Grant v Lawson Robinson Limited
[2019] NZHC 2465
•30 September 2019
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2019-441-96
[2019] NZHC 2465
UNDER the Companies Act 1993 IN THE MATTER
of GLW Group Ltd (in liq)
BETWEEN
DAMIEN GRANT
Applicant
AND
LAWSON ROBINSON LIMITED
Respondent
Hearing: 9 August and 26 September 2019 Appearances:
A Botterill for applicant
J Cameron for respondent
Judgment:
30 September 2019
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction and issues
[1] This is an application by the liquidator of GLW Group Ltd (in liq), Mr Damien Grant, pursuant to s 292 of the Companies Act 1993 for an order setting aside a payment of $51,733.93 made on 9 May 2017 by GLW to Lawson Robinson Ltd, a firm of solicitors that had provided legal services to GLW.
[2] The background is not without its complications, but, for present purposes, it can be summarised briefly.
[3] GLW was a property development company. It was incorporated in April 2009. Mr Garth Paterson was the driving force behind the company, and originally its sole
GRANT v LAWSON ROBINSON LIMITED [2019] NZHC 2465 [30 September 2019]
director until he was declared bankrupt in Australia in April 2015. Mr Paterson’s ex-wife, Ms Elizabeth O’Neil, who was the company’s sole shareholder, became its sole director in place of Mr Paterson.
[4] GLW engaged Lawson Robinson to assist with aspects of a development in Hawkes Bay. The contract of retainer appears to have begun in February 2013 and concluded in July 2016. Why the retainer came to an end is not important. At that point, the firm’s billed but unpaid costs totalled $51,733.93. On 1 September 2016, Lawson Robinson served a statutory demand for that amount. On 13 September 2016, GLW filed and served an application for an order setting aside the statutory demand. Lawson Robinson filed and served a notice of opposition on 27 September 2016. On 28 October 2016, the firm filed and served liquidation proceedings.
[5] Before GLW’s application for an order setting the statutory demand aside was heard, the parties entered into a settlement agreement pursuant to which GLW agreed to pay the full amount of Lawson Robinson’s outstanding fees upon the discontinuance by Lawson Robinson of the proceeding. GLW paid the settlement funds to its own solicitors in two tranches on 20 and 21 April 2017.
[6] With the Court’s leave, the proceeding was discontinued on 24 April 2017. On 9 May 2017, GLW’s solicitors paid the settlement funds to Lawson Robinson. By shareholder resolution dated 27 July 2018, GLW resolved to place itself into liquidation and appointed Mr Grant as liquidator.
[7] The liquidator now challenges the 9 May 2017 payment as a voidable transaction.
[8]Two sections of the Companies Act are engaged:
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 specified 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.
…
296 Additional provisions relating to setting aside transactions and charges
…
(3)A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—
(a)A acted in good faith; and
(b)a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c)A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
…
[9]The issues for determination are as follows:
(a)Was the 9 May 2017 payment capable of constituting an insolvent transaction?
(b)Was GLW insolvent at the time the 9 May 2017 payment was made?
(c)Did Lawson Robinson receive more towards the satisfaction of its debt than it would have received in the liquidation?
(d)Does Lawson Robinson have a defence under s 296(3) of the Act?
Was the 9 May 2017 payment capable of constituting an insolvent transaction?
[10] As Mr Botterill submitted, there is no serious argument in relation to this issue. At least in his written submissions, Mr Cameron sought to contend that the transaction involved both the provision of the relevant legal services and the payment. Section 292(3)(e) defines the term “transaction” so as to include “paying money”. The transaction here was the payment on 9 May 2017. This occurred within the two-year relation-back period prior to GLW’s liquidation on 27 July 2018.
[11]Plainly, the payment is capable of constituting an insolvent transaction.
Was GLW insolvent at the time the 9 May 2017 payment was made?
[12] A transaction can only be set aside if, at the time it was entered into, the company was insolvent. The relevant solvency test is set out at s 292(2)(a). The test is whether the company was “unable to pay its due debts”. Thus, the focus is on trading solvency rather than balance sheet solvency. However, the company’s overall financial position will obviously be a relevant consideration in determining whether the company can pay its due debts.
[13] In Blanchett v Joinery Direct Ltd, Associate Judge Faire (as he then was) identified the following relevant considerations for assessing whether a company was insolvent:1
a) The inquiry is made at the times when the payment is made;
b) Regard may be had, however, to the recent past to see if the debtor was unable to pay its debts as they became due;
c) A consideration of the outstanding debts at the time is required;
1 Blanchett v Joinery Direct Ltd HC Hamilton CIV-2007-419-1690 23 December 2008, at [27].
d) “As they become due” means as they become legally due;
e) The ability to pay involves a substantial element of immediacy to provide payment from cash and non-cash resources. An excess of assets over liabilities will not by itself satisfy the test if there is no ability to pay. The ability to procure sufficient money to pay debts by realisation by sale or mortgaging or pledging assets within a relatively short period of time will satisfy the test;
f) The issue of a company’s solvency requires a consideration of the company’s financial position in its entirety. A temporary lack of liquidity does not necessarily evidence insolvency. For that reason, a consideration of the debtor’s position over a period of time is required; and
g) The test is an objective one.
