Francis v Degree Plumbing Limited
[2023] NZHC 2920
•18 October 2023
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI-TERENGA-PARĀOA ROHE
CIV-2023-488-000047 [2023] NZHC 2920
IN THE MATTER of the liquidation of Podular Housing Systems Limited (in liquidation) BETWEEN
BENJAMIN BRIAN FRANCIS and SIMON
DALTON as liquidators of Podular Housing Systems Limited (in Liquidation) Applicants
AND
DEGREE PLUMBING LIMITED
Respondent
Hearing: 28 August 2023 Appearances:
N Coyle for the Applicants
D McGowan (director of Respondent) in Person, with C Wilson as support person
Judgment:
18 October 2023
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 18 October 2023 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
WRMK Lawyers, Whangarei
FRANCIS v DEGREE PLUMBING LTD [2023] NZHC 2920 [18 October 2023]
Introduction
[1] The applicants are the liquidators of Podular Housing Systems Limited (in liquidation) (Podular Housing). The liquidators were appointed by the shareholders on 25 November 2022.1 In the final months before the liquidators’ appointment, Podular Housing paid Degree Plumbing Limited (Degree Plumbing) $38,224.13 for plumbing work.2
[2] On 9 March 2023, the liquidators served a notice on Degree Plumbing stating that they considered payments totalling $37,466.57 to be voidable and that they wanted to have them set aside. Degree Plumbing objected, stating that it received the payments in good faith, it was unaware that Podular Housing was or would become insolvent, and it gave good value for the payments. The liquidators did not accept that explanation.
[3] The liquidators now apply for an order setting aside the payments and for an order that Degree Plumbing pay the liquidators $37,466.57, together with interest and costs. Degree Plumbing did not file a notice of opposition but Degree Plumbing’s director, Dean McGowan, appeared at the hearing with his support person, Charlotte Wilson, to oppose the application. I heard from Mr McGowan as to why he considered the transaction should not be set aside.
[4] I reserved my decision. After the hearing, I issued a minute with further questions of the liquidators. The liquidators responded and Degree Plumbing also filed a memorandum, essentially repeating what was said at the hearing. I have taken this memorandum into account. By hearing from Mr McGowan and considering this memorandum, I have granted Degree Plumbing an indulgence. A company requires legal representation in this Court. Furthermore, some of the content is evidence and should correctly be in an affidavit. However, because of the relatively modest sum involved, I have taken a pragmatic approach and not insisted on these procedural requirements.
1 Confirmed by this Court on 12 December 2022.
2 Payments made on 19 September 2022, and 12, 14 and 27 October 2022.
[5] Degree Plumbing gives three reasons for why the transaction should not be set aside. First, that Mr McGowan acted in good faith and was unaware that Podular Housing was insolvent when it paid Degree Plumbing in September/October 2022. Second, that it would be unfair to set aside the payments, as Degree Plumbing gave good value, even completing additional work for Podular Housing without charge. Third, Degree Plumbing does not have the funds to repay the money, and an order requiring repayment would potentially render Degree Plumbing insolvent.
Legal principles
[6] A transaction by a company is voidable by the liquidator if it is an insolvent transaction; and is entered into within the restricted period.3
[7]An insolvent transaction is a transaction of a company that: 4
(a)is entered into at a time when the company is unable to pay its 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.
[8] A transaction includes paying money.5 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.6 The restricted period means the period of six months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time which the liquidator is appointed.7
[9] A liquidator who wishes to set aside a transaction that is voidable must file a notice with the Court and serve that notice on the other party to the transaction and
3 Companies Act 1993, s 292(1).
4 Section 292(2).
5 Section 292(3).
6 Section 292(4A).
7 Section 292(4C)(a).
any other party from whom the liquidator intends to recover.8 If the person on whom the liquidator has served their notice does not object by sending the liquidator a written notice of objection within 20 working days, the transaction is automatically set aside.9 The notice of objection must contain full particulars of the reasons for objecting, and identify documents that evidence or substantiate the reasons for objecting.10
[10] A transaction that is not automatically set aside may still be set aside by the Court on the liquidator’s application.11
[11] If a transaction is set aside automatically or following the upholding of a liquidator’s application, the Court may make a range of orders, including 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; or transfer to the company property that the company has transferred under that transaction; or 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.12
[12] A Court must not order the recovery of property of a company (or its equivalent value) by a liquidator if the person from whom recovery is sought proves that when they received the property: 13
(a)they acted in good faith; and
(b)a reasonable person in their position would not have expected, and did not have reasonable grounds for expecting, that the company was, or would become, insolvent; and
(c)they gave value for the property or altered their position in a reasonably held belief that the transfer of the property was valid and would not be set aside.
