Levin v West City Construction Ltd

[2013] NZHC 929

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV2012-404-002891 [2013] NZHC 929

UNDER  the Companies Act 1993

IN THE MATTER OF     the Liquidation of St George Developments

Limited

BETWEEN  HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF ST GEORGE DEVELOPMENTS LIMITED (IN LIQUIDATION)

Applicants

ANDWEST CITY CONSTRUCTION LIMITED Respondent

Hearing:         4 October 2012 and 9 October 2012

Counsel:         N H Malarao for applicants

P J Davey for respondent

Judgment:      1 May 2013

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 1 May 2013 at 12.45pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

N H Malarao, Meredith Connell, PO Box 2213, Auckland 1140

Christopher Taylor Lawyers, PO Box 37,772 Parnell, Auckland

Counsel:

P J Davey, PO Box 1811, Shortland Street, Auckland 1140

HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF ST GEORGE DEVELOPMENTS LIMITED (IN LIQUIDATION) V WEST CITY CONSTRUCTION LIMITED HC AK CIV

2012-404-002891 [1 May 2013]

[1]      The liquidators of St George Developments Ltd (St George) apply for an order setting aside the assignment to the respondent, West City Construction Ltd of a cash bond issued to St George by North Shore City Council $104,350.   The bond provided for repayment  of money held  by North  Shore City Council  to  ensure compliance with work required by the Council to complete a residential subdivision being undertaken by St George.   West City was the head contractor in the development.

[2]      The liquidators say that the assignment is voidable because it occurred within two years of the liquidation of St George, at a time when St George was unable to pay its due debts, and it enabled West City to receive more in satisfaction of debt owed to it by St George than it would have received in the liquidation.

[3]      West City says that the assignment took place outside the two year period before  liquidation  and  so  was  not  an  insolvent  transaction.    It  also  says  the assignment should not be set aside as it was made in the ordinary course of business and, in any event, recovery should be denied as West City received the bond in good faith, there was no reason for it to suspect St George was or would become insolvent, and it altered its position in the reasonable belief that the assignment was validly made.

Background

[4]      St George traded as a property developer.  Between 2002 and 2006 it was the developer of a residential subdivision at Quail Drive, Albany.

[5]      West  City (which  has  since  changed  its  name  to  Ireland  Holdings  Ltd)1 tendered successfully for the construction work for the development, and was appointed head contractor.2   The contract between St George and West City allowed

St George to retain agreed percentages of the value of the of contract works pending

1 It did so ahead of incorporation of a new company on 22 September 2006 which was then named West City Construction Ltd, and became the trading company. This restructuring is not material to the present application. I will refer to both companies as West City.

2 The contract was originally between Urban Developments Ltd (a company related to St George), but

St George became the principal under that contract before construction commenced.

completion of the work.  West City was to receive 50% of the retentions on the date of practical completion, and the remainder six months after that date (in that period the balance was to be treated as retention for any liability for defects).

[6]      Tse  Group  Ltd  was  appointed  engineer  for  the  development,  which  was financed by borrowings from Westpac Banking Corporation.   Westpac appointed Rider Hunt Auckland Ltd as a quantity surveyor to review and report to it on the value of progress claims.

[7]      West City issued regular payment claims to St George during the period of construction.  These claims were certified for payment by Tse Group, less the agreed retention.  Tse Group certified practical completion of construction on 31 July 2004, and on 12 August 2004 a progress payment certificate up to practical completion, including payment of half of the retentions (St George was entitled to withhold payment of half for six months as Defect Liability retentions) at 31 July 2004.

[8]      North Shore City Council was the territorial authority responsible for issuing a subdivisional consent for the development.   It required bonds and contributions from St George prior to release of completion certificates for the subdivision.  Those completion certificates were in turn required to allow St George to complete sales of sections within the development, and thereby meet construction costs (including payments due to West City).

[9]      In September and October 2004 West City made two payment claims relevant to the present application.  The first was (claim no. 17) for $8,115.42, and the second (claim no. 18) for $4,285.54 (both amounts GST inclusive).  Both were certified by Tse Group.

