Kemp v T a MacAlister Limited
[2016] NZHC 1018
•18 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-3030 [2016] NZHC 1018
UNDER THE Companies Act 1993 IN THE MATTER
of the liquidation of Camera & Camera
Limited (in Liquidation)BETWEEN
MATTHEW PETER KEMP AND SIMON DALTON as joint and serveral liquidators of Camera & Camera Limited (in Liquidation)
Applicants
AND
T A MacAlister Limited
Respondent
Hearing: 22 April 2016 Appearances:
A W Johnson and R W Akroyd for Applicants
N F Moffatt for RespondentJudgment:
18 May 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
18.05.16 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
KEMP AND ANOR as joint and serveral liquidators of Camera & Camera Limited (in Liquidation) v T A MacAlister Limited [2016] NZHC 1018 [18 May 2016]
[1] In this proceeding the applicants, who are the liquidators of Camera and Camera Ltd (in liquidation), seek orders pursuant to s 292 and other provisions of the Companies Act 1993 setting aside four transactions, which are payments that the company made to the respondent, totalling in value $140,601.80 spanning the period
31 October 2014 to 6 January 2015.
Principles
[2] The relevant section of the Companies Act can be summarised for present purposes as providing that payments which are made within the specified period of six months prior to liquidation are deemed to have been made while the company is insolvent and must be repaid unless the payee is able to rely on the defence in s 296(3) of the Act.1 That section precludes the court from ordering the recovery of
payments where at the time of the payments:2
(a)
(b)
the creditor acted in good faith; and
a reasonable person in the creditor’s position would not have
suspected, and the creditor did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and (c)
the creditor gave value for the payment or altered its position in the reasonably held belief that the payment was valid and would not be
set aside. [3]
Both
of the parties referred to the leading authorities concerning
interpretation of the section and in particular, what it is necessary to prove in order to establish that the recipient did not suspect that at the time of the payment the company was or would become insolvent. There is no disagreement that the
principles stated in the Supreme Court decision Trans Otway Ltd v Shephard are applicable.3 The Court stated:4
In a statement which has long been regarded as authoritative on the statutory test, Kitto J said in Queensland Bacon Pty Limited v Rees that a suspicion that something exists is:
More than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to
‘a slight opinion, but without sufficient evidence’, as Chambers’
Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the
possibility of its existence. The notion which ‘reason to suspect’
expresses … is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes – a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.
Kitto J added that the test is an objective one. Hodgson J has conveniently summarised the position in Hamilton v Commonwealth Bank of Australia:
I accept that Queensland Bacon shows that it is insufficient that the circumstances give a reason to suspect the debtor might be insolvent; they must be such that the creditor should have suspected that the debtor was insolvent.
[4] “Insolvency” in the sense that it is used in the section means that the debtor is
unable to pay its debts as they fall due.
Factual matters
[5] Some of the evidential matters which are required to be proved in applications of this kind were not, in this particular case, disputed. It was accepted that the respondent received the disputed payments of $140,601.80. For the applicants it was accepted that the creditor acted in good faith in receiving the payments and that the creditor gave value for the payments.
[6] The key dispute concerns whether a reasonable person in the position of the respondent would have had reasonable grounds for suspecting that the company was insolvent at the time that it made the payments to the respondent.
[7] The company, as its name suggests, was involved in selling cameras. The respondent was a wholesale supplier of that equipment including Nikon brand goods for which it had held the New Zealand agency for quite a number of years.
[8] The liquidators have established that the total indebtedness of the company increased from $347,000 approximately as at January 2014 to $623,000 approximately in March 2014. Over the same period the company’s aged creditors went from the bulk being within 30–60 days to the point where there was now approximately $52,000 at 90 days. The liquidators have established that the balance sheet of the company showed a negative equity position as at 31 March 2014. They have also established that the company’s balance sheet as at 31 March 2014 showed that what is described as the “current ratio” at 0.70:1. They say, and they have not been contradicted, that:
A current ratio of less than 1:1 is evidence that the company’s current assets are insufficient to service current liabilities, and therefore the company cannot pay its debts when due.
[9] There is no evidence, though, that the respondent knew about the above matters. It was not established that it had been provided with copies of the company’s accounts prior to the time when it accepted the payments.
