Levin v Timberworld Limited
[2013] NZHC 3180
•29 November 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-007653 [2013] NZHC 3180
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of Northside Construction
Limited (in liquidation)
BETWEEN HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES AS LIQUIDATORS OF NORTHSIDE CONSTRUCTION LIMITED (IN LIQUIDATION)
Applicants
ANDTIMBERWORLD LIMITED Respondent
Hearing: 24 April 2013
Appearances: J Sumner for applicants
D Grove for respondent
Judgment: 29 November 2013
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 29 November 2013 at 5pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Ford Sumner, Wellington
Foy & Halse, Auckland
Counsel:
D Grove, Auckland
LEVIN & ANOR v TIMBERWORLD LIMITED [2013] NZHC 3180 [29 November 2013]
[1] Henry David Levin and Judith Madsen-Ries are the liquidators of Northside Construction Limited (in liquidation) (Northside). Northside purchased construction materials from Timberworld Limited for several years prior to Northside’s liquidation.
[2] After their appointment the liquidators formed the view that a number of payments made by Northside to Timberworld in the two year period prior to Northside’s liquidation are voidable under s 292 of the Companies Act 1993 (the Act). They say that Northside was insolvent at the time the payments were made and that Timberworld has received a preference of $92,213.95 by reason of the payments. They seek an order that Timberworld repay that amount to them, for the benefit of all creditors of Northside.
[3] Timberworld opposes any order for repayment. It says first that the liquidators have not shown that Northside was insolvent at the time that each payment was made, and secondly that the payments are not recoverable as they were made as part of a continuing business relationship in the form of a running account (relying on s 292(4B) of the Act). It also says that if, contrary to its view, the payments are prima facie voidable as insolvent transactions, it has a defence to the liquidators’ claim under s 296 of the Act. Additionally it says that the circumstances are such that the Court should exercise its discretion under s 295 of the Act not to order repayment.
[4] The liquidators do not dispute that there was a continuing business relationship between Northside and Timberworld from the start of their trading until about a year prior to the commencement of liquidation. However, the liquidators say that their claim allows for that by claiming only the amount by which Northside reduced its account in that period. They also say that there can be no question that Timberworld received a preference by payments made after the end of the continuing business relationship.
[5] The principle questions that the Court must decide are whether the liquidators have proved that Northside was insolvent at material times, and, if so, whether
Timberworld has established the necessary matters for a defence under s 296. As part of the first question the Court has to also consider when the running account started, and the amount by which Northside reduced its account while it was in place. If it finds that this was an insolvent transaction, and that Timberworld is not entitled to the statutory defence, the Court must decide whether there is any reason for refusing to make the order sought.
Background
[6] Northside was incorporated on 11 July 2003. It traded as a construction company. It opened a trading account with Timberworld in January 2006 for the supply of building materials (although there was a trading relationship prior to that and Northside’s director and shareholder Mr Murray Painting had traded with Timberworld even before the incorporation of Northside).
[7] It is common ground that Timberworld supplied building materials to Northside, under the trading account, until 15 April 2010 when there was a minor purchase on the account of $34.11. From that time the only charges were for interest on the overdue account. Timberworld’s debt had been reduced to $5,145.33 by the date of liquidation.
[8] Northside was placed into liquidation on 15 July 2011 on the application of the Commissioner of Inland Revenue filed on 24 May 2011. Accordingly, the specified period1 for voidable transactions ran from 24 May 2009 to 15 July 2011, and the restricted period2 ran from 24 November 2010 to 15 July 2011.
[9] The application for liquidation was brought on the basis of unpaid taxes (including penalties and interest) dating back to unpaid penalties and interest on GST for the period ending 31 March 2004. Although Northside made significant payments to the Commissioner between April 2004 and date of liquidation, the payments were insufficient to meet the accruing obligations. The Commissioner has proved for unpaid taxes totalling $234,980.80, of which unpaid GST of $53,466.08
is preferential. In addition, the Commissioner is a preferential creditor for Court
1 As defined in s 292(5) of the Companies Act 1993.
2 As defined in s 292(6).
liquidation costs in the sum of $3,584.60. The liquidators have accepted proofs of debt from other creditors totalling $36,330.05, giving a total proved debt of
$274,895.45. Timberworld has not proved for its remaining debt.
[10] The liquidators initially wrote to Timberworld to inform it that they were intending to seek recovery of the amount by which they considered Timberworld had benefitted as a consequence of those payments (by comparison to what it would have received in the liquidation). The parties exchanged correspondence over ensuing months as Timberworld endeavoured to persuade the liquidators that the payments were not voidable or, if they were, that Timberworld had defences to a claim for repayment.