8 Section 294(1).
9 Section 294(3).
10 Section 294(4).
11 Section 294(5).
12 Section 295.
13 Section 296(3).
[13] The elements of the defence in s 296(3) are cumulative, so each limb must be satisfied on the balance of probabilities. The onus is on the creditor to establish the defence.14
[14] To establish good faith under s 296(3)(a), a creditor must show that they honestly believed that there had been no element of undue preference.15 If the recipient of the payment knew that they had been treated differentially or preferentially to other creditors in a way that was giving some advantage over other creditors, then they would not be able to claim that they had received the payment in good faith.16 This is a subjective test.17
[15] A creditor is likely to fail this test if they had actual or implied knowledge of the company’s difficulties, for example where the company’s cheques are dishonoured, there is a failure to pay debts on time, or other circumstances indicate serious cashflow problems.18 Yet an awareness of financial difficulty is not necessarily sufficient to give rise to a conclusion that any actions were not made in good faith.19 The courts have also drawn a distinction between knowledge of liquidity issues and knowledge of insolvency.20
[16] Section 296(3)(b) requires an objective analysis of whether a reasonable person in the creditor’s position would not have suspected, and did not have reasonable grounds for suspecting, that the company was or would become insolvent. In Madsen-Ries v Rapid Construction Ltd, the Court of Appeal observed that:21
[The issue of] whether a reasonable person in Rapid’s position would not have suspected, or would not have had reasonable grounds for suspecting, that [the company] was or would become insolvent … is to be assessed in accordance
14 Grant v Shears and Mac Ltd [2012] NZHC 1772 at [22].
15 Pharmacy Wholesalers (Wellington) Ltd v Graham HC Auckland CIV-2003-404-3312, 5 February 2004 at [76] referring to Re Orbit Electronics Auckland Ltd CA47/88, 1 May 1989.
16 Pharmacy Wholesalers (Wellington) Ltd v Graham HC Auckland CIV-2003-404-3312, 5 February 2004 at [80] reiterated in Graham v Pharmacy Wholesalers (Wellington) Ltd CA37/04, 17 December 2004 at [66]; and Levin v BCS Holding Account Ltd [2015] NZHC 1564 at [57] citing Levin v Market Square Trust [2007] 3 NZLR 591 (CA).
17 Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189 at [51].
18 Levin v Market Square Trust [2007] 3 NZLR 591 (CA) at [54]; and Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489 at [11].
19 Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489 at [11].
20 Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489 at [17]–[18] referencing and endorsing
Sandel v Porter (1966) 115 CRR 666 at [670].
21 Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489 at [19].
with prevailing business practices, the factual matrix, and the trading relationship between the parties.
[17] The courts remain vested with a residual discretion to decline to make an order for relief under s 295 even where the transaction has been set aside and there is no defence to the claim.22 In Timberworld Ltd v Levin the Court of Appeal saw no reason to depart from the reasoning of this Court, affirming that the Court has a discretion not to order recovery if to do so would cause unfairness to the creditor.23 There is a high threshold for the exercise of that discretion going “beyond a general sense of unfairness — requiring instead some cogent and compelling factor beyond a s 296(3) defence.”24 The Supreme Court cautioned that any use of this discretion should not undermine the policy behind the principle of fairness between creditors.25
An insolvent transaction?
[18] The liquidators must establish that Podular Housing was unable to pay its debts when it made the payments to Degree Plumbing. As the payments were made within the restricted period of six months prior to liquidation, Podular Housing is presumed to have been unable to pay its debts.
[19] Next, the liquidators must establish that the payments enabled Degree Plumbing to receive more towards satisfaction of the debt owed by Podular Housing than Degree Plumbing would receive, or would be likely to receive, in Podular Housing’s liquidation.
[20] This requirement is met because the latest liquidators’ report dated 9 June 2023 records that there will be insufficient funds after recoveries and expenses to enable a distribution to preferential creditors or to unsecured creditors.
[21] Therefore, I am satisfied that the payments are an insolvent transaction and must be set aside.
22 Heath and Whale (eds) Heath and Whale on Insolvency (online ed, Lexis Nexis) at [24.123].
23 Timberworld Ltd v Levin [2015] NZCA 111, [2015] 3 NZLR 365 at [111]–[113].
24 Timberworld Ltd v Levin [2015] NZCA 111, [2015] 3 NZLR 365 at [111], n 89. Endorsed in David Browne Contractors Ltd v Petterson [2017] NZSC 116, [2018] 1 NZLR 112 at [133].
25 David Browne Contractors Ltd v Petterson [2017] NZSC 116, [2018] 1 NZLR 112 at [133].
Relief under s 295?
[22] The liquidators ask the Court for relief in the form of an order that Degree Plumbing pay to them the sum of $37,466.57.
[23] In response, Degree Plumbing raises a defence under s 296(3), saying that it received the payments in good faith, after pursuing Podular Housing to pay the invoices for four months. The bulk of the payments relate to invoices issued in May and June 2022.
