Madsen-Ries v Rapid Construction Limited
[2012] NZHC 3572
•20 December 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-001044 [2012] NZHC 3572
UNDER S 295 of the Companies Act 1993
IN THE MATTER OF Giant Engineering Limited (in Liquidation) BETWEEN VIVIEN JUDITH MADSEN-RIES AND
HENRY DAVID LEVIN
Applicants
AND RAPID CONSTRUCTION LIMITED Respondent
Hearing: 27 June 2012
Appearances: R P Coltman/C L Bell for applicants
B D Gustafson for respondent
Judgment: 20 December 2012
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 20 December 2012 at 4.30pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
R P Coltman/C L Bell, Fortune Manning, PO Box 4139, Auckland
B Gustafson, PO Box 1297, Shortland Street, Auckland 1140
VIVIEN JUDITH MADSEN-RIES AND HENRY DAVID LEVIN V RAPID CONSTRUCTION LIMITED HC AK CIV 2012-404-001044 [20 December 2012]
[1] The liquidators of Giant Engineering Limited (in liquidation) (Giant) have applied for an order that Rapid Construction Limited (Rapid) pay to Giant the sum of
$113,551.84. The liquidators seek that order on the grounds that a payment of that amount made by Giant to Rapid in January 2011 is a voidable transaction in terms of s 292 of the Companies Act 1993 (the Act).
[2] The liquidators gave Rapid notice that they wished to set aside the transaction, in accordance with s 294 of the Act. Rapid failed to give notice of objection within the statutory period and the transaction was set aside automatically as a result. The liquidators have since applied under s 295 of the Act for an order that Rapid pay to Giant an amount equal to the sum paid to it under the transaction.
[3] Rapid has filed a notice of opposition, relying on the statutory defence set out in s 296(3) of the Act. It says that the transaction was part of a cheque swap arrangement made to assist Giant get its business running after a fire in its business premises, and that any order should be limited to the difference between the value of the swapped cheques, being $22,838.34.
[4] It is common ground that the onus is on Rapid to make out the grounds for a defence under s 296.
Background
[5] Rapid is in the business of event management and construction. Prior to its liquidation, Giant was in the business of manufacturing and supplying equipment in the scrap metal and rubbish collection industry.
[6] Rapid and Giant began a trading relationship in or about 2007. Under that relationship, each provided services to the other.
[7] In or about August 2009 a fire at Giant’s premises destroyed its office area and caused damage to its plant and tools. In or about September 2009, Rapid and another of Giant’s customers came to an arrangement with Giant to help Giant re-
establish its business, which had been disrupted by the fire. Under this arrangement, Rapid was to provide Giant with materials both for work that Giant undertook on its (Rapid’s) behalf, and for work that Giant was undertaking for other customers. Rapid’s director, Mr Hume, has given evidence that the arrangement was that when Giant completed the work for which Rapid had engaged it, the companies would work out the value of each other’s work, and a payment would be made to settle the difference. Mr Hume says that this arrangement applied up to the date of the transaction in issue in this proceeding.
[8] Over the course of 2010 and under this arrangement, Giant acquired steel using Rapid’s account with a supplier, and supplied Rapid with equipment. Mr Hume exhibited to his affidavit exchanges of emails between himself and Giant’s director, Mr Lemon, evidencing discussions about the invoicing of the respective services. It appears that the invoicing was not completed until early November
2010, at which point Rapid rendered four invoices to Giant for the total sum of
$129,482.22 for steel supplied, and Giant invoiced Rapid for $90,713.15 for services provided to Rapid (or, rather, advised Rapid the sum to be invoiced, as invoices were not produced).
[9] Mr Hume says that he and Mr Lemon had agreed that, for accounting purposes, they would do a “cheque swap” for their respective invoices. There is support for this in an email sent from Mr Lemon to Mr Hume on 26 August 2010.
