Levin v Titan Cranes Limited
[2013] NZHC 2628
•10 October 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-2275 [2013] NZHC 2628
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of G T RIGGING LIMITED
BETWEEN HENRY DAVID LEVIN and VIVIEN JUDITH MADSEN-RIES
Applicants
ANDTITAN CRANES LIMITED Respondent
Hearing: 16 September 2013
(further submissions received 30 September 2013
Appearances: N H Malarao and K H Kuang for Applicants
D G Dewar and M Freeman for Respondent
Judgment: 10 October 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 10 October 2013 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Meredith Connell, Auckland, for Applicants
Thomas Dewar Sziranyi Letts, Lower Hutt, for Respondent
LEVIN and MADSEN-RIES v TITAN CRANES LIMITED [2013] NZHC 2628 [10 October 2013]
[1] This is a voidable transaction case. The liquidators of G T Rigging Ltd (in liquidation) seek an order setting aside payments G T Rigging Ltd made to Titan Canes Ltd totalling $92,401.32 and an order for payment of that sum plus interest.
[2] As its name suggests, G T Rigging Ltd operated a rigging business which included the erection and dismantling of tower cranes and occasionally providing operators and dogmen for tower cranes. Titan Cranes Ltd operates mobile cranes. At the relevant times it had a branch in Auckland, but in 2009 the branch closed. Managerial staff that used to work in that branch has since dispersed. In late 2006 and early 2007 Titan provided cranage services to G T Rigging Ltd and issued these
invoices:
11 December 2006 $ 9,202.50
11 December 2006 $10,076.63
11 December 2006 $31,595.63
12 January 2007 $23,872.50
31 January 2007 $20,171.25Total: $94,918.51
[3] On 27 February 2007 Titan issued a credit note to G T Rigging Ltd for
$2,517.19, reducing the total payable under these invoices to $92,401.32. Titan’s
terms of trade required payment on the 20th day following the date of its invoice.
[4] G T Rigging Ltd made these payments to Titan:
16 February 2007 $25,000.00
6 March 2007 $10,000.00
3 May 2007 $5,000.00
22 June 2007 $26,410.6631 July 2007 $25,990.66
Total: $92,401.32
These are the payments which the liquidators wish to have set aside and repaid.
[5] On 12 April 2012 the liquidators served a notice under s 294 of the
Companies Act to set aside these payments. Titan gave a notice of objection on
30 April 2012. The liquidators began this proceeding on 2 May 2013.
The applicable law
[6] The Companies Amendment Act 2006 came into force on 1 November 2007.1
That Act significantly changed the voidable transaction provisions of the Companies Act 1993. The facts in this proceeding straddle those amendments coming into effect. The payments were made before the amendments came into force, but the company was ordered into liquidation, the liquidators gave their notice under s 294 and began this application afterwards. For this proceeding the inquiry is:
(a) Are the transactions voidable under the current version of s 292?
(b)If they are, would the transaction not have been voidable under the old law?
That is because section 27(2) of the Companies Amendment Act 2006 repealed s
292(1)-(4) of the Companies Act 1993 and substituted new subsections. The repealed provisions are no longer in force. There is a limited saving under s 27(5):
Nothing in this section makes voidable a transaction that was completed before this section came into force, and that transaction would not have been voidable if this section had not come into force.
[7] Titan contends that it has an available defence under the old law. It says that the payments were all transactions that took place in the ordinary course of business.2
Issues
[8] These are the main issues:
(a) Was G T Rigging Ltd able to pay its due debts when it paid Titan? (b) Were the payments made in the ordinary course of business?
(c) Does Titan have a defence under s 296(3) of the Companies Act?
1 Companies Amendment Act 2006 Commencement Order 2007.
2 See s 292(3) of the Companies Act 1993, as in force between 1 July 1994 and 1 November 2007.
(d)Can the Court refuse or modify its relief on account of delay by the liquidators or other discretionary factors?
[9] G T Rigging Ltd was ordered to be put into liquidation on the application of the Commissioner of Inland Revenue on 11 September 2008. The Commissioner’s application was filed on 28 April 2008. Accordingly, the specified period under s 292(5) of the Companies Act 1993 ran from 28 April 2006. Titan accepts that the payments were made within the specified period under s 292(5), but outside the restricted period under s 292(6). The payments were transactions under s 292(3)(e). It does not dispute that the payments it received enabled it to receive more towards satisfaction of the debt G T Rigging Ltd owed it than it would receive in the liquidation. It does not say that this is a running account case under s 292(4B) of the Companies Act.
[10] The burden of proof varies according to the issues:
(a) The liquidators are required to prove that G T Rigging Ltd was not able to pay its debts at the time of the payments because the payments were not made within the restricted period under s 292(6).
(b)Titan needs to establish that the payments were transactions in the ordinary course of business.
(c) Titan has the burden of proving an affirmative defence under s 296(3).
(d)Titan has the burden of raising any relevant discretionary factors under s 295.
Was G T Rigging Ltd able to pay its due debts when it paid Titan?
[11] The enquiry is as to cash-flow solvency, rather than balance sheet equity.
The test laid down by Richardson J in Re Northridge Properties Ltd (In
Liquidation)3 remains authoritative. Titan summarised the test as follows:4
1 The test is an objective one.
2The words “as they become due” mean as the debts become legally due. However, if it established that an unsecured creditor is not making demand for his debt and does not intend to demand repayment in the immediate future, the debt to that creditor should not be regarded as due and payable.
3Consideration of ability to pay debts is concerned with the company’s present position (or its position at the time of the transaction the liquidators seek to have set aside). However, its ability or inability to pay debts in the recent past may become relevant.
4Outstanding debts must be taken into account in determining a company’s ability to meet its debts as they become due. However, outstanding debts are not determinative. The court must be careful to not assume that non-payment is the result of inability to pay (as opposed to unwillingness to pay or non-payment for other reasons such as administration difficulties).
5The company is not required to keep sufficient cash on board at all times to pay all its debts. It is a matter of striking a balance. It is not a matter of measuring assets against liabilities. The section is essentially concerned with solvency. There must be a substantial element of immediacy in the ability to provide cash from non-cash assets if required (however debts that become due during the period of assets to be converted into cash then also need to be taken into account).
6A company may maintain solvency by recourse to borrowed funds, provided borrowing is on deferred terms or the lender is not a creditor whose debt cannot be repaid when it becomes due and payable.
[12] Titan has not adduced any evidence as to the ability of G T Rigging Ltd to pay its debts as they fell due. Instead, it attacks the evidence relied on by the liquidators and says that it does not show an inability to pay due debts at the relevant times.