[10] The liquidators say that unsecured proofs of debt of approximately $662,000 have been filed in the liquidation. Realisations achieved were approximately
$266,000. There was a substantial shortfall and after satisfaction of security and preferential creditors it is unlikely that there will be any payment to the unsecured creditors. Again, the extent of the indebtedness was not, in general terms, a fact that the respondent was aware of. Just what it did know is closely contested.
Pattern of dealings and relationship between companies
[11] Mr Borne, who was the managing director of the respondent up until June
2014, was responsible for managing the relationship with the company during his time as managing director. He was succeeded by Mr Rennie, who dealt with the company until trading effectively ceased at the end of 2014. For the applicants, Mr Johnson summarised the evidence which Mr Borne gave as follows:
26.1 He had a good relationship with Mr Coutts, the director of the
Company;
26.2The Company was never one of the customers where they had a level of concern about indebtedness;
26.3 It was common for customers to pay outside the due date;
26.4In practice, TA MacAlister operated on 60 days for terms of payment and this was the normal position in relation to the Company;
26.5The extension of the 60 days with TA MacAlister was by mutual agreement;
26.6 60 days becomes standard within the industry;
26.7Even if the payment had been on 90 days, TA MacAlister would not have considered payment to be substantially overdue;
26.8There were regular discussions with the Company and at the end of the discussions, a cheque would be given;
26.9There is nothing unusual about paying invoices through lump sum amounts rather than separate cheques for each individual invoice;
26.10 There are always problems with lower sales over the winter period;
26.11 The NZPIA reports were useful when dealing with smaller customers which whom TA MacAlister did not have a lengthy relationship but TA MacAlister put little weight on them in respect of clients that they had a long standing relationship with, such as the Company. This was especially so because the reports were dependant on an accurate collation of unaudited data from a variety of sources;
26.12TA MacAlister was able to monitor payment of the Company’s account itself and were satisfied that there were no concerns as to ability to pay debts;
26.13TA MacAlister is unsure as to the extent that the NZPIA reports accurately show accounts being overdue by two or three months;
26.14The position in the NZPIA reports is inconsistent with the Company’s own position which was that between March and September 2014, there was a nil balance for three months and over.
[12] He further summarised the evidence in chief of Mr Rennie for TA MacAlister in the following way:
27.1 TA MacAlister had no concern about the Company;
27.2Whilst general manager, he was not aware of the NZPIA reports and would not have reported on them to the board;
27.3TA MacAlister relied on its own reporting and knowledge of its customers;
27.4He took over as general manager in September 2014 and he had discussions with Mr Coutts (director for the Company) but they were only as to when the funds were expected to be paid. Pressure was not being put on the creditor as he had no concerns that the creditor was unable to pay;
27.5It was never expressed to him that the Company was in trouble and needed time before it would pay;
27.6TA MacAlister had so much confidence in the Company that they offered to sell them some of the residual stock in September 2014.
[13] Those summaries are both accurate.
[14] The respondent and the company had dealt with each other for many years. Because of the size of the company’s business, it was regarded as one of the respondent’s premium clients. Mr Borne in his evidence placed weight on the fact that he devoted a lot of effort to maintaining close business relationships with all of the premium customers, including the company.
[15] To that end Mr Coutts, the CEO of the company, would have a meeting with Mr Borne each month (apparently at lunch). At the conclusion of the meeting, Mr Coutts would produce a cheque, usually in partial payment of the company’s account with the respondent. On some infrequent occasions (possibly two or three times per year was Mr Borne’s estimate) he would tell Mr Coutts that the company would have to increase the amount being paid. Sometimes there were discussions about the reasons why the company could not pay more: for example that the company had an impending GST payment to make or something along those lines.
[16] Another important issue concerned the terms of trade agreed between the respondent and the company which governed the period of time that the company had within which to pay its account. The evidence establishes that the company had
60 days within which to meet the account. Mr Borne in particular was questioned about whether the company adhered to that time limit and he said that from time to time over a ten-year period the company went outside the 60 days. There is some other evidence on this point which I will mention shortly. But based upon Mr Borne’s evidence, this was not a common occurrence.