[14] In David Browne Contractors Ltd v Petterson, the Supreme Court made the following observation about assessing insolvency in the context of voidable transactions:2
As was said in Re Cheyne Finance Plc (No 2), the issue of “how far into the future the inquiry as to present solvency is to go … is a fact sensitive question depending upon the nature of the company’s business and if known, of its future liabilities”. Concentrating only on debts due at the relevant time could fail to distinguish between those companies suffering a temporary liquidity problem and those that are, on any commercial view, insolvent even though able to continue to pay their debts “for the next few days, weeks or even months before an inevitable failure”.
[15] In support of applications under pt 16 of the Companies Act challenging allegedly voidable transactions, a liquidator will generally provide the best evidence available as to the financial position of the company as at the date of the impugned transaction, including the latest financial statements prior to the date of the transaction and an analysis of developments from that date down to the date of the transaction. Here, the liquidator’s affidavit of 21 May 2019 did not include financial statements, and his analysis of GLW’s financial position as at 9 May 2017 was, to say the least, spare.
[16] The case was listed for hearing on 9 August 2019. Counsel filed and exchanged submissions in the usual way prior to the hearing. Mr Botterill’s submissions for the applicant were filed and served on 25 June 2019. Mr Cameron’s
David Browne Contractors Ltd v Petterson [2017] NZSC 116, [2018] 1 NZLR 112 at [90], citing
Re Cheyne Finance plc (No 2) [2007] EWHC 2402, [2008] 2 All ER 987 (Ch) at [50]–[51].
submissions in reply were filed and served on 3 July 2019. Mr Cameron submitted, amongst other things, that the liquidator had not to established that GLW was insolvent as at 9 May 2017.
[17]On 5 August 2019 — approximately three working days prior to the hearing
— the liquidator’s solicitors filed and served a further affidavit sworn by him entitled “Supplementary Affidavit of Damien Mitchell Grant”. Mr Botterill contended that it was an affidavit in reply to Lawson Robinson’s evidence. In fact, it went a great deal further than offering reply evidence to any matters raised for the first time in Lawson Robinson’s evidence. Its primary purpose was to cover any ground not covered in the liquidator’s first affidavit as to GLW’s financial position as at 9 May 2017.
[18] On behalf of Lawson Robinson, Mr Cameron objected to this affidavit being read. I declined simply to exclude it. Instead, I put Mr Botterill to election. I offered him the options of proceeding without the liquidator’s second affidavit, or an adjournment of the hearing to allow the respondent to reply. Mr Botterill elected to proceed.
[19] In the event, because of the time occupied by Mr Botterill’s cross-examination of Lawson Robinson’s witness, Mr Matthew Lawson, the hearing was not completed on 9 August 2019, and the case had to be adjourned part heard. At that stage, Mr Botterill renewed his application to have the liquidator’s 5 August 2019 affidavit read on the basis that Lawson Robinson could reply prior to any resumed hearing. I declined this application. As Mr Cameron submitted, that would have involved starting the case afresh. The view I reached was that Mr Botterill was obliged to stand by his earlier election, and that the happenstance of the hearing having to be adjourned part heard should not affect that.
[20] That brings me to the question of the evidence as to GLW’s solvency as at 9 May 2017. As to this, Mr Cameron’s submission on behalf of Lawson Robinson was that the liquidator had failed to prove that GLW was insolvent — unable to pay its due debts — as at 9 May 2017. He emphasised that there were no comprehensive financial records before the Court. He also emphasised that such records as there were
indicated that between 31 March 2017 and 9 May 2017 GLW reduced its indebtedness by $170,000. Finally, he made the obvious point that GLW was able to find the funds to pay Lawson Robinson.
[21] Whilst I have been critical of the liquidator’s evidence, the view I have reached is that there is sufficient evidence to enable the Court to reach a conclusion as to GLW’s solvency as at 9 May 2017. In paragraphs 1 and 2 of his 21 May 2019 affidavit, the liquidator provides some background and focusses on GLW’s balance sheet. From this evidence, I am prepared to accept that in the period leading up to 9 May 2017 GLW had only one substantial asset — the development property. This had a value of approximately NZD 4.3 million. Two lenders held securities over the property; a concern by the name of Lepionka & Co Investments Ltd (which had taken an assignment of the debt and security from Westpac Banking Corporation, as I understand the evidence) held a registered first mortgage and AFI Management Pty Ltd held an unregistered second mortgage. The Lepionka debt was for a principal amount of NZD 2,682,345. The AFI Management debt was for a principal amount of AUD 4,109,480 (equivalent to approximately NZD 4,380,000 in July 2014). Together, those debts total more than NZD 7 million. Accordingly, even limiting the analysis to secured creditors, from a balance sheet perspective, the value of GLW’s assets was exceeded by the amount of its liabilities by a substantial margin.
