Levin v Autoterminal New Zealand Limited

[2019] NZHC 2412

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2019-419-0047

[2019] NZHC 2412

BETWEEN

HENRY DAVID LEVIN and VIVIAN JUDITH MADSEN-RIES

Plaintiffs

AND

AUTOTERMINAL NEW ZEALAND LIMITED

Defendant

Hearing:	22 August 2019
Appearances:	P Shackleton and L M Deane for the Plaintiffs M D Branch and K Shaw for the Defendant
Judgment:	25 September 2019

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 25 September 2019 at 11.30 am, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Meredith Connell, Auckland Harkness Henry, Hamilton

LEVIN v AUTOTERMINAL NEW ZEALAND LTD [2019] NZHC 2412 [25 September 2019]

[1]    The plaintiffs are the liquidators of a company called 3224647 Ltd (In Liquidation), formerly known as Nigel Thompson Motor Company Ltd – "the company". The plaintiffs, who I will refer to as "the liquidators", were appointed liquidators of the company on 23 March 2017.

[2]    The company operated as a motor vehicle dealer. It commenced trading in January 2011 and ceased trading on 30 November 2016.

[3]    The defendant (Autoterminal) operated at relevant times as a motor vehicle importer and supplier. It sold motor vehicles to the company.

[4]    In February 2019 the liquidators filed a statement of claim in which they allege that certain payments made by the company to Autoterminal are voidable transactions under s 292 of the Companies Act 1993 (the Act). The liquidators also plead a second cause of action under s 348 of the Property Law Act 2007 (the PLA), contending that the payments made by the company to Autoterminal were made with intent to prejudice the company's other creditors. The liquidators seek orders under s 294(5) of the Act, setting aside the relevant transactions and ordering Autoterminal to pay

$2,903,045.36 to the liquidators. Under the PLA, the liquidators ask for an order that Autoterminal pay compensation in that amount to the company. Interest and costs are sought on both causes of action.

[5]    With their statement of claim, the liquidators filed an interlocutory application for directions (the application). In it, they seek a direction that the proceeding may be commenced by way of statement of claim under Part 18 of the High Court Rules 2016.

[6]    The application is opposed by Autoterminal. Autoterminal contends that it is entitled to have the claims made by the liquidators under s 292 of the Act heard under the originating application procedure set out in Part 19 of the High Court Rules, and that, because the cause of action under the PLA is substantially similar to the claim under the Act, the cause of action under the PLA should be heard with the claims under the Act and dealt with under Part 19.

[7]I now give judgment on the application.

The liquidators' statement of claim

[8]    The liquidators say there were no fewer than five separate supply agreements under which Autoterminal sold vehicles to the company. First, the company opened an account via Autoterminal's website. In opening the account, the company automatically accepted Autoterminal's website terms of trade, which included a provision that no title would be transferred to the company until Autoterminal received all necessary payments and documents. The website terms gave Autoterminal a security interest in all vehicles previously sold by it to the company, and all vehicles it would supply to the company in the future.

[9]    Next, the parties entered into a separate agreement (the Consignment Agreement). It included a retention of title pending payment provision, and provided for a security interest under the Personal Property Securities Act 1999 (the PPSA) in all goods previously supplied by Autoterminal to the company.

[10]   Between September 2012 and August 2013 vehicles were supplied under a third agreement, that included the following terms:

(i)the company had 90 days to pay (unless the vehicles were sold earlier);

(ii)a security interest was created in the vehicles supplied;

(iii)a security interest was taken in all vehicles previously supplied by Autoterminal to the company.

[11]   Between April 2014 and March 2015, the company and Autoterminal operated under a fourth agreement, substantially on the same terms as the third agreement but with an increased credit limit.

[12]   In January 2016 the parties entered into a settlement agreement, and a new supply agreement that was intended to replace the first and third agreements but not the Consignment Agreement.

[13]   Although Autoterminal supplied vehicles to the company from at least September 2012, it did not  register  a  financing  statement  under  the  PPSA until 15 December 2015. The financing statement recorded the collateral as:

Inventory being all motor vehicles supplied by [Autoterminal] and proceeds.

[14]   By September 2014, the company had a substantial indebtedness to the Inland Revenue Department. A settlement was reached between the company and Inland Revenue, but the company failed to adhere to the settlement. The Inland Revenue Department issued a statutory demand. Further agreements were entered into between the company and the Commissioner, but the company also failed to adhere to these agreements.  Further  statutory  demands   were   issued   on   8 March   2016   and 23 November 2016. Eventually, on 19 January 2017 the Commissioner filed an application to put the company into liquidation. The company was put into liquidation on 23 March 2017.

[15]   The liquidators seek to set aside payments by the company to Autoterminal made in the period between 19 January 2015 and the date of liquidation, totalling

$2,903,045.36. 19 January 2015 was the start of the two year "specified period" before the commencement of the liquidation of the company, as prescribed by s 292 of the Act.

[16]   Between 19 January 2015 and the date the financing statement was registered on 15 December 2015, the company made payments to Autoterminal totalling

$452,278.62. Between 16 December 2015 and the liquidation date it made further payments to Autoterminal totalling $2,028,766.74. All of those payments were made from the company's bank accounts.