[17] The general tenor of the evidence that Mr Borne put forward was that his company was conscious of the headwinds that photographic businesses such as the company were facing. These included competition on price from products that were parallel imported, the ability for consumers to direct import their own products over the Internet, and the emergence of smart phones with cameras which meant that there was less demand for dedicated cameras. Mr Borne’s strategy was to assist the customers, particularly the long-standing loyal customers, to deal with these negative aspects which became more pronounced over the last few years, possibly three years, of Mr Borne’s tenure as managing director of the respondent.
[18] Mr Rennie also gave general evidence regarding the management of the company’s account but that was a lot less detailed than the evidence of Mr Borne and Mr Coutts. That is understandable because Mr Rennie took up this position at a time when the respondent was, in effect, managing its exit from the photographic wholesaling business.
[19] As to the compliance with the credit terms, Mr Johnson referred me to the documentary evidence in the form of monthly statements which were issued to the company. These demonstrated that at various occasions the 60 days were exceeded. That occurred at the end of March 2014 when there was $18,000 in approximate terms on this category out of the total balance of $122,000 approximately. The next occurrence was in August 2014 when the sum of $11,000 approximately came into that category out of a total of $133,000 approximately. No statements covering the later period were included in the evidence placed before the court.
[20] To conclude this part of the discussion, in the course of his evidence, Mr Borne was asked various questions about his views on the solvency of the company. In order to clarify his answers I asked him some questions about what sense he was referring to solvency or insolvency of the company. I think it is not unfair to summarise his replies as being to the effect that he did not regard the company as being insolvent in the sense that it was likely to fail.
[21] A further potential source of evidence which provides information about the solvency of the company during the period when the payments was made is the
NZPIA reports. The parties took divergent positions on what if any evidential value these reports had.
The actual performance of the company in meeting the respondent’s accounts
[22] Mr Kemp, who is one of the liquidators, gave evidence that prior to the impugned payments, the company’s account was generally satisfied within a 60 day period. It was his view that the impugned payments were made outside that 60 day period. He further gave evidence that the payments that are being challenged were lump sum payments not attributable to specific invoices.
[23] I agree that the evidence supports Mr Kemp’s opinion.
[24] There were some other matters in respect of which his evidence was not as helpful. Mr Kemp was of the opinion that it was not a standard position in a debtor/creditor relationship that the parties would meet to discuss what sum the debtor could afford to pay and that this practice should reasonably have raised suspicion.
[25] I do not agree with that conclusion. The meetings between the two businessmen were, to use the vernacular, of an “old school” character perhaps. But the meetings were not just concerned with discussing the state of the account between the company and the respondent. Mr Borne made it clear that part of the function of these meetings was for him to listen to his client and do what he could to strengthen the relationship between the two entities. It would seem that based on the evidence of Mr Borne, which I accept, discussions about how much the company was going to pay were uncommon. But at a more fundamental level, it is difficult to see what Mr Kemp’s objection really is. The fact is that the company was largely trading within its credit limits as to time of payment. It may be that Mr Coutts felt he had to explain the fact that the company would be paying a large proportion of the debt later rather than earlier. But it did not seem to be the case that at the meetings Mr Coutts raised a need on the company’s part to exceed the credit limits completely. I therefore regard criticism of the respondent for taking part in these meetings as unjustified.
[26] In any case, the lunch meetings had been discontinued some months before the impugned arrangement commenced, following the departure of Mr Borne from the role of managing director.
[27] Mr Kemp also gave evidence that after TA Macalister ceased operating (which I interpolate seems to have been around September 2014), there was a meeting where agreement was reached as to paying off the debt over time. Further, at that time TA Macalister had specific knowledge as to the company’s debt situation through the NZPIA monthly reports. Mr Kemp said that the reports clearly showed a declining financial position for the company. For example, the six association members who had provided information for the January 2014 report indicated that only $21,296.24 was at two months outstanding. By August 2014, the position had worsened to a three month and over debt of $63,345.53. By September 2014, that
sum had become $149,408.08. The September 2014 NZPIA report5 also indicated
that one of the association members had put a stop credit on the Company’s account.