[10]     Westpac had appointed Rider Hunt to verify work completed on the project ahead of releasing funds under the loan facility it had granted to St George.  On 27

October 2004, Rider Hunt wrote to Westpac alerting it to the fact that the loan facility was insufficient to meet all the development costs, and advising that St George was arranging finance from Bridgecorp to meet costs arising from requirements of North  Shore City Council.   Rider Hunt added that payment of

retentions owing to the contractor (West City) plus any further fees and costs would be met from the proceeds of sales:

With regard to the balance of the loan facility, there is currently insufficient funding available to meet the debt requirements sought by the Customer [the Company]. The Customer is seeking funding to meet the cost of bonds and contributions imposed by Council which were currently outside of the initial loan facility. These include bonds and contributions for ‘wetland planting and maintenance’, ‘reserves planting’, ‘reserves contribution’ and ‘play equipment’ etc. In order to fund this shortfall, we understand Bridgecorp will contribute a further $326,407 to the overall development. The balance of retentions owing to the contractor, together with any final fees and costs will be met from the proceeds of sales.

We  confirm  that  the  project  costs  remain  within  the  provisions  of  the

Westpac loan facility.

[11]     On 19 November 2004, North Shore City Council issued the bond that is the subject of this proceeding.   It records lodgement of the sum of $104,350 with the Council, as a bond for completion of certain works.3    It is common ground that the bond was not refundable until all work needed to comply with conditions of the resource consent for the subdivision had been completed.   The date specified for completing the works was 19 November 2005.  The bond provided that if the work was completed by that date, the sum payable under the bond would be refunded to St George.

[12]     It is common ground that in addition to the work specified in the bond, further work was needed in respect of a pond constructed to collect storm water, because design work had not taken into account an additional volume of water coming onto the land from an adjoining property (which was being developed by a related company, Urban Development Ltd).

[13]     On 2 June 2005 Tse Group (on behalf of St George) sent West City a plan for the additional work to be done on the storm water pond, seeking a quote for that work. West City provided Tse Group with that quotation, $46,376.05 plus GST, on 4

August 2005 (although, for some unexplained reason, the quote was not sent to St

George until 31 October 2005).

3 This amount is the total bond value of the “Bonds”, defined in the bond as the total of the General

Lot Bond, Wetland Planting, Reserves Planting, Minor Works Bond and Additional Bonds.

[14]     In the meantime, the Auckland Regional Council (the regional authority with responsibility for the resource consent for the subdivision) wrote to St George’s director, Mr Kevin Andersen, giving notice that the storm water management system had to be remedied in order to comply with the resource consent issued for the development,  and  asking  for the defects  to  be  remedied  by 18  July 2005.   As mentioned, St George needed compliance with the resource consent to obtain a refund  of  the  money  secured  by  the  bond.     Auckland  Regional  Authority subsequently extended the time for completing that work until the end of November

2005.

[15]     On 3 November 2005 Tse Group (on behalf of St George) instructed West

City to proceed with the additional work.   West City responded on 6 November

2005, informing Tse Group that it was willing to carry out the additional work but only if the balance of retentions of $47,532.12 was paid.  The retentions had become due on 31 January 2004 (at the end of the six month defect liability period).  West City recorded its understanding that St George intended to pay the retentions and the cost  of  the  further  work  from  the  bond,  and  said  that  it  would  accept  that arrangement provided it was “done with a formal agreement”.

[16]     West City commenced the further work on the storm water pond later in

November 2005.  It made a payment claim for part of the additional work (claim no.

19 for $25,268.24 plus GST) on 30 November 2005.  Tse Group certified this for payment on 14 December 2005 ($28,178.03 GST inclusive after retentions).  West City  issued  another  payment  claim,  for  the  balance  of  the  additional  work ($21,107.81 plus GST), on 16 January 2006.

[17]     In April 2006, St George asked West City to undertake extra planting around the base of the pond.   West City completed that work in May 2006 (invoiced for

$6,319.70 plus GST).   The parties treated it as a variation to the quote for the additional work.

[18]     On 13 June 2006, West City presented a final claim (to Tse Group) for the balance of money due under the original contract (claims 17 and 18 and retentions) and for the additional work on the pond.  The claim was made by letter.  The letter

recorded that although progress claims 17, 18 and 19 had been certified, they had not been paid. The total sought was $109,133.46.

[19]     Tse advised St George on 19 July 2006 that West City had completed its work, and that the development had passed its final inspection.  It enclosed a final payment certificate (claim no. 20) for the work done by West City in completing the pond and for release of retentions (the total value of the certificate was $61,693.54, GST inclusive).  On the basis of the four certificates (17, 18, 19 and 20), the value of the unpaid work at that time was $102,272.53, GST inclusive.   The discrepancy between West City’s claim and the certificates appears to be the value of the extra work on the pond in May 2006, which is not included in the total value of works in the final payment certificate (no. 20).