[24] Mr McGowan says that he did not know that Podular Housing was or would soon become insolvent. He says that it is not unusual for clients in Northland to take months to pay their invoices, so Podular Housing’s failure to pay on time did not indicate to him that the company was insolvent. He says that he had no knowledge of Podular Housing’s financial position. He also says that he understood that an overseas partner was going to provide funding to Podular Housing. I note that in its original objection to the liquidator, Degree Plumbing said that it understood that Podular Housing had many houses at varying stages of being built and the company seemed to be busy, with new people signing up to purchase their homes.
[25] Furthermore, Degree Plumbing says that it gave good value for the payments, even undertaking plumbing work for which it did not charge Podular Housing.
[26] The liquidators dispute that Degree Plumbing has a defence, because it commenced liquidation proceedings against Podular Housing and the payments were made after those proceedings were commenced. They also say that the fact that the debt was longstanding, dating back to June 2022, means that Degree Plumbing had reason to suspect that Podular Housing was insolvent.
[27] In my assessment, the fact that the debt dated back to June 2022 does not in itself mean that a reasonable person in Degree Plumbing’s position had reasonable grounds to suspect that Podular Housing was insolvent. Slow payment could indicate liquidity issues but not necessarily insolvency.
[28] I am more troubled by the fact that Degree Plumbing commenced liquidation proceedings against Podular Housing.
[29] The context is that on 9 August 2022 Degree Plumbing served a statutory demand under s 289 of the Act on Podular Housing for $32,217.76. Podular Housing did not comply with the statutory demand within the required 15 working days.
[30] Meanwhile, on 29 June 2022, the Commissioner of Inland Revenue applied to the Court for an order placing Podular Housing in liquidation. The proceeding received its first call on 19 August 2022. It was adjourned to 16 September 2022 to enable Podular Housing to pay Inland Revenue.
[31] On 12 September 2023, Degree Plumbing filed an Appearance in Support of the Commissioner’s application. When the Commissioner’s application was called on
16 September 2023, the Commissioner was given leave to withdraw and Degree Plumbing was substituted as plaintiff, subject to it filing a statement of claim, notice of proceeding and verifying affidavit.
[32] Degree Plumbing duly filed a statement of claim seeking an order that Podular Housing be placed into liquidation on 19 September 2023. Degree Plumbing based its application on Podular Housing’s failure to meet the statutory demand it had served on it. Mr McGowan swore an affidavit in support of the statement of claim. The statement of claim, notice of proceeding and verifying affidavit were served on Podular Housing on 27 September 2022.
[33] On 27 October 2022, Degree Plumbing filed a memorandum with the Court seeking leave to discontinue the proceeding as Podular Housing had paid the debt, and for an order for costs.
[34] In view of these facts, I am not persuaded that a reasonable person in Degree Plumbing’s position would not have suspected, and did not have reasonable grounds for suspecting, that Podular Housing was or would become insolvent. Even if Degree Plumbing acted in good faith and gave good value for the payments, it fails to meet the requirement in s 296(3)(b).
[35] I understand Degree Plumbing to say that while it was aware of the Commissioner’s liquidation proceeding against Podular Housing, it was also aware that Podular Housing had paid the Commissioner and therefore that Podular Housing had not been put into liquidation. That may be so, but once the Commissioner withdrew, Degree Plumbing itself applied to have Podular Housing placed into liquidation based on Podular Housing being unable to pay its debts (having failed to comply with the statutory demand). Degree Plumbing’s assertion that it did not have reasonable grounds for suspecting the Podular Housing was insolvent or would become insolvent is not sustainable in these circumstances.
Residual discretion
[36] Degree Plumbing says that it would be unfair for it to be required to repay the money because it has significant debts itself, very little cash, and employees to pay. It suggests that it does not have the funds to repay the money and an order requiring repayment would potentially render Degree Plumbing insolvent.
[37] The liquidators accept that there is hardship to Degree Plumbing if it is required to repay the money, but there are many creditors of Podular Housing who have put in claims in the liquidation and are suffering hardship. They submit that it would be wrong if Degree Plumbing receives preference over these other creditors.
[38] I accept the liquidators’ submissions on this issue. I appreciate that repaying the money may create hardship for Degree Plumbing. However, the law is that there must be some special unfairness beyond the usual hardship resulting from having to repay the money when the recipient gave good value and altered their position relying on the payment. There are many creditors of Podular Housing who will not receive any payment in the liquidation. Declining relief would undermine the policy behind the principle of fairness between creditors.
Result
[39]I order that:
(a)the payment of $37,466.57 is set aside;
(b)Degree Plumbing is to pay the liquidators:
(i) $37,466.57; and
(ii) interest on the amount of $37,466.57 pursuant to s 10 of the Interest on Money Claims Act 2016 from the issue of this judgment.
[40] If the liquidators seek their costs, I will receive submissions of no more than three pages, and I will decide costs on the papers.
Associate Judge Gardiner
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