The NZPIA reports
[28] The applicants adduced further evidence, being the New Zealand Photo- Imaging Industry Association (NZPIA) reports that were issued to, amongst other parties, the respondent.
[29] The NZPIA had been established some time in the last decade before the respondent went out of business. It apparently functioned as a credit reporting entity which had the role of collecting information for suppliers of wholesale photographic equipment concerning the payment performance of retailers. In the evidence that he gave to the court, Mr Borne agreed with the suggestion that it had been set up because wholesalers in the position of the respondent had been “burnt” through being left with unpaid debts by retailers of photographic equipment. One of the activities that the NZPIA undertook was the circulation of monthly reports to members about the state of the accounts of various retailers to whom the members had supplied goods. The information on which the NZPIA based its reports was contributed by the various members with each providing the particulars about the
state of the account with the main retailers that they had on their books. All of this information was accumulated to show what each retailer company owed suppliers in general.
[30] The report for January 2014 showed that the company owed $21,000 approximately at two months outstanding, $212,000 approximately 1 month and
$113,000 at current. At April 2014, $73,000 approximately was three months and over. Also one of the members of the association had placed the company on a stop credit list. The total debt for that month was shown as being $514,000 approximately owed to suppliers. In May, the three-month figure was $82,000 approximately and the total debt owed to association members was $509,000. Again one member had a stop credit in place. By June, this three months figure was down to $8000 approximately and the total amount owing to members of the association was shown as being $626,000. The figure for the month of July 2014 that was three month and over was $45,000 and total indebtedness $583,000 approximately. There was no stop credit in place. The August report showed that $63,000 approximately was three month and over with total indebtedness of $718,000 approximately. A covering note states that information had been received from six participants. There were two notations to the report showing that two participants had the company on a
cash only basis and two on a stop credit basis.6 By September 2014 the total debt
was at $746,000 and there was now $149,000 at three months or over. One respondent reported the company had stop credit status.
[31] The issue that the respondent raises in respect of these reports is their accuracy. The respondent has produced evidence that the report which the respondent sent to the compiler of the NZPIA reports for August 2014 contained a mistake which would have fed through into the results of the overall industry-wide survey. The mistake was that the indebtedness of the company to the respondent was mistakenly shown as being $307,000 approximately. In fact the correct figure was approximately $133,000. There is therefore an overstatement of $147,000. Also the figure for three months and over balances in regard to the company was overstated. It was not $43,000. It was a “minus” figure. It was not explained to me how aged
debts could include minus figures but I will accept that there was an error of at least
$43,000.
[32] Evidence was also put forward concerning the report that the respondent sent to the NZPIA for September 2014. The respondent’s return showed that the total owing figures for that month were $295,000 and the three months figure $42,000. In fact the figures should have been $147,000 and $0 respectively.
[33] The first step is to assess the evidence which has been put forward to support the respondent’s assertion that the figures provided to NZPIA in these two months were incorrect. I accept, based upon the fact that Mr Rennie was not only the CEO of the respondent but also a chartered accountant, that the effect of his evidence is correct. There were substantial errors in the returns which the respondent filed with the NZPIA for those two months.
[34] The second step is to assess the wider significance of these errors. Mr Moffatt took the position that no reliance could be properly placed upon the NZPIA figures overall because of the demonstrated errors made by one of the participants in the survey, that is the respondent.
[35] I am not prepared to accept that submission. The businesses comprising the NZPIA plainly resolved to set up a reporting mechanism that would alert them to any adverse financial developments that were occurring with respect to the retailers that they were supplying. They obviously had mutual confidence in each other that correct information would be provided. I do not consider that it is reasonable in the circumstances to conclude that a significant part of the information supplied was flawed in the case of most respondents for most months. In most cases, the basic evidence which would be used for the reports, presumably, was extracted from the companies’ various accounting records. Those records in turn would be used for stating the account position with regard to their customers and also the state of their own business. It is likely that the businesses would ensure that that information, at least, was correct.
[36] It is also necessary to consider whether it was likely that there would be widespread errors in translating the individual companies’ account information into the monthly NZPIA reports. The application that was used for reporting it was the Excel spreadsheet. I can take judicial notice of the fact that such an application is in widespread use in commerce. I am not prepared to conclude that it is likely that the NZPIA participating companies were commonly afflicted with an employee’s incompetence or lack of knowledge as to how to operate the application.