[13] The liquidators have obtained copies of management accounts of
G T Rigging. If they could be relied on, they would show insolvency. They show a
3 Re Northridge Properties Ltd (In Liq) SC Auckland M46/75, 13 December 1977. See the summary by Davison CJ in Re Universal Management Ltd (In Liq) (1981) 1 NZCLC 95-026 (HC).
4 The liquidators put the test in broadly similar terms.
consistent working capital deficit. The liquidators acknowledge however that it would not be safe to rely on them. They have not been able to confirm that the accounts are sound.
[14] Instead they say that insolvency can be established from the company’s failure to pay identified undisputed debts and the absence of sufficient realisable assets available to meet the company’s unsecured creditors. I accept their approach, but my analysis differs a little from theirs.
[15] There at least two undisputed debts: income tax and the Titan debt.
[16] The Commissioner of Inland Revenue claimed in the liquidation for
$464,740.64. That included $33,273.89 for income tax for the year ended 31 March
2005 and $45,119.91 for income tax for the year ended 31 March 2006, a total of
$78,393.80. The income tax for these years was assessed on returns filed by G T Rigging Ltd. The Commissioner’s claim in the liquidation also included late penalties and interest, that accrued later, and later income tax and other taxes, some of which were the subject of default assessments. For this decision I treat only the
$78,393.80 as in arrears at February 2007. Other taxes may have fallen due by that date, such as provisional income tax for the year ending 31 March 2007 but there is not enough evidence to say what that was. There is no dispute as to the company’s indebtedness to the Commissioner for $78,393.80 for unpaid income tax.
[17] The Titan debt for $92,401.32 was also overdue and was undisputed. Later
G T Rigging Ltd did purport to dispute the debt when Titan pressed for payment. On
24 May 2007 it wrote to Titan asserting that Titan had not complied with G T Rigging Ltd’s terms for payment because Titan’s invoices did not state G T Rigging Ltd’s purchase order number. That was spurious and Titan treated it as such. G T Rigging Ltd had earlier paid without insisting on purchase numbers being required. There is no evidence that such matters formed part of the parties’ contract. The asserted defence was no more than a stalling device – itself a sign of insolvency.
[18] The failure to pay overdue and undisputed debts is a sign of insolvency. The
English Court of Appeal made this point in Taylors Industrial Flooring Ltd v M & H
Plant Hire (Manchester) Ltd.5 That was a case where a creditor applied for a liquidation order without relying on the company’s non-compliance with a statutory demand. The creditor was able to rely on the failure to pay the undisputed debt. Dillon LJ said:6
The first limb is that if a debt is due and an invoice sent and the debt is not disputed, then the failure of the debtor company to pay the debt is itself evidence of inability to pay. That appears from the judgment of Harman J in Cornhill Insurance plc v Improvement Services Ltd [1986] BCLC 26, [1986]
1 WLR 114. The headnote correctly states that ([1986] 1 WLR 114):
'Where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that accordingly, the defendants could properly swear to their belief in the plaintiff company's insolvency and present a petition for its winding up.'
The judge refers in passing to a statement by Vaisey J in an earlier case:
'Rich men and rich companies who did not pay their debts had only themselves to blame if it were thought that they could not pay them'. It is not
right to say, as was submitted to us by counsel for the respondent
(Mr Sterling) 'Well, it may be just that they do not want to pay and so you cannot from non-payment of an undisputed debt deduce inability to pay'.
[19] That also applies when the court is considering ability to pay due debts under s 292(2)(a) of the Companies Act. Evidence that a company did not pay undisputed debts goes to prove inability to pay debts at that time.
[20] The liquidators add to that by considering what assets G T Rigging Ltd had in early 2007 that it could use to meet its debts. As a rigging company, it had little in the way of plant and equipment and that could not be readily turned into cash. It did however have a debtor’s ledger. In February 2007 it entered into a factoring agreement with Capital and Merchant Finance Ltd. G T Rigging Ltd’s trade debtors would not be available to pay its debts directly because they had been charged in favour of Capital and Merchant Finance Ltd. Instead G T Rigging Ltd drew down funds from Capital and Merchant Finance Ltd under the factoring agreement. In February 2007 it drew down $173,000. Its bank statement for that month shows that it paid Titan $25,000. The bank account was in credit for most of the month, but there were not enough funds in the account to pay off all of the Titan debt and the
outstanding income tax. That is evidence of insolvency.
5 Taylors Industrial Flooring Ltd v M & H Plant Hire (Manchester) Ltd [1990] BCLC 216.
6 At 219.
[21] The liquidators also make the point that factoring agreements tend to be a last resort measure for companies under financial pressure.
[22] The liquidators apply a similar approach to the times of later payments to Titan. G T Rigging Ltd replaced the Capital and Merchant Finance factoring agreement with an overdraft facility with Westpac New Zealand Ltd. In July 2007 it had drawn down $159,668.99 from Westpac. Westpac took security over trade debtors under a general security agreement. Again G T Rigging Ltd did not have enough cash in hand or realisable assets to meet all its liabilities to both Titan and the Inland Revenue. That is evidence that it could not pay its due debts.
[23] Between February 2007 and July 2007 G T Rigging Ltd took out loans from finance companies to purchase vehicles:
(a) $21,561.12 to buy a Volkswagen Polo; (b) $342,439.32 to buy a Porsche;
(c) $96,740.48 to buy a Dodge Ram utility; and
(d) $86,340 to buy another Dodge Ram utility.
[24] The need to pay loan instalments would also have constrained the company’s ability to pay other due debts. The vehicles could not have been used to meet other debts as the finance companies had securities over them.
[25] This examination of the company’s ability to meet its debts from assets does not follow the liquidators’ case exactly. The liquidators have assumed that there were other trade creditors, but in assessing them, have had regard to management accounts which may not be correct. They have also taken into account a default assessment of income tax for the year ending 31 March 2007. There is no evidence when the Commissioner made that default assessment and there is no evidence that there was a liability for income tax for that year in the absence of the Commissioner’s default assessment. I have not taken into account any undisputed
debts in arrears except the income tax and the Titan debt, but I have reached a similar conclusion to the liquidators.
[26] Against that, Titan protests that it cannot be right that G T Rigging Ltd was insolvent at the time. It raises these points:
(a) The failure to pay taxes can be put down to unwillingness, not to inability;
(b)The business had a high turnover and good cashflow with relatively low expenses – mainly wages;
(c) The company was able to pay its trade creditors when due until 2008, when it began to default;
(d) The company’s management accounts are unreliable;
(e) The overdraft facility for $200,000 arranged in June 2007 shows that Westpac must have been satisfied with the overall solvency of the company, including its net asset position and its ability to service the overdraft;
(f) The company’s vehicle purchases show its ability to expand its asset base; and
(g) The company was able to look to shareholders for funding.