[11] On 16 May 2012 the liquidators served notice on Timberworld to set aside, as voidable transactions:
(a) All payments made by Northside after 2 October 2009 (when
Northside’s indebtedness to Timberworld peaked at the sum of
$95,569.55) until 15 April 2010, being the date of the last supply of materials to Northside under the running account, but offsetting against those payments the costs of all goods supplied in that period, bringing the debit balance down to $47,605.60. Applying s 292(4B), the amount claimed as the insolvent transaction was the improvement of Timberworld’s position over that period, being $47,963.95.
(b) All payments made after 15 April 2010, being a total of $44,250.
[12] Timberworld responded to that notice initially by letter from its solicitors, and subsequently by serving a notice of objection on 13 June 2012. Timberworld said that it opposed the liquidators’ notice on several grounds. First, the transactions in question were part of a running account, and at a time when the company was not insolvent. In relation to Northside’s solvency it said that any debts to the Commissioner should not be taken into account as the Commissioner was estopped from asserting that the debts were due because no steps were taken to pursue payment of the sums allegedly due, and Northside had been allowed to continue to
trade even though the Commissioner knew that third party creditors could be affected. Additionally, Northside had an asset in the form of a related party loan which was sufficient to pay all creditors. Secondly, Timberland said that it had received the payments in good faith, without grounds for suspecting that Northside was insolvent.
[13] Timberland did not persuade the liquidators on their grounds of opposition. They filed the application to set aside the transactions on 20 December 2012, essentially repeating the grounds set out in their earlier notice. Timberworld filed notice of opposition also essentially in the terms of its objection, but adding as a ground for its defence that it had given value for the payments and altered its position in the reasonably held belief that the payments were valid and would not be set aside. It also opposed the application on the basis that it would be inequitable in all the circumstances to permit Northside to retain the goods supplied by Timberworld and recover the sums it had paid for them.
The approach to be taken
[14] The liquidators have the onus under s 292 of proving their case that this was an insolvent transaction. Timberworld has the onus of showing that it is entitled to the statutory defence under s 296, and also that it would be inequitable to order repayment (under s 295). I will deal with the various issues under those headings.
Is there an insolvent transaction?
[15] The Court’s power to set aside an insolvent transaction lies in s 292 of the
Companies Act 1993 (the Act). The applicable parts of that section read:
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.
(3) In this section, transaction means any of the following steps by the company:
(a) conveying or transferring the company's property:
...
(e) paying money (including paying money in accordance with a judgment or an order of a court):
....
(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.
....
[16] Timberworld argues that the liquidators have not established that this was an insolvent transaction because:
(a) they have failed to prove that Northside was insolvent at the time of the transaction; and
(b)they have not shown that Timberworld received more than it would have done in the liquidation (largely because of the effect of the continuing business relationship).
The evidence of insolvency
[17] Before addressing Timberworld’s arguments directly, I will set out the
evidence relied upon by the liquidators:
(a) One of the liquidators, Ms Madsen-Ries, has given evidence that at the date of liquidation Northside was indebted to the Commissioner for unpaid tax dating back to April 2004. The largest sum is for GST, but there are also significant amounts due for PAYE and income tax, and a small amount for employer’s child support payments.
(b)Ms Madsen-Ries has also produced financial statements for Northside for the years ending 31 March 2008 and 31 March 2009 (the last accounts that were prepared). These show:
(i) Northside had a deficit after tax in both years;
(ii)Current liabilities exceeded current assets, and total liabilities exceeded total assets, as at 31 March 2009 (that is, shortly before the start of the specified period); and
(iii) The main asset is an overdrawn shareholder’s account.
(c) Creditors’ claims accepted in the liquidation total $274,895.45.3
(d)Ms Madsen-Ries gives evidence of a change in the manner of payment over the course of the trading relationship, with payments
increasingly being made in round sums unrelated to specific invoices, at the same time as the debt was accumulating. I will come back to this point when considering whether Timberworld is entitled to the statutory defence under s 296(3).
(e) The liquidators rely on the presumption of insolvency for payments made in the restricted period (from 24 December 2010 onwards) totalling $21,000. Timberworld has not produced any evidence to rebut the presumption.
[18] The liquidators say that, in the absence of any rebuttal evidence, the Court can draw inferences from this evidence that Northside was insolvent from the start of the specified period until the date of liquidation.
Timberworld’s challenge on insolvency
[19] There are several aspects to Timberworld’s submission that the liquidators have not proved that Northside was insolvent at the time of the transactions. It contends that:
(a) the liquidators must show that Northside was insolvent at the time of each payment;
(b) the tax debt cannot be taken into account; and
(c) the liquidators need to establish that Northside could not pay, as distinct from being in a position, but choosing not, to pay.
