Madsen-Ries v Boyd-Dunlop
[2013] NZHC 2153
•5 September 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-988 [2013] NZHC 2153
UNDER The Companies Act 1993 IN THE MATTER
of the liquidation of Shepton Investments Limited (In liquidation)
BETWEEN
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN AS LIQUIDATORS OF SHEPTON INVESTMENTS LIMITED (IN LIQUIDATION)
Applicants
AND
JOHN EYRE BOYD-DUNLOP
First Respondent
AND
NANETTE JACQUELINE BOYD- DUNLOP AS TRUSTEE OF THE BOYD DUNLOP FAMILY TRUST
Second Respondent
AND
JAMES GAVIN DONOVAN
Third RespondentAND
JOHN EYRE BOYD-DUNLOP
Fourth Respondent
AND
NANETTE JACQUELINE BOYD- DUNLOP
Fifth Respondent
| Hearing: | 13 May 2013 |
Appearances: | N Malarao for Applicants J Bates for Respondents |
Judgment: | 5 September 2013 |
RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON
(Set aside voidable transactions)
MADSEN-RIES AND LEVIN AS LIQUIDATORS OF SHEPTON INVESTMENTS LIMITED (IN LIQUIDATION) v BOYD-DUNLOP [2013] NZHC 2153 [05 September 2013]
This judgment was delivered by me on Thursday 05 September 2013 at 11.30 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:………………………….
Solicitors:
Meredith Connell, Auckland Gresson Grayson, Hastings
Introduction
[1] Shepton Investments Limited was placed into liquidation on the application of the Commissioner of Inland Revenue on 28 June 2012. The liquidators, Ms Madsen-Ries and Mr Levin, apply in this proceeding for orders against the respondents under s 295 of the Companies Act 1993. The respondents are sued in their personal capacity as shareholders and/or in their capacity as trustees of the Boyd-Dunlop Family Trust.
[2] Relevantly, s 295 applies to a company’s insolvent transaction that has been set aside under s 294 and affords the court the discretion to make consequential offers requiring a person to surrender the benefits received from the transaction.
[3] The essence of the liquidators’ claim for orders is as follows:
(a)That on account of a notice that they filed in this court in December 2012, a transaction Shepton had made on 28 Febuary 2011 was automatically set aside. The transaction, described in the notice, was:
The transaction ... whereby a debt of $1,036,379.11 owed by the Company to John Eyre Boyd-Dunlop, Nanette Jacqueline Boyd-Dunlop and James Gavin Donovan as trustees of the Boyd-Dunlop Family Trust was satisfied in full.
(b)This transaction was related to a simultaneous transaction, whereby Shepton extinguished a debt of $1,012,095 that was recorded as owing to it in the current account of its shareholders, Mr and Mrs Boyd-Dunlop.
(c)The simultaneous transactions constituted two parts of an overall transaction under s 292(3): the first part effectively constituted “paying money” to the trustees of the Boyd-Dunlop Family Trust under s 292(3)(e) and the second part constituted a step under s 292(3)(f) as it was done in order to give effect to the payment to the trustees. The trustees and the shareholders have benefitted from the
overall transaction; the former to the tune of $1,036,379.11 and the latter to the tune of $1,012,095.
(d)The two part transaction is a voidable transaction within the meaning of s 292(2) and warrants the making of orders, as sought in the application, consequential upon the automatic setting aside of the first part.
[4] There are two principal orders that the liquidators seek, on the basis that only one would be enforced at their election:
(a)as against the trustees, an order that they repay the company
$1,036,379.11, being the sum of preference they are said to have received; and
(b)as against Mr and Mrs Boyd-Dunlop personally, an order that they pay the company a sum equivalent to the debt they would have owed but for the overall transaction.
[5] At the hearing, counsel for the respondents set out the modified position of the respondents. He indicated they remain opposed to the order sought against the trustees, as such order would be unfair and contrary to the purpose of the statutory voidable preference regime, but they no longer oppose the order that is sought against the shareholders. They accept the way the company dealt with Mr and Mrs Boyd-Dunlop’s’ shareholders' debt constituted a transaction which is susceptible to being set aside as an unlawful preference under the Act, though not for the reasons that the liquidators contend.
