Harte v Wood t/a Wayne Wood Contractors
[2003] NZCA 265
•19 November 2003
IN THE COURT OF APPEAL OF NEW ZEALAND
CA14/03
BETWEENDAVID PAUL HARTE AS LIQUIDATOR OF VALLEY FIELDS LIMITED
Appellant
ANDW A AND P M WOOD TRADING AS WAYNE WOOD CONTRACTORS
Respondent
Hearing:15 October 2003
Coram:Gault P
Panckhurst J
William Young JAppearances: D G Johnstone for Appellant
S Grant for Respondents
Judgment:19 November 2003
JUDGMENT OF THE COURT DELIVERED BY PANCKHURST J
INTRODUCTION
[1] At issue in this appeal is whether a payment received by the respondents prior to the liquidation of Valley Fields Limited (VFL) was of a preferential nature and, if so, whether nonetheless the respondents can avail themselves of the equitable protection provided by s296(3) of the Companies Act 1993; that is demonstrate that the payment was received in good faith, caused an alteration of position in the reasonable belief that the payment was valid, such that it would be inequitable to order repayment in whole or in part.
[2] The application by the respondents that the transaction not be set aside was heard before Master Sargisson on two dates in September and November 2002. In a judgment dated 16 December 2002 the Master found that the liquidator had not established that the $40,000 payment enabled the respondents to receive more towards satisfaction of their debt than they would have been likely to receive in the liquidation. Hence the application to not set aside was granted on this basis. No consideration was given to the further argument advanced for the respondents, that it would be inequitable to require repayment in any event. In these circumstances the respondents gave notice of their intention to support the judgment on this alternative ground and no objection was raised to our dealing with that additional aspect.
History of the payment
[3] VFL was incorporated in 1997 to develop a residential subdivision in Pukekohe. Its directors included a Mr Cronin. In mid 2000 Mr and Mrs Wood, who at that time were trading in partnership as Wayne Wood Contractors (the partnership), tendered for soil removal and site development work required by VFL. Their tender was accepted. Work began in late August 2000. At the end of the month an invoice for the initial work was rendered, due for payment by 20 September. In fact this invoice for $5,679 was not paid until 5 October 2000.
[4] In the meantime at the end of September the partnership issued a further invoice for $78,304.02 which represented the balance of the tender price together with charges for certain extra work. Again payment was late. A part payment of $10,000 was received on 9 November leaving a balance of $68,304.02 outstanding. As the Master recorded in her judgment the late payment caused “the partnership serious difficulties in meeting its liabilities to its suppliers and its IRD and wage commitments”.
[5] Various initiatives were pursued in an endeavour to recover the outstanding balance. Initially there were discussions in which Mr Cronin advised that VFL’s second mortgagee was unwilling to “roll over” its mortgage. Accordingly VFL was seeking to refinance the development. In a further discussion Mr Cronin indicated that VFL had defaulted in relation to its mortgage obligations. On 4 December the partnership solicitor sent to the solicitors acting for VFL a statutory demand for payment. However, formal service was not effected. The same day Mr Cronin advised the respondents that VFL had received another statutory demand for a substantial sum, but the creditor, McKenzie and Palma Limited, was willing to hold off to enable VFL to refinance which would enable it to pay its creditors at least in part. Further discussions ensued concerning the difficulty for VFL in refinancing while a statutory demand existed. In the result on 7 December the partnership’s solicitor indicated that his clients would withhold further action until 20 December.
[6] On that day a fresh statutory demand was duly served and a copy sent to VFL’s solicitor under cover of advice that the respondents intended to proceed to obtain a winding-up order in the New Year. On 24 January VFL’s solicitor wrote to the partnership’s solicitor offering payment of $40,000 in cash. The letter included this:
This offer is subject to ongoing negotiations with the existing first and second mortgagees which we are hopeful of concluding by the end of the week.