The time of insolvency
[20] The liquidators’ case is that the Court may properly draw an inference that Northside was insolvent throughout the specified period. In answer, Timberworld points to a number of factors which indicate that Northside would have been in a position to pay its debts at various times during the specified period:
(a) The financial accounts for 2008 and 2009 show that Northside had substantial sales in 2009 ($1,305.090), and it continued trading until date of liquidation. Bank statements show receipts of $189,495.46 in the period after 31 March 2009 (and it is unknown whether Northside operated any other bank accounts).
(b)Northside was able to pay tax at various times through the specified period.
(c) The level of trade creditors unpaid at time of liquidation was relatively modest, indicating that Northside had been paying its trade creditors through that period.
[21] Counsel submitted that given those facts the liquidators needed to give evidence of the state of Northside’s finances at the date of each payment, but had not done so. He referred to criticism of liquidators by the Court of Appeal4 for failure to provide proper evidence, given their statutory powers to compel production of documents and examine relevant persons. He argued that the Court could not reject the possibility that at the time the specific payments were made Northside was able to pay its due debts.
[22] This submission can be answered both generally and on the specific facts of the case.
[23] First, it needs to be considered generally in the context of the special treatment afforded a continuing business relationship. The Act requires preference to be judged in the context of that relationship (subsuming a number of transactions into the one “single transaction”). Timberworld’s argument, in effect, is that there should be a different test for determining solvency to that for determining preference. There is no basis in principle for such a distinction.
[24] Similarly it would be inconsistent with the purpose of the continuing business relationship provision to take s 292 (2)(a) literally and judge insolvency just at the
start of the relationship, even if the company was insolvent at that point, given that it could be solvent at a later stage of the relationship.
[25] It would be unrealistic to impose a requirement that the liquidators have to prove insolvency specifically at the time of each payment. The interpretation that is most consistent with the purpose of s 292(4B) is that the liquidators should be required to prove insolvency at the start and finish of the continuing business relationship (or at least prior to the restricted period) and that there was no significant change in the company’s financial circumstances during the relationship to call into question its insolvency throughout the period. If there was such a change, the liquidators would need to go further and show that the changes did not change the overall conclusion of insolvency.
[26] This approach aligns the assessment of insolvency under s 292(2)(a) with the assessment of preference in s 292(2)(b) in continuing business relationship cases, as in both cases the court is considering the question holistically from the perspective of net values (increase or decrease of indebtedness) and the state of solvency overall. It is also consistent with the approach taken in Re Northridge Properties Ltd (in liq) that inability to pay due debts is a “moving picture of [the] financial situation rather
than a still shot”.5
[27] I will consider separately later in this judgment the question whether the whole of the relationship is relevant, or just the part within the specified period.
[28] Turning to the facts of this case, I do not accept that the matters relied upon by counsel for Timberworld displace the conclusions of insolvency throughout the specified period that can be drawn from the evidence on which the liquidators rely. The bank receipts indicate a very substantial fall off in trading activity and an analysis of the tax debt6 shows that the only GST paid after the start of the specified period was a payment of $3,000 for the period to 30 September 2009. The same analysis of the tax debt shows credits towards Northside’s primary PAYE obligations
during the specified period, but an accruing liability for unmet penalties and interest.
5 Re Northridge Properties Ltd (in liq) SC, Auckland M46/75, 13 December 1977 at 28.
6 As part of exhibit VJMR7 to the affidavit of the liquidator Ms Madsen-Ries of 20 December
2012.
I do not consider that anything can be taken out of the fact that Northside may have been able to meet the majority of its trade creditors through that period, given the inability to clear the old tax debt.
Whether the tax debt can be taken into account
[29] Counsel for Timberworld argued that it was insufficient simply to give evidence of the amount of tax outstanding at time of liquidation. He pointed out that Northside had made payments to the Commissioner of about $470,000 over the period of the accumulated tax debt, and the liquidators had given no evidence as to the application of that money, and hence whether arrears may have been cleared at material times.
[30] I do not accept that argument. Ms Madsen-Ries produced the proof of debt filed by the liquidator.7 A breakdown of the debt is given in a schedule to that claim. Attached to that schedule is a summary of Northside’s unpaid tax as at 9 August
2011 showing how Northside’s payments have been applied. Taking GST as the most
significant liability, the summary shows that payments were credited from 31 March
2004 to 30 September 2009, that all but $3,000 had been credited by the start of the specified period, and that there was unpaid GST at the start of the specified period in the order of $90,000.
