GRANT BRUCE REYNOLDS, as Liquidator of LOVE OF LEARNING LIMITED (IN LIQUIDATION) AND YOU & ME LIMITED

[2024] NZHC 3704

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2024-404-1805

[2024] NZHC 3704

IN THE MATTER

of the liquidation of Love of Learning Limited (in liquidation)

UNDER

the Companies Act 1993

BETWEEN

GRANT BRUCE REYNOLDS, as

Liquidator of LOVE OF LEARNING LIMITED (IN LIQUIDATION)

Applicant

AND

YOU & ME LIMITED

Respondent

Hearing:

28 November 2024

Appearances:

B M K Pamatatau for Applicant

B J Norling and T van Zyl for Respondent

Judgment:

6 December 2024

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 6 December 2924 at 3:00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

REYNOLDS v YOU & ME LIMITED [2024] NZHC 3704 [6 December 2024]

[1]    Mr Reynolds, as Liquidator of Love of Learning Limited (in liquidation) (LOL), applies to set aside what he says was a payment to You and Me Limited (YML) of $86,902.33 in reduction of LOL’s debt to YML of $141,950. An order is sought that YML pay $86,902.33 to the Liquidator.

[2]The “payment” of $86,902.33 was made by journal entry. LOL was owed

$124,146 by Children Teachers Limited (CTU). LOL’s debt to YML was partially set off against the amount LOL was owed by CTU.

[3]    Mr Collin and Ms Chan are directors of all three companies and, either directly or through other entities they own, shareholders in the three companies.

[4]    An application was made to the Court to liquidate LOL on 21 April 2022. LOL was liquidated on 17 February 2023 having first indicated it would defend the proceeding but ultimately not doing so.

[5]    The payment in issue in this proceeding was made by way of the following journal entry in LOL’s accounts. The journal was posted on 16 August 2022.

Journal #23438
Love of Learning Limited
ID 23438 Being to offset Loan owed by CTU as at 31 March 2022 against Loan from YML and XICL as the 31 Mar 2022 shareholders of CTU are YML and XICL (Manual Journal: Posted by Pradeesh Chand on 16 August 2022)
Account	Branch	Debit	Credit
Loan from You & Me Ltd – Otahuhu 51%		86,902.32
Wages for LOL (833)
Loan from XICL 49% (832)		37,243.85
Loan – Children Teach Us Limited (839)		124,146.17
124,146.17	124,146.17

[6]    The reference to “Loan from XICL” is to Xinghua Investment Company Ltd, a 30 per cent shareholder in CTU, with YML holding the remaining 70 per cent of CTU.

[7]    As a result of the journal entry, LOL’s asset in the form of the debt it was owed by CTU was extinguished. The amount LOL owed YML was reduced by $86,902.33, leaving LOL owing YML $55,047.68.

[8]    YML benefitted through the transaction as in the liquidation of LOL it is not seeking to recover its original debt of $141,950 but $55,047.68.

[9]    YML does not dispute this summary of what occurred, however, it disputes the transaction resulted in it receiving a preference as it says the impugned transaction was purely a journal (bookkeeping) entry. Mr Chan says no money was ever paid by LOL to YML and no money was ever received by YML as a result of the transaction.

[10]   Mr Chan says that in those circumstances, YML should not be obliged to pay to the Liquidator the credit it received as a result of the journal entry.

[11]   The Liquidator issued a voidable transaction notice in respect of the set off served on YML on 13 September 2023. No challenge was raised to that notice.

[12]Accordingly, the Liquidator seeks the following orders:

(a)That the transaction, pursuant to s  292  of  the  Companies  Act 1993 (the Act), by LOL to the respondent, being a payment of  $86,902.32  made   on   or   around   31   March 2022   or 16 August 2022, when the journal entry was posted, be set aside as an insolvent transaction.

(b)That the respondent pays to the applicant the sum of $86,902.32 together with interest from the date of the notice.

(c)The respondent pays to the applicant its costs of and incidental to this application.

[13]YML does not oppose order (a).

[14]   With YML not responding to the voidable transaction notice, its options in defending the Liquidator’s applications were limited. Section 294(3) of the Act provides that a transaction subject to the Liquidator’s notice is automatically set aside as against the person to whom the notice is served if no objection is taken by that person.

[15]Chambers J in McKinnon v Falla Holdings NZ Ltd (in liq) said: 1

… if a transaction is set aside, then on a subsequent s 295 application for recovery by a liquidator, the recipient (the defendant) cannot argue that the transaction was not voidable because such arguments could and should have been raised on a s 294(2) application.