[22] In paragraphs 3 and 4 of his affidavit, Mr Grant focusses on GLW’s liquidity and ability to pay its debts. Paragraph 3 is irrelevant. I set out paragraph 4 in full:
4.Inability to pay due debts
4.1The Company’s inability to pay its due debts is evidenced by having outstanding unsecured creditors of $222,549.79 and bank balance of
$39.55 as of the date of liquidation. A copy of the Company account balance as at liquidation is attached at page 017 of the Exhibit. Prospective and contingent liabilities may be taken into account pursuant to section 288(4) of the Act.
4.2The Company had outstanding unsecured creditors of $179,971.50 at the time payments were made to the Respondent on the condition that the Respondent was to discontinue liquidation proceedings.
4.3The Company was having difficulty paying its due debts since 20 April 2014. A copy of Walsh & Associates Limited’s invoice dated 19 March 2014 is attached at page 018 of the Exhibit.
4.4In addition to the above, the Company also owed substantial debts to secured creditors. As of 29 October 2018, the Company owed AFI approximately $9,528,000.00. A copy of an affidavit by the director of AFI is attached at pages 019 – 057 of the Exhibit.
[23] Mr Cameron criticised the assertion by the liquidator at paragraph 4.2 of his affidavit that GLW had unsecured debtors of $179,971.50 as at 9 May 2017, saying that there was no supporting evidence for this. But, as Mr Botterill pointed out, there was supporting evidence. The liquidator provided an analysis of the claims of unsecured creditors in the liquidation, supported by copies of their proofs of debt, and the ages of the debts. This supports the liquidator’s assertion at paragraphs 4.2 as to the level of unsecured creditors and the assertion at paragraph 4.3 that GLW was having difficulty paying its creditors including its accountants, Walsh & Associates.
[24] In the end, it is really only necessary to focus on one aspect of this evidence to resolve the question of whether or not GLW was able to pay its due debts as at 9 May 2017. There would appear to have been an issue at the time as to whether or not the Lepionka debt was payable. However, it is beyond serious doubt that the AFI Management debt was legally due. That loan was repayable no later than 14 October 2014 with penalty interest of 25 per cent accruing from that point. Whether AFI Management was actively pursuing recovery of its debt in May 2017 is beside the point, although it appears AFI Management did formally demand repayment by letter dated 26 July 2016. That letter referred to the prospect of AFI Management issuing a notice under the Property Law Act 2007. Even ignoring interest, it seems clear that AFI Management would, as at 9 May 2017, have been effectively unsecured to the extent of at least NZD 2.76 million of its debt.
[25] In addition, the liquidator’s evidence, as already said, is that, at the same time, GLW had other unsecured debts (excluding that of Lawson Robinson), of
$179,971.50.
[26] On that basis, as at 9 May 2017, GLW had minimal immediately available assets and net current obligations of at least NZD 2.9 million.
[27] Although, as Mr Cameron submitted, the liquidator’s evidence does not provide a complete analysis of what assets other than the development property — and
particularly what liquid assets — GLW might have had, I am satisfied on the evidence as a whole that it did not have liquid assets sufficient to meet anything approaching that level of debt.
[28] In my judgement, the evidence establishes that, as at 9 May 2017, GLW was not able to pay its due debts.
[29] I record for completeness, first, that the conclusion I have reached as to GLW’s solvency as at 9 May 2017 appears to have been shared by Mr Lawson, as in the context of the firm’s liquidation proceedings he deposed that the company was insolvent, and second, that the figures I have used are supported by the conclusions reached by Fitzgerald J in subsequent litigation concerning GLW.3
Did Lawson Robinson receive more towards the satisfaction of its debt than it would have received in the liquidation?
[30] GLW paid Lawson Robinson 100 per cent of its outstanding fees. Mr Cameron submitted that there was insufficient evidence to enable the Court to conclude that it would not receive 100 per cent in the liquidation. The liquidator’s second report, covering the period 27 July 2018 – 26 January 2019, which Mr Cameron put in during the course of the hearing without objection from Mr Botterill, indicates that no secured creditors have lodged claims. No doubt this indicates that the liquidator has been able to settle any residual debt owed to them over and above the value of the development property. But it still leaves a company which the evidence establishes had no other material assets and unsecured obligations to unsecured creditors (including Lawson Robinson) of well over a quarter of a million dollars before the liquidator’s costs are considered. In my view it would be unrealistic to contemplate that Lawson Robinson would recover anything in the liquidation, let alone 100 per cent of its debt.