[31] In his written submissions, counsel for Timberworld also contended that a substantial part of the Commissioner’s claimed debt was for penalties and interest, which should not be considered as there was no evidence of demand for those sums having been made. He did not press that argument in oral submissions, which is appropriate given that liability arises under statute, and they are clearly part of the unpaid taxes.
Could not pay rather than choosing not to pay
[32] I turn now to consider Timberworld’s argument that Northside was in a
position to pay its debts. The basis for this argument is that Northside’s accounts as
at 31 March 2009 show shareholder advances of $231,733 as a current asset, and property, plant and equipment (including a motor vehicle) of $11,317 as a non- current but nevertheless easily saleable asset. The accounts also show that Mr Painting received drawings of $176,462 in that year in addition to a salary and could have had drawings in the specified period. Counsel for Timberland submitted the liquidators had failed to produce financial accounts to show Northside’s position at the time of the various payments, and that the above facts demonstrate that Northside was able to pay but chose to use the money differently.
[33] This submission is answered in principle by the very fact that any available funds were not in fact used to pay due debt. I accept the submission of counsel for the liquidators that the focus of the enquiry in s 292 as to whether a company is unable to pay its due debts, is on the fact of insolvency, not the cause.
[34] Counsel for Timberworld referred to the liquidators’ evidence that they had recovered $85,000 of the shareholder advances of $231,733. Counsel said that this provided support for his argument that at least that amount was always available to Northside to meet its due debt. I do not accept that submission. It would defeat the purpose of s 292 to hold that a company was solvent purely because its balance sheet contained an asset that was potentially realisable to meet its due debts, particularly where there is no evidence to suggest that the company was intending to realise the
asset. As the Court in Re Northridge stated:8
...a cash asset should not be taken into account for the purpose of assessing solvency unless realisation of the asset in that way was in contemplation by the debtor at the time.
[35] The fact that the liquidators had to take action to try to recover that shareholder’s account, and ultimately accepted recovery of only $85,000 is clear evidence that Northside was not contemplating recovery of the shareholder’s current account to clear its due debts.
[36] Timberworld also relies on Northside having motor vehicles on its plant which could have been used to realise money to pay its due debt. In Re Timbatec Pty
Ltd,9 plant essential to a company’s business was held not to be an asset to be taken into account when determining whether a debtor has sufficient money available to pay its due debt. Even if one or other of the vehicles was not needed for the company’s business, they fall short of the test stated in Investment Enterprises Ltd v The Private Sale Co Ltd10 for a currently realisable asset. In that case the Court found that the proceeds of a possible future sale of five franchises could not be considered when determining whether the defendant could meet its due debts, as distinct from proceeds of a sale already made where the payments were still to be received.
[37] I find that the existence of the shareholder’s account and the ownership of the
vehicles is not evidence that Northside was able to meet its debts as they fell due.
[38] Lastly, I note the liquidators’ evidence that the accounts to 31 March 2009 were the last accounts that Northside prepared (perhaps another indication of its parlous financial position). The liquidators are not required to prepare accounts up to the date of liquidation, and may prove insolvency by other means. I find that they have done so.
Have the liquidators established that Timberworld was preferred?
[39] The second limb of the definition of an insolvent transaction requires the liquidators to show that Timberworld was preferred by the payments because it obtained more by them than it would have in the liquidation.
[40] The preferential effect of a transaction is to be judged objectively. It is an “effects based” assessment, so the intent of the company or the creditor is irrelevant.11 Hence a liquidator has only to show that the creditor received a greater payment than would be the case in liquidation. This requires a comparison between what the creditor actually received, and what it would have received in the
liquidation as one of the general body of creditors.12
9 Re Timbatec Pty Ltd [1974] NSWLR 613.
10 Investment Enterprises Ltd v The Private Sale Co Ltd (1997) 10 PRNZ 282 (HC).
11 Paul Heath & Michael Whale (eds), Heath and Whale on Insolvency (online looseleaf ed, LexisNexis) at [24.50].
12 Ibid.
[41] The liquidators say that it is self-evident that Timberworld received a greater benefit as the evidence is clear: even after applying the single transaction approach required by s 292(4B), as a matter of fact Timberworld’s position had been improved by $47,963.95 up to the end of the running account (applying the peak indebtedness as the starting point),13 or failing that by $29,490.46 if the specified period was used as the starting point.