[17]   The balance of the total $2,903,045.36 challenged by the liquidators, $422,000, was paid by the company to Autoterminal as a single payment on 4 March 2016. The liquidators say that this payment was made in settlement of a dispute between the company and Autoterminal. It was not made from the company's normal cash flow, but from a loan of $542,419.26 obtained by the company (inter alia) so that it could complete the settlement. The payment was recorded by Autoterminal as a payment to "clear debt owed at that time".

[18]   Total unsecured creditors' claims to date exceed $680,000, and the liquidators have recovered only approximately $3,200 including GST. They consider that there are no other assets apart from the present claims against Autoterminal.

[19]   The liquidators contend that, from at least 31 July 2013, the company was insolvent. They say that the challenged transactions were all entered into during a period when the company was unable to pay its due debts, and the payments enabled Autoterminal to receive more towards satisfaction of the debts owed to it by the company than Autoterminal would have received, or would have been likely to receive, in the company's liquidation.

[20]   On 2 July 2018 the liquidators issued a notice under s 294(1) of the Act to set aside the transactions as voidable. On 25 July 2018 Autoterminal served a notice of objection under s 294(3) of the Act.

[21]   In their second cause of action, under the PLA, the liquidators allege that the challenged transactions were dispositions at a time that the company was insolvent, made with the intent to prejudice creditors of the company.

[22]   The liquidators plead that the dispositions have in fact prejudiced other creditors of the company.

Relevant provisions of the Act

1. Section 292 of the Act materially provides:

292     Insolvent transaction voidable

(1)A transaction by a company is voidable by the liquidator if it—

(a)is an insolvent transaction; and

(b)is entered into within the 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.

…

(4A) A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.

(4B)     Where—

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

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

then—

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

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

(5)For the purposes of subsections (1) and (4B), specified period

means—

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

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

(c)if—

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

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

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

(6)For the purposes of subsection (4A), restricted period means—

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

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

(c)if—

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

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

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

[24]   Section 294 of the Act sets out a procedure under which a liquidator who believes that a transaction is voidable under s 292 may file and serve a notice on the other party to the transaction, specifying the transaction the liquidator wishes to have set aside. The transaction will be automatically set aside as against the other party if the other party does not send the liquidator a written notice of objection, stating the reasons for objecting, within 20 working days. Under s 294(5), a transaction that is not automatically set aside under that procedure may still be set aside by the Court on the application of the liquidator.

[25]   Under s 295 of the Act, the Court may make a number of orders on a liquidator's application under s 294(5). One of them is:

(a)an order that a person pay to the company an amount equal to some  or all of the money that the company has paid under the transaction.

[26]   A person receiving property under a transaction that would otherwise be voidable under s 292, may have a defence to a claim under s 294(5) if he or she acted in good faith and had no grounds for suspecting that the company was insolvent when the property was transferred. Section 296(3) of the Act provides:

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.

…

Relevant provisions of the PLA

[27]Section 348 of the PLA materially provides:

348     Court may set aside certain dispositions of property

(1)A court may make an order under this section—

…

(b) if satisfied that the applicant for the order has been prejudiced by a disposition of property to which this subpart applies.

(2)The order must do one, but not both, of the following:

…

(b)require a person who acquired or received property through   the disposition to pay, in respect of that property, reasonable compensation to the person (for any applicable purpose) specified in section 350.

…

(5)The order must not have effect so as to increase the value of a security held by a creditor over the debtor’s property.

(6)Subsection (5) overrides subsection (2) …

(7)This section is subject to section 349.

[28]Section 346 of the PLA provides:

346     Dispositions to which this subpart applies

(1)This subpart applies only to  dispositions  of  property  made  after 31 December 2007—

(a)by a debtor to whom subsection (2) applies; and

(b)with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.

(2)This subsection applies only to a debtor who—

(a)was insolvent at the time, or became insolvent as a result, of making the disposition; or

(b)was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or

(c)intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.

[29]Section 345 of the PLA defines certain expressions that are used in ss 346 and

348. On the questions of when a disposition is made with intent to prejudice a creditor, and when a disposition has in fact prejudiced a creditor, the section provides:

345     Interpretation

(1)For the purposes of this subpart,—

(a)a disposition of property prejudices a creditor if it hinders, delays, or defeats the creditor in the exercise of any right of recourse of the creditor in respect of the property; and

(b)a disposition of property is not made with intent to prejudice a creditor if it is made with the intention only of preferring one creditor over another; and

…

[30]   Section 349 of the PLA contains certain protections for a person who receives property under a disposition that could otherwise have been subject to an order under s 348. Section 349 provides:

349     Protection of persons receiving property under disposition

(1)A court must not make an order under section 348 against a person who acquired property in respect of which a court could otherwise make the order and who proves that—

(a)the person acquired the property for valuable consideration and in good faith without knowledge of the fact that it had been the subject of a disposition to which this subpart applies; or

(b)the person acquired the property through a person who acquired it in the circumstances specified in paragraph (a).

