Harris v Bikes International Limited
[2013] NZHC 1314
•5 June 2013
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV-2012-463-000220 [2013] NZHC 1314
UNDER The Companies Act 1993 BETWEEN
ANTHONY CHARLES HARRIS as liquidator of BRILLIANT ORANGE LIMITED
Applicant
AND
BIKES INTERNATIONAL LIMITED
Defendant
Hearing: 27 May 2013 Appearances:
H L Thompson for Applicant
B J Upton and TK Cunningham-Adams for DefendantJudgment:
5 June 2013
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This judgment was delivered by me at 11.30 am on 5 June 2013 pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
McMahon Butterworth Thompson, Auckland.
Simpson Grierson, Auckland
A C HARRIS as liquidator of BRILLIANT ORANGE LIMITED v BIKES INTERNATIONAL LIMITED [2013] NZHC 1314 [5 June 2013]
[1] Mr Harris is the liquidator of Brilliant Orange Limited, previously known as
Bike Vegas Limited (“BVL”). BVL was a bicycle retailer in Rotorua.
[2] Bikes International Limited (“BIL”) supplied goods to BVL and as at 19 July
2011 was owed $56,830 by BVL. BIL has a wholly owned subsidiary, with the
same board of directors, called Bike Retail Group Limited (“BRGL”).
[3] On 19 July 2011 BVL sold its business to BRGL for $56,830. Under the agreement, the balance of the purchase price was payable to BVL on the settlement date, 21 July 2011. Clause 15.0 of the agreement was in the following terms:
Settlement is by way of amount owing to Bikes International Ltd of $56,830 being full and final payment for the business and settlement of outstanding account (attached 2).
[4] Attached to the contract was a copy of a statement issued by BIL to BVL dated 30 June 2011 showing in printed form a debit balance of $103,858.12, but with a superimposed handwritten note for credits not yet processed to the account, and a balance of $56,830.08. On 7 September Mr Harris issued a notice under s 292
Companies Act 1993 to set aside an insolvent transaction by BVL described in these terms:
The transaction to be set aside consisted of the payment by the Company, no earlier than 20 July 2011, of an amount of $56,830, representing payment in full of the Company’s indebtedness to Bikes International Limited (“BIL”) in relation to goods supplied by BIL to the Company between February 2011 and 30 June 2011.
[5] Payment was not forthcoming, so Mr Harris applies for an order setting aside the transaction under s 294(5), and requiring BIL to pay him the sum of $56,830 under s 295.
[6] Mr Harris says there was an arrangement between BVL, BRGL and BIL
which comes within the definition of an insolvent transaction in s 292. Section
292(3) defines a transaction to mean any of certain steps by a company, and the step relied on by counsel for Mr Harris is in sub-paragraph (e):
paying money (including paying money in accordance with a judgment or an order of a court).
[7] A transaction is defined in s 292(2) as an insolvent transaction if:
(a) it is entered into at a time when the company is unable to pay its due debts, and (b)
it 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]
The
payment relied on by Mr Harris took place on 29 July. On that day BIL
passed a credit to BVL by journal entry in the sum of $56,830. On the same day it debited BRGL in the same sum.
[9] The effect of these transactions is that BIL is no longer owed $56,830 by BVL, but is owed that sum by its wholly owned subsidiary BRGL. BRGL has received assets of an equivalent value. BVL has sold its entire business but has received nothing for it in cash; it has been relieved of liability to pay a debt to BIL. Mr Harris’ position is that BIL received $56,830 but would not have received this sum in the liquidation of BVL.
[10] The first issue in this case is whether the credit passed by BIL to BVL on
29 July constituted “paying money” in terms of s 292(3)(e). If it did, a second issue is whether this transaction was an insolvent transaction in terms of the definition in s 292(2).
First issue: “paying money” in terms of s 292(3)(e)
[11] Mr Upton founded his argument for BIL on the proposition that Mr Harris alleges that there was a form of set-off arising from BVL’s transfer of its business to BRGL, and BIL crediting BVL’s overdue account with the same sum of money. He accepted that a set-off may constitute payment for the purposes of s 292(3)(e),1 but then analysed the circumstances in which a set-off may arise, and submitted that clause 15 does not evidence an agreement to set-off, in terms of the established
principles for when a set-off arises.
1 Trans Otway Ltd v Shephard [2005] 3 NZLR 678 (CA).
[12] However, this is not the basis upon which Mr Harris alleges that a transaction took place in terms of s 292(3)(e). Indeed, in the amended notice of application Mr Harris does not allege that a set-off occurred. Although Mr Thompson submits that the meaning and effect of clause 15 of the agreement was that BRGL agreed to pay the purchase price for the business by procuring that its holding company BIL set the purchase price off against an equivalent debt owed by BVL to BIL, the thrust of his argument is that in the agreement BVL expressly agreed to receive payment for its business by a credit being given by BIL for its debt to that company. That, Mr Thompson says, was a payment of money in terms of s 292(3)(e).