[42] Whichever is the correct approach to the single transaction, the amount of the benefit was then increased by the payments of $44,250 made after the end of the running account. The evidence is clear that the predominant, if not the only, purpose of those payments was to pay past indebtedness.14
[43] The liquidators contend that this evidence constitutes a clear preference given that Timberworld received the amounts ahead of the preferred creditor, and was in a better position than its fellow unsecured creditor due to the transaction. They note that there is no evidence before the Court to rebut this evidence that Timberworld received a preference. I accept this submission.
[44] In response to the liquidators’ case, Timberworld says first that as a matter of construction s 292 does not apply, because the section requires the Court to take into account all transactions from the start of the continuing business relationship, and at that starting point there was no debt to be reduced. Alternatively it says that the correct starting point is the start of the specified period as “the rule of peak indebtedness” does not apply in New Zealand.15
[45] The issues that the Court has to determine, therefore, on this second limb of the test for an insolvent transaction are:
(a) Whether s 292 applies; and
(b) Whether the liquidators can rely on “the rule of peak indebtedness”.
13 Relying on Blanchett v McEntee Hire Holdings Ltd (2010) 10 NZCLC 264,763 (HC)
notwithstanding Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189.
14 See Rea v Russell [2012] NZCA 536 at [59].
15 Shephard v Steel Building Products (Central) Ltd, above n 13.
Interpretation of s 292
[46] Timberland’s first argument is based on the word “all” in s 292(4B)(c):
“subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction”. (emphasis added)
[47] In his written submissions, counsel for Timberworld argued that as the continuing business relationship started with the first transaction after the trading account was opened in January 2006, and there was no debt in existence at that time, the single transaction could not have enabled Timberworld to receive more in satisfaction of a debt. However, he did not press this in oral argument, where he focussed on whether the transactions to be taken into account can be limited to those within the specified period.
[48] Counsel’s change of position on this point was entirely appropriate. The section, read as a whole, is clearly directed towards establishing the net position under the trading relationship as a result of the transactions within the period of the continuing business relationship. It would make the section meaningless if benefit was to be assessed by reference to the position before the first transaction in the relationship.
[49] I turn now to consider what transactions fall within the single transaction under s 292(4B). This addresses Timberland’s alternative argument that s 292(4B) requires all transactions from the start of the continuing business relationship to be taken into account, and that the liquidators’ contention that the section contemplates only transactions within the specified period is not available on the plain words of the section and there is no reason to read them into it.
[50] This argument is unlikely to have any practical significance, as the transactions within the continuing business relationship prior to the start of the specified period will inevitably be taken into account in the balance of the running account at the start of the specified period.16 The more significant point is whether
the liquidators can choose a point of peak indebtedness within the specified period as
16 A point recognised in Olifent v Australian Wine Industries Pty Ltd (1996) 14 ACLC 510 at 202.
the starting point for assessing the extent of any preference (a point I will consider next). However, I also accept the liquidators’ argument that when s 292(4B) is construed in the context of s 292 as a whole, the single transaction is determined by reference to payments and supplies made in the specified period. This is a logical corollary of the underlying rationale for the continuing business relationship rule, namely that it would be unfair to isolate payments, and attack them as preferences, where they are made to induce the creditor to provide further goods and services as well as to discharge existing indebtedness. This interpretation is also consistent with the terms of s 292(1)(b) that a transaction is voidable if it is entered into within the specified period. Accordingly, and addressing the respondent’s argument directly, I find that s 292(4B)(c) read in context refers to transactions in the specified period..
Liquidator’s ability to select within the specified period - the rule of peak indebtedness
[51] The liquidators argue that the preference that Timberworld has received is the improvement of its position from the point of peak indebtedness within the specified period. They rely on Australian authority on the comparable provision to s 292 in Australia.17 Counsel acknowledge that there is a conflict of authority within New Zealand as to whether the peak indebtedness rule is available under s 292,18 and
invited the Court to leave it open as an approach available to the liquidators. Counsel argued that that approach was open because my decision in Shephard drew from the decision of the High Court of Australia in Airservices v Ferrier,19 and although that decision expressed a view on the underlying policy, it did not expressly rule out the use of the peak indebtedness rule. This rule is still used in Australia, as demonstrated by the Court in Sutherland v Lofthouse,20 which at [50] endorsed the decision of the Supreme Court of New South Wales in Rees v Bank of New South Wales.21 Counsel argued that this course should be followed to reflect commercial
reality and to ensure consistency between Australia and New Zealand.
17 Corporations Act 2001, s 588FA.
18 Blanchett v McEntee Hire Holdings Ltd, above n 13, which followed the Australian cases; cf my decision in Shephard v Steel Building Products (Central) Ltd, above n 13, where I held that the terms of s 292 did not permit the use of the peak indebtedness rule.