Background
[6] Mr and Mrs Boyd-Dunlop have been directors of Shepton and have held separate shareholdings in the company for some years. At material times they have been the co-trustees with Mr Donovan of the Boyd-Dunlop Family Trust.
[7] As at 28 February 2011, Shepton was indebted to the trustees in the sum of
$1,036,379.11 and Mr and Mrs Boyd-Dunlop were indebted to Shepton for a similar amount in respect of their joint shareholders’ current account.
[8] On 28 February 2011, Shepton made certain entries in its general ledger:
(a)Shepton applied a credit of $1,036,379.11 against the loan it owed to the trustees, with the narration “To record move”.
(b)Shepton applied a credit of $1,108,686.00 against Mr and Mrs Boyd- Dunlop’s joint shareholders’ current account, again with the narration “To record move”.
[9] On 28 June 2012, Shepton was placed into liquidation and the liquidators were appointed. Inland Revenue filed a claim in the liquidation for the sum of
$295,956.79 of which $163,526.85 is preferential. As at the date of liquidation, Shepton had no assets from which to satisfy Inland Revenue’s claim.
[10] On 31 October 2012, the liquidators wrote to the trustees to advise that the “repayment” of their loan by Shepton was considered to be an insolvent transaction under the Act, and made demand for the payment of $1,036,379.11. No response was received from the trustees to this letter and on 19 December 2012 the liquidators issued a notice to the trustees and to Mr and Mrs Boyd-Dunlop seeking to set aside the transaction. The notice detailed the recovery intended to be sought against the trustees and Mr and Mrs Boyd-Dunlop.
[11] The notice was served on all the parties on 20 and 21 December 2012. No objection was received to the notice and the transaction was set aside in accordance with s 294 as at 29 January 2013.
[12] On 25 February 2013, the liquidators filed their application for orders of relief under s 295 and served notice on the trustees and shareholders under s 294.
Opposing characterisations of the twofold transaction
[13] Counsel for the liquidators submits the twofold transaction was made by credit entries in Shepton’s accounts essentially to produce certain consequences as described by Ms Madsen-Ries in her affidavit evidence:
On 28 February 2011, the Company applied a credit of $1,036,379 against the Trustee’s Loan, thereby causing the Trustee’s loan to be satisfied in full.
...
On 28 February 2011, the Company entered a credit against the Current Account of $1,108,686... The credit of $1,108,686 effectively extinguished the debt owed by Mr and Mrs Boyd-Dunlop and resulted in a net credit of
$122,703 on the Current Account.
[14] Counsel contends the overall effect of the credit entries was that the trustees received full satisfaction from the company of the debt it owed them while at the same time the company no longer had an asset in the form of the debt owed to it by Mr and Mrs Boyd-Dunlop. Additionally, that in terms of s 292, the credit entries represent in essence two steps by the company under s 292(3): the company paying money to the trustees under s 292(3)(e) and the company extinguishing the shareholders' debt to enable the company to effect that payment under s 292(3)(f).
[15] Counsel further submits that the two parts of the overall transaction constitute insolvent transactions for the purpose of s 292(2).
[16] The respondents characterise the first part of the overall transaction as an assignment of debt that did not involve the company and that enabled the second part by way of a set off. Mr Boyd-Dunlop in his affidavit states:
What we as Trustees decided to do was effectively reassign the benefit of the Trust debt to extinguish our personal liability, which was a transaction that did not need the consent of the company.
[17] Under their characterisation the respondents argue there was no transaction involving a payment or equivalent benefit to the trustees. The only benefit of the overall transaction was to the Boyd-Dunlops, as they were enabled to stand in the trustees' shoes as the company's creditor to get the benefit of a set off against their current account debt. The respondents concede that, taking a substance approach,
such a benefit would be a payment by the company under s 292(3) that would be voidable under s 292(2). 1
[18] Under both of these characterisations, there was a transaction under s 292(3) but with different outcomes for the trustees. Though I am unconvinced that either side's characterisation is right, I accept that there was a transaction that benefitted the shareholders and that it is appropriate to make the second of the orders the liquidators seek. I am not satisfied, however, that the first of those orders should be made. I will come to my reasons presently. I begin by setting out the issues that require determination.