[13] In Trans Otway Ltd at first instance Associate Judge Sargisson held that a substance-focused approach should be applied when determining whether a transaction amounted to paying money in terms of s 292(3)(e). The Court of Appeal upheld this conclusion.2 Her Honour had concluded in that case there had been a payment which was “a transaction the equivalent of cash among businessmen”, words lifted from a judgment of Lord Hanworth MR in Re Matthew Ellis Ltd.3 As Mr Anderson pointed out, the transaction could have been effected by an exchange of cheques; indeed it could have been done by passing around cash. In that scenario BRGL would have paid the purchase price to BVL, BVL would have cleared its account with BIL, and BIL would have funded BRGL, its wholly owned subsidiary. Instead BVL expressly agreed to accept payment by its outstanding account with BIL being settled, which in the context of the agreement means, in my opinion, credited with a sum equating the purchase price.
[14] Mr Brown, a director of BIL and BRGL, referred to journal entries which had been made by BIL in relation to this transaction. The first, being the record of the transaction relied upon by Mr Harris, is the credit by journal entry of $56,830 to the account of BVL. The second, however, is a debit against BRGL for the same sum of money. In respect of this entry Mr Brown says that although the journal entry refers to a loan, no funds were actually advanced by BIL to BRGL. On its face, that statement is difficult to understand, but I take it to mean that BIL did not actually
transfer money to BRGL as part of this transaction. Whether that is the case or not,
2 Trans Otway Ltd v Shephard [2005] 3 NZLR 678 (CA) at [19].
3 Re Matthew Ellis Ltd [1933] 1 Ch 458 (CA) at 469.
the journal entry clearly records a loan to BRGL. Mr Brown then states that there is no inter-company arrangement between BRGL and BIL to repay the wiped company debt. That does not have any relevance, however, to the current analysis. It is for BIL and BRGL to make whatever arrangements they wish in relation to how each of them treats the arrangement they entered, and the fact that BRGL has not, presently, agreed to repay BIL the sum recorded as a loan is a matter for those two companies.
[15] The material and crucial point is that BVL agreed to accept settlement of its loan account with BIL by transferring its business to BIL’s wholly owned subsidiary. The substance of BIL then passing a credit for the outstanding account as agreed to by BVL as the method of payment for the sale of its business was a payment of money in terms of s 292(3)(e).
Second issue: Was this an insolvent transaction?
[16] As noted in [7], there are two aspects to the definition of an insolvent transaction. In this case it is convenient to examine the second element first: whether the transaction enabled BIL to receive more towards satisfaction of the debt owed to it by BVL than it would receive or be likely to receive in the liquidation of BVL. It is not necessary to ascertain what BIL would have received in a hypothetical liquidation on the day the payment was made. In Levin v Market
Square Trust4 the Court referred to the decision in Re Yukich Brothers Ltd (in liq)5
and said:
[45] ... We have no doubt that Associate Judge Doogue was right to hold in Yukich that “the degree of any preferment is to be measured against what the creditors would receive in the actual liquidation”.
[17] In reaching this conclusion the Court agreed with Associate Judge Doogue that attempting to assess the effect of a hypothetical liquidation would:6
impose considerable practical difficulties on liquidators if they had to carry out an assessment of whether there were creditors at the time of the asserted act of preference and then to calculate whether the creditor in the impugned transaction received a preference against other creditors extant at the point of the transaction ...
4 Levin v Market Square Trust [2007] 3 NZLR 591 (CA).
5 Re Yukich Brothers Ltd (in liq) (2006) 9 NZCLC 264,070 (HC).
6 Levin at [46].
[18] The Court also noted that the preference, if any, does not arise in fact or law until the liquidation itself.
[19] In his affidavit Mr Brown says BIL received nothing from the transaction. He postulates, without any given foundation, that it might have received more if it proved in BVL’s liquidation.
[20] Although the Court must be reticent in rejecting a view expressed in an affidavit, on which the deponent has not been cross-examined, equally the Court is not required to accept every assertion in an affidavit, however unlikely it may be.7
Here, the facts deny Mr Brown’s assertion. First, the transaction enabled BIL to exchange the indebtedness of BVL for indebtedness of its subsidiary, BRGL, at a time when BVL sold its business and ceased to trade. Although the amounts of each debt are the same, the worth of the debt of BRGL in terms of its recoverability is materially greater.