[37] For completeness’ sake, it should probably be accepted that a third place at which an error could conceivably occur was when the accountants who prepared the reports totalled up the various figures that were provided to them as part of the participants’ responses.
[38] Perhaps more to the point, I do not consider that a conscientious and sensible credit manager or financial officer would put aside any suspicions about the credit worthiness of a retailer that he might otherwise base on the information from the NZPIA reports on the ground that it was it was likely to be wrong and should be excluded from consideration. No doubt the reports would have to be used judiciously and in combination with other sources of information about a company’s solvency. But in showing general trends affecting a company and reporting adverse credit information such as stop credit notices, the information was of some potential assistance.
[39] Later that year, the respondent made the decision to cease trading as a wholesaler of cameras and associated equipment. This decision was taken because of the diminishing profitability of the business. Mr Coutts gave evidence that the company received a circular communication addressed to the creditors generally advising of this decision and asking the creditors to make payment by the end of October. Mr Rennie in his evidence thought it was unlikely that there would have been such a circular sent round because, amongst other things, it amounted to a unilateral attempt to change the terms of trade between the respondent and its customers. However, whatever the real position is there is no doubt that at about that time the company did make an offer to pay off its remaining indebtedness of
approximately $150,000 by three equal payments. That is what occurred, even though the total payments amounted to $143,000.
[40] These payments were to be staggered over the months of October, November and December 2014. Whether or not the respondent explicitly communicated acceptance of this offer to the company is not known but is not important because that is how the matter progressed anyway. The October and November payments were made but the December payment did not come in. Mr Rennie contacted the company about the missing payment and on or about 6 January 2015, Mr Coutts made the missing payment. The important point from the perspective of the applicants is that each of the payments for September, October and November would have been outside the 60 day payment arrangements. I accept that that was likely to be the position with at least some of the payments that were to be made in accordance with the arrangement. I agree, therefore, that the evidence establishes that there were further defaults on payment between October 2014 and January 2015.
Discussion
[41] The respondent does not contest that the payments occurred within the specified period and that they were made at a time when the company was unable to pay its debts.7 It does not contest either that the payments enabled it to receive more than it would have been likely to receive in the company’s liquidation.8 Likewise, the applicants do not dispute that the respondent acted in good faith in accepting the payments,9 nor that the respondent gave value for the property.10 The focus of this judgment will be on the remaining question of whether the respondent is able to prove that when it received the payments:11
(b) a reasonable person in [its] position would not have suspected, and [it] did not have reasonable grounds for suspecting, that the company was, or would become, insolvent[.]
[42] The matters that I will address in this part of the judgment will be the following:
7 Companies Act, s 292(2)(a).
8 Companies Act, s 292(2)(b).
9 Companies Act, s 296(3)(a).
10 Companies Act, s 296(3)(c).
11 Companies Act, s 296(3)(b).
(a) the scope of what has to be proved, and by whom, in an application of this kind;
(b)what is involved in the concept of insolvency in relation to s 292 of the Companies Act;
(c) the significance of the evidence bearing upon the knowledge that is to be imputed to the respondent regarding the financial position of the company arising from:
(i) the state of the financial accounts of the respondent during
2014;
(ii)the trading pattern between the respondent and the company including assessing the extent of any departure from the terms of trade during 2014. This will include consideration of the evidential value, if any, of the NZPIA reports;
(iii)the inherent deferment effect of the agreed payments that were to be made under the arrangement;
(iv)the assertions about the payment of lump sums and what significance they have in relation to the perceptions of the company’s solvency at the time when the payments were made;
(v) the significance of the general trading environment.
[43] The burden of proof rests upon the respondent to establish, on the balance of probabilities, that there were no reasonable grounds upon which a reasonable person in its position would have suspected that the company was, or would become, insolvent at the time when the payments were made. The latter expression in the context of the section seems to require that the respondent held a reasonable view that the company was not likely to become insolvent – that is, that at the point when the payments were being made, it was not foreseeable that there was a substantial
risk that the company was close to insolvency. That interpretation focuses attention on the months of October and November 2014 and January 2015. If the evidence does not persuade the court of these matters then the respondent will have failed to prove its defence. The applicants are not required to prove that the respondent should have foreseen the risk of insolvency.
