Levin v Rastkar
[2011] NZCA 210
•23 May 2011
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA755/2009 [2011] NZCA 210 |
| BETWEEN HENRY DAVID LEVIN AND BARRY PHILLIP JORDAN |
| AND SOMBOUN RASTKAR |
| Hearing: 17 November 2010 |
| Court: Chambers, MacKenzie and Simon France JJ |
| Counsel: T J Cooley and M L Broad for Appellants |
| Judgment: 23 May 2011 at 11 am Reissued 19 August 2011: see recall judgment of 19 August ([2011] NZCA 399) Effective date of judgment: 23 May 2011 |
JUDGMENT OF THE COURT
AThe appeal is allowed, to the extent that we make:
(i)An order under s 294(5) of the Companies Act 1993 setting aside the transaction dated 24 May 2004 by which a loan of $17,000 to Amarine Sirichak was credited to the respondent’s loan account with Western Clothing Ltd; and
(ii)An order under s 295(a) that the respondent pay to Western Clothing Ltd the sum of $17,000; and
(iii)An order under s 295(g) that the respondent is entitled to claim as a creditor in the liquidation for that amount, in addition to any other amount owing to the respondent.
BIn all other respects, the appeal is dismissed.
C No order as to costs in this Court. The costs order made in the High Court is quashed and the respondent must repay the costs of $5,920 paid to her by the appellants.
____________________________________________________________________
REASONS OF THE COURT
(Given by MacKenzie J)
Table of Contents
Para No
Background [1]
The liquidators’ claim [3]
The issues [11]
The transactions [12]
Preliminary observations [12]
The “Loan Amarine” transaction [16]
The “Loan Sisavath” transaction [23]
The “Loan Joman” transaction [31]
The “Additional Payments” transaction [37]
Unable to pay its due debts [40]
The General Security Agreement [41]
The ordinary course of business [49]
Does s 296 preclude recovery? [53]
Result [57]
Background
This is an appeal against a judgment of Associate Judge Doogue delivered on 9 November 2009[1] dismissing an application by the appellants, the liquidators of Western Clothing Limited, to set aside, under s 294 of the Companies Act 1993 (the Act), several transactions by the company alleged to be voidable under s 292 of the Act. Section 292 was amended, with effect from 1 November 2007, by s 27 of the Companies Amendment Act 2006. By s 27(5) of the Amendment Act, s 292 in its previous form applies.
[1] Levin v Rastkar HC Auckland CIV2008-404-3965, 9 November 2009.
Western Clothing Ltd (Western, or the company) carried on a clothing sewing business. Its sole director and shareholder was Mr Siamac Rastkar. His wife, the respondent, was involved with managing and running the company. The company ceased trading in June 2004, when it sold its assets to Essential Apparel Limited, a company owned and operated by the respondent’s daughter, Amarine Sirichak. The company’s main creditor is the Commissioner of Inland Revenue, who has a total claim of some $183,000. The company was put into liquidation on 12 May 2005 pursuant to an application by the Commissioner filed on 24 February 2005. The specified period under s 292(5)(b) began on 24 February 2003 and the restricted period under s 292(6) began on 24 August 2004. The liquidators’ notice was given on 20 June 2008.
The liquidators’ claim
It is desirable to set out in full the details of the allegedly voidable transactions from the liquidators’ notice. That said:
3.The value that the liquidator wishes to recover is $53,433.00 made up of the transactions referred to in Appendices A and B.
4.In giving this notice, the liquidator relies on the following grounds:
(a)Within the two year specified period as defined in s 292(5) of the Companies Act 1993 the maximum amount owed by the company to Somboun Rastkar was $60,778.00 on 30 April 2004. (Appendix A)
(b)The company’s general ledger shows that loans made by the company to Amarine Sirichak of $17,000, Kingmany Sisavath of $10,000 and Jo Mann of $11,783.45 were all transferred to Somboun Rastkar’s loan account, reducing the company’s liability to Mrs Rastkar. (Appendix B)
(c)Somboun Rastkar stated in court under oath that the payment of $17,000 on 24 May 2004 to Amarine Sirichak, the payment of $10,000 to Kingmany Sisavath and the payment of $11,783.45 to Joman (NZ) Ltd were all repayments by the company of Mrs Rastkar’s loan. (Appendix C) Together these payments total $38,783.45.
(d)Additional payments were also made to Somboun Rastkar within the two year specified period totalling $37,738.61. These additional payments are detailed in Appendix A.
(e)The balance owning to Mrs Rastkar on liquidation was $7,345, therefore, Mrs Rastkar received $53,433 (being the difference between the peak balance of $60,778 and the balance of liquidation of $7,345) in preference to other creditors. (Appendix A)
(f)The transactions were insolvent transactions in terms of s 292 of the Companies Act 1993 (“the Act”).
(g)The transactions were within the specified period as defined by s 292(5) of the Act as the period of two years before the date of commencement of the liquidation.