The offer is made on the basis that your client would be entitled to be paid the balance owing from any net sale proceeds after payment of the secured creditors and if there is any shortfall in payment, on a pro rata basis.”
[7] The letter described the offer as the best VFL could do, conditional upon it securing write-offs of other debts and as contingent upon Mr and Mrs Wood withdrawing their statutory demand and agreeing not to issue another one. By letter dated 31 January the partnership’s solicitor accepted the proposal including confirmation that his clients were prepared to leave the balance of the debt outstanding until land sales had been completed by VFL when the unpaid balance would be paid on a pro rata basis. The letter also included an undertaking to withdraw the statutory demand served in December upon receipt of the $40,000.
[8] By 9 February VFL’s solicitor was finally in a position to effect payment. He wrote to the partnership’s solicitor recording the arrangement “for the sake of clarity”, including requirements that Mr and Mrs Wood were to immediately withdraw and abandon their statutory demand, VFL would use its best endeavours to pay the balance upon completion of the subdivision and the Woods were to agree not to issue a further demand in the meantime. Payment was made and received on the basis of these understandings.
[9] On 6 July 2001 McKenzie and Palma Limited applied to the High Court at Auckland for a winding-up order. Such order was made on 6 September.
[10] On 7 May 2002 the liquidator of VFL gave notice to Mr and Mrs Wood that the $40,000 payment would be set aside pursuant to s294 of the Companies Act 1993 (the Act) unless they obtained an order to the contrary. An application for an order against avoidance was filed by the partnership. Three grounds were set out in the notice being that the transaction took place in the ordinary course of business, was made at a time when VFL was able to pay its due debts and, alternatively, that Mr and Mrs Wood entered into the transaction in good faith, altered their position in the reasonable belief that the payment was valid, such that it would be inequitable for the Court to order repayment to the liquidator.
[11] Finally we note that the application was the subject of argument on different days in September and November, culminating in the written judgment of the Master on 16 December 2002.
The statutory provisions
[12] The first section of relevance is s292 of the Act, headed “Transactions having preferential effect”. A transaction is broadly defined in subsection (1) and includes a payment of money by the company concerned. The section continues:
(2)A transaction by a company is voidable on the application of the liquidator if the transaction –
(a) Was made -
(i) At a time when the company was unable to pay its due debts;
and
(ii) Within the specified period; and
(b) Enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation –
unless the transaction took place in the ordinary course of business.
[13] The specified period relates back two years from the commencement of the liquidation upon the filing of a winding-up application. Accordingly this payment, being only five months earlier, was well within the specified period. Indeed in terms of s292(6) the transaction was within the restricted period (six months back from commencement of the liquidation). Accordingly in terms of s292(3) it was presumed both that the payment was made at a time when the company was unable to pay its debts and otherwise than in the ordinary course of business. An onus therefore rested the partnership to establish ability to pay and payment in the ordinary course, if they were to rely upon those factors as supportive of their application.
[14] On the other hand even within the restricted period it remained for the liquidator to establish that the challenged payment enabled the Woods to receive more towards satisfaction of their debt than they would otherwise have received, or been likely to receive, in the liquidation : s292(2)(b).
[15] Sections 294 and 295 prescribe the procedure for setting aside voidable transactions and the orders which the Court may make, respectively. Then is s296 headed “Additional provisions relating to setting aside transactions and charges”. And of present relevance is:
(3) Recovery by the liquidator of property or its equivalent value, whether under section 295 of this Act or any other section of this Act, or under any other enactment, or in equity or otherwise, may be denied wholly or in part if –
(a) The person from whom recovery is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside; and
(b) In the opinion of the Court, it is inequitable to order recovery or recovery in full.
The decision of the Master
[16] After a review of the history of the transaction and reference to the statutory provisions, the Master noted that the payment was made within the restricted period and therefore that it was for Mr and Mrs Wood to establish VFL could as at February 2001 pay its due debts and that it made the $40,000 payment in the ordinary course of business.