[20]     On 3 October 2006, St George executed a deed of assignment under which it assigned the bond now in dispute to West City, in consideration of the work West City had carried out on St George’s behalf.  On the same day, St George gave notice to North Shore City Council that it had assigned the bond to West City.

[21]     The deed of assignment contained the following:

BACKGROUND

....

D.       St  George  has  agreed  to  assign  the  Bonds  to  West  City  in consideration of the Works undertaken by it on St George’s behalf.

....

2.1 Completion of the Works

West City shall undertake and complete the Works on or before the Completion Date4  in a proper and workman like manner and to the full satisfaction of St George and the Council.

...

3.1 Assignment to West City of the beneficial interest in the bonds

St George hereby assigns all its right title and interest in the Bonds to West

City absolutely upon the satisfactory completion by West City of the Works.

4 Completion Date was defined as 19 November 2005.

...

8.3 This Deed is the entire agreement of the parties on the subject matter. All representations, communications and prior agreements in relation to the subject matter are merged in and superseded by this Deed.

[22]     The Commissioner of Inland Revenue filed an application to put St George into liquidation on 22 January 2008.  St George was placed into liquidation, on that application, on 2 May 2008.

[23]     The liquidators met with St George’s director, Mr Andersen, on 8 May 2008. Mr Andersen was asked about the assignment of the bond.  He informed them that it had occurred “around 2006” (putting it within the period for voidable transactions). The liquidators wrote to West City seeking an explanation of the assignment.  West City replied on 11 July 2008 contending that St George had agreed to assign the bond to it in November 2005.  The liquidators did nothing until October 2009, when their solicitors wrote to West City to advise that the liquidators considered that insufficient evidence had been provided to justify the assignment and calling for any further evidence within 14 days.  West City’s solicitors replied on 30 October 2009 setting  out  the  grounds  on  which  it  would  oppose  any notice  to  set  aside,  but providing no further evidence of the assignment.

[24]     The liquidators filed a notice to set aside the assignment of the bond in the High Court on 7 December 2012.  It was served on West City on 23 January 2012. West City served notice of objection on the liquidators on 20 February 2012.

The legal principles

[25]     The liquidators bring their application under s 292 of the Companies Act

1993 (the Act), as in force at the time of the transaction.5     Under that section a transaction6  by a company is voidable on the application of the liquidator if it was

made when the company was unable to pay its due debts and within the specified

5 Section 292 was amended with effect from 1 November 2007 by the Companies Amendment Act

2006. Under s 27(5) of that Amendment Act, the previous s 292 continues to apply to transactions that were completed before the amended section came into force.

6 An assignment has been held to be a transfer of the company’s property: Managh v Morrison HC Napier CIV-2009-441-522, 5 September 2011.

period,7 and it enabled the other party to receive more towards satisfaction of a debt than that  party would  receive, or would  be likely to  receive, in  the company’s liquidation, unless it took place within the ordinary course of business.

[26]     The saving in respect of a transaction in the ordinary course of business requires an assessment of the transaction in its setting, and a determination as to whether an objective observer would view it as having taken place in the ordinary course of business:  Countrywide Banking Corporation Ltd v Dean.8

[27]     Further, even if a transaction is voidable against the liquidator, the Court will not set it aside if the party to whom the company’s property has been given has a defence under s 296(3) of the Act:9

(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.

[28]     Finally, even if a transaction is set aside under s 294, the Court will not make an order to enforce a return of the value of the transaction if to do so would be

unfair.10

7 Defined in s 292(5) as the period of two years prior to commencement of liquidation.

8 Countrywide Banking Corporation Ltd v Dean [1998] 1 NZLR 385 (PC) at 394-395; followed in

Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541(CA), particularly at [31].

9 In Levin v Rastkar [2011] NZCA 210, the Court of Appeal held that the new form of s 296(3) applies to transactions that were completed before the Companies Amendment Act 2006 came into force.

10 Companies Act 1993, s 295.

[29]     The liquidators say that the assignment of the bond to West City occurred at the date of execution of the deed of assignment (3 October 2006), at which time St George was unable to pay its due debts.  They say that the effect of the assignment was to reduce the debt owing to West City by the value of the bond ($104,350), thus enabling West City to receive more towards satisfaction of the debt than it would receive in the liquidation.   Further, they say that liquidation commenced on 22

January 2008 (the date when the application for liquidation was filed) so the transaction was clearly within the specified period.