[10] For reasons that have not been explained, apart from a reference in the email correspondence to a wish to get some money across to Rapid, Giant paid Rapid the sum of $15,930.38 on 4 November 2010, immediately after Rapid had rendered the four invoices for its services. This sum was the value of one of those invoices. The total of the remaining three invoices was $113.551.84. Mr Hume does not explain how this payment can be reconciled with his evidence about the “cheque swap”.
[11] A copy of Rapid’s ledger for Giant also shows that in December 2010 Rapid invoiced Giant for a further sum of $13,374.09, which Giant paid immediately, thus leaving the sum owed at $113,551.84.
[12] On 6 January 2011, Rapid and Giant exchanged cheques for the respective sums of $113,551.84 and $90,713.15. Both cheques were presented and paid the following day.
[13] It is common ground that on 2 February 2011, the Commissioner of Inland Revenue filed an application for liquidation of Giant, based on non-compliance with a statutory demand served on 29 November 2010. Giant was placed into liquidation by this Court, on that application, on 22 May 2011. The applicants were appointed joint and several liquidators.
[14] On 30 August 2011, the liquidators served a notice on Rapid to set aside the payment of $113,551.84 as an insolvent transaction. Rapid did not file a notice of objection, resulting in the transaction being set aside automatically pursuant to s
294(3) of the Act.
[15] The liquidators filed the present application on 23 March 2012 seeking an order that Rapid pay Giant the sum of $113,551.84, as a payment made in the two years before date of commencement of the liquidation (being 2 February 2011, the date that the application was filed). Rapid has filed a notice of opposition to the application, relying on the statutory defence under s 296(3) of the Act.
Preliminary point
[16] In his written submissions, counsel for Rapid referred to the statutory set-off provided by s 310 of the Act. Counsel for the liquidators challenged Rapid’s entitlement to argue any ground of defence based on that section, as it had not been raised in Rapid’s notice of opposition or at any time before Rapid’s written submissions.
[17] Counsel for Rapid clarified its position at the commencement of the hearing: he said that Rapid was not pleading a set-off by way of defence, but simply raising what would have happened (as a matter of law) had there not been a cheque swap (he referred to this as the “counter-factual” outcome). Counsel for the liquidators accepted the clarification and withdrew his objection.
[18] The liquidators bring their application under s 295 of the Act, the relevant provisions of which read:
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:
...
(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:
....
[19] Regardless of whether a transaction is set aside automatically, or by order of the Court, s 296(3) of the Act provides that the Court must not order the recovery of property or its equivalent value if the person from whom recovery is sought proves that the property was received in good faith, without having reasonable grounds for suspecting insolvency, and gave value or altered its position in a belief that the transfer was valid:
296Additional provisions relating to setting aside transactions and charges
...
(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.
Did Rapid receive the payment in good faith?
[21] Rapid has to show that it had an honest belief that there was no element of undue preference in the payment.2 If it knew that it was being treated differently to, or being given a preference over, other creditors it cannot claim that it received the payment in good faith.3 Generally it will be sufficient if it establishes that it had no knowledge of financial difficulties, and there was no indication from the trading relationship that it was being paid ahead of other creditors. It will not satisfy this requirement if it had actual or implied knowledge of Giant’s financial difficulties (for example, cheques being dishonoured, not paying debts on time, or other factors indicating serious cash flow difficulties).4
[22] Rapid relies on the evidence of its director, Mr Hume, that he had no knowledge that Rapid was being treated differently, or preferentially, to other creditors. Mr Hume says that the trading arrangement entered into after the fire in Giant’s premises was not due to insolvency, but merely to assist with liquidity problems suffered as a result of the fire (Mr Hume refers to the parties’ successful trading history previously, and Rapid’s assumption that Giant would have insurance cover for the losses suffered). He says that there was benefit to Rapid in having the additional business. He refers to one other creditor who came to a similar arrangement.