[27] The fact that management accounts were unreliable is not positive evidence of solvency. Instead it may point the other way. A well-managed company is likely to have good accounts. A company without proper accounting systems is more likely to founder.
[28] There is wider point here. The company was not well managed. That can be seen from the fact that although the business should have been sound and should not have got into financial difficulties, it did default in its obligations – for tax it
defaulted consistently over time. Its resort to debt factoring on two occasions and its purchase of luxury vehicles on credit are indicative of poor financial management.
[29] Its ability to pay some creditors, such as wages, secured creditors and some trade creditors is not conclusive that it could pay all creditors.
[30] While the director of the company gave a mortgage over his home as security for Westpac’s facility, there is no evidence that he injected any funds of his own into the company during the relevant period. Westpac was willing to advance funds on the basis that it had adequate security, which would give it a preferred position if the company failed. It does not follow that unsecured creditors were adequately protected at the same time.
[31] There is no evidence that the company was unwilling as opposed to unable to overdue taxes.
[32] When I weigh all these matters, I find that the liquidators have established that G T Rigging Ltd was not able to pay all its due debts from its resources at the times that Titan was paid. The matters raised by Titan are not enough to disturb this finding.
Were the payments in the ordinary course of business?
[33] In Waikato Freight and Storage (1988) Ltd v Meltzer,7 Tipping J said:
In our view the judicial approach has become over-complicated and over- refined. The question is whether, at the time it was made, the relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned. So too is the previous commercial relationship between the parties. The observer spoken of in the Privy Council is in reality the court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether, on the evidence before the court, the transactional payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out-of-the-ordinary transaction for the parties to have entered into?
7 Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 at [31].
[34] It is beside the point that the company making the payments is insolvent at the time. Insolvency does not by itself take the transaction out of the ordinary course of business. That is because the enquiry whether the transaction was in the ordinary course of business does not arise until there has first been a finding that the company was unable to pay its due debts at the time.
[35] It can be relevant to enquire into the exercise of pressure by the creditor. In Chatfield v Mercury Energy Ltd,8 Randerson J said:
In my judgment, the existence of pressure in the form of threats, of the kind identified, will generally be relevant where they evidence an abnormal or special circumstance which the objective bystander would regard as taking the transaction out of the ordinary course of business. Where the pressure applied is of a routine nature, such as the making of enquiries or a written request for payment, it is less likely to be regarded as taking the matter outside the ordinary course of business. However, as the nature, scale, and potential consequences of the pressure increases, it may, in the circumstances, be sufficient to indicate a departure from the ordinary course of business. Where, for example, pressure is applied in the form of a threat of the imminent appointment of receivers or the realisation of a security or the seizure of assets under a lease or hire purchase agreement, or the issue of legal proceedings, such events may be sufficient to indicate, along with any other relevant circumstances, that the transactions are made or transactions are entered otherwise than in the ordinary course of business. In making the assessment it will be relevant to consider the effect on the creditor’s (sic) business if the threat is carried out and the causative influence of the threat upon the payment or other transaction. A payment made or transaction entered in direct response to a serious threat to the continuation of the creditor’s (sic) business may be such as to take the transaction outside the ordinary course of business. Similarly, with a threat to cut off essential supplies unless payment is made.
It is important to emphasise that all of the circumstances must be considered in the particular case from an objective standpoint to establish whether they are such as to give rise to a transaction outside the normal flow of business. This approach is consistent with that followed in a number of Australian cases which have held that a payment made in response to a threat of legal proceedings may be such as to take the transaction out of the ordinary course of business. ...
[36] In Stapley v Fletcher Concrete and Infrastructure Ltd the creditor refused to allow further supplies unless outstanding accounts were brought into order.
The Court of Appeal said:9
8 Chatfield v Mercury Energy Ltd (1998) 8 NZCLC 261,645 (HC) at 261,654.
9 Stapley v Fletcher Concrete and Infrastructure Ltd [2008] NZCA 442 at [26].
[26] Undoubtedly Fletcher applied pressure to Bedrock to make payments, just as it did with all other creditors who were outside their credit arrangements. But the mere existence of pressure by, for example, the withholding of supplies until payment is made, does not compel the conclusion that the payment is made outside the ordinary course of business. Indeed where conventional or usual debt collection measures are taken to recover a trade debt, it will ordinarily be difficult to establish that the making of a payment in response is outside the ordinary course of business. Some other circumstances will usually be required to establish that state of affairs.
[27] While the existence of pressure may be a relevant factor, all the circumstances must be considered from an objective standpoint in any given case to establish whether they demonstrate that the transaction is outside the normal flow of business: see the discussion in Chatfield v Mercury Energy Ltd (1998) 8 NZCLC
26,645 at 26,654.
[37] Ms Pritchard, Titan’s credit control officer, described Titan’s debt collection
policies and procedures:
... The construction industry is notorious for late payment. The people we contract to, who are often themselves sub-contractors, commit to projects in which they find themselves delayed and caught up in a multitude of payment issues. It is a regular feature of construction-based crane hireage that payments are received late.
[38] The procedures are in three stages:
(a) At Stage 1, when an invoice is overdue, a statement is sent stamped “Overdue” and the customer is advised that Titan will stop credit unless payment is made, an arrangement for payment is entered into, the debt is formally disputed or for some reason an exception has been authorised by management.
(b)Stage 2 is when the debt is two months overdue. A final notice is sent to the customer with a letter of final demand for payment. The customer is advised that the matter will be referred to a collection agency if payment is not made within 10 days.
(c) Stage 3 is when the debt is three months overdue. If the account is not settled the matter is referred to a collection agency or solicitor for legal action. In those cases an individual formal demand is made for
payment and advice is given of the consequences if payment is not made. For a company a statutory demand is served on the customer.
[39] Her evidence was that approximately a quarter of Titan’s customers tend to be bad payers. A significant number of them who get to stage 3 are referred to solicitors and a statutory demand, or formal demand, is issued. Generally by that stage most customers pay or settle the account. A number of Titan’s regular customers whom they still deal with have had demands made on them at least once. On occasions bankruptcy or liquidation proceedings have been issued when payment is not made following legal demand. Those cases are, in her experience, in the minority. Most customers pay following statutory demand, if not before. For Titan’s customers that are limited liability companies Titan gives no consideration to the actual solvency or insolvency of the company at any stage of the process. The sole consideration in most cases in issuing instructions to solicitors to proceed further than a formal demand is the legal cost of liquidation and bankruptcy proceedings compared to the size of the debt. G T Rigging Ltd had not been a regular customer of Titan’s but Titan had hired equipment to it in 2006 and invoiced it accordingly.