(h)The transactions were within the restricted period as defined by s 292(6) of the Act as the period of six months before the commencement of the liquidation. Pursuant to s 292(4A) of the Act, unless the contrary is proved, for the purposes of s 292(2) of the Act, a transaction that took place within the restricted period is presumed to have been made at a time when the company was unable to pay its debts.
(i)The transactions have enabled Samboun Rastkar to receive more towards the satisfaction of a debt than she would otherwise have received or have been likely to have received in the company’s liquidation as we have received substantial preferential creditors claims showing outstanding debt prior to 31 March 2004.
Appendix A to the notice to set aside is a schedule prepared by the liquidators from a review of the company’s general ledger and bank statements. That schedule is apparently intended to list all entries made in the respondent’s loan account with the company over the period from 1 April 2004 to 12 May 2005.
The respondent objected to the liquidators’ notice, and the liquidators applied to the High Court for an order that the transactions specified in the notice be set aside. The liquidators’ application substantially repeated the allegations in paragraphs 3 and 4 of the notice. An omission in para 4(h) of the notice, which refers to but does not specify transactions alleged to have occurred within the restricted period of six months before liquidation, was corrected in these terms:
2.8The following payments occurred within the restricted period as defined by s 292(6) of the Companies Act 1993:
a.The repayment by the company of the Respondent’s loan by direction of the payment to Joman (NZ) Limited in the sum of $11,783.45; and
b.The following payments to Ready Money:
i.The payment on 1 September 2004 in the sum of $2,900;
ii.The payment on 28 September 2004 in the sum of $200; and
iii.The payment on 1 November 2004 in the sum of $3,000.
Pursuant to s 292(4A) of the Companies Act 1993 unless the contrary is proved, the above transactions that took place within the restricted period are accordingly presumed to have been made at a time when the company was unable to pay its debts.
The essence of the liquidators’ claim is that the respondent had, by a number of transactions recorded in the general ledger, advanced money to the company. The liquidators further assert that, between 1 April 2004 and 12 May 2005 a number of payments were made by the company, mostly not to the respondent but to other persons, and that those payments were debited, in the company’s ledger, to the respondent’s loan account, so reducing the amount owed by the company to the respondent. The liquidators assert that the maximum amount owed by the company to the respondent at any time during the specified period was $60,788, which was the balance of the respondent’s loan account as at 30 April 2004. The liquidators assert that the effect of those debits to the loan account was to reduce the amount owing by the company to the respondent from $60,778 on 30 April 2004 to $7,345 at the date of liquidation. The claim is to recover the difference between those two figures, i.e. $53,433.
We consider that formulation of the claim to be unsatisfactory. Section 292 is concerned with transactions, not with accounting entries. The liquidators’ notice does not clearly identify what were the payments of money by the company which are each said to constitute a ‘transaction’ as defined in s 292(1). Consequently, it also does not clearly identify when these payments were made. Nor does it adequately address the other issues which the liquidators must satisfy under s 292.
There are also unsatisfactory aspects, from an evidential point of view, in the schedules which are replied upon by the liquidators in support of their claim. The schedule which is relied on by the liquidators is not supported by adequate evidence as to the basis on which it has been prepared. The supporting affidavit states that the schedule reviews and incorporates the transactions registered in Western’s general ledger as debits or credits to the respondent’s loan account. The copy of the general ledger produced in evidence which is said to form the basis for Appendix A is a poorly prepared photocopy. Parts of pages are omitted or illegible. This makes it impossible for us to carry out a proper cross check between Appendix A and the general ledger entries which are relied upon. The respondent’s loan account appears to be recorded as two separate accounts within the general ledger. That makes it difficult properly to reconcile Appendix A with the general ledger. In particular, the figure of $60,778, which is an important element of the liquidators’ case, does not directly appear in the general ledger.
It should not be necessary for the Court to have to undertake a check of the material relied upon at this level of detail, for the purpose of verifying its accuracy. The evidence needs to be of a standard where that exercise can be undertaken if required. Entries in a general ledger do not, without more detail and evidence, prove the existence or nature of the transactions which purport to be recorded in them. In this case, there is little evidence, apart from the incomplete copies of the general ledger and the bank statements, of the transactions which the liquidator seeks to set aside. It is not satisfactory for evidence which is crucial to the liquidators’ claim to be put before the Court in the incomplete, undigested and unexplained form which has been adopted here.
It would not be appropriate to impose upon a liquidator an unduly onerous standard of proof. Liquidators will frequently be faced with situations where insolvent companies have not maintained proper accounting records to enable a clear trace of relevant transactions. However, there are means available to a liquidator to undertake further investigations, including the ability to interview those responsible for the running of the company under oath and to require production of documents, under s 261 of the Act. It appears that those powers have been exercised here. The presentation of the case, and the evidence to support it, is unsatisfactory.