(2)A court may decline to make an order under section 348, or may make an order under section 348 with limited effect or subject to any conditions it thinks fit, against a person who received property in respect of which a court could otherwise make the order and who proves that—

(a)the person received the property in good faith and without knowledge of the fact that it had been the subject of a disposition to which this subpart applies; and

(b)the person’s circumstances have so changed since the receipt of the property that it is unjust to order that the property be restored, or reasonable compensation be paid, in either case in part or in full.

Counsels' submissions

The liquidators

[31]   Mr Shackleton accepted that, if the liquidators' voidable transactions claim under the Act were its only claim, it would have to be dealt with under Part 19 of the High Court Rules.1 And if it were the only claim made, the claim under the PLA would have to be brought as an ordinary action. However, the voidable transactions claim and the PLA claim relate to the same transactions, and they are so closely related that they should be heard and determined together, in the same proceeding. Rule 18.1(e)

1      Rule 19.2 provides that certain kinds of proceedings must be commenced by originating application under Part 19. One of them is an application under s 294(5) of the Act to set aside a voidable transaction or transactions.

provides the necessary jurisdiction for the Court to direct that the two claims be heard together under Part 18.2

[32]   Mr Shackleton referred in support to the judgment of MacKenzie J in Fisk v X,3 submitting that an order that both causes of action be heard under the Part 19 procedure will best serve the interests of justice, and best achieve the objective of the High Court Rules to secure the just, speedy and inexpensive determination of the claims.4 Mr Shackleton also relied on the judgment of Venning J in Public Trust v Kain.5

[33]   The liquidators say there is no doubt that, going forward, the proceeding will be contentious. There is little common ground, and Autoterminal has challenged all parts of the liquidators' claims, including as to the solvency of the company at material times. It seems inevitable that evidence filed by the parties will be challenged by extensive cross examination. Expert evidence may also be required.

[34]   Autoterminal has also alleged that the company and its director committed fraud. In those circumstances, the liquidators cannot reasonably rely on the company's own records and information in the usual way. Discovery will be crucial for the liquidators to consider any defences advanced by Autoterminal, and interlocutory applications may also be required after discovery. The necessary discovery, and any necessary interlocutory applications, can readily be accommodated under Part 18, but the Court is generally more cautious in permitting discovery and interlocutory applications in Part 19 proceedings.6

2      Rule 18.1(e) provides that Part 18 is to apply to various types of proceedings, including:

(e)        any other proceedings to which the court directs this Part is to apply.

3      Fisk v X [2014] NZHC 2797 at [14].

4      High Court Rules 2016, r 1.2.

5      Public Trust v Kain [2018] NZHC 1547 at [46] – [47].

6      Referring to Manchester Securities Ltd v Body Corporate 172108 [2015] NZCA at [15], where the Court of Appeal said:

[15] We accept that the Court generally adopts a conservative approach towards discovery in originating applications brought under Pt 19 of the High Court Rules. This is because the originating procedure was designed … to provide a relatively speedy and inexpensive mechanism for a number of applications which need to be made to the Court under specific statutory provisions …

See also the judgment of Associate Judge Osborne in Commissioner of Inland Revenue v Elementary Solutions Ltd [2017] NZHC 2411 at [37], where the Associate Judge considered that discovery in a Part 19 proceeding should be subject to the requirements of proportionality and

[35]   Mr Shackleton categorised the case as involving "a reasonable level of complexity", going beyond the level encountered in an ordinary insolvent transaction claim.

[36]   Mr Shackleton submitted that the Court will be required to consider and determine novel issues as to the application of the voidable preference rules to the position of secured creditors in the position of Autoterminal. The limited existing case law in that area is not conclusive and determinative, and it has recently been considered in the Corporate Insolvency Law Review (the Review).7 The Review confirms the potential novelty of the issues that will have to be determined by the Court in this proceeding.

[37]   All of those considerations make it important that the parties' respective positions be properly pleaded by statement of claim and statement of defence. That procedure is accommodated by Part 18 of the rules, but not by Part 19.

Autoterminal

[38]If the liquidators' application were to succeed, the effect would be to:

(a)make the proceeding complicated and expensive to the extent that settlement would become attractive to the defendant purely as a means to avoid costs; and/or

(b)allow the liquidators to obtain discovery as of right, as opposed to being required to justify discovery to the Court as part of a voidable transaction proceeding under the Part 19 procedure. Autoterminal should not be placed in that position, given that voidable transaction cases are required by the rules to be dealt with under Part 19 and the Part 19 procedure is more than adequate to meet the needs of this case.

practicality identified in r 8.2, and should accord with the r 1.2 objective of "just, speedy and inexpensive determination". The approach to discovery under Part 19 should be conservative.

7      Report No. 2 of the Insolvency Working Group, on voidable transactions, Ponzi schemes and other corporate insolvency matters (published by the Ministry of Business, Innovation and Employment, May 2017).

[39]   Mr Branch and Ms Shaw broke the impugned transactions down into the following three categories, (a), (b) and (c):

Date range	Number of transactions	Total value
(a)	28/01/2015 – 14/12/2015	52	$452,278.62
(b)	17/12/2015 – 18/07/2016	292	$2,197,276.74
(c)	19/07/2016 – 29/11/2016	37	$252,790.00

[40]   Category (a) transactions are the transactions that were both within the "specified period" defined in s 292 of the Act and before Autoterminal registered its financing statement. Category (b) transactions are transactions entered into after the financing statement was registered and before the "restricted period" defined in s 292, and category (c) are the transactions entered into within the "restricted period".