[40] In this case, G T Rigging Ltd did not pay on time. Titan issued an overdue statement in early 2007. Following that, G T Rigging Ltd paid $25,000 on
16 February 2007 and $10,000 on 6 March 2007. Titan sent a notice of final demand
(stage 2 in its debt collection procedures) in April 2007.
[41] G T Rigging Ltd responded, protesting against the demand. It purported to raise a dispute, alleging that Titan’s invoicing procedures were not in accordance with G T Rigging Ltd’s terms of trade. It offered to pay $5,000 a month in good faith, and tendered a cheque for $5,000. That was the payment received into Titan’s bank account on 3 May 2007 for $5,000. As already noted,10 the reasons put up by G T Rigging Ltd, contesting the way that Titan had invoiced it, were spurious. There is no evidence that those matters raised in the letters of G T Rigging Ltd were terms
of contract. They have all the hallmarks of a company playing for time.
10 See [17] above.
[42] On 10 May 2007, Titan’s lawyers issued a statutory demand under s 289 of the Companies Act 1993. The amount claimed was $52,401.32 for crane hireage. Impermissibly,11 Titan also claimed costs for serving the statutory demand.
[43] Lawyers instructed by G T Rigging Ltd wrote on 24 May 2007. They stated that G T Rigging Ltd disputed liability, relying again on G T Rigging Ltd’s claim that Titan had not complied with G T Rigging’s terms and conditions of trade. The letter went on, on a without prejudice basis, to make an offer of settlement by making four separate payments of $13,100 each in full and final settlement. Titan’s lawyers replied on 28 May 2007 rejecting this. They indicated that if payment was not made in full by 14 June 2007, liquidation proceedings would be started. That letter was not sent on a “without prejudice” basis. At the end of May G T Rigging Ltd had not complied with the statutory demand and had not applied to set it aside.
[44] Further communications between the lawyers – Titan’s lawyers writing on
8 June and G T Rigging Ltd’s lawyers writing on 13 June 2007 – resulted in an agreement that G T Rigging Ltd was to pay Titan $26,410.66 by 14 June 2007, and a further payment of $26,410.66 before 20 July 2007. G T Rigging Ltd then made the last two payments in issue in this proceeding, and they were accepted in full and
final settlement.12
[45] In this case G T Rigging Ltd made the first two payments when the debt to Titan was overdue. It paid in response to overdue statements issued by Titan. The amounts paid were rounded sums. The liquidators point out that G T Rigging Ltd had raised finance to be able to make these payments by factoring its debtor book to Capital & Merchant Finance Ltd. The liquidators submit that G T Rigging Ltd made these payments when it was under financial strain and as a result of Titan placing pressure on the company to satisfy an overdue debt.
[46] I do not accept that submission. The fact that a part-payment is for a rounded sum is not usually taken as being outside the ordinary course of business. Payment
11 Manchester Securities Ltd v Body Corporate 172108 [2013] NZHC 177 at [65]–[67].
12 Although G T Rigging Ltd’s final payment was for $26,410.66, Titan received only $25,990.66, presumably after the lawyers had deducted their fees. The liquidators are claiming only the net amount.
was made in response to steps taken at stage 1 of Titan’s debt-collecting procedures. That was not undue pressure. It is a normal step expected to be taken by a trade creditor when there has not been any payment made. I regard these two payments as within the ordinary course of business.
[47] The third payment was for $5,000. It was paid in response to the notice of final demand – Stage 2 of Titan’s debt-collecting policy. It was for a rounded sum. It was tendered as a payment in good faith and as the first of payments being made over an extended period of time. At the same time, the company had put up spurious grounds for disputing its liability to pay.
[48] I accept the liquidators’ submission that there was not a genuine dispute over the debt. Nevertheless, I do not regard the payment of $5,000 as outside the ordinary course of business. The steps taken by Titan to obtain payment were conventional debt-collecting steps which were a matter of course in the construction industry.
[49] The fourth and fifth payments were made in response to the statutory demand served on G T Rigging Ltd by Titan and by the threat by Titan’s lawyers to follow up with a liquidation application in default of payment. The issue here is whether this was such undue pressure as to take the matter outside the ordinary course of business. Mr Toebes, a Wellington lawyer experienced in insolvency work, has given evidence that the issue of statutory demands is very much part of standard debt-recovery steps taken by a creditor to recover payment from a company incorporated under the Companies Act. He notes the advantages of the statutory demand in that it is time-efficient, cost-efficient and effective. It will be standard for a creditor to rely on a statutory demand, even when the creditor has limited information about the debtor company. The response from the company served with the demand will assist the creditor in establishing what further steps to take by way of recovery.
[50] In response, the liquidators rely on evidence from Mr Kuran, an Auckland lawyer with relevant experience, that the issue of a statutory demand as a means of debt recovery is not a matter of course. It is his practice to advise clients of the risk that payments received after the issue of a statutory demand may be clawed back if
the company later goes into liquidation and that the clients should therefore consider carefully whether to go ahead with the demand.
[51] The question here is whether the service of the statutory demand and the later advice that a liquidation application would be filed amount to undue pressure so as to take the following payments out of the ordinary. It is important to note the effect of a statutory demand. If a company does not comply with the demand within the
15 working days allowed, there is a presumption that the company is unable to pay its debts. That presumption lasts for 30 working days from the last day for compliance with the demand. Within those 30 days the creditor may apply for a liquidation order. If the debt remains unpaid and the company does not adduce any evidence to rebut the presumption that it is unable to pay its debts, a liquidation order will be made ex debito iustitiae unless the company can persuade the court in its discretion not to make a liquidation order.
[52] The service of the statutory demand and the threat to bring a liquidation application, when there was a presumption of insolvency, are the kind of pressure which comes within Randerson J’s dictum in Chatfield v Mercury Energy. It is akin to the threat of appointing receivers imminently, realising securities imminently, and seizing assets under a lease or hire purchase agreement. The threat goes to the very existence of the company. When a creditor makes a payment in response to such pressure, it is no longer in the ordinary course of business. I accordingly find that the payments of 22 June 2007 and 31 July 2007 (totalling $52,401.32) were not made in the ordinary course of business.
[53] The payments of 22 June 2007 and 31 July 2007 are accordingly voidable under s 292 of the Companies Act 1993, but the first three payments are not voidable because they were made in the ordinary course of business and are saved under s 27(5) of the Companies Amendment Act 2006.
Does Titan have a defence under s 296(3)?