The issues
We approach the issues which it is necessary for us to address in deciding this appeal in the following way:
(a)We identify the alleged transactions on which the liquidators rely, to determine whether the liquidators have established that there was a payment by the company to or for the benefit of the respondent at a date which is within the specified period or the restricted period.
(b)We consider whether the liquidators have established that, at the relevant dates, the company was unable to pay its due debts.
(c)We consider, in respect of any transaction which meets those tests, whether the transaction enabled the respondent to receive more towards satisfaction of the debt owed to her by the company than she would have received in the liquidation. The respondent’s contention is that it did not, because she was a secured creditor in respect of that debt.
(d)For any transaction which also meets that test, we consider whether the transaction took place in the ordinary course of business.
(e)We consider whether s 296 precludes recovery by the liquidators in respect of any transaction which meets all the previous tests.
The transactions
Preliminary observations
The argument in the High Court, and in this Court, focused on four “transactions”. The first three arise from journal entries in the company’s accounts. It seems that the three alleged transactions were first debited to the respondent’s account in the general ledger of the company by three journal entries made on 31 March 2005, described by the liquidator in his affidavit in support of the liquidator’s originating application. In the company’s general ledger records, these appeared in the account ‘Loan Samboun’ by debit entries on 31 March 2005 described as:
Loan Amarine $17,000.00
Loan Sisavath $10,000.00
Loan Joman $11,783.45
The first journal entry involves the respondent’s daughter Amarine Sirichak, the second involves a friend of Ms Sirichak named Kingmany Sisavath, and the third involves Joman (NZ) Ltd, a company owned by the respondent’s husband. Each of these transactions is said by the liquidators to constitute a payment by the company for the benefit of the respondent.
The fourth “transaction” was described by counsel for the liquidators as “additional payments”. It comprises all of the debit entries to the respondent’s loan account in the relevant period, apart from the three other “transactions”, less the credit entries, and makes up the balance of the liquidators’ total claim of $53,433.
We make some preliminary general observations which apply to all of the first three transactions. The way in which these journal entries came to be made was described by Mr Russell, a retired accountant and business consultant. He had never been Western’s company accountant, but had advised the company’s accountant about a number of matters. He was asked after the liquidation to prepare accounts dated 31 March 2005. He did so on the basis of the general ledger, with the assistance of the company’s accountant, Satish Maharaj. In his brief of evidence in the District Court proceedings to which we later refer, Mr Russell said:
16.That initial general ledger was then given to me to look through. I recall that I noted a number of transactions which appeared to involve Somboun’s family or friends and did not appear to be company items, in the sense they didn’t appear to be transactions connected with the “rag trade”. Rather, they appeared to be connected with Somboun personally.
17I was aware from discussions with Somboun that she had a current account balance with Western which fluctuated as she loaned money to Western from time to time and occasionally made withdrawals against that account balance. So I recommended to Satish that he offset the personal entries in Western’s accounts against the sums due by Western to Somboun. This was because, at that stage, I knew Somboun’s current account was secured by a General Security Agreement registered in her name (“GSA”), and sums that related to that current account needed to be dealt with there so the total sum left owing to her (if any) under the GSA could be determined.
The journal entries made on the basis of Mr Russell’s recommendation cannot properly form the basis of the liquidators’ claim. These were purely internal entries in the books of the company which recategorised the way in which payments made earlier by the company were treated in the company’s accounts. None of those involved a payment, on the date of the journal entry, by the company. None of them involved a transfer of the company’s property on the date of the journal entry. There is no evidence of any transaction entered into by the company, on or about the date of the journal entries, which is intended to be recorded by the journal entries. The inquiry must be focused on the original payments made by the company, which each of those three journal entries recategorised.
The “Loan Amarine” transaction
We deal first with the item described as “Loan Amarine”. The original payment by Western in respect of that matter is recorded on Western’s bank statement for 24 May 2004. On that date, a telephone bill payment from Western to Amarine Sirichak of $17,000 is recorded as having been made from the company’s bank account. The code for that payment was “loan”. On the face of that record, that is a payment by the company. However, it is not on its face one which was made to the respondent or made in such a way that the payment would have reduced the company’s indebtedness to her.
The liquidator initially took the view that the payment made by the company on 24 May 2004 to Amarine Sirichak was, as the company’s bank statement suggests, a loan by the company to Amarine Sirichak. The liquidator brought unsuccessful District Court proceedings against Ms Sirichak seeking to recover the loan amount of $17,000 from her. Judge Sharp defined the issue in those proceedings in this way:[2]
Both counsel, that is for the defendant and the plaintiff, agree that the only issue here is a factual one and that is the status of that $17,000 whether it was in fact a loan by the company to Ms Sirichak or whether it in fact was a repayment of the company to the defendant’s mother who held a current account with the company and who directed that the payment be made to her daughter rather than to herself.
Judge Sharp held that it was the latter.