[30]     The liquidators also say that the assignment cannot be considered to have been undertaken in the ordinary course of business (St George’s records show that usually it  paid West  City from  its  bank  account, this  was  the only instance of payment by an assignment, and the transaction was undertaken when claims were well overdue for payment).   They say that West City has failed to satisfy the three elements of s 296(3).

[31]     West City does not dispute the liquidators’ claim that St George was unable to pay its debts in October 2006, or that an assignment at that time would have allowed West City to receive more than it would have in the liquidation.  However, it says that this was not an insolvent transaction, because St George agreed to assign its interest in the bond monies in November 2005, prior to the specified period.  It also says that the assignment was in the ordinary course of business (contending that it is not uncommon for payment of claims to be delayed until sections were sold).

[32]     West City also says that it has a defence under s 296(3) because:

(a)      its  director  had  no  knowledge  that  St  George  was  insolvent  (he thought the only other creditor was Tse Group), and

(b)the  delays  in  payment  prior  to  receiving  the  assignment  did  not provide reasonable grounds for suspecting insolvency given that such delays were common both in property developments generally and in

its previous dealings with St George, and it understood at all times that Mr Andersen had arranged the necessary finance to complete the development so as to allow release of the bond monies, and

(c)      West City had altered its position in the reasonable belief that the assignment was valid.

[33]     Lastly, in a late (second) amendment to its notice of opposition, West City says that it would not be fair to make an order under s 295 because the assignment had taken place before the deed was executed, St George would not have received the bond money if it had not agreed to do the additional work, it received little benefit from the additional work (although it was paid it had to continue to maintain the bond for two years before the bond money was released), and there had been inexcusable delays by the liquidators in seeking to have the assignment set aside, which should not be countenanced on the grounds of need for commercial certainty.

[34]     The issues that the Court needs to determine on this application, therefore are:

(a)      Have the liquidators established that the transaction occurred within the specified period? This requires a finding as to whether there was an equitable assignment of the bond as a result of an agreement between the parties.

(b)Have the liquidators established that the assignment was not in the ordinary course of business?

(c)       Has West City established the grounds for a defence under s 296(3)? (d)       Is it fair to make an order under s 295?

[35]     It is common ground that the specified period ran from 22 January 2006. Although the deed of assignment was clearly signed within that period, West City says11  that there was an earlier assignment of any equitable interest that St George had in the bond monies, arising out of an agreement between the parties in or about November 2005.12

[36]     An equitable assignment has been described in the following terms:13

A transaction is only properly characterised as an equitable assignment of a legal right if the assigner intends to transfer ownership of the right to the assignee and if the assignee is vested with the equitable ownership of the legal right which is the subject of the transaction.

[37]     In this case the right to receive payment under the bond is a legal chose in action capable of being assigned in equity by agreement.   No formal words are required for a valid equitable assignment of a legal chose in action:14 what is needed is the intention to assign, which may be established by conduct.15   If the intention of the assignor for a contractual right to become property of the assignee is clear, equity requires the assignor to do all that is necessary to implement that intention.16    It is not necessary to give notice of the assignment to the debtor to create an effective assignment as between assignee and assignor, but notice to the debtor must be given before the assignment is perfected.17

[38]     Whether there has been an equitable assignment ahead of the deed signed on

3 October 2006 must be determined on the facts of the case.  In the present case it turns on the evidence as to the intention of the parties, and in this case in particular,

the evidence as to St George’s intention.

11 Initially in an amended notice of opposition filed after receipt of the liquidators’ affidavit in reply.

12 There was no dispute that where there is an agreement to assign a legal chose in action, the assignee becomes the owner of the legal chose in equity: Three Rivers District Council v Bank of England [1995] 4 All ER 312, at 326.

13 G J Tolhurst “Equitable Assignment of Legal Rights: A Resolution to a Conundrum” (2002) 118

LQR 98 at 98.

14 Pulley v Public Trustee [1956] NZLR 771 (SC) at 777.
15 Hela Pharma AB v Hela Pharma Australasia Ltd CA165/03, 17 February 2005 at para [60].

16 John Burrows, Jeremy Finn and Stephen Todd, Law of Contract in New Zealand, (4th ed

LexisNexis, Wellington, 2012), at 17.1.2.