[41]   Mr Branch and Ms Shaw submitted that the category (a) transactions are the only ones where Autoterminal has any risk. Although it had security during this period, it did not have a Purchase Money Security Interest (PMSI) registered, and preferential creditors have priority over creditors holding security interests in inventory and the proceeds of sale of inventory, including PMSI's, where the secured creditor has not perfected its security interest.8 Even then, Autoterminal's risk on category (a) transactions will be limited to the amount of the preferential claims in the liquidation ($168,413.71), and it will first be necessary for the liquidators to show that the company was insolvent. Even then Autoterminal will have the opportunity to show (for the purposes of the defence provided by s 296(3) of the Act) that it acted in good faith and did not suspect insolvency at the relevant times.

[42]   The liquidators have no prospect of showing that the 292 category (b) transactions resulted in Autoterminal receiving more than it would have received, or would have been likely to have received, in the liquidation. From 15 December 2015, Autoterminal had perfected its security interest, and all vehicles supplied after that date were provided pursuant to its perfected PMSI. For those reasons, Autoterminal's total exposure to the liquidators cannot exceed the $168,413.71 owed by the company to the preferential creditors.9

8      Companies Act 1993, s 312 and Schedule 7, cl 2.

9      Even an unperfected security interest has priority over unsecured creditors.

[43]   Mr Branch and Ms Shaw submitted that once a valid PMSI is established, any money received for the discharge of the security falls outside of the liquidation.10 A secured party (whether or not by PMSI) does not have to conduct a tracing exercise in relation to each item of security released.

[44]   For those reasons, the voidable transaction claims are far less complicated than the liquidators have suggested they are. There is nothing novel in the liquidators' application, and the voidable transaction claim  is  no more than  an  "ordinary run"  s 294(5) application. It is the discovery issue that is driving the liquidators' stance, and their arguments about discovery are also overstated.

[45]   The issue to be determined on this application, is therefore whether the liquidators can effectively usurp the mandated process for voidable transactions by merely electing to run a parallel claim under the PLA. The answer to that question is no.

[46]   First, the fraud alleged against the company by Autoterminal related solely to the alleged forging of documents that allowed vehicles to be registered. There was no suggestion of fraud in relation to the finances of the company.

[47]   Secondly, Autoterminal has responded to notices issues by the liquidators under s 261 of the Act and s 177 of the PPSA by providing the documentation it was required to provide. If the liquidators did not consider there was compliance with those sections, they had remedies under the relevant statutes. Autoterminal also provided a detailed response to the liquidators' notice issued under s 294 of the Act.

[48]   Thirdly, a direction that the proceeding proceed under Part 19 would not in any event preclude any discovery that is really necessary. Although the Courts may apply a conservative approach to discovery under Part 19, if the liquidators establish that they have good reasons for obtaining such discovery they may still obtain orders in the context of a Part 19 application. But they should not be permitted to bypass the Part 19 requirements by the expedient of issuing a parallel PLA claim which effectively adds nothing to the voidable transactions claim. The elements of the PLA

10     Companies Act 1993, s 312. The assets of the company do not include secured assets.

claim are either the same as the voidable transactions claim, or they are harder to establish. There is no realistic prospect of the liquidators establishing fraud, or prejudice to other creditors, given Autoterminal's position as a secured creditor, and the liquidators are in effect wanting to run a balance of probabilities claim (the voidable transactions claim) alongside a "beyond reasonable doubt claim" (the PLA claim). If the first claim fails, then the second, with its more exacting standard of proof, must also fail. If the first claim succeeds, the second will be redundant. Either way, the claim under the PLA was unnecessary, and its existence should not be used to deprive Autoterminal of its right to have the voidable transactions claim heard under the cheaper, more expedient, originating application procedure.

Discussion and conclusions

Parts 18 and 19 of the High Court Rules

[49]   Both parts of the rules are concerned with the particular form in which a civil proceeding should be commenced. Like an ordinary civil proceeding, a proceeding under Part 18 is commenced by statement of claim. Unlike most civil proceedings, however, the statement of claim must be accompanied by an application for directions as to service and representation.11 Rule 18.12 requires that the defendant file a statement of defence. Unless a Judge otherwise directs, evidence in a Part 18 proceeding must be given by means of an agreed statement of facts, or by affidavit.12

[50]   Rule 18.1 sets out a list of types of proceedings that must be filed under Part 18. The list includes proceedings in which the relief claimed is wholly within the equitable jurisdiction of the Court, and cases where the proceeding is concerned with a person's rights or obligations under a mortgage or charge over land.13 There are a number of other types of proceedings expressly referred to  in  the list,  but applications  under  s 294(5) of the Act or for orders under s 348 of the PLA are not among them.

11     High Court Rules 2016, r 18.4.

12     High Court Rules 2016, r 18.15. There are certain exceptions which are not relevant for present purposes.

13     High Court Rules 2016, r 18.1(a) and (d).

[51]   However, the Court does have a broad discretion to direct that other types of proceedings may be commenced under Part 18. Rule 18.1(e) adds to the list of proceedings that may be commenced under Part 18:

Proceedings directed by court

(e) any other proceeding to which the court  directs that this  Part  is  to apply.