[2] Western Clothing Ltd v Sirichak DC Auckland CIV2006-090-1303, 3 December 2007 at [4].
Faced with that decision, the liquidator sought to set aside the transaction on the grounds that it was, as Judge Sharp had held, a repayment by the company of an amount owing to Mrs Rastkar, paid at her direction to her daughter Ms Sirichak. As evidence in support of this contention in this proceeding, Mr Levin annexed to his affidavit copies of a number of documents from the District Court proceeding. These were the briefs of evidence of Mr Levin, Ms Sirichak, Mrs Rastkar, and Mr Russell, and the judgment of Judge Sharp.
The Associate Judge said of this transaction:
[25]The respondent apparently accepted that a payment of that amount was made to Amarine. However the respondent gave evidence to the District Court that the substance of the transaction was not in fact an advance to the respondent. Amarine and the respondent alleged that the respondent Mrs Rastkar had made capital injections into the company and as a result the company was indebted to her; and that Mrs Rastkar procured the payment to Amarine, regarding it as partial repayment of the credit that she had with the company. The District Court Judge apparently accepted this account and concluded that as a result judgment should not be entered against Amarine for the alleged debt which the liquidators claimed.
[26] The conclusion arrived at by the District Court Judge is not, of course, binding on me and nor would it, in any event, bind the parties to the present litigation.
The Associate Judge went on to make his own findings about that transaction in these terms.
[28] Dealing with the payment from the company to Amarine, I record that the respondent does not dispute that this was a loan. She considered it, though, to be a loan from herself to Amarine. But whatever the respondent’s motives or understanding, it is plain that the transaction was not a loan by her. Further, the starting point is that it is only in limited circumstances that the Court in analysing the transaction may ignore the formalities that the parties actually adopted: Snook v London & West Riding Investments Ltd [1967] 1 All ER 518 at p 528. The parties have not identified any basis for ignoring the actual structure of the transaction in this case. There is no evidence, for example, that all three parties to the transaction agreed that despite its actual form, the effect of the transaction would be treated between themselves as being a loan from the respondent to Amarine.
[29] Adopting that approach, it is my view that the arrangement with Amarine could not have been a loan from the respondent to her. That is because there was no advance from the company to the respondent, and thence from the respondent to Amarine which would have been required if the transaction was what the respondent says it was. Instead, it must be assumed that the company acting through the instrumentality of the respondent, made an advance or gift to Amarine.
[30] It is further my view that the fact that Ms Rastkar has apparently compensated the company by off-setting the sum advanced against what the company owed her - she not seemingly being obliged to do so - does not bring the transactions in their totality within the scope of s 292. That is, the transaction did not (in the words of the section) enable the respondent to receive more towards satisfaction of a debt, (I interpolate this means a debt that is owed by the company to the person), than the person would otherwise have received or be likely to have received in the liquidation.
We consider that the Associate Judge’s reluctance to ignore the apparent actual structure of the transaction is understandable. However, the apparent actual structure of the transaction, namely a payment by way of loan from the company to Amarine Sirichak, had been rejected in the District Court. That rejection was made on the basis of the evidence of both the respondent and Amarine Sirichak that the real nature of the transaction was a loan from the respondent to Amarine Sirichak, made by directing or procuring that the company should pay money then owing to the respondent to Amarine Sirichak. The findings by the District Court judge are not binding in this proceeding. However, the evidence does support her conclusion, and that conclusion was not contested in this proceeding.
Accordingly, we consider that the payment of $17,000 is to be regarded as a payment by the company at the direction of the respondent, made on 24 May 2004.
The “Loan Sisavath” transaction
The second transaction is that which is described as “Loan Sisavath”. In the original written submissions filed on 26 October 2010 counsel for the appellant indicated that recovery was not pursued in respect of this transaction. In a revised synopsis handed up at the hearing on 17 November, counsel reversed that position. Counsel for the respondent objected to that course. We allowed the point to be pursued, but gave the respondent leave to respond to the revised submissions.
The original payment by Western in respect of that matter is also recorded on Western’s bank statement for 24 May 2004. A telephone bill payment to Kingmany Sisavath of $10,000 is recorded as having been made from the company’s bank account on that date. The code for that payment was “loan”.
Mrs Rastkar and Amarine Sirichak each described the circumstances of that payment in their evidence in the District Court proceedings, though it was not directly in issue there.
Amarine Sirichak said:
14.I understand that there has been some reference by the liquidators to a $10,000 payment from Western’s account to Kingmany-Sisavath. Kingmany is a friend of mine. In April 2004 she had agreed to loan me some money for me to put towards the deposit I needed for the house. Kingmany was able to loan me $10,000. My ASB Bank statement 107 shows that money was deposited by Kingmany on 27 April 2004.
15.However at the same time Western really needed some money so it could pay wages, outworkers and a payment to IRD. Western was owed money from some clients but it was late coming in, so mum asked me if I could lend her the money which Kingmany had lent me, just for a short time so she could cover Western. I agreed and decided to add $1,000 of my own money. Mum asked me to deposit that $11,000 direct to Western because Western needed it straight away.