[23] Counsel for the liquidators addressed the section’s requirements of good faith and lack of reasonable grounds for suspecting insolvency together, as I understand it on the basis that Rapid could not have received the payment in good faith (believing there was no element of undue preference) if it suspected or reasonably should have
suspected that Giant was insolvent. While I accept that the facts will bear on both
1 Re Orbit Electronics Auckland Ltd (in liq) (1989) 4 NZCLC 65,170 (CA).
2 Ibid, at 65,170.
3 Pharmacy Wholesalers (Wellington) Ltd v Graham HC Auckland CIV 2003-404-3312, 5 February
2004 at [80].
4 See for example Rees v Bank of New South Wales [1964] HCA 47, (1964) 111 CLR 210.
points, these are nevertheless separate aspects to s 296(3) and need to be considered separately.
[24] In his oral submissions counsel for the liquidators accepted that Mr Hume and Rapid would not have known of Giant’s specific financial circumstances. He argued that, nevertheless, correspondence between the parties promising payment of at least part of the debt, and the delay in making the payment, had to give grounds for suspicion and, in turn, indicated a lack of good faith.
[25] I am in no doubt that Rapid entered into its arrangement with Giant in the belief that it was experiencing temporary liquidity difficulties as a consequence of the fire. The liquidators have not challenged the evidence that Giant came to a similar arrangement with at least one other creditor.
[26] Taken in isolation, there is merit to the liquidator’s argument that correspondence starting in July 2010 is suggestive of continuing cash flow difficulties, which is supported by letting Rapid have money as payments were received by Giant. However, this argument focuses on events just prior to the payment, rather than on the trading arrangement as a whole.5 Looking at it in the context of the dealing between the parties as a whole, the correspondence passing
between the parties from late July 2010 to early November 2010 was seeking to establish the state of the account between them in terms of their offset arrangement. I am satisfied that when Rapid received Giant’s cheque for $113,551.84 on 6 January
2011 (under the cheque swap terms super-imposed on the earlier arrangement) it did so believing that that was the culmination of the parties’ efforts to effect an accounting transaction in terms of their arrangement. The fact that the process took so long can be viewed as evidence that the parties were giving it little priority because they were thinking in terms of a reasonably modest balancing item rather
than a debt for the nominal amount of the cheque.
5 In Trans Otway Ltd v Sheppard [2006] 2 NZLR 289, the Supreme Court commented that when considering whether a creditor received more from the transaction than it would in a liquidation that the Court should look at the commercial reality of the transaction as a whole rather than isolating individual steps (at [9]).
[27] As counsel for the liquidators appropriately acknowledged, there was no evidence that Rapid knew of Giant’s financial circumstances (and particularly that it was served with a statutory demand in late November 2010). What it did know was that it was not the only creditor to have entered into this kind of arrangement: Mr Hume refers to one other creditor, and although the point is not addressed expressly in evidence, there is also a suggestion in a letter from Giant’s solicitors to Rapid’s accountant in August 2011 that there were more. Cross-crediting of entitlements under such an arrangement does not, in my view, give rise to an undue preference. I accept that Rapid received the payment in good faith.
Were there grounds to suspect insolvency?
[28] This limb of s 296(3) requires the Court to be satisfied both that a reasonable person in Rapid’s position would not have suspected that Giant was, or would become, insolvent and that Rapid did not have reasonable grounds to suspect the same.
[29] The first aspect requires an objective assessment of the facts. The hypothetical person is deemed to have the knowledge and experience of an average business person, standing in Rapid’s position.6 This hypothetical person will be assumed to have the full range of information available to the creditor at the date of the transaction.7
[30] The second aspect requires an analysis from Rapid’s perspective, although the facts known to it are to be judged objectively. It is a demanding test. Rapid must negate any suggestion of actual apprehension, based on the circumstances of which Rapid was aware (considered objectively).8
[31] The test for suspicion is something more than idle wondering – it requires a positive feeling of actual apprehension or mis-trust,9 and consideration of what
6 Cussen v Federal Commissioner of Taxation (2004) 22 ACLC 1528 – a decision on the Australian equivalent to s 296(3)(b): s 588FG(b) Corporations Act 2001.