[16]   However, Chambers J did recognise it was open to a party in the position of YML to argue there was in fact no transaction at all.   The Judge said in that case,     a defendant “… is not asking that the ‘transaction not be set aside’ because he denies that there was a transaction in the first place”.2

[17]   Mr Norling, counsel for YML, emphasised here that the Liquidator’s voidable transaction notice ought to set aside a “payment” and that in this proceeding the Liquidator seeks to recover a “payment”. Mr Norling says no payment was in fact made — no money was received by YML.

[18]   Mr Norling’s second point is that if there was a transaction, that is a payment, then the fact no money changed hands needs to be reflected in any relief ordered under s 295 of the Act. In short, Mr Norling submits YML should not be liable to repay cash to the Liquidator when it did not receive cash. To make such an order Mr Norling submits would be punitive and give the Liquidator a windfall.

[19]   YML submits setting aside the transaction means the journal entries are reversed leaving LOL in the same position it would have been in if the transaction did not occur. I will return to that point below.

The Law

[20]Section 292 of the Act provides:

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.

1      McKinnon v Falla Holdings NZ Ltd (in liq), HC Auckland HC212/98, 21 July 1999 at 11.

2      At 11.

(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

(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:

(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.

(4)In this section, transaction includes a transaction by a receiver, except a transaction that discharges, whether in part or in full, a liability for which the receiver is personally liable under section 32(1) or (5) of the Receiverships Act  1993  or  otherwise  personally  liable  under a contract entered into by the receiver.

(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.

(4B)     Where—

(a)a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties); and

(b)in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then—

(c)subsections (1) and (1A) (as relevant) apply in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d)the transaction referred to in paragraph (a) may only be taken to be an insolvent transaction voidable by the liquidator if the effect of applying subsection (1) or (1A) in accordance with paragraph (c) is that the single transaction referred to in paragraph (c) is taken to be an insolvent transaction voidable by the liquidator.

(4C)For the purposes of subsections (1), (1A), (4A), and (4B), restricted period means—

(a)the period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

(b)in the case of a company that was put into liquidation by the court,  the  period  of  6  months   before   the  making   of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the court was made; and

(c)if—

(i)an application was made to the court to put a company into liquidation; and

(ii)after  the  making  of  the  application  to  the  court  a liquidator was appointed under section 241(2)(a) or (b),—

the period of 6 months before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

(5)For the purposes of subsections (1A) and (4B), related party period means—

(a)the period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

(b)in the case of a company that was put into liquidation by the court, the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on

the date on which, and at the time at which, the order was made; and

(c)if—

(i)an application was made to the court to put a company into liquidation; and

(ii)after  the  making  of  the  application  to  the  court  a liquidator was appointed under section 241(2)(a) or (b),—

the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

(6) …

[21]   Mr Norling developed an argument that the journal entries did not constitute a “payment of money” as contemplated by s 292(3)(e) of the Act, that is, there was no transaction.

Set off as a payment

[22]It is established that a set off is a payment for the purposes of s 292 of the Act.

Associate Judge Osborne in Fisk v Galvanising (H.B.) Ltd said:3

[43] Authority for the proposition that a set-off can amount to a preference (or voidable transaction) may be  found  in  Rea  v  Russell⁴and  Trans Otway Ltd v Shephard.5 In Trans Otway the Supreme Court upheld the judgments in the Courts below which had recognised that the discharge of    a debt by way of set-off made within the specified period could be regarded as a ”payment” for the purposes of s 292 of the Act.

[23]   The decision was upheld in the Court of Appeal,6 with leave to the Supreme Court being declined in respect of a different issue.7 The short point is, Associate Judge Osborne’s conclusion set out above was not subject to any challenge or adverse comment in the Court of Appeal or the Supreme Court.

3      Fisk v Galvanising (H.B.) Ltd [2013] NZHC 3543.

4      Rea v Russell [2012] NZCA 536 per Asher J delivering the reasons of the Court at [27].

5      Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2NZLR 289 (SC).

6      Galvanising (HB) Ltd v Fisk [2015] NZCA 529, (2015) 14 TCLR 204.

7      Galvanising (HB) Ltd v Fisk [2016] NZSC 49.

[24]The Court of Appeal in Rea v Russell, said in reliance on Trans Otway Ltd:8

A set off can be a preference.9 The effect of the payment by the company to the trust was that the trust ended up in a better position than a comparable creditor that was owed the same amount who had not received the payments. In terms of s 292(2)(b) the payment enabled the trust to receive more towards satisfaction of the debt owed to it than otherwise.

