McCullagh v Robt Jones Holdings Ltd
[2017] NZHC 2182
•8 September 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2013-404-3475 [2017] NZHC 2182
UNDER Sections 292, 294 and 295 of the
Companies Act 1993
IN THE MATTER
of the liquidation of Northern Crest
Investments Limited (In liquidation)BETWEEN
ANTHONY JOHN MCCULLAGH AND STEPHEN MARK LAWRENCE Applicants
AND
ROBT JONES HOLDINGS LIMITED Respondent
Hearing: 19-21 and 23 June 2017 Appearances:
B P Keene QC and L M Van for the applicants
D G Chesterman for the RespondentJudgment:
8 September 2017
JUDGMENT OF GORDON J
This judgment was delivered by me
on 8 September 2017 at 2.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: Anthony Harper, Auckland
Gillespie Young Watson, Lower Hutt
Counsel: B Keene QC, Auckland
D Chesterman, Auckland
MCCULLAGH v ROBT JONES HOLDINGS LIMITED [2017] NZHC 2182 [8 September 2017]
Contents
Introduction .................................................................................................................... [1] The companies ............................................................................................................... [5] The relationship between NCI and RJH......................................................................... [9] The liquidation ............................................................................................................. [18] The impugned payments .............................................................................................. [27] Section 292 of the Companies Act 1993 ...................................................................... [28] Were the payments by Columbus and MSH2 transactions by NCI? ........................... [31] The law in relation to third party payments ............................................................. [32] The licence agreements ............................................................................................ [44] Theory of the case – the liquidators ......................................................................... [64] Theory of the case – Robt. Jones Holdings Ltd........................................................ [68] Were the payments by Columbus a transaction by NCI? ............................................. [73] Were the payments by Columbus before 1 April 2010 a redirection of licence fees?[75] Were the payments by Columbus after 1 April 2010 a redirection of licence fees? . [95] Was the Nov09 agreement a legitimate licensing agreement? ............................... [102] The existence of the intellectual property .............................................................. [104] The ownership of the intellectual property ............................................................ [120] The legitimacy of the licence fee ............................................................................ [134] Conclusion regarding the legitimacy of the Nov09 agreement .............................. [143] Were the payments made at the direction of, or with the consent of, NCI? ........... [144] Conclusion.............................................................................................................. [148] Were the payments by MSH2 a transaction by NCI? ................................................ [150] Were the payments by Columbus and MSH2 insolvent transactions? ....................... [166] “The company is unable to pay its due debts” – the restricted period .................. [169] Was NCI “unable to pay its due debts” at the relevant times? .............................. [181] Did RJH receive more money than it would have received in the liquidation? ..... [198] Conclusion.............................................................................................................. [204] Were the payments to RJH voidable transactions by NCI? ....................................... [205] Was there an abuse of process by the liquidators? ..................................................... [207] The orders sought by the liquidators .......................................................................... [213] Result ......................................................................................................................... [217] