Fisk v Mahoney HC Wellington CIV-2010-485-2518
[2011] NZHC 732
•13 June 2011
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2010-485-2518
UNDER Sections 292, 293 and 294 of the
Companies Act 1993
BETWEEN JOHN HOWARD FISK AND CRAIG ALEXANDER SANSON
Plaintiffs
ANDDAVID LAURENCE MAHONEY First Defendant
ANDMICHAEL DAVID MAHONEY AND TRACEY LEE MAHONEY
Second Defendants
Hearing: 1 June 2011
(Heard at Wellington)
Counsel: R.J. Gordon - Counsel for Plaintiffs
R.C. Laurenson - Counsel for Defendants
Judgment: 13 June 2011
REASONS FOR DECISION OF ASSOCIATE JUDGE D.I. GENDALL
Solicitors: Buddle Findlay, Solicitors, PO Box 2694, Wellington
Harkness Law Limited, Solicitors, PO Box 342, Wellington
JH FISK AND CA SANSON V DL MAHONEY HC WN CIV-2010-485-2518 13 June 2011
Introduction
[1] On 1 June 2011 I heard an application by the plaintiffs first, to set-aside a transaction affecting Jouer Money Limited (in liq) (“the Company”) said to be an insolvent transaction involving the first defendant and secondly, to set-aside a charge given by the Company said to be a voidable charge involving the second defendant.
[2] At the conclusion of that hearing I gave an oral judgment indicating that the applications by the plaintiffs succeeded. The following orders were made:
(a) Setting aside the subject transaction in this proceeding between the first defendant, David Laurence Mahoney and Jouer Money Limited (in liq) being a payment of $177,399.76 made by Jouer Money Limited to the first defendant, David Laurence Mahoney (out of the proceeds of the sale of Jouer Money Limited’s property at 314 Queens Drive, Lyall Bay, Wellington) on or about 15 May 2009.
(b)That the first defendant, David Laurence Mahoney, is to pay to Jouer Money Limited (in liq) a sum equal to the sum that Jouer Money Limited (in liq) paid to him under the transaction in question namely $177,399.76 within 5 working days of today, that is by 8 June 2011.
(c) That the first defendant, David Laurence Mahoney, is also to pay to Jouer Money Limited (in liq) interest on the said sum of $177,399.76 from
the date of the transaction being 15 May 2009 up to the date of actual payment by him of this sum at the prescribed rate of 8.4% per annum pursuant to s 87(1) Judicature Act 1908.
(d)Setting aside the subject charge in this proceeding between the second defendants, Michael David Mahoney and Tracey Lee Mahoney and Jouer Money Limited (in liq) being the security interest referred to in the financing statement numbered FR6V29X1MH920286 registered on the Personal Property Security Register on Monday, 23 November 2009 at
9.45 am and asserted to be a charge in favour of the second defendants over all present and after acquired personal property of Jouer Money Limited (in liq).
(e) Costs on a Category 2B basis together with disbursements as approved by the Registrar are awarded to the plaintiffs with respect to the present applications against the first defendant and the second defendants.
[3] In that 1 June 2011 judgment I indicated that my detailed reasons for that decision would follow. I now set out those reasons.
Background Facts
[4] The Company which is the subject of these proceedings was incorporated on
8 December 2004 and carried on business as a property developer. The first defendant was at all material times its sole director and shareholder. The Company effectively had only one asset of substance, a development property at 314 Queens Drive, Lyall Bay, Wellington (“the Lyall Bay property”).
[5] Some time ago, the Company subdivided the Lyall Bay property into two selling the bare section created first. The remaining section and house were sold later with settlement of this sale being completed on 15 May 2009. From this May
2009 sale, the net sale proceeds belonging to the Company found their way to the defendants. The handling of these sale proceeds at that point in time was clearly documented by the solicitors who acted for the company on the conveyancing aspects of the sale in a number of respects.
[6] First, in the reporting letter from those solicitors to the first defendant dated
18 May 2009 they confirmed:
Dear David ...
Full statements of account in respect of the sale are enclosed. We confirm that we have deduced our legal costs and disbursements from the funds received. The statement shows a final balance available of $177,399.76. These funds have been treated as a repayment (or partial repayment) of unsecured shareholder advances to the Company. You have re- advanced those funds to the Mahoney Terpstra Family Trust to assist with the purchase of 33
Mantell Street, Seatoun. In accordance with your instructions the sum of $177,399.76 has been paid to the solicitors for Barry and Barbara Brook in partial settlement of the purchase of 33 Mantell Street, Seatoun.
[7] Secondly, in their settlement statement dated 15 May 2009 they noted:
Debits ...
Sale proceeds paid to David Mahoney by way of repayment/reduction of unsecured shareholders advances (to be applied in the purchase of 33 Mantell Street, Seatoun) -
$177,399.76.
[8] And thirdly, in their trust account ledger they noted:
15/05/2009 – JOU – 0270
From Jouer Money Limited (4981/5) $177,399.76, To Mahoney D L (4473/6) $177,399.76 sale proceeds to pay shareholders advances.
[9] Soon after these dates, the Commissioner of Inland Revenue brought liquidation proceedings against the Company for unpaid debts. A statutory demand was served in July 2009 and when this was not complied with, liquidation proceedings against the Company were filed in this Court on 21 September 2009.
[10] Subsequently the liquidation proceeding was heard and at 10.23 am on 23
November 2009 an order was made placing the Company into liquidation. The plaintiffs were appointed liquidators.
[11] On the same day, 23 November 2009 but shortly prior to that time at 9.45 am, the second defendants registered on the Personal Property Securities Register a financing statement in their own names which asserted they personally were secured creditors over all the Company’s present and after acquired personal property.
[12] Interestingly, at this point it is useful to note the first defendant’s contemporaneous explanation to the plaintiff liquidators of the reasons he advanced for the insolvency of the Company (noted in the liquidator’s report dated 26 January
2010 at Exhibit “E” of the affidavit of the second-named plaintiff sworn 14
December 2010). The liquidator’s report confirmed:
The director (the first defendant) has advised that the funds from the sale of the Company property were used to repay an unsecured loan which left a shortfall of available funds to pay company taxes.
[13] Notwithstanding this, however, recently both the first defendant and his solicitor have asserted first, that the payment of the $177,399.76 Company’s sale proceeds was not made to the first defendant or for his personal benefit but was rather a repayment made to his parents the second defendants and that secondly,
there was an antecedent debt relating to this owing by the Company to his parents that had been secured.
[14] Following liquidation of the Company on 23 November 2009, and after letters of demand had been unmet, notices under s 294(1) Companies Act 1993 were served on the defendants on 1 June 2010. Objections were received on 29 June 2010 leading ultimately to the present application filed on 15 December 2010 by the plaintiff liquidators which is made in reliance on ss 292 to 295 Companies Act 1993.
Arguments of the Parties and My Decision
[15] The relevant law on the two matters which are before the Court is well settled. I now set out brief details.
Insolvent Transaction
[16] Under s 292(2) Companies Act 1993 an insolvent transaction within the specified period is voidable at the suit of the liquidator if it:
(a) Is entered into at a time when the Company is unable to pay its due debs; and
(b)Enables another person to receive more towards satisfaction of a debt owed by the Company then the person would receive, or would be likely to receive, in the Company’s liquidation.
(c) The purpose of the insolvent transaction regime is clearly to prevent one creditor “stealing a march” over others so that (as far as is possible) all creditors can share equally in the assets of a Company in liquidation – Re: Modern Terazzo Limited (in liq) [1998] 1 NZLR
160.
[17] In the present case the insolvent transaction, being the payment of
$177,399.76 to the first defendant, was made on or about 15 May 2009.
[18] This is well within the “restricted period” referred to in s 292(6) Companies
Act 1993 (6 months before the date of commencement of the liquidation being 21
March 2009, the proceedings having been filed on 21 September 2009). Unless the contrary is able to be proved by the first defendant therefore, the transaction in question is presumed to have been entered into at a time when the Company was unable to pay its due debts – see s 292(4A) Companies Act 1993.
Voidable Charge
[19] Similarly, under s 293(1) Companies Act 1993 a charge over any property or undertaking of a company is voidable by the liquidator if:
(a) The charge was given within the specified period; and
(b)Immediately after the charge was given, the Company was unable to pay its due debts.
[20] Again, the rationale for s 293 and its legislative predecessors is clear. This provision was designed to combat attempts by a Company’s creditors to obtain priority for antecedent debts by taking a belated security. If such a security were allowed to stand, the secured property would be available only towards settlement of the antecedent indebtedness – and thus effectively removed from the pool of assets that would otherwise properly be available for sharing pro-rata amongst the Company’s unsecured creditors in the ensuing liquidation.
[21] In the present case, the voidable charge (a General Security Agreement) (“GSA”) was said to have been created on 6 November 2009, so again well within the restricted period which commenced on 21 March 2009. Again, I note that this GSA was purportedly registered on the Personal Property Securities Register some
38 minutes prior to the Company being placed into liquidation by this Court.
[22] Given that the GSA was created within the restricted period, therefore unless the contrary is able to be proved by the second defendants, the charge is presumed to
have been given at a time when the Company was unable to pay its debts – s 293(2) Companies Act 1993.
[23] Finally, I note that within s 293 Companies Act 1993 there are certain limited exceptions. The one of relevance in this case would appear to be s 293(1A)(b), which provides that a charge is not voidable if it is “in substitution for” a charge given before the specified period.
Section 292 – Insolvent Transaction
[24] The payment of $177,399.76 was clearly a “transaction” in terms of s 292
Companies Act 1993.
[25] Was the payment made at a time when the Company was insolvent?
[26] Section 292(4A) provides that unless the contrary is proved a transaction which took place within six months of the date of an application to place the Company into liquidation is presumed to have been made at a time when the company is unable to pay its debts.
[27] The payment in this case was made on 15 May 2009 which was well within the specified period which commenced on 21 March 2009. The Company therefore is presumed to have been unable to pay its debts at the time it made the payment.
[28] And before me there was no evidence of any kind provided to suggest that the Company was solvent at the time the payment was made in the sense that it was able to pay its due debts at the time – s 292(2)(a). This requirement therefore is satisfied.
[29] Was the payment made to the first defendant as recipient and did it prefer the first defendant over other creditors of the company? The assertion here on the part of the first defendant that the payment of $177,399.76 was not made to “his personal benefit” in my view is without real substance. Despite the fact that the money was routed via a solicitor’s trust account, it was unquestionably a payment made to him by the Company – Jacques v Official Assignee, HC, Wellington, CIV-
2006-485-973, 16 July 2007 at paras 21 and 22. It was specifically recorded to be a repayment of his unsecured shareholder advances, which monies he then re- advanced to his own family trust to purchase the property at 33 Mantell Street, Seatoun.
[30] Paragraph 4 of the first defendant’s affidavit, contending that the payment was in fact a “repayment of moneys” to his parents, similarly in my view lacks any substance. The evidence clearly shows that the payment was made to the first defendant’s benefit, and in particular towards the purchase of the Seatoun property. Once that purchase had settled, the owners of the Seatoun property were the trustees of his family trust (i.e. the first defendant and his wife). The belated averment in the affidavit that the $177,399.36 was a “repayment” to his parents as I see the position is wholly inconsistent with the undisputed contemporary documentation before the Court.
[31] In addition, for the transaction to be set aside under s292, it must be established that it enabled the first defendant to receive more towards satisfaction of a debt owed to him by the Company than he would have received, or been likely to receive, in the Company’s liquidation. There can be no question that this is the case here:
(a) By taking and using the $177,399.76 for his own personal benefit and subsequently that of his family trust, the first defendant received a substantial payment in reduction of his unsecured shareholder current account debt (which, it would seem from the evidence of the liquidators, in any case, stood at only $32,967 at that point in time).
(b)The uncontested evidence of the liquidators before the Court is that recoveries in the liquidation to date total $0. Even preferential creditors have not been paid. I am satisfied the first defendant here has endeavoured to receive a substantial preference at the expense of the Company’s larger body of creditors.
[32] And, as I have noted above, no evidence has been advanced by the first defendant to support the pleaded contention that the Company was solvent as at 15
May 2009. The liquidator’s evidence before me that the company was insolvent as at and after 15 May 2009 is unchallenged. In any event, the transaction was well within the restricted period, and as I see it there is nothing before me to rebut the statutory presumption.
[33] The first defendant as the Company’s sole director and shareholder must have known throughout of the Company’s unpaid tax debts, but in spite of this he simply took and applied all its money from the Seatoun property sale proceeds for his own benefit. Irrespective of what the unsecured balance of his current account was, by doing so the first defendant sought to (and did) benefit himself at the expense of the company’s other creditors. The plaintiffs’ application before me regarding the insolvent transaction succeeds. The payment to the first defendant of the
$177,399.76 must be set aside.
Section 293 Companies Act 1993 – Voidable Charge
[34] At the outset, it is important, in my view, to note certain facts regarding the emergence of the second defendants’ claimed GSA security here:
(a) Rather surprisingly, it seems that no mention was made of this asserted GSA security at the time of the first defendant’s initial discussions with the liquidators. (The mention of it appearing in the liquidator’s first report of 26 January 2010 it appears is from what they had discovered themselves on searching the PPSR).