19 Airservices Australia v Ferrier (1996) 185 CLR 483.
20 Sutherland v Lofthouse [2007] VCSA 197.
21 Rees v Bank of New South Wales (1964) 111 CLR 210 at 221.
[52] I see no reason to depart from my reasoning and decision in Shephard. In the absence of any language suggesting that Parliament intended to allow more than one way of determining the single transaction giving rise to the preference, it must be assumed that a single method was intended. There is nothing in the wording of s 292 to support the availability of more than one method of determining the single transaction, and there is no good reason, in my view, to read that into the statute. Moreover, although the majority of the High Court of Australia in Airservices Australia v Ferrier did not explicitly reject the peak indebtedness rule, there was no
question that it did not apply it:22
Throughout the six-month period, Airservices provided Compass with services whose value far exceeded the value of the payments that Compass made during that period. At the end of the six-month period, Airservices was more than $8 million worse off than it had been at the commencement of the period.
[53] Legal commentators23 have pointed out a number of arbitrary features to the single transaction concept. However, ultimately that is a matter for the legislature. As I construe s 292, the single transaction is determined by reference to all transactions in the continuing business relationship, within the specified period. On that basis I find that the preference that Timberworld received from the single transaction was $29,490.46. I also find that there was a preference of $44,250 from transactions after the end of the continuing business relationship.
[54] If I am wrong in my view of the determination of the single transaction, and the liquidators can apply the peak indebtedness rule, I find that the amount of the preference from the single transaction was $ 47,963.95.
The statutory defence under s 296(3)
[55] Timberworld contends that it is entitled to the defence under s 296(3) of the
Act:
(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
22 Airservices Australia v Ferrier, above n 19 at 507.
23 H Bolitho “Continuing Business Relationships – Eight Questions in Search of an Answer” (1998) 16 C&SLJ 581 at 599, Rebecca Edwards “A testing time” NZ Lawyer, 18 April 2008.
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.
[56] It is common ground that a creditor seeking to rely on this defence must establish all three requirements of receiving the property in good faith, without reasonable grounds for suspecting insolvency, and giving value or altering position in the belief that the transfer of property was valid.24
[57] Timberworld has the onus of proving these matters. The liquidators say that it has not provided an evidential basis for the defence.
Good faith
[58] Timberworld needs to demonstrate an honest belief that the transaction would not involve any element of undue preference. This is a subjective test. It will not be met if the recipient has actual or implied knowledge of the financial predicament of the company, and that it was being treated differently or preferentially.25
[59] Timberworld’s director, Mr Carpenter, has given evidence that Timberworld had no knowledge of any insolvency issues affecting Northside until it received correspondence from the liquidator. Mr Carpenter pointed out that at no time had Timberworld refused to supply Northside due to non-payment of accounts, rendered invoices for overdue accounts or sent letters of demand. He says that the only matter that Northside raised with Timberworld that could constitute such knowledge was advice that one of Northside’s customers had taken it to arbitration. He said that that
was not unusual, nor was Northside’s request for additional time to pay as a result.
24 Re Orbit Electronics Auckland Ltd (In Liq) (1989) 4 NZCLC 65,170 (CA).
25 Re Orbit Electronics Auckland Ltd (In Liq), above n 24; and Graham v Pharmacy Wholesalers
(Wellington) Ltd CA37/04, 17 December 2004.
He acknowledged that Timberworld had undertaken regular credit checks on Northside once advised of the arbitration, but maintained that those were regular credit checks, and were no more than ensuring that there was no concern about insolvency (and he noted that the responses to the credit checks did not give any reason for concern).
[60] In response, the liquidators pointed to a number of changes in the trading relationship, particularly around the time of commencement of the specified period, including the very fact that Timberworld felt it necessary to make a series of credit checks between July 2009 and March 2010:
(a) At the start of the trading relationship 80 per cent of the payments were referable to specific invoices, but by the time of the specified period the majority of payments were round sum amounts.
(b)There was a significant increase in the average amount overdue at the end of each month – in the 22 months prior to the specified period the average amount overdue was $28,788, whereas in the 11 months from the start of the specified period until supply ceased in April 2010, the average increased to $50,442.
(c) Northside was regularly in the position of owing Timberworld significant amounts for an extended period of time during the specified period.
(d)Mr Carpenter’s evidence that Timberworld’s customers normally reduced their accounts by lump sum payments rather than by reference to specific invoices (because they relied on release of lump sums at certain stages throughout projects) was not borne out by evidence. Ms Madsen-Ries referred to one of Northside’s customers (the owners of a Torbay property) paying the exact amount of each payment claim on approximately a monthly basis. Further, payments on construction contracts are usually on the basis of specific payment
schedules. Timberworld has not given any specific evidence of a contrary industry practice.