7 Cussen, above n 6, at [64].
8 Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266 (HCA) at 303.
9 Ibid.
circumstances were apparent to Rapid, the cumulative impact of all factors, and any potentially countervailing factors.10
[32] Counsel for Rapid submitted that all that was reasonably apparent to Rapid was that Giant had temporary liquidity issues. These had led to the arrangement in August 2009, and there was nothing in the parties’ dealings in 2010, viewed objectively, to give it concern about Giant’s solvency. The transaction in question was simply the outcome of the arrangement they had made. He acknowledged that an email from Rapid on 8 October 2010 alerted Rapid to the fact that there was still a liquidity issue (it seems unlikely that this was due to the fire), but again temporary as evidenced by the accompanying statement that large payments were awaited. He noted that there was no evidence of any demand for payment having been made by Rapid, and referred to the evidence of Mr Hume that he had had no indication of any possible insolvency. Counsel relied on the comment of the High Court of Australia in Sandell v Porter that a conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety, and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity; the
conclusion of insolvency arises from:11
...the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due....
[33] Counsel for the liquidators argued that the evidence pointed to insolvency rather than temporary liquidity: these were debts incurred from early 2010 onwards, there were still liquidity issues in October 2010 (when Giant informed Rapid that it would not be able to pay until it received large payments that were expected), and even then payment did not eventuate until early January 2011. He also argued that Giant’s advice to Rapid on 8 October 2010 that it would courier cheques (pending Giant’s receipt of the anticipated payments) down to Rapid “so you have them” allowed an inference that the cheques were not to be banked but merely held until
funds became available and was offered, “as a salve”.
10 Sutherland v Eurolinx Pty Ltd (2001) 37 ACSR 477 (NSWCA) at [43]–[48].
11 Sandell v Porter (1966) 115 CLR 666 (HCA) at 670.
[34] It is unlikely, in my view, that any creditor standing in Rapid’s shoes would have entered into the arrangement and advanced credit to Giant after the fire if it had not believed that Giant’s liquidity was a temporary issue. Similarly, it is unlikely (even against the background of that arrangement) that matters would have been left as long as they were, without demand for payment of any balance due, if there was cause for concern about Giant’s solvency as distinct from liquidity. The correspondence evidences the fact that Giant was pressing Rapid for the reconciliation and delivery of invoices. This evidence suggests that, at most, Rapid was aware of a continuing liquidity issue, but one that was being resolved. I am satisfied that the facts known to Rapid were insufficient to meet the test for suspicion of insolvency.
[35] I also consider it unlikely that Rapid (or any reasonable person in Rapid’s
position) would have agreed to a cheque swap or made any payment to Giant on 6
January 2011 if it believed Giant was insolvent. It would either have paid only the net amount in terms of the arrangement made in August 2009, or made no payment at all (and left the issue of set-off to be determined in the liquidation). This takes me to the third limb if s 296.
Alteration of position
[36] The purpose of this limb of s 296(3) is:12
...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 that 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.
[37] The requirement that any alteration takes place in the reasonable belief that the payment is valid is likely to be established if the payment is made in the ordinary
course of business and by showing that the payment was received in good faith.13
12 Baker Timber Supplies v Apollo Building Associates (Tauranga) Society Ltd (in liq) (1990) 5
NZCLC 66,791 (HC) at 66,793.
13 Pharmacy Wholesalers, above n 3, at [100].
[38] In general, the party receiving the payment must show a deliberate course of conduct, following receipt of the payment, which would not have been taken but for receipt of the payment and belief in its validity.14
[39] It is sufficient if the recipient shows that it would have undertaken some action in a different manner if it had known of the possibility of challenge.15
[40] Counsel for Rapid submitted that Rapid had altered its position by issuing the cheque to Giant (for $90,713.50) in the cheque swap. He argued that Rapid did so in the reasonably held belief that the payment it was receiving from Giant (its cheque for $113,551.84) was valid, and would not be set aside.