[52]   Part 19 of the rules provides for a more simple procedure, which has been likened to the procedure on an interlocutory application. Under Part 19, the proceeding is commenced by an originating application supported by an affidavit or affidavits.14 No statement of claim or statement of defence is required, although the Court may direct, whether on an interlocutory application or on the Judge's own initiative, that a statement of claim or statement of defence be filed.15

[53]   Rule 19.1 lists a number of statutory provisions under which applications to the Court must be made using the Part 19 procedure. One of them is an application for an order under ss 294(5) of the Act. Applications for orders under s 348 of the PLA are not included in the list, and nor are they expressly included in any other rule within Part 19. However, r 19.5 provides:

19.5 Court may permit proceeding to be commenced by originating application

(1)The court may, in the interests of justice, permit any proceeding not mentioned in rules 19.2 to 19.4 to be commenced by originating application.

(2)The court’s permission may be sought without notice.

(3)The proposed originating application must be filed with an application for permission under this rule.

[54]   On the relationship between Parts 18 and 19, both counsel referred to the judgments of McKenzie J in Fisk v X 16 and Venning J in Public Trust v Kain.17

14     High Court Rules 2016, rr 19.7 and 19.10(1)(b).

15     High Court Rules 2016, r 19.5A.

16     Fisk v X, above n 3.

17     Public Trust v Kain, above n 5.

[55]   In Fisk v X, the liquidators of Ross Asset Management Ltd (Ross) sought orders under s 348 of the PLA setting aside each of 11 payments Ross had made to an investor before the liquidation, at a time when Ross was said to be insolvent. The application in respect of the 11 payments was made under s 348 of the PLA. The liquidators also contended that seven of the payments were voidable transactions under s 292 of the Act, or were transactions at an under-value, recoverable under s 297 of the Act. The liquidators sought leave to proceed on all three causes of action using the Part 19 originating application procedure.

[56]   McKenzie J noted that if each of the three causes of action had been brought as a separate proceeding, the rules would have required three different forms of commencement. The application under the PLA would have to have been brought as an ordinary action, the application under s 294 of the Act would have had to be brought under Part 19, and the application under s 297 would have had to be brought under Part 18. However, it was clear that the three claims were closely related, and that they ought to be heard and determined together.18

[57]   McKenzie J described Part 19 as providing a procedure that is broadly speaking analogous to the interlocutory application procedure. Part 19 was initially designed as an expedient for cases where there was in reality no opposing party. While that narrow approach no longer strictly applied, Part 19 remains a procedure generally used for cases where it is not necessary to have full pleadings and interlocutory steps such as discovery for the proper determination of the issues.19

[58]   McKenzie J noted that the liquidators were entitled to bring proceedings before the Court for whatever claims they considered to be appropriate. It was not for the Court on the procedural question of how the claims should be commenced to deprive the liquidators of the ability to litigate the claims they had made. Nor should the Court direct the liquidators to bring some different proceedings. The issue was what the appropriate procedure was for the claims the liquidators had elected to bring.20

18     Fisk v X, above n 3, at [8].

19     At [17] and [18].

20 At [12].

[59]   McKenzie J considered that the most important consideration was which option would best secure the just, speedy and inexpensive determination of the proceeding.21 His Honour observed that a "just determination" would be one which addressed the claims the liquidator had brought, and took into account all defences and other matters which the respondent might properly have wished to argue on the claims.22

[60]   Some of the arguments run in Fisk were the same as counsel have run in this case. The respondent argued that the case was contentious, and would involve contested evidence. The case was also said to raise novel issues, different from those encountered in the ordinary run of s 294 applications. It was argued that pleadings would be appropriate, and discovery and access to other interlocutory steps would be necessary.

[61]   McKenzie J observed that appropriate case management directions could address those interlocutory steps under either Part 18 or Part 19. However, his Honour took the view that Part 18 was the better of the two options (an ordinary action would not be a better option than Part 18, having regard to the desirability of securing a speedy and relatively inexpensive determination). His Honour noted that Part 18 is routinely used for applications which involve significant contests on factual issues, and that it was the directed procedure for one of the causes of action in the case before him (under s 297 of the Act). McKenzie J saw no need to require that an ordinary action be brought. An order was made under r 18.1(e) that Part 18 was to apply to the proceeding in respect of all of the causes of action.

[62]   In Public Trust v Kain, Public Trust proposed to seek certain directions from the Court under s 66 of the Trustee Act 1956, on matters it might be required to take into account in the administration and distribution of certain trusts associated with the Kain family. All parties agreed that directions of the general nature sought might be appropriate, but they disagreed over the procedure by which the directions should be sought. Some family members supported the Public Trust's view that the originating

21     As required by r 1.2 of the High Court Rules 2016.

22 At [14].

application  procedure  under  Part 19 was appropriate.    Others contended that the  directions should be sought under Part 18 of the rules.