Issues for determination
[19] The parties do not dispute that there was a transaction under s 292(3) or that the transaction, whatever its precise nature, is caught by s 292(2). At issue is whether the transaction arose in part at least by reason of the company taking a step that constituted “paying money” to the trustees and thereby benefitting them, or whether the benefit was to the shareholders alone.
[20] The second issue relates to the appropriate relief under s 295. It must be determined whether orders to surrender benefits should be made against the shareholders and the trustees, or solely against the shareholders. The liquidators do not argue that there will be a case for orders against the trustees to compensate the company unless they did in fact benefit from a step taken by the company that constituted “paying money” to them.
Was there a step by the company that constituted payment to the trustees?
[21] The liquidators agree that the company made no actual payment of money to the trustees. Thus the liquidators have the onus of showing there was a step that in substance constituted the passing of a money equivalent to the trustees by the
1 The concession by counsel for the Boyd-Dunlops was not offered on the basis of any concession that it was part of an overall transaction involving a payment by the company to the trustees. Rather it was based on an acknowledged payment by the company to the shareholders by way of a set-off of a debt they claim to have acquired from the trustees which entitled them to stand in the trustees shoes as creditors of the company.
company. They rely on the entries made in the company’s general ledger on 28 February 2011, which simply record corresponding "moves" and "credits". The liquidators do not however explain why such entries must be construed as representing the steps that they assert that the company took.
[22] On the other hand, I accept counsel for the liquidators’ argument that there is insufficient evidence of an assignment. Relevantly, there is no contemporaneous documentary evidence of the purported assignment and no hint of a suggestion that the shareholders bought the trustees’ asset (debt) as would be expected were a valuable trust asset assigned. Nor is there evidence of a contemporaneous resolution or unanimous decision to assign the debt. Mr Boyd-Dunlop's affidavit evidence is notable for its lack of reference to such documentation or decisions and the mention that it does make of the trustees is equivocal. The evidence of the third trustee, Mr Donovan also does not state unequivocally that he was party to a unanimous decision of the trustees to effect an assignment. It confirms only his authority for Mr Boyd- Dunlop’s “affidavit to be provided on behalf of the trustees”.
[23] The liquidators point to the insufficiency of the evidence of assignment as support for their position. However, the respondents' difficulties in that respect do not make the liquidators' case that the company made a payment to the trustees. Putting aside the explanations that each side relies on, the entries in the general ledger are suggestive of a different, tripartite arrangement involving the company in two steps. First, the directors and shareholders (in each case being the Boyd- Dunlops), agreed that the company would assume a liability to the shareholders for a debt of a roughly equivalent amount to the shareholders' current account debt so as to afford the shareholders the benefit of a set-off to clear the current account debt. Because the company incurred an obligation, s 292(3)(c) applies to this step. Secondly, the directors and shareholders agreed that they would procure the trustees to write off their asset (the debt the company owed them). This amounts to a step under s 292(3)(f). In this scenario the Boyd-Dunlops treat the trust's asset (the debt the company owes the trustees) as their own in order to effect their objective of satisfying their shareholders’ debt; and there are two steps that constitute an overall transaction in terms of s 292(3) but it is the shareholders who benefit under s 292(3)(e) and the trust’s asset that is extinguished under s 292(3)(f).
[24] Mr Boyd-Dunlop's affidavit evidence contains more than a hint of direct and hands-on involvement by the Boyd-Dunlops in their capacities as directors and shareholders in the overall transaction which is suggestive of such a tripartite arrangement. Though his affidavit states "[w]hat we as Trustees decided to do was effectively reassign the benefit of the Trust debt"' it continues by setting out that the
purpose of the assignment was "to extinguish our personal liability".2 This focus on
our liability can only be a reference to Mr and Mrs Boyd-Dunlop and not to the non- shareholder trustee, Mr Donovan. As such it belies any inference that Mr Boyd- Dunlop's evidence of a decision to effect an assignment refers to a unanimous decision of the three trustees and not simply of himself and Mrs Boyd-Dunlop. Though it points to the use of a trust asset to effect a set off against the shareholders' debt, the company is very much involved.