[17] She continued:
Before examining whether the applicant has disproved either or both matters I note that the liquidator still must prove that the transaction enabled the partnership to receive more than it would have received or was likely to have received in the liquidation. If he has not done so, then the partnership’s application succeeds.
[18] With reference to this question the Master acknowledged Ms Grant’s submission that there was no objective evidence which established that the partnership received more in satisfaction of its debt than it would have received in a liquidation. To illustrate the point counsel extrapolated certain figures from the affidavit evidence, on the basis of which she contended that after payment of secured creditors it was likely there would be $300,000 available for pro rata distribution to unsecured creditors who were owed $500,000. This would produce a recovery in the liquidation of 60 cents in the dollar. Since the impugned payment represented about 60% of the total owing ($40,000 out of $68,304), the partnership had not received more than it would have in the liquidation. We note that this calculation ignores the 60% notional recovery which the partnership could expect (on the basis of counsel’s figures) upon proving in the liquidation for the balance of $28,304.
[19] Mr Johnstone’s first response to this argument was that the preferential effect of the payment had not been put in issue and accordingly was not in dispute. But in any event, he continued, the figures advanced by counsel for the partnership were spurious. In order to arrive at a sum of $300,000 available for unsecured creditors, Ms Grant adopted an assumed figure for subdivisional sales and reached her essential conclusion upon the basis that unsecured creditors were owed only $500,000. The sales figure was entirely speculative, while the unsecured creditors’ figure was simply wrong because proofs of debt for $962,681 had been received.
[20] In light of these arguments the Master expressed her conclusion as follows:
[30] I accept Mr Johnstone’s submission that Ms Grant’s calculations as to the value of the land are full of assumptions. However, this cuts both ways. As I examine the papers, I am not satisfied that there is evidence of sufficient probative value to establish how much the land is worth, nor what the sections will fetch when sold. That is a matter for expert valuation evidence. Therefore there is no way of knowing what amount of money will be available for unsecured creditors. Also it seems to me that Mr McCullagh’s report is hearsay. He did not give(sic) swear an affidavit, and the report does not come within any of the statutory exceptions to hearsay found in section 3 of the Evidence Amendment Act (No. 2) 1980 or elsewhere. Therefore I ignore the opinion in that report that there will be no funds available for unsecured creditors.
[31] I have a feeling that in obtaining the $40,000 payment the partnership is in a better position than they would be in the liquidation if they had not received the payment. However judgments are based not on feelings, but on the evidence.
[21] It followed that in the Master’s view the liquidator had not shown on the balance of probabilities that the partnership had received more than it would have in the liquidation. The Master added “it is unnecessary to consider the other elements and I decline to do so.”
Did the transaction have preferential effect?
[22] The submissions of counsel in this Court canvassed the question whether this element of a voidable preference was ever in issue. The grounds contained in the partnership’s application to avoid setting aside did not extend to this aspect. However, the matter is complicated because between the September and November hearings before the Master there was correspondence between counsel concerning whether the point required to be pleaded. They agreed to differ. And in the end result Mr Johnstone elected not to adduce additional evidence directed to the preference aspect.
[23] The evidence which was before the Master was contained in an affidavit of Ms Fatupaito, an insolvency practitioner with the firm of chartered accountants retained by the Official Assignee to investigate VFL’s affairs. She deposed:
Preferential effect
15On 19 October 2001, Bridgecorp Finance Limited appointed Anthony John McCullagh as VFL's receiver under the powers contained in a Deed of Debenture dated 8 February 2001. Mr McCullagh’s most recent report, dated 3 July 2002, is annexed marked ‘D’. Mr McCullagh’s opinion is that he considers it unlikely that there will be funds available for distribution to unsecured creditors.
16McKenzie & Palma Limited did not receive any payment after service of their statutory demand claiming a sum in excess of $900,000 on or about 27 October 2000.