16.So when it came to mum agreeing to loan me the $17,000 about a month later, I reminded her I needed to repay Kingmany too for the $10,000 I’d borrowed from her. So it made sense to just pay the $10,000 direct from Western to Kingmany, rather than to me and then from me to Kingmany.
17.So the $10,000 payment from Western to Kingmany was repayment of the $10,000 Kingmany had loaned me which I’d then loaned to mum for her to use for Western, all done through my personal ASB bank account – she paid $10,000 into my account.
Mrs Rastkar said:
10.Kingmany Sisavath is a friend of Amarine’s who loaned her $10,000 in April 2004. Amarine arranged to borrow that money so she could put it toward her house deposit.
11.In early April 2004 Western needed money so it could pay wages, outworkers and an agreed payment to IRD. Western was owed money from some clients but it was late coming in, so I asked Amarine if I could borrow that money from her for a short time to cover Western. Amarine agreed to lend me the $10,000 she’d borrowed from Kingmany, and was also able to add $1,000 of her own money. I got her to deposit that $11,000 straight to Western because Western needed it straight away.
12.So when it came to me lending Amarine the $17,000, about a month later, Amarine said she needed to repay Kingmany too for the $10,000 she’d borrowed from her. I had to pay back Amarine and she had to pay back Kingmany, so I told Amarine to just pay $10,000 straight from Western to Kingmany. I haven’t paid back the $1,000 Amarine loaned me of her own money.
The Associate Judge said of this transaction:
[31] The factual position concerning this advance is rather different from the advance to Amarine. The respondent says that even though the loan was treated in the accounts as an advance to Mr (sic) Sisavath, in fact, the payment was to repay money which Mr Sisavath advanced to the company when it was pressed financially so that it could pay its current creditors. Oddly, though, when the advance from Mr Sisavath was repaid, it was treated in the company’s accounts as a reduction of liability of the company to the respondent. It is odd because the payment to Mr Sisavath discharged a liability of the company and not a liability of the respondent and therefore there would be no reason for the respondent to credit that sum in her account with the company.
[32]The narrative that has been provided by the respondent concerning the payment to Mr Sisavath effectively involves the Court accepting what she says. The corollary of that is that the accounts have been mistakenly drawn in such a way that they do not reflect the reality of the transaction. I consider that it is permissible for the Court to adopt such an approach. If that is so, there has been no transaction which offends s 292. The transaction did not enable the respondent to receive more towards satisfaction of a debt that she would otherwise have received or have been likely to have received in the liquidation. She received nothing as a result of the payment and in fact may have sustained a loss in that the accounts mistakenly reduced what the company owed to her once the transaction had been completed.
For this transaction, too, there is a difference between the apparent structure and what is said to be the true nature of the transaction. The evidence indicates that the money was paid into the company by Amarine Sirichak, and paid out by the company to Kingmany Sisavath. The latter payment was not, on its face, a payment to or for the benefit of the respondent. However, Mrs Rastkar’s evidence is that, in both cases, the payments were made at her request and on her direction.
In these circumstances, we consider that, in the light of that evidence and in the absence of any challenge to it, the payment of $10,000 is to be regarded as a repayment, made by the company at the direction of the respondent on 24 May 2004, of an earlier advance made to the company at the direction of the respondent.
The “Loan Joman” transaction
The third transaction is the alleged loan to Joman. The only relevant accounting record for that item is the journal entry made as at 31 March 2005. There is no evidence before the Court in this proceeding as to the date on which that loan was actually made. There is no entry in the company’s bank accounts recording that payment by the company. The liquidators’ evidence is that it was recorded as an asset of the company in the balance sheet for the year ended 31 March 2004. How long it had been an asset is unexplained.
The respondent also described this transaction in her evidence in the District Court proceedings, though again it was not directly in issue there. She said:
16.The Joman payment referred to Joman (NZ) Ltd (“Joman”). That was a company owned by my husband Siamac. I had, at Siamac’s request, paid various accounts of Joman totalling $11,783.45 and used Western’s bank account to make those payments, with the intention that Joman would eventually pay it back.
17.By September 2003 it was clear that Joman wouldn’t be able to repay that money so it needed to be deducted from what Western owed me, so that I repaid the debt on Joman’s behalf. I understand that is how it was dealt with when the accounts for the years ending 31/3/04 and 31/3/05 were brought up to date after the liquidation.
Mr Russell described the reasons for his journal entries made as at 31 March 2005. He said “$11,783.45 to “Joman” which, I later established, was a payment which, from 17 September 2003, was clear Joman could not repay and so was carrying it over to the y/e 31/3/05 where it was set off against Somboun’s current account”.
