a claim for $1m.

[28]     I  prefer  a  simple  approach.    That  is,  all  things  being  equal,  a  simpler explanation  is  often  better  than  a  more  complex  one.    Here,  the  deed  can  be explained as a simple transfer of an asset in return for a reduction of a debt.  If the deed is to have the added complexity of also involving payments, as a matter of interpretation, that argument should be adopted only if it is necessary to give true effect to the transaction.

[29]     As I understand it, the liquidators’ argument is this: (a)          New Zealand owed Denmark at least $1m;

(b)      New Zealand sold the South Waikato debt to Denmark for $1m;

(c)       That resulted in Denmark owing New Zealand $1m as a debt to be paid;

(d)The debts between the two were set-off, and that set-off was payment following the Court of Appeal’s decision in Trans Otway;  and

(e)       Denmark became the owner of the South Waikato debt, having paid for it.

[30]     The  liquidators’ argument  is  that  it  is  Denmark’s  payment  that  was  in satisfaction of the debt owed by New Zealand. That part of the liquidator’s argument cannot be reconciled with clause 1.2, which provides that the assignment of the South  Waikato  debt  shall  be  deemed  to  be  satisfaction  of  New  Zealand’s indebtedness to Denmark to the sum of $1m.  Clause 1.1 says that the assignment is at and for a consideration of $1m.  It states that there is a consideration, and sets the value of the consideration.  It does not go on to say that the sum of $1m is to be paid. The words “at and for the consideration of NZ$1m” are descriptive only.

[31]     On its face, clause 2.1 appears to set a time when the assignment takes effect. The  wording  is  “On  payment  of  the  consideration  referred  to  in  clause  1,  the Assignor shall ... be deemed to have transferred the debt to the assignee absolutely.” That suggests that something had to be done first before the transfer could take effect.  But when the transfer under the deed is considered more closely, the time of transfer is not deferred.  The liquidators’ argument based on payment by set-off does not require any deferral of time for the transaction to take effect.  And under the argument that there was only an assignment of debt without a payment of money, the consideration was the satisfaction of the debt  under clause 1.2 which also took immediate effect.  So the words “on payment of the consideration...” in clause 2.1 do not add anything to the agreement.   They have no effect.   Legally, they are meaningless.     They do not support an interpretation that there was a payment of money.

[32]     There is the heading to clause 1: “Sale and Purchase”.  Ms Shaw accepts that a heading is a guide to meaning, but is not conclusive.  The transaction has to be analysed to find out whether there is in fact a true sale and purchase.  When the deed is  properly  considered,  it  can  be  explained  as  a  simple  transfer  of  an  asset  in reduction of debt without the added complexity of a deemed payment of money.

[33]     The Trans Otway case can be distinguished because in that case there were express requirements for payments under clauses 2 and 5(e).  In that case, the courts had to recognise and give effect to the express provisions for payment.  But there are no such express provisions in this case.   The transaction in this case falls solely within s 292(3)(a) of the Companies Act as a transfer of property.   There was no payment of money under s 292(3)(e).

What relief should be ordered under s 295?

[34]     Section 295 provides:

295     Other orders

If a transaction or charge is set aside under section 294, the Court may make

1 or more of the following orders:

(a)       an order that a person pay to the company an amount equal to some or all of the money that the company has paid under the transaction:

(b)       an order that a person transfer to the company property that the company has transferred under the transaction:

(c)       an order that a person pay to the company an amount that, in the Court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction:

(d)       an order that a person transfer to the company property that, in the Court's opinion, fairly represents the application of either or both of the following:

(i)       money that the company has paid under the transaction:

(ii)      proceeds of property that the company has transferred under the transaction:

(e)       an  order  releasing,  in  whole  or  in  part,  a  charge  given  by  the company:

(f)       an order requiring security to be given for the discharge of an order made under this section:

(g)       an order specifying the extent to which a person affected by the setting aside of a transaction or by an order made under this section is entitled to claim as a creditor in the liquidation.

[35]     Orders under s 295 are made after a transaction has been set aside.   The section allows the court to make a range of orders.   In particular, there can be an order for payment of money under subs (a).   There can also be an order for the transfer of property under subs (b).   There are other powers to allow orders to be made for the disgorgement of benefits that have been received as a result of a voidable transaction.  The clear purpose of s 295 is to give the court the power to put the parties back into the position that they were in at the outset.  That is, there is a restitutio in integrum, similar to the powers that a court exercises in equity after it has rescinded a transaction.   A creditor who has received a preference should be

required to surrender it for the benefit of all creditors.[8]   I see no reason to require a

creditor who has received a preferential benefit to give back more than the benefit he has received.  As I have found that the transaction under s 292(3) is solely a transfer of property, the appropriate remedy is that proposed by Denmark, that is, that it be ordered to transfer back to the company in liquidation the debt that was transferred

under the deed of assignment.