17Accordingly, the challenged payment would appear to have enabled Mr and Mrs Wood to receive more towards satisfaction of the debt in question than they would otherwise have received or be likely to have received in the liquidation.
[24] Annexure D to the affidavit was a six monthly receivership report from Mr McCullagh. It included the following details:
[a]that since his appointment eighteen sections had been sold for $1.22m inclusive of GST.
[b]that the sale of seven lots was in progress, leaving a total of 36 lots still to be sold which he expected to be achieved within eight to ten months.
[c]that according to the liquidator’s first report to creditors it was estimated that claims by unsecured creditors would be in excess of $500,000.
[d]that at the date of the report Mr McCullagh considered it unlikely there would be funds available for distribution to unsecured creditors.
[d]that the total amount due to Bridgecorp Finance Limited as debenture holder was $2,676,775.
[25] Elsewhere in her affidavit under a heading that VFL was unable to pay its debts Ms Fatupaito deposed that the company’s accounts for the year ended 31 March 2000 disclosed a loss for that year of $328,341 and accounts payable at years end of $254,945. Her affidavit continued:
To date, five claim forms totalling $962,681 have been presented to the liquidator. Those claim forms relate predominantly to debts incurred after 1 April 2001 (corrected to 2000 in an updating affidavit). On a simple calculation, it would therefore appear that unsecured creditors increased in the six months prior to liquidation by in excess of $700.000.
[26] In light of this evidence we return to the reasoning of the Master and the conclusions which she reached. Two matters require consideration and comment.
[27] First, the exercise through which Ms Grant went in order to advance the thesis that there may be $300,000 available to pay to unsecured creditors producing a likely return of 60 cents in the dollar, was based on the proposition as the Master put it “that around $500,000 is owing to unsecured creditors”. In fact it is clear from the affidavit evidence that this figure was derived from the liquidator’s first report, to which Mr McCullagh made reference in his receiver’s report of 3 July 2002. By contrast Ms Fatupaito deposed that as at 12 August 2002 claims totalling $962,681 had been received in the liquidation. Admittedly she did not comment on whether the claims were accepted or not, but that was not surprising in the context of a liquidation where the prevailing belief was there would be nothing available for unsecured creditors in any event.
[28] We do not understand how this evidence of the up to date position was viewed by the Master. Her decision confirms that counsel for the liquidator drew attention to the $962,681 figure. It is sufficient to say that once this point is brought to account the process of reasoning by which it was suggested that unsecured creditors may receive a 60% return in the liquidation is highly suspect if not untenable.
[29] But secondly and of more consequence is the conclusion that the receiver’s report was hearsay and that the opinion in it that there would be no funds available for unsecured creditors should be ignored. In reaching that conclusion the Master was satisfied that the receiver’s report could not be received as documentary hearsay evidence in terms of the Evidence Amendment Act (No 2) 1980. In terms of s3(1) a business record is admissible to establish a fact or an opinion if, in civil proceedings, its maker had personal knowledge of the matters in the record, and “undue delay or expense would be caused by obtaining his evidence” : s3(1)(c)(ii).
[30] Mr Johnstone’s submission was to the effect that satisfaction of this pre-condition fell to be assessed in the prevailing circumstances of the case. Here, the preferential effect of the payment was not squarely put in issue. Nonetheless evidence relevant to that aspect was adduced through Ms Fatupaito, who in turn annexed the receiver’s report to her affidavit. The report was one made under s24(1) of the Receivership Act 1993. Receivers are required to provide six monthly reports, including details of the amounts likely to be available for payment to preferential and unsecured creditors. Hence the report was one prepared pursuant to a statutory duty.
[31] In these circumstances Mr Johnstone argued that the report was able to be produced as an exhibit to Ms Fatupaito’s affidavit. Moreover, that in terms of s3(1)(c)(ii) of the Evidence Amendment Act (No 2) undue delay or expense would be caused by requiring that Mr McCullagh give original evidence.