[63]   Public Trust acknowledged that the rules do provide for applications under s 66 to be brought under Part 18. Despite that, it sought leave to commence the proceeding under Part 19, submitting that the interests of justice favoured the use of the Part 19 procedure. Venning J accepted that Part 19 proceedings were generally intended to be speedier and less expensive than those commenced under Part 18, but noted that the Part 18 procedure would "still be more efficient and confined than a general proceeding".23

[64]   Counsel for Public Trust submitted that the proposed application for directions was a straightforward application under s 66 of the Trustee Act. The application was said to involve only questions of construction and interpretation of a judgment, and questions of law. There would be no material issues of fact that required detailed pleadings or discovery. If the proceeding had to be commenced under Part 18, the objective of an expeditious resolution of the application would be lost. Full pleadings, counterclaims, cross-claims, interrogatories and full discovery would inevitably be part of the proceeding if it were commenced under Part 18.

[65]   Members of the Kain family arguing for the Part 18 procedure submitted that the proposed originating application lacked sufficient particularity to properly inform the Court and the respondents about the questions on which the Public Trust sought directions.

[66]   Venning J referred to Fisk v X, noting that Part 19 is generally used where it is not necessary to have full pleadings and interlocutory steps such as discovery for proper determination of the issues.

[67]   Given the history and background to the litigation between the various Kain family groups, Venning J expressed some sympathy for Public Trust's concern about the proceeding becoming more complicated than it might need to be. However, the matter had to be approached on a principled basis.

23     Public Trust v Kain, above n 5, at [15].

[68]   First, the danger of the directions application being bogged down with numerous side-issues raised by way of counterclaim could be put on one side: his Honour had the benefit of an assurance from one of the opposing groups within the Kain family that the group would not pursue a counterclaim if the Part 18 procedure was required. Nevertheless, his Honour was unable to accept that the resolution of the directions application would be as straightforward as Public Trust had suggested. The fact that the application was likely to be contentious was a consideration favouring Part 18. Further background, or context, would be necessary, and that would be assisted by pleadings and limited discovery.

[69]   The Judge considered that Public Trust's residual concerns could be met by appropriate management of the proceeding, recognising that it was an application under Part 18 for directions, not a general proceeding. The issues would be clearly defined by Public Trust in its statement of claim.

Analysis

[70]   Particularly at this very early stage of the proceeding, with the main evidence not yet in and only a statement of claim identifying the substantive issues, I do not think it would be appropriate to effectively disregard the liquidators' cause of action under the PLA as being redundant. First, it is for the liquidators, not the Court, to select the causes of action they wish to run. As McKenzie J observed in Fisk v X, the liquidators are entitled to bring proceedings before the Court for such claims they consider to be appropriate. It is not for the Court to direct the liquidators to bring some different proceedings, 24 and it is not the role of the Court to make an assessment of the liquidators' motivation for adding the claims under the PLA. As in Fisk, the issue is the appropriate procedure for the claims which the liquidators have brought, and that includes the claims under the PLA.

[71]   I acknowledge the submission of Mr Branch and Ms Shaw that the elements required to make out a voidable transaction claim under s 292 may largely be regarded as a subset of the bundle of requirements necessary to make out a case under s 348 of the PLA. But I think the focus of the PLA application is different in one respect, and

24     Fisk v X, above n 3, at [12].

that is that the relevant part of the PLA is concerned not with whether a particular creditor has improved its position in comparison with what it would have received in the liquidation, but with whether the debtor made the relevant dispositions for the purpose of hindering, delaying, or defeating (ie "prejudicing") the claims of another creditor or creditors.25

[72]   At first blush it may seem improbable that payments made by a debtor to a creditor for goods supplied could be regarded as having been made with the intent of prejudicing other creditors, but I do not consider that possibility can or should be ruled out in the course of an early procedural application such as this. There is simply no evidence at this stage on the issue of why the company may have made particular payments to Autoterminal.

[73]   Once it is accepted that the cause of action under the PLA cannot be disregarded, and it is accepted (as both parties accept) that the claims under the Act and the PLA should be heard together, Autoterminal's prima facie entitlement to have the claims under the Act heard under Part 19 must have lesser force. As in Fisk v X, the court has a discretion to direct that the proceeding should be dealt with under  Part 18 if that would be more likely to secure its just, speedy and inexpensive determination.

[74]   Mr Branch and Ms Shaw submitted that the whole case is far more simple than the liquidators have portrayed it. In their submission, the only significant issue is whether payments made in the first period, before registration of Autoterminal's financing statement, might be voidable. They submitted that when the focus is put on that first period, it will be seen that the only issues are whether the company was insolvent during the period (a matter on which the liquidators should have full access to the required information) and (if so) whether Autoterminal has a defence under     s 296(3) of the Act. The disputes relating to the first period will be neither complex nor substantial, and they are well able to be accommodated within the Part 19 procedure.

25     Property Law Act 2007, s 345(1)(a) and (b).

[75]   Not so fast, says Mr Shackleton. The entire period up to the date of liquidation is in issue. That is essentially because Autoterminal did not have a security over all of the company's assets — its security was only over particular vehicles and the proceeds of the sales of those vehicles — and Autoterminal's position is to be compared for the purposes of s 292(2)(b) of the Act with what it would receive in the actual liquidation of the company, not with a hypothetical liquidation occurring on the date a challenged transaction was made.26 If the company used the proceeds of sales of vehicles supplied by Autoterminal for purposes other than repaying Autoterminal, then to that extent Autoterminal's security was gone, and it became an unsecured creditor. Repayments received by Autoterminal from sources other than the proceeds of the particular vehicles sold will be voidable.