[25]   Whether a set off was a transaction is discussed in detail in the Trans Otway decision. I do not set out the detail of that discussion given, as I have said, it is established that a set off is a payment. I note in Trans Otway the Court referred to the observation by Associate Judge Sargisson that a “substance focused approach” was required in this context.10

[26]   Mr Norling submitted Trans Otway concerned only two parties and an express written agreement to set off. I do not accept that Trans Otway Ltd can be distinguished on the basis that it involved an express written agreement in respect of set off. Here, there was an agreement in respect of the set off, as reflected by the terms of the journal entry. Mr Chan does not deny there was an agreement for the set off to take place, as recorded in the journal. Whether the agreement is in writing or oral makes no difference.

[27]   There is evidence recording the circumstances that led to the journal entry being made. There is an email from the company’s accountant dated 12 July 2022 to Mr and Mrs Chan that refers to a meeting the previous day where the set off was included in the matters discussed. The accountant’s email of 12 July 2022, along with its attachments, were sent to the Liquidator by Ms Chan on 9 October 2023. Ms Chan said; “Please find below notes regarding accounting explanations for LOL …”. One of the attachments to the accountant’s email of 12 July 2022 deals with a number of matters including the CTU loan payable to LOL. The attachment included the following:

… CTU and LOL has common shareholders. Therefore, we propose that the above amounts owed by CTU be offset in proportion to the shareholding of CTU against the “Loans from Shareholders”…

8      Rea v Russell, above n 4, at [27].

9      Trans Otway Ltd v Shephard, above n 5.

10 At [19].

A table is then set out that records various set offs, not all of which are in issue in this proceeding but including the challenged set off.

[28]   Accordingly, the decision to enter the journal entry was a deliberate and considered one. The journal entry was not an after the event reconstruction by the Liquidator, rather, it reflected an agreement intended to alter the rights and obligations of the three companies.

[29]   I need to mention here Mr Norling’s reliance on Levin v Rastka.11 Mr Norling referred to para [7] of that decision where the Court of Appeal said s 292 is concerned with transactions, not accounting entries.

[30]   However, the observations by the Court in that case are limited to the context in which the ledger entries in that case were made.

[31]   In Rastka, the ledger entries relied on by the Liquidator were made after liquidation.   The ledger entries came about as a result of input from a Mr Russell,    a retired accountant who had not been the company’s accountant, but who advised the company’s accountant about a number of matters. Mr Russell was asked after the liquidation to prepare accounts dated 31 March 2005 and he did so on the basis of the general ledger with the assistance of the company’s accountant. Mr Russell, in his evidence, records that he recommended to the company’s accountant that the transactions subject to the Liquidator’s voidable transaction notice be off-set against sums due by the company to the respondent.

[32]The Court of Appeal said:12

The journal entries made on the basis of Mr Russell’s recommendation cannot properly form the basis of the liquidators’ claim. These were purely internal entries in the books of the company which recategorised the way in which payments made earlier by the company were treated in the company’s accounts. None of those involved a payment, on the date of the journal entry, by the company. None of them involved a transfer of the company’s property on the date of the journal entry. There is no evidence of any transaction entered into by the company, on or about the date of the journal entries, which is intended to be recorded by the journal entries. The inquiry must be focused

11     Levin v Rastkar [2011] NZCA 210.

12 At [15].

on the original payments made by the company, which each of those three journal entries recategorised.

[33] As noted at [28] above, the evidence is that the set off was agreed by Mr and Mrs Chan prior to the journal entries in question. The transaction is the agreement to set off as a set off is a form of paying money (s 292(3)(e)) and therefore a transaction for the purposes of s 292(3).

[34]   The Court of Appeal in Rastka went on to examine the substance of the transactions that had been subject to the journal entries.

[35] In respect of one of the transactions, the Court of Appeal rejected the appellant’s submission that the journal entry constituted a transfer of property, referring back to the passage set out at [32] above. The Court of Appeal said, in the passage relied on by Mr Norling:13

There is no evidence that the respondent ever received this money from the company. There is no satisfactory evidence as to why Mr Russell made the journal entries, well after the company went into liquidation. The liquidators have not established that there was, at the time the journal entries were made, any valid transfer of property from the company to the respondent. There was no assignment to her of a loan by the company to Joman. The evidence is that any such loan was, by the time the journal entries were made, irrecoverable.

[36]   The above situation does not apply in this case. A payment occurred here because of the agreement to set off put in place by the journal entry.

[37]   The accounting entries in the Rastkar decision were effectively disregarded by the Court because they were post-liquidation journal entries categorising payments made earlier by the company.