[54] Section 296(3) says:
(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—
(a) A acted in good faith; and
(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
[55] It is common ground that the current version of s 296(3) applies.13 The former version was repealed under the Companies Amendment Act 2006 and there is no saving provision. Titan is required to make out all three grounds under subsection (3). If it does make out all three grounds the court must not order payment under s 295 – the court has no discretion under s 296(3).
Good faith
[56] The liquidators rely on the judgment of the Court of Appeal in Levin v
Market Square Trust:14
The first matter the trust must establish, therefore, is that it received the property in good faith. The test of “good faith” has been clearly established by this court. The recipient of the property or money must show that he or she honestly believed that the transaction would not involve any element of undue preference either to himself or herself or to any guarantor (Re Orbit Electronics Auckland Ltd (In Liq) approved in Re Number One Men Ltd (In Liq).15 The cases show that a creditor is likely to fail this test where he or she has actual or implied knowledge of the company’s financial difficulties, due to the company’s cheques being dishonoured, its failure to pay its debts on time, or of the circumstances indicating serious cash flow problems.
13 Levin v Rastkar [2011] NZCA 210 at [55].
14 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [54]. The case was decided under the version of s 296(3) in force between 1 July 1994 and 31 October 2007. That
version of s 296(3) gave the court a discretion to decline relief in full or in part if the court
considered it inequitable to order recovery in full and if “the person from whom property is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside”.
15 Re Orbit Electronics Auckland Ltd (In Liq) (1989) 4 NZCLC 65,170; Re Number One Men Ltd
(In Liq) (2001) 9 NZCLC 262,671.
[57] The good faith requirement in (a) goes to the recipient’s honesty in believing
that it would not be preferred. In Royal Brunei Airlines Sdn Bhd v Tan,16
Lord Nicholls famously explained dishonesty in the context of accessory liability for breach of trust. He noted that acting dishonestly is not acting as an honest person would in the circumstances, and that that was an objective standard. He said:17
Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct not inadvertent conduct. Careless is not dishonesty. Thus for the most part dishonesty is to be equated with a conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. ...
[58] That offers helpful guidance when considering “good faith” under s 296(3). Because carelessness is not a component of dishonesty, it is important to avoid imputing absence of good faith to a recipient on the basis of what they ought to have known, rather than what they actually knew.
[59] Under the test in the Court of Appeal’s decision in Levin v Market Square Trust, to hold that Titan did not act in good faith requires the court not to be satisfied that Titan honestly believed that the payments would not involve any element of undue preference to itself. Titan’s evidence is that it collected payment from G T Rigging Ltd following routine procedures which did not involve any unusual elements. Ms Pritchard said:
There was nothing out of the ordinary about the debt collection procedure followed by Titan in order to chase payment of G T Rigging’s outstanding account. The fact that G T Rigging part paid when chased, did not pay in full until a statutory demand was made, and then sought to dispute the debt, unfortunately does not distinguish GT Rigging, or the manner of payment, from many of Titan’s other customers that are in arrears.
[60] The fact that Titan went to the stage of serving a statutory demand, and then threatening liquidation proceeding in the absence of payment, is consistent with
Titan taking a firm debt recovery policy to deal with G T Rigging Ltd’s slowness in paying. That Titan used measures such as service of a statutory demand and the threat of a liquidation application does not lead to a conclusion that Titan was aware that payments would involve an element of preference. It is to be remembered that Titan had dealt with G T Rigging Ltd only briefly. There was no long-standing relationship between the two companies. There was no reason to believe that Titan had any inside knowledge about G T Rigging Ltd. It knew that G T Rigging Ltd was a slow payer, but that knowledge is not enough to hold that it was acting in bad faith.
[61] Titan has satisfied the first limb.
Reasonable suspicion of insolvency
[62] In this context, it is standard to refer to the dicta of Kitto J in Queensland
Bacon Pty Ltd v Rees:18
A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence” as Chambers’ Dictionary expresses it. Consequently a reason to suspect a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses ... is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes – a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. ...
[63] It is also important to note that Kitto J warned against too ready an assumption of insolvency. He said:19
In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of ringing the last ounce of credit out of everyone who can be fobbed off with promises.
[64] Kitto J found on the facts of that case that the dishonour of a number of cheques did not create the requisite feeling of apprehension or mistrust.
[65] In Hamilton v Commonwealth Bank of Australia Hodgson J said:20
I accept that Queensland Bacon shows that it is insufficient that the circumstances give a reason to suspect the debtor might be insolvent: they must be such that the creditor should have suspected that the debtor was insolvent . . .
[66] Titan relies on the same factors that it relied on to show good faith. However, whereas under the test in Levin v Market Square Trust goes to the belief that the transaction does not involve any element of undue preference, here the matter goes to suspicion of insolvency. The test is not one of dishonesty but whether the information available to the creditor would have created Kitto J’s feeling of actual apprehension or mistrust.
[67] The liquidators point to Titan’s use of the statutory demand and the threat to bring a liquidation application. In Petterson v Allied Concrete Ltd,21 a creditor had issued a statutory demand but asserted absence of reasonable grounds to suspect under s 296(3)(b). Non-compliance with a statutory demand22 gives rise to a presumption of insolvency. Associate Judge Doogue held that a creditor’s resort to a statutory demand was evidence that would suggest insolvency to the creditor.23
[68] That a presumption of insolvency would arise is something a reasonable credit control manager in Titan’s shoes would appreciate. In this case, once the statutory demand had expired, Titan’s threats to issue a liquidation proceeding were based on the fact that it could legitimately issue the proceeding because it could rely on the presumption under s 288(1). Given that it could rely on that presumption and it would be for G T Rigging Ltd to show that it was in fact solvent, Titan can hardly be heard to say that it did not suspect – and a reasonable person in its position would
not have suspected – that the company was insolvent.
20 Hamilton v Commonwealth Bank of Australia (1992) 9 ACSR 90 at 113.
21 Petterson v Allied Concrete Ltd [2013] NZHC 710.
22 Companies Act 1993, s 288(1).
Alteration of position
[69] Titan does not say that it gave value for the payments it received. The decision of the Court of Appeal in Farrell v Fences and Kerbs Ltd,24 stands in the way of such a submission. Instead, Titan says that it altered its position in the reasonably held belief that the payments would not be set aside.
[70] In Re Bee Jay Builders Ltd (In Liq),25 Fisher J said:
The essence of an alteration of position for present purposes seems to me to be a deliberate course of conduct, be it act or omission, following receipt of the impugned payment which course of conduct the recipient would not have undertaken but for receipt of the payment and belief in its validity.