[21] Secondly, BRGL owns and operates a chain of retail stores in New Zealand under the name Bike Barn and the business it bought from BVL has been rebranded as a Bike Barn outlet and continues to operate. The value to BIL of its subsidiary BRGL has accordingly increased. Although BRGL has currently decided to trade the business, equally it could have decided to sell it or realise its assets. BIL accounts for the activities of its subsidiaries by producing consolidated accounts. In my view it would be quite naive of the Court to take the view that any value derived from this transaction was derived solely by BRGL.
[22] Mr Harris must show, however, that the transaction enabled BIL to receive more than it would receive in the liquidation, which requires BIL’s likely recovery in the liquidation to be established. Mr Harris produced his first report as liquidator. The assets at the date of liquidation were minor shop fittings and inventory, and security monitoring equipment. Mr Harris described these as minimal. Unsecured creditors known at the time of the report amounted to $517,974. On that basis Mr Harris expressed the view in his report that there appeared to be little likelihood
of a distribution to unsecured creditors.
7 Eng Mee Yong v Letchumanan [1980] AC 331 (PC).
[23] Had BIL proved in the liquidation the unsecured creditors would have risen by a further $56,830 to $574,354, but on the information supplied by Mr Harris that would not, of course, have made any difference. Had the asset which was sold to BRGL been an asset in the liquidation, simple arithmetic shows that creditors would have received under 10 cents in the dollar, without any allowance for the costs of the liquidation.
[24] Mr Upton was critical of the lack of information provided by Mr Harris on the financial position of the company. However, the effect of the transaction in financial terms is in my opinion sufficiently clear. BIL gained the value of the business, through its subsidiary, as I have discussed. On the other hand had the business remained with BVL and been disposed of for the same price, the dividend to unsecured creditors is unlikely to have been more than a small fraction of the gain to BIL resulting from this transaction. Even at 10 cents in each dollar, BIL would only have received $5,683.
[25] It follows that I am satisfied that the transaction enabled BIL to receive more towards satisfaction of its debt than it would have received in the liquidation.
[26] Mr Harris must also establish that when the transaction was entered, BVL was unable to pay its due debts. The transaction was entered nearly 10 months before Mr Harris was appointed liquidator by the Court. The list of creditors is produced as at the date of liquidation. In his affidavit Mr Harris says that he relies on three factors to establish insolvency at the date of settlement of the transaction. First, BIL repossessed stock which was not sold to BRGL under the sale and purchase agreement. Secondly, there was a substantial indebtedness between BVL and BIL at that date. Thirdly, Mr Harris relies on the transaction itself, resulting in BVL ceasing to trade and 10 months later being shown to still owe over half a million dollars to unsecured creditors.
[27] In addition, in a letter Mr Harris wrote to BIL on 23 July 2012 he noted that as at 31 March 2010 the statement of financial position for BVL showed total assets of $562,000 exceeded by a total liabilities of $818,000. The same statement showed
insolvency on the basis of a working capital test, as current assets of $454,000 were exceeded by current liabilities of $544,000.
[28] A year later the company was insolvent on the basis of a balance sheet test with total assets of $499,000 being exceeded by total liabilities of $758,000, and on the basis of a working capital test with current assets of $403,000 exceeded by current liabilities of $444,000. Mr Harris noted that the failure of BVL to meet the balance sheet test of solvency and the working capital test of insolvency had worsened in the intervening year.
[29] The sale of the company’s business took place four months after the latter balance date. There is no evidence before me to suggest that the financial position of the company improved in this period. There is no evidence to rebut the evidence of Mr Harris. Whilst the majority of the information provided by him is more relevant to capital-based tests of insolvency than the test in s 292(2)(a), inability to pay due debts, current liabilities of $444,000, some $41,000 more than current assets, strongly indicates that BVL would have been unable to pay its due debts at the time of the transaction. On the balance of probabilities I am satisfied that the transaction was entered when BVL was unable to pay its due debts.
[30] For these reasons the transaction was an insolvent transaction for the purposes of s 292.
Outcome
(a) Pursuant to s 294(5) I set aside the payment by BVL to BIL of the sum of $56,830 as described in this judgment.
(b) Pursuant to s 295(a) I direct BIL to pay to Mr Harris as liquidator of
BVL the sum of $56,830.
(c) Pursuant to s 295(g) I specify that BIL is entitled to prove as an unsecured creditor in the liquidation of BVL in the sum of $56,830.
(d) BIL will pay the costs of Mr Harris on a 2B basis, and disbursements
fixed, if necessary, by the Registrar.
J G Matthews
Associate Judge
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