Counsel for the appellant submits that the journal entries on 31 March 2005, whereby the loan to Joman was credited and the current account of the respondent was debited, constitute a transfer of property. That is not so, for the reasons given above at [15]. There is no evidence that the respondent ever received this money from the company. There is no satisfactory evidence as to why Mr Russell made the journal entries, well after the company went into liquidation. The liquidators have not established that there was, at the time the journal entries were made, any valid transfer of property from the company to the respondent. There was no assignment to her of a loan by the company to Joman. The evidence is that any such loan was, by the time the journal entries were made, irrecoverable.
We have also considered (although the case was not argued on this basis) the possibility that the original payments by the company on Joman’s behalf might be treated in the same way as the Amarine Sirichak transaction: that is, as a loan by the respondent to Joman, made by the company at the respondent’s direction. The liquidators cannot succeed on that basis, for two reasons. First, there is no evidence to support that proposition. Second, for the liquidators to succeed on that basis, it would be necessary to establish that the payments by the company to or for the benefit of Joman were made within the specified period. They must have been made before September 2003, since the evidence is that they had become irrecoverable by that date. The onus on the appellant in this proceeding is to establish that the amount which it sought to recover was the result of an insolvent transaction entered into after 24 February 2003. There is no evidence to establish that the payments were made by the company after 24 February 2003.
For these reasons, the liquidators’ application to set aside this transaction must fail, and it is unnecessary to consider it further.
The “Additional Payments” transaction
As we have noted at [6] above, the liquidators’ total claim is for the difference between the highest balance in the respondent’s loan account with the company ($60,778 on 30 August 2004) and the balance at the date of liquidation ($7,345). That difference is $53,433. The three “loan transactions” discussed above total $38,783.45. The liquidators’ claim, under the “additional payments” head, is the balance of $14,649.55.
There is no proper basis for this claim. The total debits to the respondent’s loan account, apart from the three “loan transactions”, are shown on Appendix A as $37,738. There is no evidence to establish what any of these debits were for, and no correlation between the debits in Appendix A and payments from the bank account. There is no evidence as to how and on what basis the decision was made by the liquidators to include those in Appendix A in the notice to set aside. Further, there is no evidence to establish on what basis the credit entries have been made to Appendix A. Those credits are relevant to the liquidators’ claim, because the liquidators’ calculations rely upon the proposition that within the specified period the maximum amount owed by the company to the respondent was $60,778. In reaching that total, credits totalling $77,500 are included. Without an explanation of those credits, (sufficient to establish that these were all properly amounts owing by the company to the respondent) there is insufficient evidence to support the liquidators’ assertion that the maximum balance was $60,778.
Counsel for the appellants submits that the Associate Judge erred in not analysing these alleged transactions. Any fault in this regard was entirely that of the appellants. The way in which the case was presented made it impossible for the Associate Judge, as it is impossible for us, to conduct a proper analysis. There was no evidence on which the Associate Judge could have found that these were voidable transactions. The liquidators’ claim in respect of these payments must fail.
Unable to pay its due debts
We have concluded that two payments by the company, namely the payment to Amarine Sirichak and the payment to Kingmany Sisavath, were payments by the company within the specified period. It is also necessary for the liquidators to establish that the company was, at the time of those transactions, unable to pay its due debts. Mr Levin’s evidence is that there were at all relevant times substantial arrears of tax. He expresses the opinion that Western was unable to pay its debts as they fell due from 31 March 2003 until liquidation. That conclusion was not contested in Mr Weir’s submissions. We consider that this element of the s 292 test is satisfied in respect of these two payments.
The General Security Agreement
The next question is whether either or both of those payments enabled the respondent to receive more towards satisfaction of a debt owed to her by the company than she would have received in the company’s liquidation. The respondent asserts that they did not, because she was a secured creditor in respect of her debt, under a general security agreement (GSA) given in her favour by the company. The respondent’s contention is that she would, in the liquidation, have ranked ahead of the Commissioner and other unsecured creditors. The liquidators submit that the respondent is an unsecured creditor of the company. They assert that the GSA is not valid. In the alternative, they submit that the respondent has surrendered any claim under the GSA under s 305 of the Act. They further submit that, even if the GSA is to be taken into account, the loan to Amarine is an account receivable, and the charge over that will rank below the Commissioner’s preferential claim by virtue of Schedule 7 of the Act.
The GSA, which has been registered under the Personal Property Securities Act 1999, is dated 23 October 2002. It is on a standard Auckland District Law Society form and records the granting of a security interest by the company in favour of the respondent in respect of all of the company’s rights, title and interests in all the company’s present and after acquired property. It ranks as a first security, and if valid would rank ahead of the claims of the Commissioner of Inland Revenue and of unsecured creditors. Unless the liquidators have established that the GSA is invalid, they will have failed to prove that either of the transactions under consideration has resulted in the respondent receiving more than she would have received in the company’s liquidation.