[71] Fisher J identified the injustice at which s 293(6) is directed in Baker Timber
Supplies Ltd v Apollo Building Associates (Tauranga) Soc Ltd (In Liq):26
The main purpose...is to assist a creditor if he has deliberately gone down one path in the reasonable expectation that he has received a valid payment, only to find that he is not only required to repay the money but in the meantime he has also lost a valuable alternative opportunity. In other words, he must have acted to his detriment on the strength of the insolvent company’s payment.
[72] In the same case, Fisher J made the point that simply applying payments received from an insolvent company in the general running of the company business is not a relevant change of position:27
I do not think it sufficient for a creditor simply to apply on its injection of the relevant funds into its working capital, with or without a reduction of its outstanding overdraft. In this case there is no satisfactory evidence of any conscious or deliberate decision to embark upon a course of action or refrain from an action in reliance upon the payment. There is no suggestion that because of the payment the applicant would now be unfairly denied the opportunity to take up a course which, without payment, would not have been pursued or would have been available as the case may be.
[73] Titan says that it has been prejudiced by the delay. It says that if it had known that the company was insolvent in 2007, Titan would have enforced its rights
24 Farrell v Fences and Kerbs Ltd [2013] NZCA 91, [2013] 3 NZLR 82.
25 Re Bee Jay Builders Ltd (in liq) [1991] 3 NZLR 560 (HC) at 566.
26 Baker Timber Supplies Ltd v Apollo Building Associates (Tauranga) Soc Ltd (In Liq) (1990)
5 NZCLC 66,791 (HC) at 66,793.
27 Ibid.
against G T Rigging Ltd’s director, Mr Fraser. It says that Mr Fraser is now bankrupt and is understood to be in Australia. Titan does not identify what rights it would have had against Mr Fraser. It has, for example, not put in evidence any guarantee signed by Mr Fraser on which it could have sued him.
[74] Titan referred to the Court of Appeal’s decision in Meltzer v Axiom International Ltd,28 a case about a change of position under s 270(3) of the Companies Act 1955.29 In that case the creditor did have a possible right of recourse from a guarantor. The liquidator did not take any steps to challenge the validity of payments for three-and-a-half years after the liquidation. The Court said:30
We consider that, with no suspicion of preference (the good faith requirement) and in the absence of any notice or other suggestion of any questioning of the validity of the payments of any more than three years, the assumption of validity inherent in refraining from taking steps otherwise than to recover the monies amply satisfies this requirement.
[75] On the facts in that case, the court found a relevant alteration in position in a failure to pursue the director of the company and its estate on a guarantee given by the director.
[76] It is necessary to establish the applicable times of potential alteration of position. In Farrell v Fences and Kerbs Ltd the Court of Appeal said:31
[86] We conclude that, with one exception, proof of all three elements of s 296(3) of the Companies Act 1993 is to be established at the time the payment or other company property is received. Specifically, in relation to s 296(3)(c), the giving of value must be proved to have occurred at that time and does not include value given to the company at the time the antecedent debt was created. This conclusion is supported by the authors of Heath & Whale on Insolvency.
[87] The exception to this general approach arises in the second part of s 296(3)(c) relating to alteration of position in the reasonably held belief that the transfer of the property was valid and would not be set aside. Although in some cases the alteration of position might occur contemporaneously with receipt of the property, it would typically
28 Meltzer v Axiom International Ltd (2001) 9 NZCLC 262,671 (CA).
29 The company had not re-registered under the 1993 Act. That provision is in the same terms as the former version of s 296(3) of the Companies Act 1993, as originally enacted.
30 At [38].
31 Farrell v Fences and Kerbs Ltd [2013] NZCA 91; [2013] 3 NZLR 83 at [86]-[87].
occur after receipt. The legislation necessarily allows for that possibility.
[77] Titan could not have sued Mr Fraser before liquidation on the basis that he had secondary liability for G T Rigging Ltd’s debt to Titan. That is because G T Rigging Ltd had been paid and until liquidation the payments could not be disturbed. The power to set the payments aside under s 294 only arose on liquidation. The liquidators’ evidence is that after liquidation Mr Fraser could not be contacted. If the liquidators could not contact Mr Fraser, it is doubtful that Titan, who had dealt with his company only briefly, would be in any better position to trace him and sue him. Given his bankruptcy, it is highly dubious that even if Titan had a cause of action against Mr Fraser, any claim against him would have resulted in any payment to it. The suggestion that Titan lost some valuable opportunity is speculative. On these facts, Titan has not established that there was any relevant change of position under s 296(3) in the sense that in addition to having to pay back money to the liquidators it has lost some other valuable opportunity.
[78] Overall, Titan has not made out its defence under s 296(3) because it has not satisfied the reasonable suspicion test under s 296(3)(b) and has not shown a relevant alteration of position on its part under s 296(3)(c).
Exercise of discretion
[79] Titan says that even if it fails on the defence under s 296(3), the court ought to exercise its discretion in its favour not to make any orders under s 295. It raises two matters:
(a) It alone of the trade creditors of G T Rigging Ltd has been singled out to pay money back to the company, whereas payments to no other creditors have been attacked as insolvent transactions.
(b) Delay by the liquidators in using their powers under ss 292–295.
Singled out
[80] Titan’s complaint is that it alone, amongst the unsecured creditors, has been selected to refund payments as a voidable transaction. It complains that this is “unfair”. Titan’s submission invites me to speculate that there are other creditors who received payments otherwise than in the ordinary course of business, who might be the subject of voidable transaction claims, but it alone has been targeted for action. There is no evidence to suggest that there are other creditors against whom voidable transaction claims can be brought. The decision whether to bring a voidable transaction claim is pre-eminently one for the judgment of the liquidators. They will need to evaluate the strengths of any claim, potential defences, and whether it is worth pursuing the alleged preferred creditor. The liquidators need to consider carefully what litigation to undertake, and whether there are resources available to fund proceedings. The Court is not in a position to second-guess such decisions. The fact that the liquidators are claiming against only one creditor under the voidable transaction provisions of the Companies Act 1993 is not by itself, or in combination with any other factor, a matter for the exercise of a discretion under s 295.
Delay by the liquidators
[81] For Titan’s complaint about delay by the liquidators, it is helpful to see when time starts to run under the limitation statutes. There are two reasons. One is to see if the application is statute-barred. The other is to see if there was relevant delay by the liquidators before time started to run.
[82] As the liquidators’ application under s 295 is to recover payment, there are relevant limitation periods under s 4(1)(d) of the Limitation Act 1950 (six years from the date on which the cause of action accrued) and s 11(1) of the Limitation Act 2010 (six years after the date of the act or omission on which the claim is based).32
[83] For limitation purposes, the key dates are:
32 The limitation period under the 2010 Act is subject to extension for three years after the late knowledge date, but with a 15 year longstop after the date of the act or omission on which the claim is based (s 11(3)).