17 Mountain Road (No.9) Ltd v Michael Edgley Corporation Pty Ltd (CA) [1999] 1NZLR 335 at 343.

[39]     West City relies on the following evidence to support its contention that the parties intended to assign the bond money in November 2005:

(a)       West City’s director, Mr Ireland, has given an affidavit in support of

West City’s opposition in which he states:

I had discussions with [St George’s director] Mr Andersen and he agreed to pay for the additional pond works and the outstanding amounts under the original contract by assigning the Council bond monies to West City.

(b)Mr Ireland followed up this oral agreement by a letter to Mr Andersen on 6 November 2005. The letter reads:

RE: Quail Drive Subdivision

I see they have final sorted the Pond planting plan [sic]

We would be happy to carry out this works but the balance of the retentions $47,523.12 were due on 31st January 2004.

We cannot proceed with the planting and minor works until this is paid

The quote for planting the pond and minor earthworks is

$46,376.05 plus Gst

We understand you intend payment of these amounts from bond monies held by NSCC

This arrangement is acceptable provided it is done with a formal agreement

If you have any queries, please do not hesitate to call me on

[cell phone number removed].

(c)       Mr Ireland then states in his affidavit:

Mr Andersen proceeded to have his lawyer prepare a formal deed relating to the payment of the bonds which is the Deed of Assignment....I believe  that  this  deed  was  prepared  in November 2005 shortly after my letter to Mr Andersen as it refers to a completion date of 19 November 2005 in the definition section.   However, it was simply “kept in the bottom draw” and not actually signed at that time.

(d)Mr Ireland was cross-examined on this evidence.  He said that he had had several discussions with Mr Andersen and the project engineer

about the need for further work on the storm water pond.  At different points in the cross-examination he said that

(i)       he told the engineer and Mr Andersen that he was not doing

any more “until, unless you assign me the bond”18;

(ii)[Mr Andersen] told him he would arrange payment for the further work and the balance of the retentions from the bond monies held by [the Council]19;

(iii)the deed was “just the assignment”, not necessarily what was agreed: “What he agreed to do was pay us using the Council bond money. This [the deed] is just the assignment of it.”20;

(iv)     The first time he saw the deed was when he signed it on 3

October 2006 at St George’s offices: he was happy with the agreement that West City would be paid out of the Council bond, as recorded in his letter of 6 November 2005, but had asked for the formal  document  so  that  he could  take it  to Council to get the bond changed into West City’s name (which could not happen until the works were complete)21. `

[40]     The liquidators say that the evidence does not support an intention to assign in November 2005. They rely on the following:

(a)      There  is  no  direct  evidence  from  St  George  of  an  agreement  in November  2005  to  assign  the  bond  (I  will  return  shortly  to  a contention in oral submissions for the liquidators that Mr Ireland’s evidence of discussions and an agreement with Mr Andersen to assign

the bond are hearsay and inadmissible);

18 Notes of evidence 40 at line 26.

19 Notes of evidence 42 at line 15.
20 Notes of evidence 57 at lines1 - 4.

21 Notes of evidence 58 at lines 1ines 26 – 33.

(b)The only documentary evidence of “an agreement” is Mr Ireland’s letter of 6 November 2005, but that only evidences West City’s understanding that the retentions and the cost of the pond work would be paid from the bond monies (it does not mention an assignment of the bond);

(c)       The terms of the letter called for a formal agreement to be drawn up;

(d)West City presented its final payment claim in June 2006, and that claim  was  certified  for  payment,  without  any  reference  to  the supposed prior assignment;

(e)      There is no other document in St George’s records that suggests an assignment prior to the deed of 3 October 2006, and notice to Council of the assignment other than the notice sent on 3 October 2006;

(f)      The deed states (clause 8.3) that it is the entire agreement of the parties on the subject matter.

(g)When St George’s director, Mr Anderson, was interviewed by the liquidators’ representatives  in  May 2008,  he  was  asked  about  the timing of the assignment.  He stated that it was “done around 2006”, and did not mention an earlier oral agreement.

[41]     This case is made difficult by the absence of any evidence from St George. The liquidators have given evidence of unsuccessful attempts to locate Mr Andersen, particularly with a view to having him address West City’s evidence of an agreement in November 2005.   In the absence of any such direct evidence, the question of whether the parties intended to assign the bond, ahead of the deed of 3 October 2006, must be determined on the basis of Mr Ireland’s evidence, both as to his discussions and agreement with Mr Andersen, and as to subsequent conduct.