The liquidators submit that the GSA is invalid, in that it was not properly executed by the company. The GSA was signed, on behalf of the company, by the respondent. There is no indication in the GSA of the capacity in which she purported to act. As we have noted, the respondent is not a director of the company though she was involved with managing the company. The respondent’s evidence as to her authority to sign on behalf of the company, in her brief of evidence in the District Court proceedings, was as follows:
21.I signed the GSA in October 2002 in order to secure all money which I loaned to Western. I signed it following my solicitor’s advice. They told me that was the document which would protect my loans to Western. I’d asked my solicitor Fiona Mathieson how I could protect my money in case something went wrong with Western. She said the GSA would protect me.
22.From 1998 I held a power of attorney from Siamac (Western’s sole director and shareholder) which allowed me to sign documents on his behalf (see last page of MP document 51). I therefore signed the GSA for him as director of Western using that power of attorney.
23.I signed the GSA under that power of attorney, and the solicitor, Fiona Mathieson witnessed my signature. She was the same solicitor who had helped me set up the power of attorney in 1998, so I understood from my solicitor that was the right way to do it and that everything was legal and in order.
The power of attorney relied upon is dated 4 December 1998. In it, Siamac Rastkar appoints Somboun Sirichak to be his attorney for the purposes of Part IX of the Protection of Personal and Property Rights Act 1988 (the PPPR Act) with a general authority to act on his behalf in relation to the whole of his property. It is an enduring power of attorney in that it is not revoked if the donor becomes mentally incapable. In terms of s 97 of the PPPR Act, the power of attorney authorises the respondent to act generally in relation to the whole of Mr Rastkar’s affairs in relation to his property.
Counsel for the liquidators submits that the power of attorney does not empower the attorney to act on behalf of the donor in relation to the affairs of the company. Mr Weir submits that this point cannot properly be taken in these proceedings. He submits that no directions have been sought to set the GSA aside, and that it is not for the liquidators to unilaterally dismiss the GSA without such a direction, particularly since the liquidators had initially treated the GSA as valid, to the extent of putting the respondent to her election under s 305 of the Act. We think that there is some force in Mr Weir’s submission, in general terms. Where a liquidator challenges the validity of a security given by the company, it will generally be preferable that that challenge be made in a way which puts that issue squarely and directly in issue, rather than indirectly, as it is in this case, where the validity arises in the context of a quite different question, namely what the respondent might have received in the liquidation. That will generally be preferable because the validity or invalidity of the security will be relevant in a wider context in the liquidation. However, in this case, we consider that it is necessary and desirable to resolve the issue of validity in the present proceeding. The only parties likely to be affected by the decision on that issue are the liquidators and the respondent.
We consider that the power of attorney does not confer on the respondent any power to act on behalf of her husband in his capacity as a director of the company. Mr Rastkar’s powers as sole director of the company do not fall within the ordinary meaning of his “property”. The powers of a director involve duties owed to the company. They are not, in general terms, delegable, and they are not an item of property of the director. The company has not conferred on the respondent any power to act on behalf of it. There is express power in s 181 of the Act for the appointment by a company of an attorney. That was not done here. It is also possible, by appropriate provision in the company’s constitution, for a director to be able to appoint an alternate. Again, that was not done here. We consider that, to the extent that the respondent seeks to rely upon the power of attorney as a basis for her authority to act on behalf of the company, that reliance is misplaced.
Mr Weir did not suggest any alternative basis upon which the GSA could be upheld. We do not, therefore, consider whether the respondent might otherwise have had authority to sign the GSA on the company’s behalf. The evidential record is quite incomplete.
Our conclusion that the GSA did not give the respondent any right to the property of the company makes it unnecessary to consider alternative submissions advanced on the liquidators’ behalf in the event we held the GSA to have been effectively made. The liquidators have established the respondent received more than she would have received in the company’s liquidation.
The ordinary course of business
The final question, under the earlier form s 292 in issue here, is whether either of the relevant transactions was in the ordinary course of business. The general principles are discussed in Countrywide Banking Corp Ltd v Dean[3] and Waikato Freight and Storage(1988) Ltd v Meltzer.[4] There must be an examination of the actual transaction in its factual setting undertaken objectively by reference to the standard of the ordinary course of business.
[3] Countrywide Banking Corp Ltd v Dean [1998] 1 NZLR 385 (PC).
[4] Waikato Freight and Storage(1988) Ltd v Meltzer [2001] 2 NZLR 541 (CA).
When the loan to Amarine Sirichak is viewed in that way, we consider that it is clear that the transaction was not in the ordinary course of business. The respondent procured that the company would pay money which was owed to her, to her daughter, so as to constitute a loan from her to her daughter. That is not an ordinary business transaction for the company.