22 June 2007 Payment of $26,410.66
31 July 2007 Payment of $25,990.66
11 September 2008 Court order putting company into liquidation
12April 2012 Liquidators’ notice under s 294 Companies Act 1993
30 April 2012 Titan’s notice of
objection
2 May 2013 Start of this proceeding
[84] It is not necessary to take account of the payments on 16 February, 6 March and 3 May 2007 as they were made in the ordinary course of business and are not voidable.
[85] The liquidators filed this proceeding about 5 years 10 months after the earlier of the voidable payments. Accordingly, no matter whenever the six years’ limitation period is measured from, this proceeding is not statute-barred.
[86] Both sides filed helpful supplementary submissions on the limitation point. It would hardly do justice to their efforts for me to say nothing more about limitations. Both agreed that the relevant statute was the Limitation Act 1950. The Limitation Act 2010 came into force on 1 January 2011. The defences under that Act apply
only to claims based on acts or omissions after 31 December 2010.33
Notwithstanding its repeal,34 the Limitation Act 1950 continues to apply to an act or omission before 1 January 2011, and to which it applied immediately before its repeal.35 That in turn reflected the parties’ general agreement that the cause of action accrued under the Limitation Act 1950 on the company being ordered into liquidation, and that was also the relevant act or omission on which the claim was based under s 11(1) of the Limitation Act 2010. Adopting the time of liquidation as the date from which time runs excludes other potential dates: the dates of payment
and the date on which the liquidators gave their notice under s 294.
33 Limitation Act 2010, s 10(a)(i).
34 Limitation Act 2010, s 57.
35 Limitation Act 2010, ss 59 and 61, Limitation Act 1950, s 2A.
[87] It is relevant that proceedings under ss 294 and 295 of the Companies Act involve the setting aside of transactions and giving ancillary relief, where the transactions would otherwise be valid and effective between the parties to those transactions. This aspect of the law as to preferential transactions was recognised even before the law was governed by statute. In Marks v Feldman, Kelly CB said:36
... though a perfectly valid transaction in itself, [it] was voidable by the assignee in the event of a subsequent adjudication of bankruptcy. ... [T]he transaction still retains its original character; it is good and valid as between the parties, but it is still voidable by the assignee. ...
Here, the transaction was voidable at the suit of the assignee from the time the property of the bankrupt became vested in the assignee.
See also to similar effect the dictum of Lord Collins in Rubin v Eurofinance SA:37
The order does not vindicate property rights which the company itself would have had prior to liquidation, but statutory rights which the liquidator has under the statutory scheme in consequence of winding up. The purpose of the order for the payment of money to a company in liquidation is not to compensate the company, but to adjust the rights of creditors among themselves in such a way as to eliminate the effects of favourable treatment afforded to one or more creditors, to the exclusion of others in the period immediately before an insolvent administration commences.
[88] As the transactions could only be set aside following the appointment of an assignee in bankruptcy or the appointment of a liquidator, time could not start to run against liquidators until they were appointed. This approach is consistent with decisions in insolvency proceedings where it has been held that a fresh cause of action arises upon adjudication in bankruptcy or liquidation: Re J E Hurdley & Son Ltd (in liq); Re Network Agencies International Ltd (in liq); Taylor v Official Assignee; Redmond Trustees No.5 Ltd v Official Assignee; and Palmer v Official
Assignee.38 That is in contrast to cases where existing causes of action are
enforceable after bankruptcy or liquidation by the assignee or liquidators respectively.39 Proceedings to set aside a voidable transaction are a fresh cause of action that arises on liquidation because there is no power to set them aside before
36 Marks v Feldman (1870) 5 LR QB 275 at 280-281.
37 Rubin v Eurofinance SA [2012] UKSC 46, [2013] 1 AC 236 at [98].
38 Re J E Hurdley & Son Ltd (in liq) [1941] NZLR 686 (CA); Re Network Agencies International
Ltd (in liq) [1992] 3 NZLR 325 (HC); Taylor v Official Assignee HC Auckland CIV-2006-404-
7115, 26 August 2009; Redmond Trustees No.5 Ltd v Official Assignee HC Auckland CIV-2010-404-7, 27 August 2010; and Palmer v Official Assignee [2011] 1 NZLR 846 (HC).
39 See for example Arataki Properties Ltd v Craig [1986] 2 NZLR 294 (CA).
liquidation. Accordingly time did not start to run against the liquidators before they were appointed. Associate Judge Abbott expressed a similar view in Levin v West City Construction Ltd.40
[89] There is another possibility – that the cause of action does not arise until the liquidator has first given a notice under s 294. On this approach, the action of setting aside the transaction is the relevant event that must occur before a proceeding under s 294 or 295 can be commenced. The argument would be that the setting aside cause of action did not accrue until the liquidator gave notice. Hugh Williams J hinted at such an approach in Redmond Trustees (No.5) Ltd v Official Assignee when he
said:41
Alienations to set aside under s 60 are voidable, not void. Being valid until set aside, it is therefore arguable any cause of action (or defence) under s 60 only arises when the alienation is set aside.
[90] If the date of the notice under s 294 is taken as the time from which time runs, then the time for a liquidator to give notice is not fixed by the statute. That gap leaves room for an argument that the discretion under s 295 to grant or withhold relief can be used to address delay by liquidators in setting aside voidable transactions.
[91] Against taking the date of the s 294 notice, the liquidators submitted that the notice was no more than a procedural requirement. It did not go to the substance of the cause of action. I accept that characterisation. The position is analogous to a claim for breach of contract following cancellation: time runs from breach by the defendant, not from the notice of cancellation under s 8 of the Contractual Remedies Act 1979.
[92] I also accept the submission for the liquidators that using the liquidation date as the point from which time begins to run will achieve consistency with the
limitation period for setting aside proceedings under s 207 of the Insolvency Act
40 Levin v West City Construction Ltd [2013] NZHC 929 at [56].
41 Redmond Trustees No.5 Ltd v Official Assignee HC Auckland CIV-2010-404-7, 28 August 2010 at [82](d).
2006.42 I also note that the English courts have reached a similar position on limitations for proceedings under the Insolvency Act 1986.43
[93] As the time for bringing this proceeding started on 11 September 2008, the date of liquidation, the liquidators began this application about 4 years 8 months afterwards and were within the six years’ limit under s 4(1)(d) of the Limitation Act
1950. Accordingly, Titan does not have a limitation defence as such. Instead, it complains about delay on the part of the liquidators, even though proceedings were launched inside the limitation period. There is no complaint about delay in running the application once it was launched.