[42]     In the course of his oral submissions, counsel for the liquidators challenged

Mr Ireland’s evidence as to the content of his discussions with Mr Andersen.   He

submitted that it was too late for the liquidators to make this challenge as their counsel  had  already  cross-examined  Mr  Ireland  on  the  point,  but  in  addition submitted that it was hearsay and inadmissible.   Counsel for West City submitted that the evidence was not hearsay, as it was evidence given by Mr Andersen as agent of St George, relying on the statement in Maxwell v Inland Revenue Commissioner:22

The admissions of an agent are evidence against his principal, either when expressly authorized by the latter, or when made on the principal's behalf in the ordinary course of some business or transaction in which the agent is acting as his representative: 15 Halsbury's Laws of England, 3rd ed. 301; Phipson on Evidence, 9th ed. 249.

In the alternative, and in the event that it was hearsay, counsel submitted that it was admissible under s 34 of the Evidence Act 2006 as Mr Andersen was a party to the agreement, and was admissible against the liquidators as the surrounding circumstances provided reasonable assurance that it was reliable.

[43]     As a company can only act through its agents or servants (such as a director) a statement made by Mr Andersen can be taken as a statement on behalf of St George.  It was clearly within the authority of Mr Andersen to come to an agreement such as is alleged by West City.   Moreover, even if any alleged statement by Mr Andersen is hearsay, it is still admissible under s 34(1) of the Evidence Act 2006 as it was made to Mr Ireland.   Further, counsel for the liquidators did not develop the point in his oral argument, but if he was arguing that the liquidators are to be treated separately from St George for the purpose of this application the exception in s 34(2) of  the  Evidence Act  2006  applies  as  the  circumstances  leading  to  the  alleged discussions coupled with the letter that followed are sufficient to provide reasonable assurance that the statement is reliable.

[44]     I consider that there is sufficient evidence in the evidence of Mr Ireland,

coupled  with  St  George’s  conduct  following  receipt  of  Mr  Ireland’s  letter  of  6

November 2005, to provide an evidential basis for an agreement to assign the bond, for the following reasons:

22 Maxwell v Inland Revenue Commissioner [1959] NZLR 708 (SC and CA) at 719.

(a)      I gained the impression that Mr Ireland was a man more versed in the subtleties of construction than in the subtleties of language.  Having said  that,  I  am  left  in  no  doubt  that  in  his  discussions  with  Mr Andersen before writing his letter of 6 November 2005, he made West City’s position clear: it wanted to ensure that both its retentions and the cost of the further work on the pond would be met.

(b)Although  Mr  Ireland  does  not  set  out  particular  words  in  the discussions that he had with St George (except as he stated in his answers to cross-examination), I have no doubt that when he recorded his understanding of the agreement in his letter, he meant more than that the bond money was to be the source of payment.  He wanted the right to receive that money.

(c)      There is no direct evidence as to when the deed was drafted, but there is no reason to question Mr Ireland’s evidence that it was drafted by St George’s solicitors, on instructions from Mr Andersen.   Mr Ireland was clear in cross-examination that he did not see the deed until it was put before him on 3 October 2006.

(d)The terms of the deed are more consistent with it having been drafted shortly after Mr Ireland’s letter of 6 November 2005 than with it being prepared shortly before it was signed.  Paragraph D of the background section refers to St George having agreed to assign “the Bonds” as described in the bond of 19 November 2004 (a copy of which was attached).   Clause 2.1 referred to the work, and required it to be completed by 19 November 2005 (a date which could well have been taken from the bond itself).  Significantly, the clause 2.3 provided for extension of time for completion, which would not have been necessary if it was drafted shortly before the deed was signed (bearing in mind that the last of the additional work contemplated as at 6

November 2005 to be undertaken on the pond, was completed before

16 January 2006, being the date that West City issued a claim for that work).

(e)      St  George  produced  and  signed  the  deed  on  3  October  2006, apparently without demur, when Mr Ireland called for formal documentation of the arrangement so that he could approach the Council direct as owner of the bond.

[45]     Counsel for the liquidators raised several points which he argued pointed away from any agreement to assign the bond ahead of the signing of the deed on 3

October 2006:

(a)       Mr Ireland’s letter required the arrangement to be drawn up into a

formal document.

(b)West City made its final claim in June 2006, and the engineer certified payment and informed St George in July 2006 that it should pay in accordance with the contract, without reference to the alleged agreement.

(c)      The deed provided for assignment only after the work was complete, rather than at the time of the alleged agreement.

(d)The deed provided that it was an entire agreement, so excluding any prior agreements.

(e)       Mr Andersen informed the liquidators’ representatives (in a meeting

shortly after the liquidation) that the assignment was “done around

2006”.