[41] He argued that it would be repugnant to the principle underlying s 296(3) (identified in Baker Timber Supplies)16 not to protect a party who alters its position, and submitted that an order to repay the sum received would result in recovery of more than the benefit that Rapid received (which was only the net sum of
$22,838.34). He pointed to what he called the “counter factual” position had Rapid not entered into the cheque swap, in which case it would have had an entitlement to set-off under s 310. He submitted that the present case could be compared to Re Bee Jay Builders Ltd where the creditor (a supplier of bricks) delivered further bricks to the company following a payment that was voidable, and was held to be entitled to set-off the value of that supply against the voidable payment.
[42] Counsel also relied on his submission as to Rapid’s good faith and lack of reasons to suspect insolvency as support for Rapid’s reasonable belief in the validity of the transaction.
[43] Counsel for the liquidators submitted that Rapid had not satisfied the requirements for an alteration of position. He argued first that delivery of the cheque in a cheque swap (a simultaneous act) could not be an act in reliance on validity of the payment by Giant. He argued that it cannot be an alteration of position to pay a
debt that is due, and relied on established law that mere receipt of a payment is not
14 Re Bee Jay Builders Ltd [1991] 3 NZLR 560 (HC) at 566.
15 Baker Timber Supplies, above n 12, at 66,794; Pharmacy Wholesalers, above n 3, at [95].
16 Baker Timber Supplies, above n 12.
an alteration of position.17 He argued that Rapid needed to show that it had made a conscious decision to make its payment having received the payment from Giant, and had done no more than show a contemporaneous exchange. He said that Re Bee Jay Builders Ltd could be distinguished as in that case the further supply took place after the creditor had received payment.
[44] Secondly, counsel for the liquidators submitted that Rapid had sufficient knowledge (long outstanding debt, continuing liquidity issues, delay in making payment even after promises made) that even if the giving of its cheque was an alteration of position, it was not in the reasonable belief that Giant’s payment was valid.
[45] I am conscious that Rapid has the onus of satisfying the Court that it has met the requirements of this aspect of s 296, as with the earlier two limbs. I am satisfied that it has done so to the extent that it gave Giant its cheque for $90,713.50 in the expectation that it was getting a valid payment of $113,551.84. In my view it altered its position to the extent of losing the opportunity to have a set-off applied
automatically on Giant’s liquidation, or at least to advance a case for that set-off.18
[46] I do not accept the liquidators’ argument that the act which constitutes the alteration of the position must follow the receipt of the impugned payment. I consider that it can be a contemporaneous act (as in this case) as long as it is the result of a conscious or deliberate decision to undertake the act in reliance on the payments.19
[47] In the present case, I am satisfied that Rapid delivered its cheque as a conscious decision based on expectation of the delivery of a valid payment by Giant.
[48] I do not see any need to determine a difference between the parties as to whether the set-off would have applied automatically. It is sufficient to say that it was an opportunity that Rapid could have taken, but forwent as part of the overall
arrangement between the parties.
17 Re Access Houses Ltd (HC) at 67,485.
18 Refer Harte v Wood [2004] 1 NZLR 526 (CA) at [39].
19 Baker Timber Supplies, above n 12, at 66,794.
[49] I am also satisfied, for the reasons I have given, that at the time Rapid had a reasonable expectation that the payment was valid.
Decision
[50] I find that Rapid has a defence under s 296(3), but only to the extent of its payment of $90,713.50.
[51] The liquidators are entitled to an order setting aside the payment made by
Giant to Rapid on 6 January 2010 to the extent of the balance of $22,838.34.
[52] The parties are to file memoranda as to costs. Taking into account the
Christmas and New Year period, those memoranda are to be filed and served by 1
February 2013, but with leave reserved to seek an extension of time if that timing is insufficient. Costs will be determined on the basis of those memoranda.
Associate Judge Abbott
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