[32] We accept it is commonplace for reports of this nature to be put in evidence as an annexure to an affidavit sworn by their maker. Had Mr McCullagh provided an affidavit to which his report of 3 July 2002 was exhibited no admissibility issue would have arisen. Yet, it is said, that through adoption of the expedient of the liquidator’s agent introducing the report as an exhibit to an affidavit, its contents must be ignored. The merit in this is somewhat elusive.
[33] However, we prefer not to express a final view on whether the requirements of s3(1)(c)(ii) were met in this case. Undue delay and undue expense are elastic concepts and there is a good deal to be said for the view that their application should extend to a focus upon all the particular circumstances, including in this instance that the document was prepared pursuant to a statutory duty and whether its subject matter was squarely put in issue.
[34] But in this Court Mr Johnstone mounted a further argument based on r252 of the High Court Rules. The rule provides that affidavits filed in respect of interlocutory applications must comply with the standards for affidavits generally:
Provided that where the application affects the party applying only, or where the interests of no other party can be affected thereby, or in a routine matter, or where the interests of justice so require, the Court may accept statements of belief in an affidavit in which the grounds of such belief are given.
Applications to avoid a setting aside are deemed to be originating applications by r458D(1)(a)(vi) and by r458F(i), r252 applies.
[35] The submission was that in this instance it was in the interests of justice to accept a statement of belief contained in Ms Fatupaito’s affidavit, in which she expressed the opinion that the $40,000 payment enabled the partnership to receive more towards satisfaction of the debt than would have been the case in the liquidation. The grounds provided for such belief included the extent of the claims made by unsecured creditors, $962,681, and express reliance upon Mr McCullagh’s report and opinion that as the receiver he did not consider there would be funds available for distribution to unsecured creditors.
[36] We accept this submission. In the circumstances of this case we consider it was logical and legitimate for someone in Ms Fatupaito’s position to provide evidence in the manner adopted which was endorsed in a brief affidavit sworn by the Official Assignee as liquidator of VFL. The indebtedness of VFL and the opinion of the receiver, recorded pursuant to a statutory duty, provided a sound basis for the belief expressed. By contrast we agree with the Master’s observation that counsel’s thesis to the contrary was “full of assumptions” and indeed flawed. It follows that we do not accept the conclusion reached by the Master that preferential effect was not established. While she had “a feeling” that the partnership was preferred, we are satisfied that the evidence required a positive conclusion it was likely that Mr and Mrs Wood received preferential treatment.
[37] We note in passing that there was some inconsistency in approach to Mr McCullagh’s report. Information derived from it was advanced by counsel, and featured in the Master’s reasoning, concerning the likely recovery of unsecured creditors in the liquidation. Yet the opinion evidence contained in the report as to the likely non-return to unsecured creditors was ignored. It was hardly appropriate to have regard to the document for one purpose, but not for another.
Is s296(3) available?
[38] In order for the equitable protection provided by s296(3) to avail a creditor four requirements must be met:
[a]the payment must have been received in good faith,
[b]the recipients must have altered their position in reliance upon it,
[c]such alteration must have been made in the reasonably held belief that the payment was valid and would not be set aside, and
[d]in consequence it must be inequitable in the opinion of the Court to order recovery in whole or in part.
The focus of counsel was mainly upon the second requirement, whether Mr and Mrs Wood had altered their position in reliance upon the $40,000 payment. Counsel for the liquidator also questioned whether persons in the position of Mr and Mrs Wood could reasonably have believed the payment would not be set aside, given the background outlined earlier.
[39] We agree, but shall deal with this aspect in the context of whether there was an alteration of position in reliance on the payment. The relevant test was described by Fisher J in Baker Timber Supplies v Apollo Building Associates (Tauranga) Society Limited (In Liq) (1990) 5 NZBLC 66,791 at 66,793 in these terms:
The main purpose of s311A(7) (the predecessor to the present section), as I see it, is to assist the creditor if he has deliberately gone down one path in the reasonable expectation that he has received a valid payment, only to find that he is not only required to repay the money but that in the meantime he has also lost a valuable alternative opportunity. In other words, he must have acted to his detriment on the strength of the insolvent company’s payment.