[76]   Mr Branch and Ms Shaw rejected any suggestion that the company might have been selling vehicles Autoterminal had supplied to it for less than cost, with the result that Autoterminal would only be partly secured for the amounts owed to it. If that had been the case, payments made by the company to Autoterminal would, on the authority of Associate Judge Bell's judgment in Grant & Khov v BB2 Holdings Ltd,27 be treated as having been applied first to the unsecured part of the total debt owing to Autoterminal. To that extent the payments would be liable to be set aside if the other requirements of s 292 of the Act were met. Mr Branch acknowledged in his oral submissions that Grant & Khov was correctly decided, but he rejected the proposition that it could have any application on the facts of this case.

[77]   Nor, in the submission of Mr Branch and Ms Shaw, would it make commercial sense if a "tracing exercise" were required, to show that repayments received by a creditor holding security over inventory and the proceeds of sale of that inventory had been paid from the proceeds of sale of that inventory. If that were the correct position it would have to apply to all kinds of products a manufacturer or wholesaler might supply to a retailer, and would catch (for example) a manufacturer supplying large numbers of relatively cheap items such as nails to a large retailer like Bunnings. Determining whether repayments had been made from the proceeds of sale of the nails would in most cases be impossible. The liquidators' proposition would also catch any

26     Levin v Marlet Square Trust [2007] NZCA 135, [2007] 3 NZLR 591.

27     Grant & Khov v BB2 Holdings Ltd [2014] NZHC 2504.

situation where products were sold to a retailer on terms requiring repayment within a period that was shorter than the period of credit the retailer gave to its own customers. In that situation, any repayments made by the retailer to the inventory supplier could not have been made from the proceeds of sale. Parliament could not have intended the holder of a PMSI to lose its security in such cases.

[78]   In response, Mr Shackleton accepted that it will be for the liquidators to prove all elements of the alleged voidable transactions. However, he submitted that it is clearly arguable that a "tracing exercise" will be required. The issue in this case was not that the company was selling vehicles purchased from Autoterminal at an undervalue: it is that it was selling vehicles and not paying Autoterminal from the proceeds of sale. To the extent the cars were gone, and the proceeds of sale have been spent elsewhere or intermingled with other money received by the company, Autoterminal will be unsecured for some or all of its debt.

[79]   Mr Shackleton noted that the authors of the Review suggest that the approach in Levin v Market Square Trust will be appropriate in most circumstances, but there is a concern about how the approach relates to a creditor who had a valid security at the time payment was received. As the authors of the Report put it:28

… We consider that it is unfair on the creditor that their valid security interest will have been negated simply because the assets over which the security was held were subsequently traded away.

Although the point of insolvency is the usual rule for voidable transactions, the hypothetical liquidation rule should apply in relation to valid securities. We consider that a defence should be added in relation to a creditor with a valid security interest who can demonstrate that there was no preference at the time the payment was made.

[80]   Mr Shackleton's argument was essentially that the passage just quoted from the Review supports the view that the law as it stands exposes creditors in the position of Autoterminal (with security over inventory and the proceeds of sale of that inventory) to the risk that payments received by them within the specified period will be voidable under s 292 if the payments were not made from the proceeds of sale of the relevant inventory, and the company was insolvent when they were made.

28     Report No. 2 of the Insolvency Working Group, above n 7, at [103] – [104].

[81]   That is an argument I do not need to determine on this application. It is enough to say that I accept that there is an arguable legal issue as to the effect of Grant and Khov v BB2 Holdings Ltd and the application of Levin v Market Square Trust in this case. For present purposes, the issue appears to be whether this is purely a legal question, or whether the parties should be entitled to put before the Court the full facts of the matter before the legal issue is determined. If the full facts surrounding the payments made by the company during the relevant periods are required, it seems likely that full discovery will be appropriate. That is a factor which in my view favours Part 18 over Part 19.

[82]   I accept Mr Shackleton's submission that nearly all aspects the proceeding are likely to be contentious, and I doubt very much that proceeding under Part 19 would result in significant savings of cost or time. If the proceeding were to continue under Part 19, I think it not unlikely that the Court would wish to see the issues identified by pleadings, and if a factual foundation is required for argument on the s 292(2)(b) and "tracing exercise" issues discovery may be necessary. But whether or not full discovery is required on those issues, it seems likely that it will be required on Autoterminal's defence under s 296(3) of the Act. Was the company behind with its 90 days credit in 2015, and if so did that give Autoterminal reason to suspect insolvency? Those might be discovery areas arising in every voidable transaction case where the respondent relies on the s 296(3) defence, but I think the allegations of fraud on the part of the company and its director in this case do suggest that more extensive discovery may be required here than in most voidable transaction cases.