Liquidators’ steps up to filing of application
[94] Mr Levin says that at the outset of the liquidation, the liquidators had only limited records. The director of G T Rigging Ltd could not be contacted and did not provide any records. An accounting practice gave them records in 2009 only after the liquidators had given notices under s 261 of the Companies Act 1993. Banks (including Westpac) were requested to but did not provide information promptly. In October 2009 the liquidators contacted Titan for information. Titan responded and gave information in good time. Mr Levin says that following that information the liquidators investigated a possible claim against Titan. It wrote to Titan on
2 December 2010 — 13 months after receiving information from Titan. There followed an exchange of correspondence between the liquidators and lawyers acting for Titan in December 2010, which did not result in any resolution. In January 2011 the liquidators uplifted files from lawyers who had acted for G T Rigging Ltd. Mr Levin says that the liquidators then reviewed information and further investigated a claim against Titan.
[95] In September 2011, the liquidators requested bank statements from Westpac
New Zealand Limited. Westpac provided the information in September 2011. The
liquidators wrote to Titan’s lawyers again. Titan’s lawyers did not respond quickly.
42 Limitation Act 2010, s 16(1)(g) and s 38(1)(c).
43 See Hill v Spread Trustee Company Ltd [2007] 1 All ER 1106 (EWCA) and the discussion in
Andrew McGee Limitation Periods (6th ed, Sweet & Maxwell, London, 2010) at [17.038].
[96] There was further correspondence in February 2012. The liquidators issued their s 294 notice on 12 April 2012 and received an objection from Titan on 30 April
2012. The liquidators then made further enquiries after receiving Titan’s objection. More information was gathered during 2012 including records received from Oceania Factors Ltd. Mr Levin says that that last lot of information gave assistance.
[97] Mr Levin’s account shows there were significant periods which are put down to “investigation.” In those periods there were no other discernible overt activities. At the same time, the explanation of investigation cannot be dismissed out of hand. The evidence assembled for the setting aside application reflects thorough work and careful thought. All the same progress was slow. Titan cannot say that it was lulled into a sense of security. Mr Levin’s account shows that from time to time contact was made with Titan as the liquidators asked for information and proposed that the payments gave Titan a preference.
Relevance of delay under s 295
[98] Titan’s case is that the court should exercise its discretion under s 295 to withhold relief because of delay by the liquidator. That submission has to be seen in the context that the time within which a liquidator may apply under ss 294 and 295 is regulated by the limitation statutes and the liquidators did apply within time. Because the time to apply is expressly covered by statute, there is less room for the court to apply a discretion to deny relief on the grounds of delay. So far decisions have held that because limitation statutes govern the time for applying, delay is not a
ground for denying relief entirely: Blanchett v McEntee Hire Holdings Ltd44 and
Levin v West City Construction Ltd.45 It may be unsafe to say categorically that delay can never be a relevant consideration for denying relief under s 295 entirely. What I can say is that while I regard the progress by the liquidators in this case as slow, they stirred the pot enough to stop the stew sticking. Titan was put on notice that it could not assume that the liquidators would not claim. It could only claim the
benefit of delay if the limitation period expired without proceedings having issued.
44 Blanchett v McEntee Hire Holdings Ltd (2010) 10 NZCLC 264,763 (HC) at [16].
45 Levin v West City Construction Ltd [2013] NZHC 929 at [56]–[57].
[99] On the other hand, I do take account of the liquidators’ slowness in the award of interest. The right to claim interest in a voidable transaction proceeding arises under s 295(c), not under s 87 of the Judicature Act 1908.46 The liquidators accept that delay may be a factor in awarding interest. Decisions under the Judicature Act
1908, s 87 offer guidance.
[100] In Day v Mead, Somers J said:47
There are cases in which interest has been refused or a lesser rate awarded as an expression of disapproval of the conduct of the plaintiff or as soon as a punishment for his delays and to encourage expedition in other cases. Thus, in Business Computers Ltd v Anglo-African Leasing Ltd ([1977] 2 All ER
741) interest was refused because the defendant had kept the plaintiff out of other moneys. I would not go so far as to say that a plaintiff’s delays may not be brought to account; but I consider they require to be weighed carefully against other factors. A defendant has opportunities of bringing a case to trial, the award of interest is compensatory and, as mentioned above, the defendant will have had the use of the plaintiff’s money, or has been saved from borrowing at interest in order to pay the plaintiff. It is also material that the maximum rate of interest bears little relation to commercial rates. To a debtor, litigation may well be cheaper than an overdraft. In the end it is a question of what the justice of the case requires. There are no inflexible rules as to the rate to be awarded or the date from which it should run.
[101] The liquidators were slow, but not inordinately slow. They were not so slow as to lose any right to relief. I take into account that it took time for them to make inquiries, to gather information and to assess. Even so, in my judgment if the liquidators had followed matters through with greater diligence, they could still have got their application under way within two years of liquidation. On the basis that the cause of action arose on liquidation I will fix the period of interest at two years six months to cover the period reasonably required to cover both the time before the proceeding and the time up to judgment.
Summary
[102] At the times of all the payments G T Rigging Ltd was not able to pay its due debts. The payments enabled Titan to receive more than it would have in the
46 Grant v Lotus Gardens Ltd [2013] NZHC 1135, Porter Hire Ltd v Blanchett HC Auckland CIV-
2005-404-3056, 24 July 2006 at [24]–[26].
47 Day v Mead [1987] 2 NZLR 443 (CA) at 463–464.
liquidation. G T Rigging Ltd made the payments of 16 February, 6 March and
3 May 2007 in the ordinary course of business. They are not voidable. The payments of 22 June and 31 July 2007 were made under threat of liquidation proceedings and were not in the ordinary course of business. They are voidable. When it received those payments a reasonable person in Titan’s position would have suspected that G T Rigging Ltd was insolvent. It did not relevantly alter its position in reliance on those payments. The liquidators’ application is not statute-barred. While there was delay by the liquidators, that goes only to the award of interest, but is not a ground to deny relief entirely.
[103] I make these orders:
(a) Under s 294 of the Companies Act, I set aside the payments of
22 June 2007 ($26,410.66) and 31 July 2007 ($25,990.66).
(b)Under s 295 I order Titan Cranes Ltd to pay the liquidators the sums of $26,410.66 and $25,990.66, a total of $52,401.32.
(c) I order Titan Cranes Ltd to pay the liquidators interest on $52,401.32 at five per cent per annum for a period of two years six months.
(d)I award the liquidators costs on a category 2 basis. If the parties cannot agree costs, memoranda may be filed.
.............................................
Associate Judge R M Bell
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