[44] The task of any respondent seeking to establish these matters under s 296(3) is a difficult one. That is properly so. After all, the creditor seeking to retain payments made on the eve of liquidation will, if successful, put itself in an advantageous position compared with all of the other creditors. Such a position should only be open to it if it gives proper justification. It is for those reasons, presumably, that it is not enough for the respondent to simply show that having considered all the factors, it did not consider that the company was insolvent when it made the payments. It must go further and show that there were not even reasonable grounds to suspect that that was the case.
[45] As to insolvency, I accept the submission that Mr Moffatt made to the effect that insolvency is not proved for the purposes of this section in circumstances where the company has a brief shortfall of current assets with which to meet its liabilities. The transition to insolvency involves an alteration to the financial ability of the company to meet its debts generally and involves something more than an ephemeral shortage of cash which results in only one or a small number of debts not being paid on time.
[46] In making a decision on the state of the company at the relevant time, occurrences from an earlier stage in the company’s trading life, although somewhat distant from the date when the transactions that are under question were entered into, may yet have some probative value. They may suggest background matters that cast light on what happened at the critical time when the transactions were entered into.
[47] With this in mind I turn to an examination of the evidence to determine whether the respondent has proved the matters that it is required to.
[48] The general background of the company in 2014 suggested that while there had been possibly two occasions on which the company had gone outside its permitted credit arrangements, it was making timely payment in general. The fact that the respondent had agreed credit arrangements that might have been somewhat generous would not seem to be relevant. In that regard, my conclusion that the terms of trade actually permitted the company to pay up to 60 days after invoice for the goods that the respondent had supplied. I further accept that this was not a concession made to the company grudgingly in order to deal with liquidity constraints on its part. The evidence of the respondent is that 60 days was demanded from other retailers that it supplied and there would be no justification for having two streams of payment terms for different retailers. There was no obligation on the company to pay any earlier than the agreed credit terms required.
[49] It is necessary to consider the question of what, if any, relevance ought to be attached to the NZPIA reports. There is evidence that those reports were being sent to the respondent right up until September 2014. While Mr Borne and Mr Rennie played down the significance of these reports, they would have assisted in making an assessment of the financial state of the company, had the respondent’s responsible executives paid attention to them.
[50] Mr Rennie, who was the relevant company officer at the time that the transactions were entered into, had not seen the NZPIA reports as he made clear when he was asked questions, particularly about the months of July and August
2014. He accepted that if he had seen them, he would have noted the increase in total indebtedness from $583,000 for July to $717,000 for August as being a matter that required to be investigated. It was also drawn to his attention that the NZPIA report showed an increase in three months and over indebtedness from $45,000 to
$63,000 between July and August 2014. His attention was also drawn to the fact that by August 2014, there were two NZPIA members who were operating on a stop credit basis and two on a cash only basis. The same report showed that by September 2014 the three months and over had gone up to $149,000 and the total indebtedness up to $745,000.
[51] I accept that in at least one case there was an error in the information that the respondent included in the return that it sent in for inclusion in the reports of NZPIA. That fact only seems to have been recently discovered. I also accept that the respondent has established that the NZPIA reports for August 2014 overstated the total indebtedness (shown in the NZPIA report as $307,000) by approximately
$147,000. It also accepts that the same NZPIA report overstated the three months and over figures that were owed. If however the evidence of Mr Rennie about the extent of the mistake in the NZPIA report is accepted in its entirety, there was still
$53,000 approximately at three months and over owing on the face of the NZPIA
report for August 2014.
[52] The statement from the respondent for the month of September 2014 shows that there was $147,000 owing and this amount was all within the arranged limits.
[53] It is clear that the business relationship of Mr Borne and Mr Coutts was an affable one. Both companies had been in business for a long time. It may be that the respondent had become lulled into being less watchful than it ought to have been about the ability of the company to meet its debts. No doubt the concession that is made by applicants that the respondent acted in good faith reflects these considerations.