(b) Promptly following liquidation of the Company on 23 November
2009, the liquidators wrote to the second defendants requesting a copy of the claimed security agreement and details of any monies said to be owing. It appears nothing, however, was provided.
(c) At a meeting on 4 February 2010, the evidence before the Court shows the first defendant contended that a “GSA document [was] put
in place from day one”. A copy of the document was to be delivered to the liquidators “tomorrow”. It was not.
(d)The formal demand on 15 March 2010 by the liquidators’ solicitors put in issue the veracity of the asserted security agreement. Despite this, the second defendants’ short response of 16 March 2010 again did not appear to provide the actual document.
(e) It seems that it was only following the service of notice under s294(1) of the Companies Act 1993 that the second defendants finally disclosed the GSA.
[35] It is also significant here to note certain aspects which appear on the face of the GSA document itself:
(a) The date of execution (6 November 2009) was only two and a half weeks before the liquidation hearing for the Company scheduled for
23 November 2009. In addition, this was after the liquidation proceedings had been served on the first defendant personally (on 22
October 2009).
(b)The security is said to be granted in favour of the second defendants personally. That is despite the fact that from the evidence before me it is clear they were not personally creditors of the Company but rather (at best) their company Mahoney Corporation Limited (in liquidation) (“MCL”) was. Of course, by this point in time (6
November 2009), MCL had long been in liquidation.
[36] The essence of the first defendant’s evidence now on this aspect appears to be his assertion that the second defendants (personally) had advanced some $393,920 to the Company between December 2004 and August 2008. It was these past advances that the GSA of 6 November 2009 was now said to charge. On the evidence before me, however, these rather belated contentions advanced for the defendants would not seem to withstand scrutiny:
(a) The differences between the top two entries dated 23 December 2004 in the first defendant’s version of the payment schedule (his exhibit “DLM2”) and the original document (the liquidator Mr Sanson’s reply exhibit “C”) are concerning and immediately account for
$134,035.00. It seems reasonably clear on the evidence that these two sums were paid to the benefit of the Company by the first defendant himself and not the second defendants as is now contended.
(b)The remainder of the advances as confirmed in the Company’s annual accounts were all clearly made to the Company by persons other than the second defendants – principally MCL. And that is exactly what the financial statements of the Company record when they too set out the (unsecured) related party current account debt owing by it to MCL. Significantly, in my view, these are financial statements that the first defendant has himself signed as being true and correct.
[37] As I see it, the position here is a straight forward one. The second defendants
(personally) have not done enough here to show they were creditors of the Company
– be it secured or otherwise. From the annual accounts MCL does appear to have been a creditor. But no financing statement was ever registered in its name, nor is any GSA claimed by the defendants to exist charging assets in its favour.
[38] The final matter for consideration is the defendants’ contention that the GSA of 6 November 2009 was in substitution for some earlier (unspecified and undocumented) “oral agreement” that a security would be granted by the Company to the second defendants. Ignoring for a moment the rather belated nature of this assertion, in my view, it is in any event quickly dismissed:
(a) Importantly, again, the second defendants did not themselves advance monies to the Company on all the evidence before the Court. MCL may have and thus been a creditor of the company – but not the second defendants personally.
(b)The GSA could only have been (and indeed on its face was) one granted for past advances. As I have noted above, this is precisely the mischief that s 293 is directed at, to prevent a creditor stealing a march by belatedly creating a security interest for their antecedent unsecured debt. And again, there was no real opposition from the defendants put to me to contest the fact that the GSA was granted at a time when the Company was presumed to be unable to pay its due debts.
(c) Even if the different unsigned “agreements” now annexed by the first defendant as exhibits to his affidavit had been executed “in late 2008, early 2009” (as he says was intended), that would still have been well within the specified period.
[39] I turn now to the alleged “oral agreement” that a GST charge would be granted. In my view, in the circumstances prevailing here this still would not advance the second defendants’ case. It is common ground that no such interest was ever perfected by any registration. On this aspect I note and adopt the careful analysis by the Court of Appeal in similar circumstances Parsons v Norris1:
[21] In the normal course the substitution of one charge for another will not materially prejudice other creditors if they would not have had access to the charged property to begin with. That is not the case, however, where the prior charge had been void for non-registration. Pursuant to s 3 and 6 of the Companies (Registration of Charges) Act 1993 the mandatory registration requirement in s 102 of the Companies Act 1955 is applied to companies registered under the Companies Act 1993. The effect of non- registration is stipulated in s 103(2) of the Companies Act 1955 which materially provides:
..... Every charge to which this section applies shall, so far as any security on a company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the charge is registered in the manner and within the time prescribed by s 102 of this Act ....”.