[31]Clearly, s 292(2)(b) is satisfied.
3 See AFI Management Pty Ltd v Lepionka & Co Investments Ltd [2017] NZHC 3116 at [61] and [80].
Does Lawson Robinson have a defence under s 296(3) of the Act?
[32] Under s 296(3) of the Companies Act, the Court is prohibited from making an order setting aside a transaction if the party against whom the order is sought establishes that:
(a)he, she or it acted in good faith;
(b)a reasonable person in the same position would not have suspected, and the party did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c)the party gave value for the property or altered its position in reliance on the reasonably held belief that the transaction was valid.
[33] In Levin v Market Square Trust, the Court of Appeal dealt with the good faith aspect of the provision in these terms:4
… The first matter the trust must establish, therefore, is that it “received the property in good faith”. The test of “good faith” has been clearly established by this Court. The recipient of the property or money must show that he or she honestly believed that the transaction would not involve any element of undue preference either to himself or herself or to any guarantor… The cases show that a creditor is likely to fail this test where he or she has actual or implied knowledge of the company’s financial difficulties, due to the company’s cheques being dishonoured, its failure to pay debts on time, or other circumstances indicating serious cash-flow problems…
[34] On the evidence, Lawson Robinson began pressing for the payment of its outstanding costs in mid-2016. On 10 June 2016, Mr Lawson emailed Mr Paterson, who was at that time operating as a “consultant” to GLW, saying in effect that the firm was not prepared to do any further work for GLW until its outstanding costs were paid. At the conclusion of this email, Mr Lawson said:
I simply cannot continue to do work on the promise of payment. You need to use the prospect of these costs orders as a means of securing funding from your funders for GLW.
4 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [54].
This referred to an expectation on Mr Paterson’s part that the company would recover substantial costs in legal proceedings in which it was involved at the time.
[35] Mr Paterson replied by email on 13 June 2016 explaining why GLW was not in a position to pay Lawson Robinson’s costs. Towards the end of his email he said: “I am willing to pay you all the monies you have charged, but unfortunately it won’t be this week.”
[36] When Lawson Robinson’s fees were not paid, in September 2016, the firm initiated recovery proceedings. As already explained, it did so by serving a statutory demand. GLW moved to set the statutory demand aside. In this application, GLW claimed to be solvent. Lawson Robinson opposed this application. In its notice of opposition, Lawson Robinson expressly alleged that GLW was insolvent. Mr Lawson swore an affidavit dated 28 September 2016 in support of the firm’s opposition. This was lengthy, setting out the background in considerable detail. Between paragraphs 125 and 139, Mr Lawson addressed GLW’s financial position. Without going into any detail, Mr Lawson’s affidavit evidence was that “GLW is clearly insolvent irrespective of which test of insolvency is applied”. Mr Lawson also gave evidence of the difficulties his firm had been experiencing in obtaining payment of its fees by GLW. Finally, Mr Lawson referred in his affidavit to the 26 July 2016 letter in which AFI Management formally demanded repayment of its debt, so he was clearly aware that debt was due and had not been paid.
[37] It is difficult to conceive of more compelling evidence that Mr Lawson, and therefore the firm, was fully aware of GLW’s financial position. There is no evidence to suggest the position substantially changed between the time Mr Lawson swore his affidavit and the time payment was made. The only thing that changed was GLW found the money — apparently from an external source — to settle its debt with Lawson Robinson. That was not necessarily indicative of its broader financial position. This change in circumstances would not have been enough, in my view, to remove any suspicion of insolvency from the mind of a reasonable person in the shoes of Lawson Robinson.
[38] In my judgement, Lawson Robinson cannot establish that it acted in good faith (as that term is used in s 296(3) of the Companies Act), that a reasonable person in the firm’s position would not have suspected that GLW was insolvent, or that Lawson Robinson did not suspect that.
Result
[39] For those reasons, the liquidator has made out his case under s 292 of the Companies Act 1993 for an order setting aside the payment made by GLW to Lawson Robinson on 9 May 2017, and I order the firm to repay that amount to the liquidator.
[40] The liquidator is entitled to interest pursuant to s 10 of the Interest on Money Claims Act 2016.
[41] I reserve costs, not having heard from counsel as to these. If counsel are unable to settle costs, as the Court would expect them to do, then they may come back to the Court by memoranda within 15 working days. If it assists, I can indicate that my preliminary view is that the liquidator, as the successful party, is entitled to his costs on a 2B basis.
Associate Judge Johnston
Solicitors:
Waterstone Insolvency, Auckland for applicant Lawson Robinson, Napier for respondent
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