[46]     The liquidators’ points are answered by the following:

(a)      Mr Ireland says that he proceeded with the work on the pond because he was happy with the agreement he had reached, and did not call for the  formal  document  until  he  felt  he  needed  it  to  deal  with  the Council.

(b)The correspondence surrounding the final claim does not assist, one way or the other, in determining the existence of an agreement in November  2005  – West  City had  still  to  complete  its  contractual obligations.

(c)      As there was no negotiation on the terms of the deed, it cannot now be said with any certainty whether the parties intended in November

2005 that it was to be an absolute or a conditional assignment.  The fact that approximately half of the bond monies were to be used to clear retentions and the two smaller claims (17 and 18) supports an absolute assignment, given that West City was also obligated to carry out the additional work. However, even if it was to be conditional on carrying out the work, it appears that the work was completed by the end of December 2005 (certainly West City presented its claim for the balance of the pond work on 16 January 2006).  It must be borne in mind   that   in   November   2005   the   only   additional   work   in contemplation was the quoted work for the pond: the need for the extra planting undertaken in April 2006 had not arisen.

(d)For the purpose of establishing St George’s intention, the significant fact is that St George had a deed of assignment prepared, rather than the content of the deed.

(e)      West City did not see the deed before Mr Ireland went to St George’s offices to sign it.  Mr Ireland said in cross-examination that he did not read it (I take that to mean that he did not read it closely).   His concern at that point was for West City to be in a position to deal directly with the Council over release of the bond.

(f)      The liquidators’ representative, Ms Ali, has not explained the context in which Mr Andersen made the statement that the assignment was done around 2006.   The liquidator had  two  representatives  at  the meeting.  The notes of the other representative were produced in Mr Levin’s affidavit in reply.   Those notes simply record that the bond

was assigned.  I infer that there was not any significant inquiry of Mr Andersen as to the circumstances of the assignment.   In the circumstances I do not take his comment as to timing to be significant.

[47]     It  seems  likely  that  the  liquidators’  concerns  over  the  existence  of  an agreement will never have a definitive answer.   However, I am satisfied on the evidence before the Court that it is more likely than not that Mr Ireland and Mr Andersen came to an agreement in or about November 2005 that St George would assign the bond to West City.  The liquidators have the onus of proving a transaction within the specified period.  I find that they have not done so.  Although this finding is a complete answer to the liquidators’ case, for the sake of completeness I will also address briefly the other matters raised in argument.

Was the assignment in the ordinary course of business?

[48]     Had the assignment not taken place until the deed of 3 October 2006, I would not have accepted that it was in the ordinary course of business.  Mr Ireland gave evidence that it was not an unusual event, but gave no support for that statement.  To the contrary, Mr Levin gave evidence that St George’s records showed that payments were usually made direct to West City, and there was no instance of any other assignment.  I am satisfied that the assignment was a “one off” response to the need to complete the pond work, set in the context of retentions that were long overdue.  I do not view it as being in the ordinary course of business either for these parties, or generally within the construction industry.

Does West City have a defence under s 296(3)?

[49]     The first element that West City would need to establish to avail itself of the defence under s 296(3) is to establish that it honestly believed the transaction would not involve any element of undue preference.23   A creditor is likely to fail this test where it has actual or implied knowledge of the company’s financial difficulties, and

such knowledge can arise from failure to pay debts on time or other circumstances

23 See Re No One Men Ltd (In Liq); Meltzer v Axiom International Ltd (2001) 9 NZCLC 262, 671 (CA).

indicating serious cash-flow problems.24    An awareness of financial difficulty, however,  will  not  of  itself  be  sufficient  to  give  rise  to  a  conclusion  that  any transaction was not made in good faith.25

[50]     In addition, West City would need to establish the second limb of the test; that a reasonable person in its position would not have suspected St George was or would  become  insolvent  (an  objective  analysis  applying  what  is  known  as  the average business person test),26 and also that it did not have reasonable grounds for such suspicion.  A “reason to suspect” will be found where the circumstances would create in the mind of a reasonable person in West City’s position an actual apprehension or fear that St George was unable to pay its debts as they became due.27   In assessing this it is necessary to apply commercial reality derived from the particular industry: cash-flow problems are just one potentially relevant factor (as solvent companies may have temporary liquidity issues).28