[25] Weighing up the evidence, I am led to the conclusion that neither side has put forward a convincing explanation of what the entries in the company's register were intended to reflect. Relevantly the liquidators have not discharged the onus of showing the trustees received the benefit of payment or the equivalent from the simultaneous transactions carried out on 21 February 2011; nor have they shown evidence of any indirect benefit flowing to the trustees from the company as a result of those transactions. But there is evidence of a benefit to the shareholders, by way of set off, equating in substance to a payment by the company. In respect of the trustees the evidence points to nothing more than the writing off of their debt by the company's credit entry to give effect to the payment that benefitted the shareholders.
[26] I find for these reasons that, on the balance of probabilities, there was no payment by the company to the trustees; rather that there was a tripartite arrangement of the nature I have discussed.
What is the appropriate relief?
[27] Given my findings thus far, the remaining issue relates to the appropriate relief under s 295. There is no real dispute that there will be no case for orders requiring the trustees to compensate the company unless they did in fact benefit by a
2 Emphasis added.
step by the company that constituted “paying money” to them. They did not. The real case for compensation is against the shareholders.
[28] The relief orders the court may make following a finding of a voidable transaction are discretionary. They are set out in s 295:
295 Other orders
If a transaction or charge is set aside under section 294, the court may make 1 or more of the following orders:
(a)an order that a person pay to the company an amount equal to some or all of the money that the company has paid under the transaction:
(b)an order that a person transfer to the company property that the company has transferred under the transaction:
(c)an order that a person pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction:
(d)an order that a person transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:
(i)money that the company has paid under the transaction:
(ii)proceeds of property that the company has transferred under the transaction:
...
(g)an order specifying the extent to which a person affected by the setting aside of a transaction or by an order made under this section is entitled to claim as a creditor in the liquidation.
[29] In determining what relief is appropriate it is necessary to consider the purpose of the statutory voidable preference regime. The recent decision of Associate Judge Bell in Grant v Lotus Gardens is apposite. Relevantly he states:3
As the aim of the voidable transaction provisions of the Companies Act is to undo transactions and charges which have preferential effects, the purpose of giving relief under s 295 is to undo the preference. The power to grant relief should be used to achieve that purpose.
[30] Also apposite is the High Court’s statement in Farrell v E & E Aps:4
The clear purpose of s 295 is to give the court the power to put the parties back into the position that they were in at the outset. That is, there is a restitutio in integrum, similar to the powers that a court exercises in equity after it has rescinded a transaction. A creditor
3 Grant v Lotus Garden Ltd [2013] NZHC 1135 at [25].
4 Farrell v E & E Aps [2012] NZHC 417, (2012) 11 NZCLC 98-004 at [35] (footnotes omitted).
who has received a preference should be required to surrender it for the benefit of all creditors.
[31] If such an order is made a creditor should not be required to give back more than the benefits received.5
[32] It is the assumption of liability by the company for the debt to the shareholders that must be undone. Thus the debt of $1,012,095 owed by the shareholders to the company must be reinstated, through an order under s 295(c).
[33] Additionally, the liquidators' setting aside notice means that the extinguishing of the debt owed by the company to the trustees has been undone. Thus the trustees are entitled to make a claim for their original debt of $1,036,379.11, which they can claim after other creditors. Such an order can be made under s 295(g).
Orders
[34] The result is that I make the following orders:
(a)Pursuant to s 295(c) I direct that Mr and Mrs Boyd-Dunlop as shareholders pay to the liquidators the sum of $1,012,095.
(b)Pursuant to s 295(g) I direct that the trustees of the Boyd-Dunlop Family Trust are entitled to claim in the liquidation for their original debt.
(c)Leave is reserved to file and serve memoranda within 10 working days if further orders are sought by way of interest and costs. Any reply memorandum may be filed and served within a further 10 working days.
5 Reynolds v HSE Holdings Ltd HC Whangarei CIV-2009-488-738, 17 September 2010 at [28];
Farrell v E & E Aps above n 4, at [35].
H Sargisson Associate Judge
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