The Kingmany Sisavath transaction is not so clear cut. The evidence as to that transaction is set out at [26] and [27]. We consider that, had money been lent to the company for the purposes described by Amarine Sirichak or Kingmany Sisavath and repaid to the lender about a month later, both legs of that transaction, the loan and the repayment, would have been transactions in the ordinary course of business. It is, in our view, within the ordinary course of business of a company such as Western to obtain short-term funding from whatever source may be readily available in order to tide the company over a cash flow difficulty and to repay that funding when the cash flow permits. Is the position different because, as we have held at [29], both legs of the transaction were made at the respondent’s request and on her direction? Although the loan is to be treated as one by the respondent to the company, the evidence as to the source of these funds suggests that it could be expected that the respondent would need to have early repayment from the company, so that she could repay Amarine Sirichak, who could in turn repay Kingmany Sisavath. There could have been no expectation that that advance by the respondent was intended to be a long-term injection of funds into the company. The funds were, on the evidence, injected to meet a short term cash flow problem. The use by the respondent of borrowed money to make that injection must have imposed a constraint on the respondent’s ability to make funds available long term. Looking at the actual transaction in its factual setting objectively by reference to the ordinary standards of business, we consider that the repayment of the respondent’s advance within one month was an expectation arising in the ordinary course of business. Accordingly, we consider that the repayment by the company to Kingmany Sisavath at the direction of the respondent, is a transaction in the ordinary course of business.
For these reasons, we conclude that the liquidators have established that the payment of $17,000 to Amarine Sirichak on 30 April 2004 is voidable under s 292, but that the payment to Kingmany Sisavath is not.
Does s 296 preclude recovery?
That leaves for consideration, in respect of the Amarine Sirichak transaction only, whether recovery is precluded by s 296(3) of the Act. The first issue for consideration is which version of s 296(3) applies. That section was, like s 292, amended by the Companies Amendment Act 2006, with effect from 1 November 2007. Counsel for the liquidators submits that the amended form of s 296(3) applies. Counsel for the respondent submits that the previous provision applies. Sections 292 and 296 were amended by, respectively, ss 27 and 31 of the 2006 amendment Act. Section 27(5) provided:
Nothing in this section makes voidable a transaction that was completed before this section came into force, if that transaction would not have been voidable if this section had not come into force.
There was no similar provision in s 31.
Counsel drew our attention to some conflicting decisions in the High Court as to whether the effect of s 27(5) is to require the whole of the setting aside process, including the application of s 296(3), to be determined under the previous law.[5] It appears that, in these cases, the point was not fully argued. We consider it clear that s 27(5) does not have that effect. The transitional provision in s 27(5) requires that, in determining whether a transaction is voidable, the previous law will apply. Section 296(3) is not relevant to the determination of whether a transaction is voidable. Section 296 is engaged only after a transaction has been found to be voidable and has been set aside under s 294. The amended s 296(3) applies in this case.
[5]TRC Consultants Ltd v Higgs HC Auckland CIV-2005-425-290, 21 December 2007; Blanchett v The Roofing Specialists Ltd [2009] NZCCLR 42 (HC); Reynolds v Glengary Hancocks Ltd HC Auckland CIV-2008-404-4745, 7 July 2009.
To successfully invoke s 296(3), the respondent must show that she gave value for the property, or altered her position in the reasonably held belief that the company’s payment to Amarine was valid and would not be set aside. She did not give value to the company when she directed that the company make the payment. There is no evidence that she has altered her position in reliance on that belief. Mr Weir did not advance any matters which might properly be invoked as constituting or contributing to an alteration to her position, in reliance upon a belief that the advance to her daughter had been validly made from her account with the company. The enforceability of the loan, as between her and Amarine Sirichak, is not in question. An order that she repay the sum of $17,000 to the company will not affect her ability to recover that amount from Amarine Sirichak. However the transaction is viewed, Amarine Sirichak is liable to repay the loan of $17,000. If recovery were refused under s 296(3), then the respondent would be able to recover that amount, and the company would be unable to recover it, despite the fact that company funds were expended in making the advance.
Result
For these reasons, the appeal is allowed to the extent that we make an order under s 294(5) of the Act setting aside the transaction by which the $17,000 loan to Amarine Sirichak was credited to the respondent’s loan account with the company, an order under s 295(a) of the Act that the respondent pay the company the sum of $17,000 and an order under s 295(g) that the respondent is entitled to claim as a creditor in the liquidation for that amount, in addition to any other amount owing to the respondent. In all other respects, the appeal is dismissed.
As to costs, each party has had some measure of success on this appeal. We consider that the appropriate orders are that costs in this Court should lie where they fall. The High Court judgment did not fix costs in that Court. We express the view that costs in that Court should also lie where they fall.
In the High Court, costs were agreed in the sum of $5,920. The appellants paid that sum to the respondent. We think that each side should have borne its own costs in the High Court as well as in this Court. Accordingly, we quash the High Court costs and we direct the respondent to repay the costs the appellants paid to her.
Solicitors:
Kensington Swan, Auckland, for the Appellant
DMA Burgess, Auckland for Respondents
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