(e) Timberworld made a credit check in relation to Northside on 18
January 2006, but nothing further until 16 July 2009. From 16 July
2009 to 26 March 2010, Timberworld made four credit checks.26
(f) Timberworld stopped supplying Northside in April 2010.
(g) Timberworld knew that Mr Painting’s previous company, Northside
Homes Ltd, had gone into liquidation.
(h)Timberworld had not provided any documentary evidence to support the general assertions made by Mr Carpenter.
[61] The test for good faith is a subjective one. Although the factors advanced by the liquidators raise a doubt as to whether Timberworld had an honest belief that Northside was not in any financial difficulty, and hence that it was not being treated differently to other creditors, I will give Timberworld the benefit of the doubt on this aspect of the test, given the views that I have reached on the next aspect.
Suspicion of insolvency
[62] To meet the second limb of the defence, Timberworld must show that a reasonable person in its position would not have suspected, and that it did not have reasonable grounds for suspecting, that Northside was or would become insolvent. The first aspect requires an objective analysis by reference to a reasonable person having the knowledge and experience of the “average business person”. This hypothetical creditor is assumed to have the full range of information that was
available to Timberworld.27 The second limb requires consideration of what was in
fact known to Timberworld (a subjective analysis) and whether that provided reasonable grounds for suspecting insolvency (introducing an objective element).
26 16 July 2009, 27 October 2009, 11 February 2010 and 26 March 2010.
27 Cussen v Federal Commissioner of Taxation (2004) 22 ACLC 1528 (NSWCA).
[63] The test for suspicion is that there be more than “a mere idle wondering” whether or not something exists: there must be cause for a positive feeling of actual apprehension or mistrust.28 Ultimately, however, whichever test is applied, the Court has to be satisfied that the creditor has established that it had no reasonable grounds for suspecting insolvency, involving an objective consideration of the circumstances.
[64] Counsel for Timberworld relied on Mr Carpenter’s evidence that Timberworld had received no information from within the industry that Northside was in any difficulty, and relied on the fact that the credit checks did not reveal any reason for concern. However, although that might help a case for lack of actual knowledge of insolvency, it does not address what the Court must determine, which is whether it had any grounds for suspecting insolvency.
[65] The critical evidence is the timing and frequency of the credit checks, coupled with the change in nature and timing of payments. The increase in average indebtedness and the length of time Northside was taking to make payments, and the shift from payment of specific invoices to lump sum payments which did not clear all debt, created a background that would cause some concern to the reasonably prudent creditor. The number and nature of credit checks (whether or not they were initially instigated by the advice of the arbitration on the Torbay project), goes beyond a mere idle wondering. I find that Timberworld had reason to suspect insolvency, and in all likelihood, did so. For this reason I find that it is not entitled to the defence under s 296 of the Act.
Value given/alternative of position
[66] Given the finding I have just made it is not necessary for me to consider the third element of the statutory defence. I will do so, however, for the sake of completeness.
[67] This aspect of the defence requires Timberworld to show that following receipt of the payment it gave new value, or undertook a deliberate course of conduct
28 Refer Blanchett v McEntee Hire Holdings Ltd [2011] NZCCLR 4 (HC).
that it would not have taken but for receipt of the payment, and in belief in its validity.29
[68] Timberworld has provided no evidence of any alteration of position. It relied solely upon the fact that the payments it received related to goods supplied. This is met by the decision of the Court of Appeal in Farrell v Fences & Kerbs Ltd30 that antecedent in debt is not value for the purposes of s 296(3) of the Act.
[69] For all of the reasons I have given above I find that Timberworld is not entitled to avail itself of the defence in s 296(3) of the Act.
Is it equitable to order payment?
[70] The last ground advanced by Timberworld for resisting the liquidators’ claim is that it would be inequitable to order repayment, as the liquidators seek. It relies in this respect on the provision of s 295 that the Court may order repayment to the company of a sum that the company has paid under the transaction,31 or an amount that fairly represents some or all of the benefit that the person received because of the transaction.32
[71] The liquidators say in response that the Commissioner had no obligation under the Tax Administration Act to act within a given time, and indeed that it could be argued that it would have dealt with Northside unfairly if it had not allowed it time to address its tax obligations. In addition the liquidators say that the repayment is sought for the benefit of all creditors, in accordance with the statutory priorities and within the class of unsecured creditors in proportion to their respective debts.