[51]     Mr Ireland said in evidence that it is fairly common in property developments for there to be delays in payment until sections are sold.  However, the purpose of the bond (executed in October 2004) was to allow the Council to provide the certificate needed to allow titles to be issued and sections to be sold.   If the assignment did not take place until 3 October 2006, that was nearly two years later. This delay, on its own, must have signalled financial difficulties, and Mr Ireland’s insistence in November 2005 (a year after release of the sections for sale) that West City would take on additional work only if outstanding retentions and the cost of the new work was paid out of the bond monies, must be taken as indicating a concern about payment. Although Mr Ireland says that he was unaware of any other creditors (save for the engineer), the commercial realities are such that I do not accept that as at  October 2006 West  City could  have honestly believed  that  the deed  did  not

involve any element of undue preference, or that an average business person in the

24 Watchorn Transport Ltd v Blanchett HC Hamilton CIV-2004-419-165, 23 November 2004, Associate Judge Lang.

25 See, for example, Re Lakeview Farm Fresh Ltd (In Rec and Liq) HC Wellington CIV-2003-485-

1616, 30 June 2004, Mackenzie J.

26 Cussen v Federal Commissioner of Taxation (2004) 22 ACLC 1528 (NSWCA).

27 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 (HCA); confirmed as applicable in New

Zealand in Trans Otway Ltd v Shephard [2006] 2 NZLR 289 (SC).

28 Sydney Appliances Pty Ltd v Euralinks Pty Ltd (2001) 19 ACLC 633 (NSWSC) at 638.

shoes of West City would not have had a positive feeling of apprehension or mistrust

about St George’s solvency.

[52]     It is not necessary to address the third limb of the test (whether West City gave value or acted in reliance), as I am satisfied that it could not satisfy either or both of the first two limbs.

Is it fair to order West City to repay?

[53]     I am not persuaded that, if the transaction in question was the deed of 3

October 2006, that the Court should decline to make an order for repayment on the ground of fairness.  Neither the authorities mentioned by counsel for West City nor the facts of the case, justify that course.

[54]     Counsel did not refer me to any case where the Court had declined to make an order solely on the basis of delay (which appears to be the primary additional ground advanced and I have found that there was a voidable transaction under s 292 and no defence under s 296(3)).

[55]     Counsel for West City referred to two cases: Levin v Iti & Syddall Enterprises Ltd 29  and Levin v Rastkar.30    I do not find that either case assists. In Iti Associate Judge Faire made a passing reference to a four-and-a-half year gap between the transaction and the filing of the application to set aside, but did not decide the case on that point: the application was refused on the basis that the payments were made in the ordinary course of business.  In Rastkar, the Court of Appeal was critical of the liquidators, but in respect of the way they had formulated their claim rather than on the basis of delay (and Associate Judge Faire had noted that criticism in Iti).

[56]     The only statutory requirement in respect of timing is for the liquidator to

serve a notice to set aside on the other party to the transaction “as soon as practicable”.31    That section was considered by this Court in Blanchett v McEntee

29 Levin v Iti& Syddell Enterprises Ltd HC Auckland CIV-2011-404-405, 1 September 2011 (HC).

30 Levin v Rastkar [2011] NZCA 210.

31 Companies Act 1993, s 294(1)(b).

Hire Holdings Ltd.32   The Court held that the requirement was to serve the notice as soon as practicable after it was filed, 33  rather than as soon as practicable after liquidation. Any application will of course be subject to the usual six year limitation from the date of liquidation (when the liquidators’ cause of action arises).

[57]     In the absence of any other statutory proscription of delay, the Court must approach its discretion under s 295 in a general way, and on the facts of the case.  In the circumstances of the present case, I do not accept that the arguments for West City would operate to prevent the liquidators from recovering the bond, had the deed been the operative transaction:

(a)      The  insolvent  transaction  regime  is  predicated  on  the  pari  passu principle: unfairness would seem to require something more than the consequences of the application of that principle, once there has been a finding of a voidable transaction;

(b)The comparatively minor profit gained from the contract for the pond works was a conscious decision on the part of West City, and the fact that the bond was not released until the end of a two year maintenance period is immaterial.

Decision

[58]     For  the  reasons  that  I  have  given,  I  find  that  the  liquidators  have  not established that there was a voidable transaction, and their application is dismissed.

[59]     As the successful party, West City is entitled to its costs on a scale 2B basis, together with disbursements as fixed by the Registrar.

Associate Judge Abbott

32 Blanchett v McEntee Hire Holdings Ltd (2010) 10 NZCLC 264,763 (HC)

33 At [14] – [16].