[54] But the foregoing matters do not absolve the respondent from the need to repay any insolvent transaction that it entered into. The standard which the Companies Act imposes is an objective one. It obliges the court, essentially, to enquire whether a reasonable person in the position of the respondent would have had reasonable grounds to suspect that the company was insolvent. The subjective view that Mr Borne put forward about the solvency of the company was not relevant. The court has to apply an objective standard
[55] It was not relevant that Mr Borne or any other responsible employee of the respondent took the view that the departures from the credit terms that occurred were no worse or different from those that occurred with quite a number of other entities that the respondent traded with.
[56] The next issue concerns the increase in indebtedness that occurred throughout
2014. That factor on its own did not necessarily provide grounds to the respondent to reasonably suspect insolvency or impending insolvency.
[57] It is possible to imagine cases where an increase in indebtedness is due to increases in turnover so that the amount owed by the purchasing company increases in step with the increasing turnover. However, there was no reason why the respondent should have regarded such an explanation as being the probable reason for the company’s increase in indebtedness. Certainly, neither Mr Borne nor Mr Rennie gave evidence that they thought that was a plausible reason.
[58] There was no expectation (as is sometimes encountered in these cases) that a change of circumstances in the company’s affairs was anticipated so that, for example, a fresh investor would come into the company and bring additional capital; a property was to be sold to consolidate the company’s deposition; or that a line of credit not previously available was to be set up.
[59] It seems likely that the increase in the indebtedness level coupled with a trend of increasing time to payment ought to have alerted the respondent to the possibility that an explanation for these trends might have been diminishing liquidity of the company. I should explain that the reports from the NZPIA form the basis for my conclusion that the indebtedness was in fact increasing. That would not be clear from the evidence of the company’s indebtedness to the respondent alone during the relevant period (i.e. based on the respondent’s own accounts showing the position of the company). However I accept in a general way that there was an increase in indebtedness throughout 2014.
[60] The respondent places reliance on the fact that Mr Coutts never told the respondent that the company was having difficulty paying its debts. That is not a very strong point, if indeed a point of any weight at all. A retailer who is vitally dependent upon continuing supplies of products to sell is hardly likely to disclose solvency difficulties which could easily lead to a complete close off of supply.
[61] Another point that is significant in my view is the general background to trading during 2014. To be fair to the respondent, the deterioration in the accounts which took place during 2014 could have been viewed as being consistent with the usual pattern of slower trade during the winter months. On the other hand, one would have thought that a prudent person looking at matters from the perspective of the respondent could not have overlooked that the respondent itself was finding business conditions more difficult as time went by. This has been explained in evidence given on behalf of the respondent as being due to causes such as the increase in the parallel importation of photographic equipment from Nikon and the unwillingness of that company to make any concession on the margins that the respondent was able to earn on reselling its products. Also having a negative impact was the ability of those with smartphones to take photographs which reduced the demand for cameras. One would have thought that these were matters that the respondent would reasonably take into account as being a possible explanation for the apparent difficulty that the company was having in meeting its obligations to the respondent. The negative factors, one would have thought, would have impacted retailers as well as wholesalers such as the respondent.
[62] As I have mentioned, the applicants stressed the fact that there were rounded or lump-sum payments made to the respondent. It is correct that such payments in general indicate that the company was paying less than the amount that was currently due. However, it all depends upon the circumstances of the company viewed against the background of the trading history between the parties. The respondent referred me to the case of Carter Holt Harvey v Fatupaito where Lang AJ opined that there
was nothing particularly unusual about lump-sum payments being made.12 That
comment was made in the context of the legislation as it then was where unavoidable payment could be saved if the recipient could establish that it had been received in the usual course of business.13
[63] However, a reasonable creditor confronted with an offer to make a lump sum payment of less than the amount that was actually owed would, in my opinion, be
alerted to the possibility that the company was or would become insolvent. After all