In this instance it is said that the partnership did lose a valuable alternative opportunity, in that the $40,000 payment was used to pay creditors when otherwise the partnership would have sought to compromise with its creditors or the partners would have gone into bankruptcy. Moreover, the partnership, soon after the payment, proceeded with a long-standing plan to transfer its business assets to a limited liability company which has continued to trade over the past two and a half years in difficult circumstances.
[40] As the Master accepted there was nothing untoward in the incorporation of a company a few months after the impugned transaction. The intention to form a company had existed for a considerable time. But it follows equally, we think, that formation of the company and transfer of the partnership’s assets to it, were not actions in reliance upon the validity of the payment.
[41] Was there a change in position in reliance on the payment in that the partners did not become bankrupt and/or did not endeavour to negotiate a compromise with trade creditors? The highpoint of the evidence in this regard is contained in Mr Wood’s affidavit in opposition to the setting aside. He said:
51.The payment was paid into the Partnership’s BNZ and ASB Current Accounts. Payments were then made to the Partnership’s existing creditors. If the payment had not been made, then the Partnership would have had to negotiate with its creditors to reduce the amounts owing in order to stay afloat. Instead the Partnership paid its creditors then owing in full, in reliance on its belief that the payment was valid. If the payment was set aside the chance to negotiate with creditors has long ago been lost, and the Partnership would be severely disadvantaged.
52.In addition, the Partnership ceased to trade and transferred its business to WWL (the new company). It has no means to pay back the $40,000. My wife and I would be bankrupted and WWL would be liquidated. The Partnership has entered into an agreement to repay an amount of $142,000.00 to the Inland Revenue Department. WWL has been able to pay its debts as they fall due, but only just. It could not assist the Partnership with repayment of the $40,000.00, if the Partnership transaction was set aside.
[42] When an affidavit was filed on behalf of the liquidator which challenged the value of the opportunity to negotiate with creditors, Mr Wood deposed in reply:
Contrary to Ms Fatupaito’s comments in this paragraph, Wayne Wood Contractors Ltd often negotiates with its creditors. The only way it has been able to continue trading has been by negotiating with creditors, and these creditors compromising, which has allowed the payment of debts by way of regular instalments. Indeed, the Partnership has negotiated to pay off a substantial debt of $142,000.00 owed to the Inland Revenue Department (‘IRD’). I attach marked ‘A’ a letter from WWC’s accountant recording the terms of this settlement, which was accepted by the IRD and has been honoured by the Wayne Wood Contractors Ltd. This shows that the allegations by Ms Fatupaito that the opportunity to negotiate with creditors was not valued, is incorrect.
[43] We do not consider that on the most benevolent view of this evidence it suggests a change of position of the required kind. No doubt the partnership was in a difficult financial position as at February 2001 when the payment was received. But the evidence does not permit of the interpretation that the partners were about to attempt to negotiate a compromise with the creditors or file in bankruptcy, and that they desisted from doing so upon receipt of the $40,000 cheque. Had the payment caused the partnership to draw back from either course of action we would have expected evidence to establish the actual extent of the financial crisis and evidence to confirm that a compromise with creditors and/or bankruptcy were in serious contemplation, for example that these options had been the subject of discussions with the partnership’s advisors.
[44] It follows we are not persuaded that there was any alteration of position in terms of the statutory provision.
Result
[45] The appeal is allowed. The respondents’ application for an order that the transaction not be set aside, is dismissed. The appellant is entitled to costs in this Court which we fix at $4,000 together with reasonable disbursements approved, if necessary, by the Registrar. Costs in the High Court shall be reviewed by the Master in default of agreement.
Solicitors:
Meredith Connell, Auckland, for Appellant
Franklin Law, Pukekohe, for Respondent
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