[83]   In an affidavit dated 23 September 2016 sworn in a proceeding between Autoterminal and the company, Mr Tyler, Autoterminal's director, described the systems under which vehicles were supplied by Autoterminal to the company. The first step was that Autoterminal would deliver ordered vehicles to the company. The company would then enter into a contract to sell a vehicle to a customer, and it would request a release from Autoterminal. At that point, Autoterminal would release the necessary registration paperwork to enable the company to register the vehicle and settle the transaction with its customer. The company would pay Autoterminal within 48 hours of Autoterminal supplying the document necessary to allow the company to register the vehicle. While that system was later amended to allow the company

90 days to pay for a vehicle once the vehicle had arrived in the country, the company was still obliged to pay Autoterminal on sale of the vehicle by it (or on the expiry of the 90 day period if the vehicle had not been sold by then).

[84]   According to Mr Tyler's affidavit, the safeguard for Autoterminal was that the company should not have been able to on-sell vehicles without registering the vehicles, and to do that it had to obtain from Autoterminal a particular registration form.29 Notwithstanding that apparent safeguard, Mr Tyler said that he became aware in January 2016 that the company was fraudulently producing its own paperwork in order to get vehicles registered, without paying Autoterminal for the vehicles. Uncovering this fraud led to the settlement under which the company paid Autoterminal $422,000 in March 2016.

[85]   Mr Tyler said that he discovered further instances of fraud in August 2016. The company had somehow contrived to register and sell further vehicles without receiving the appropriate documentation from Autoterminal, and without settling with Autoterminal. Mr Tyler undertook a stocktake, and he concluded (inter alia) that at least eight vehicles had been registered without payment being made to Autoterminal. A further 13 vehicles (total value $97,200) were missing. There were said to have been other instances where the company had received payment from its customer but had not paid Autoterminal. Mr Tyler said in his affidavit: "[the company] continues to respond to my requests for information on these vehicles with information I know to be false". Later in his affidavit, he said that the only reason he could think of why the company would not want to alert Autoterminal to its sales, was to pocket the payments itself "and to pay its debts or move the funds elsewhere".

[86]   The impression from Mr Tyler's September 2016 affidavit is one of the company withholding payments due to Autoterminal over a considerable period of time, and it seems likely that issues will arise under s 296(3) as to when Autoterminal first had reason to suspect the fraudulent activity, and whether or not the fraudulent activity should have put Autoterminal on notice that the company might be insolvent. Subsidiary issues seem likely to arise over the dates on which vehicles were delivered

29     Form MR2A.

to the company, and whether or not Autoterminal should have expected that (ostensibly unsold) vehicles ought to have been sold earlier. There may be other documents or records held by Autoterminal that would be relevant to the s 296(3) defence, but it is not necessary for the purposes of this decision to identify them. It is enough to say that it seems more likely than not that the justice of the case will require discovery extending well beyond the scope of the discovery that is sometimes required in a Part 19 proceeding.

[87]   As in Public Trust v Kain, I think Autoterminal's concern that the costs and delays of the proceeding might blow out, with over-extensive discovery and interlocutory steps, if the liquidators are allowed to proceed under Part 18, should be able to be dealt with by appropriate case management. For example, if the issues are clearly defined by full pleadings, Autoterminal's legal contentions (especially on the "tracing exercise" issue) might be amenable to early determination, whether on a strike-out application or by determination before trial. Even if that does not prove to be possible, I expect counsel should be able to agree on a limited list of issues, with discovery to be tailored to those issues.

[88]   Those are questions for another day. For now, it is enough to find, as I do, that a just determination of the proceeding, under which the parties will have access to all relevant documents and information, is more likely to be secured if the proceeding continues as a Part 18 proceeding.

[89]   On the "speedy and inexpensive" components of the "just, speedy and inexpensive" requirement of the rules, I doubt that proceeding under Part 19 would be likely in the long run to be any less time-consuming or expensive than proceeding under Part 18. I think there would inevitably be an argument over the extent of the discovery that would be required, and in a case of this size I think it not unlikely that there would be a r 19.5 direction to the parties to file pleadings. A proceeding under Part 19 might end up looking not too much different from a Part 18 proceeding, with both pleadings and fairly extensive discovery.

[90]   Neither party suggested that the proceeding should continue as an ordinary civil proceeding. I agree with their apparent rejection of that possibility. As was the

case in Public Trust v Kain, I think the issues are likely to be more expeditiously determined under Part 18 of the rules.

Result

[91]   Taking the foregoing matters into account, I conclude that the most just, speedy and inexpensive determination of the proceeding is likely to be achieved if the proceeding is dealt with under Part 18. I accordingly make an order that the proceeding is to proceed under that part.

[92]   The liquidators are to file and serve their statement of claim under Part 18 (and apply for directions for any further service that might be necessary or appropriate), by 4 October 2019.

[93]   Autoterminal is to file and serve its statement of defence, by 11 November 2019.

[94]   Any reply by the liquidators to Autoterminal's statement of defence, is to be filed and served by 25 November 2019.

[95]   The registrar is to arrange a case management conference for the first practicable date after 2 December 2019.

[96]   On the issue of costs, I see no reasons why costs should not follow the result in the usual way. Costs are awarded to the liquidators on a 2B basis, with disbursements to be fixed by the registrar.

Associate Judge Smith