12 Carter Holt Harvey v Fatupaito (2009) 9 NZCLC 263,005 at [34].
13 Companies Act (as at 27 June 2002), s 292(2).
in the present statutory context, insolvency means “unable to pay its due debts”. The discussions that Mr Borne had with Mr Coutts at their monthly meeting when Mr Borne would give an indication of how much the respondent was agreeable to accept on account of the debt would never have occurred if the company had been able to pay its due debts. It is most unlikely that Mr Borne would have been prepared to accept a lesser amount in any other circumstances. Even the respondent does not suggest that the acceptance of lump sums of less than the amount due was just a matter of the convenience or for some other factor such as to reduce the interest bill that it would have to pay on borrowed money unless the respondent made a concession sought. This is apparent from the evidence of Mr Coutts who said at the meetings that he held with Mr Borne he (Mr Coutts) would write out a cheque “for the sum that Camera and Camera could afford to pay”. Not only is inability to pay the only logical explanation for the arrangement that the parties adopted, but a reasonable person would have seen that that was the case.
[64] That conclusion is reinforced by the fact that the arrangement that Mr Coutts deposes to was not just an isolated event. One could understand that in some circumstances, a company might be temporarily unable to pay its account for the month, for example because it had not been paid itself by one of its own creditors. But the tenor of the affidavit that Mr Coutts has given conveys that this arrangement prevailed from the beginning of 2014 until August of that year. The context in which these payments were made is not unimportant either. Mr Coutts also says that:
During the month there would be a phone call to meet, to generally discuss how sales were going.
[65] Sales were not going well according to Mr Coutts and he recorded that:
… by winter 2014 it was more difficult to successfully trade due to sales being at lower levels than previous years. As a result the company’s creditor position gradually worsened[.]
[66] Given that the meetings were partly for the purpose of discussing how much the company could afford to pay, it is not fanciful to suppose that these difficulties that Mr Coutts has described about the trading climate at that time would have been discussed and an accurate description given of how the company was faring. After
all, it is unlikely that Mr Borne would have agreed to a payment on account if
Mr Coutts was describing trading conditions in rosy terms.
[67] The applicants also put forward evidence of the state of the accounts of the company and I have made brief reference to that already at [8] above. While that evidence is legitimately available to demonstrate insolvency on the part of the company, it does not assist on the question of the reasonableness of the respondent’s opinions or beliefs on that subject. That is because there is no evidence that the financial statements of the company were ever provided to the respondent and, if they were, no evidence that that happened in the period when the transactions took place.
[68] I also accept the point that Mr Moffatt made that at no time did the respondent threaten or take enforcement action for the debt.
[69] Next, there is the fact that the payment arrangement itself, and the impugned payments, permitted payment to occur outside the agreed credit terms. That is so because the actual debts included in the statement for September 2014 were paid late. The indebtedness shown in the statement for September 2014, the due date for payments and the date of actual payment can be set out as follows:14
Date due Date paid under arrangement
$30,000 September $57,000
October
$50,000
$59,000
November
$45,000
December
-
January 2015
$45,000
[70] However, having regard to the onus on the respondent to establish that it held a reasonable view and that there were no reasonable grounds to suppose insolvency, the respondent has a difficult task in satisfying the court that it can bring itself within
the provisions of s 296(3).
14 Rounded figures are used.
Conclusion
[71] The applicants have established that the company was unable to pay its debts at the time when the payments were made. In that circumstance, the onus moves on to the respondent to establish that the court ought not to set aside the transaction and order recovery of the property because the case comes within the provisions of s 296(3). While the respondent is able to establish that it acted in good faith15 and
gave value for the payment,16 it is unable to satisfy the requirements of s 296(3)(b).
[72] Given the recent trading history of the company, the increasingly difficult trading conditions in 2014 and the fact that at the end of the trading relationship the company was not able to meet the credit terms, the respondent is not able to show that a reasonable person in its position would not have suspected that the company was or was about to become insolvent in the sense of not being able to pay its debts as they became due.
[73] There will therefore be orders in terms of [1] of the originating application dated 11 December 2015.
Costs
[74] The parties through counsel agreed that costs should follow the event and should be on a 2B basis. There will therefore be an order that the respondent is to
pay costs on a 2B basis together with disbursements to be fixed by the Registrar.
J.P. Doogue
Associate Judge
15 Companies Act, s 296(3)(a).
16 Companies Act, s 296(3)(b).
0