[72] Counsel for Timberworld submitted that it would be unfair to order
Timberworld to repay the money because:
(a) Northside’s insolvency essentially arises out of its debt to the
Commissioner of Inland Revenue.
29 Re BeeJay Builders Ltd (in voluntary liq) [1991] 3 NZLR 560 (HC).
30 Farrell v Fences & Kerbs [2013] NZCA 91, [2013] 3 NZLR 82 at [70], [80] and [86].
31 Sections 295(a).
32 Sections 295 (c).
(b)The Commissioner allowed that debt to accumulate from 2004, and took no steps to recover it until 2011 by which stage the debt had accumulated to some $274,000, more than half of which was penalties and interest.
(c) Timberworld had no knowledge of the worsening tax position and was
prejudice by the Commissioner’s inaction.
(d)In these circumstances it was unfair that the Commissioner should now be the sole beneficiary of any repayment (as a consequence of the preferential debt of $57,000 and the majority of the other debt).
[73] Section 295 states that the Court “may” make one or more of the orders set out in the section, including those set out in s 295(a) and (c). The section does not state how that discretion is to be exercised, and it is by no means certain that there is a general discretion once an insolvent transaction has been established.33
[74] Counsel for the respondent relied in particular on the wording of s 295(c) to the effect that the Court could order a person an amount that in the Court’s opinion fairly represents some or all of the benefits the person has received (emphasis added). He also relied on the obiter comment of the Court of Appeal in Levin v
Market Square Trust:34
Considerations of fairness (using that concept loosely) arise later in the regime, when the court is considering what orders, if any, to make under s
295 or whether to deny the liquidator recovery under s 296(3).
[75] Reading s 295 in relation to these authorities it seems that the Court has a discretion not to order payment if to do so would cause unfairness to the creditor. However, given that Parliament has prescribed in s 296(3) particular conditions under which a payment must not be set aside on the basis of unfairness to the
respondent, the threshold for any further discretion under s 295 should be a high one,
33 Refer Heath and Whale on Insolvency at [24.119]; and Cussen v Sultan (2009) 74 ACSR 496 (NSWSC) where the Supreme Court of NSW found that there was no discretion in the comparable section of the Australian Corporations Act 2001 (s 588FF) despite the use of the word may.
34 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [49].
going beyond a general sense of unfairness to some cogent and compelling factor going beyond the s 296(3) defence. Anything less would undermine the requirements of s 296(3), and would also be an unprincipled departure from the basic principle of the insolvency regime to achieve fairness amongst all creditors (inter se) as distinct from doing justice or achieving fairness between a particular creditor and the company.
[76] Counsel Timberworld relied on statements in Hansard in the debates leading to the introduction of s 295 by the Companies Amendment Act 2006,35 referring to unfairness as a consequence of delays by the Commissioner in enforcing tax obligations, given that it enjoyed preferential status for some taxes. Whilst I accept that there can be an element of unfairness in those circumstances, and I do not regard it as the kind of unfairness that warrants exercise of the discretion under s 295 not to order repayment where an insolvent transaction has been established. It is a matter
for Parliament to address if it sees that to be necessary.
[77] Counsel for Timberworld advanced two other arguments for exercising the discretion under s 295 not to order repayment:
(a) The liquidators settled Northside’s claim against Mr Painting for repayment of the shareholders account, for too little. There is nothing in that point. The Court will rarely assist it purely commercial decisions are in issue.36 There is no evidence to suggest that the liquidators failed to act on appropriate considerations. Moreover, Timberworld is not affected by the settlement as it holds a personal
guarantee from Mr Painting.
(b)The Commissioner should be estopped by his failure to pursue the unpaid taxes sooner from pursuing the tax debt. There was nothing in this. There is no evidence to support an argument of equitable
estoppel. The Commissioner has a statutory obligation to recover the
35 By Pansy Wong MP.
36 Heath and Whale on Insolvency at [22.1] and [22.4].
taxes. He cannot be estopped by past conduct from performing his
statutory obligations.37
Decision
[78] For the reasons I have given the transactions identified as voidable in the
liquidators’ notice to set aside voidable transactions dated 3 May 2012 are set aside.
[79] I further order that Timberworld pay the liquidators the sum of $73,490.46 (in accordance with s 295(a) of the Companies Act 1993), together with interest on that sum from the date of filing of these proceedings to the date of payment at the rate of
5 per cent per annum.
[80] Timberworld is also to pay costs to the liquidators on a scale 2B basis, together with disbursements as fixed by the Registrar.
Associate Judge Abbott
37 Challenge Realty Ltd v Commissioner of Inland Revenue [1990] 3 NZLR 42 (HC).
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