In short, upon liquidation an unregistered charge is void against the only people who matter, the liquidator and other creditors.
1 [2002] 2 NZLR 497(Companies Act 1993) at p504 (per Fisher J).
[22] It is against that background that the second word “charge” in s
293(1)(c) falls to be interpreted. Absent a specific reason to the contrary, realisable assets will be equally distributed. The exceptions do not include an unregistered charge. For all practical purposes an unregistered charge is void upon liquidation. We do not think that there is any reason for treating its progeny, in the sense of another charge whose validity rests upon the original, any differently. The prima facie effect of s 293(1) is to make charges given within the specified period voidable at the instance of the liquidator. Although an exception is created in a situation where the fresh charge is merely a substitute for another, there is no warrant for using the exception to convert void securities into effective ones. It would also be contrary to the public notification purposes of s 102 of the Companies Act 1955. (emphasis added)
[23] We conclude that to hold that the second word “charge” in s
293(1)(c) includes an unregistered charge would run directly counter to the scheme of the Act. There may, of course, be other reasons for upholding the validity of a recently registered charge. However, if reliance, must be placed solely upon s 293(1)(c) the original charge must have been one which, had the liquidation occurred at the time of the substitution, would have been valid as
against liquidator and other creditors. It follows that in the present
case Mr Norris cannot rely upon the substitution of charges exception found in s293(1)(c). (emphasis added)
[40] While the Companies (Registration of Charges) Act 1993 has since been repealed by the PPSA, the policy of the Act itself still remains the same. In my view, the position is still as set out in the Court of Appeal’s substantive analysis. There is still no warrant to take an alleged security which, even on the second defendants’ best case scenario would be unregistered, unperfected and unattached, and convert it into an effective one. The exception in s293(1A)(b) of the Act still does not include an unregistered charge (much less a vague and unspecified “oral agreement” such as that which is claimed here).
[41] Finally, and most telling, is the affidavit evidence of the first defendant. He does not contend that the GSA of 6 November 2009 was in substitution for an earlier charge. Rather, he deposes in his affidavit that the GSA document was to “implement” the oral agreement that a charge would be granted in the future. This is a key distinction, in my view, as the two are quite different things. To adopt the Concise Oxford dictionary definition, to “implement” is to “put (a decision, plan, agreement, etc) into effect.” So even if one ignores all of the above, the charge that the second defendants’ now seek to rely upon was not actually put into effect until 6
November 2009. That cannot be said, on any sensible view, to be a substitution of something that pre-exists. It is the actual granting of the charge itself.
[42] It is difficult here to escape the conclusion that the defendants’ position now is one that has been embraced by them in hindsight – after being served with proceedings for the liquidation of the Company, and when the actual creditor MCL was in liquidation and thus no longer under their control. But even on the defendants’ very best case scenario, an alleged “oral agreement” that a charge would be granted to the second defendants in the future, can provide no answer to the liquidators’ case here.
[43] The plaintiff liquidators have established that the GSA purported to be given by the Company to the second defendants was given within the restricted period under s 293 and that immediately after it was given the Company was unable to pay its debts. I find also that the GSA was not in substitution for another charge. Nor is there anything before the Court to persuade me that the defendants are entitled to the benefit of s 296(3) Companies Act 1993 on the basis of any party acting here in good faith or giving value for the property acquired or making a reasonable alteration of their position. The GSA of 6 November 2009 must be set aside.
Conclusion
[44] As I see the position, the present case is a straightforward one which probably represents a rather obvious example of what constitutes a voidable transaction and a voidable charge. Rather than properly attending to payment of the Company’s unpaid taxes, as I see the position, the first defendant here has endeavoured to “steal a march” by transferring virtually the entirety of the Company’s assets (the sale proceeds of $177,399.36) to his own personal benefit. And the GSA purporting to be granted to the second defendants on 6 November
2009 it would appear sought to achieve the very same result, except by a different route.
[45] In my view, all of the requirements of ss 292 and 293 Companies Act 1993 are met here.
[46] It is for all these reasons that the decision and orders noted at [2] above were made on 1 June 2011.
‘Associate Judge D.I. Gendall’
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