[38]   There is no recategorisation of entries post liquidation in this case. The Liquidator relies on the original journal entries put in place and agreed to by all three companies as confirmed in the contemporary correspondence.

[39]   Nor do I consider it relevant that this set off involved an agreement between LOL and CTU and between LOL and YML. Again, the Court is entitled to take

13     Levin v Rastkar, above n 11, at [34].

a “substance focused approach”. Such is called for here, given the commonality of control. Further, s 292(3)(f) of the Act provides the meaning of “transaction” include; “anything done or admitted to be done for the purpose of entering into the transaction or giving effect to it.” It is clear this refers to anything done or admitted to be done by the company. The company in this context is LOL, which means that in assessing what the voidable transaction is, the Court is entitled to look at what LOL did to permit YML to be credited with what CTL owed LOL.

What, if any, order should be made under s 295 of the Act

[40]   The real issue in this proceeding is whether YML should be required to repay the journalled amount to LOL.

[41]   I do not accept Mr Norling’s submission that YML has not received any benefit under the entries. As I have said, YML’s exposure in LOL’s liquidation was reduced by the level of the set off. Equally, CTU has not had to pay cash to LOL.

[42]   Mr Norling submits setting aside the transaction will restore the parties to the position they were in before the journal entry. The evidence before the Court does not support that submission. Whether LOL’s ability to recover what it was owed by CTU as at liquidation remains the same nearly two years after liquidation, is not addressed in the evidence.

[43]   It is a reasonable inference that Mr and Mrs Chan had their companies carry out the set off exercise to protect CTU from LOL taking steps to recover what it was owed by CTU. If absent the journal entry CTU had no ability to pay LOL at liquidation that should have been put in evidence. If CTU had no ability to pay LOL, the journal was in a practical sense unnecessary as LOL could not get blood out of a stone, albeit there may have been a desire to protect CTU for other commercial reasons but again, that is not explained.

[44]   In a real sense, YML’s submission that it is sufficient relief if the journal is unravelled, carries with it the implication there is no prospect of LOL recovering against CTU.   If the debt could be paid by CTU then one would have  expected       a commercial resolution to this proceeding. That can be compared to Mr and

Mrs Chan putting in place the set off which is consistent with them wanting to protect CTU from recovery action by LOL.

[45]   As Mr Pamatatau, counsel for Mr Reynolds, submitted, CTU is not a party to this proceeding. YML did not seek to have it joined on the basis it needed to be a party if unwinding the journal would be an effective remedy for LOL. Mr Norling did not explain how CTU would be bound by an unwind order when it is not a party.

[46]   Accordingly, absent evidence that reversing the journal entry would return LOL to the position it would have been as at liquidation and with CTU not being     a party, it is appropriate that YML be ordered to repay the value of the benefit it received by the journal entry.

[47]   Mr Norling relied on Associate Judge Bell’s comments in Reynolds v HSE Holdings Ltd.14 There, the Judge said that at the stage relief is being considered when a transaction has been avoided, the Court can examine the insolvent transaction so as to determine the most appropriate way of giving relief to eliminate the preference.15 The Judge said:16

While the creditor benefiting from an insolvent transaction should not be allowed to retain a preferential advantage, nor should he be punished for having received such a benefit. There is nothing in the legislation that calls for a punitive approach. The various remedies in s 295 allow for the exercise of a discretion to mould an outcome appropriate for the case.

[48]   Whether or not YML received cash is not the point. It agreed to accept in reduction of what it was owed, the amount that CTU owed LOL. The journal was put in place some four months after an application to liquidate LOL was made to the Court. The transaction appears to be part of a wider series of transactions involving other entities.

[49]   The submission that as no cash changed hands means undoing the set off is sufficient remedy would always be an answer to a voidable transaction proceeding

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

15 At [32].

16 At [28].

based on a set off. Reversal of a set off has not been seen as sufficient remedy in prior set off cases involving debts.

[50]   The position may have been different if it had been demonstrated that the Liquidator had no prospect of recovery of the money CTU owed LOL at liquidation had the set off not occurred. If that had been the case then, as Mr Pamatatau said, it is doubtful the Liquidator would have pursued this application. Absent that evidence, which could only come from Mr and Mrs Chan, I do not consider it punitive or unjust to require YML to repay the value it received at the expense of LOL.

[51]I make the orders sought by the Liquidator.

Costs

[52]   Costs are reserved. Memoranda of not more than five pages in length may be filed within 10 working days. If no memoranda are filed, the order of the Court is that there is no order as to costs.

Associate Judge Lester

Counsel:

Craig Griffin & Lord, Auckland (L Waugh) Counsel: B Pamatatau, Barrister, Auckland