[8] See Reynolds v HSE Holdings Ltd at [28].

[36]     I also consider, in the alternative, what order I should make in case I am wrong in finding that there was not a payment under s 292(3).  That is, even if there were a payment, what is the appropriate order to make under s 295?  In Trans Otway the Court of Appeal ruled that a liquidator was entitled to analyse a transaction and pick and choose out of it the elements that were most favourable for the liquidator.[9]

That is why it upheld the liquidators’ claim that there was a payment by set-off, even

though the transaction also involved the transfer of assets.  But the Court was only required to decide the characterisation of the transaction.  The High Court had not addressed the question of remedy, and the Court of Appeal remitted the matter back to the High Court for the question of remedy to be dealt with.

[9] Trans Otway Ltd v Shephard [2005] 3 NZLR 678 at [36].

[37]     While I do not know the exact outcome in the Trans Otway case - other than the fact that Trans Otway’s appeal to the Supreme Court was also unsuccessful - it is worthwhile considering what the court might have done by way of remedy.    The transaction in that case was the sale of a client list.  Although it was termed a “sale”, it was really an agreed disclosure of valuable information.   Once that information had been handed over, it would be hard to reverse its effect.  It would not be possible to put the parties back into their original positions before the agreement.   Before Trans Otway had been free to win Newman’s customers by its own independent marketing efforts.  But after the agreement, that would not be possible because it was tainted with knowledge of the customer list.  In claims to restrain use of confidential information in equity, this can sometimes be remedied by moulding injunctions to eliminate  any springboard  effect  of  such  knowledge,  but  that  kind  of  equitable remedy is not available under s 295.  So the courts would have to look to monetary relief instead.  Without other information as to the value, the courts may well adopt the values that the parties adopted in the transaction, which is the approach the

Supreme Court seems to have taken in the Trans Otway decision.[10]

[10] Trans Otway Ltd v Shephard [2006] 2 NZLR 289 at [11].

[38]     In contrast to Trans Otway, this case is much simpler.  It involves a transfer of property which can be the subject of an order for the return of that property,

together with disgorgement of benefits received.

[39]     Even if the transaction is characterised as involving payments by set-off, the principle that the remedy should be directed at eliminating no more than preferential benefit should still apply.  It is highly artificial to hold that the respondent received the sum of $1m.   As emerged from discussions with counsel, the value of the debt payable by South Waikato is much less than $1m.  To require Denmark to pay $1m would go far beyond eliminating any preferential benefit that it has received.  So the aim of putting the parties back into the position they were in at the outset can be achieved by requiring the debt to be returned to the company.   It would not be achieved by requiring Denmark to pay $1m.

Relief

[40]     I give the following relief:

(a)      There is an order that the deed which was signed on 14 February 2011 is set aside;

(b)(To  the  extent  that  the  setting-aside  order  alone  does  not  already achieve it) the respondent is ordered to transfer the debt paid by South Waikato to E & E New Zealand Ltd and to do all things reasonably necessary to ensure that the debt is re-vested in E & E New Zealand Ltd.

(c)      The respondent is ordered to pay to E & E New Zealand Ltd any amounts that it has received from South Waikato under the assigned debt (Mr  Dalkie says that Denmark has not received any payments from South Waikato).

(d)I reserve leave to apply for further directions.   In particular, the liquidators may apply to the court for further directions (including an application  under  s  266  of  the  Companies Act)  to  find  out  what benefits, if any, Denmark has received from South Waikato.

[41]     Denmark seeks an order for costs.  Ms Shaw accepts that the case has gone against her, even though there has been an order for relief.  Ms Shaw accepts that costs should be calculated on a 2B basis. Mr Dalkie seeks higher costs.  He says that Denmark made it clear from the outset that it was prepared to transfer back the debt and it confined its argument to the question of the characterisation.  The respondent’s argument is similar to that made when there has been a tender of payment before

action.[11] The defendant is entitled to costs.  But I do not see any basis for an uplift.

[11] Griffiths v School Board of Ystradyfogwg (1890) 24 QBD 307.

The liquidators have been unsuccessful, but I see nothing in the way that they have conducted the proceeding that requires anything by way of increased costs.   They obviously took advice and believed they had an arguable case.  It was not a frivolous proceeding.   So costs follow the event on the normal basis for an unsuccessful application.  I award Denmark costs on the 2B basis.

.........................................

R M Bell

Associate Judge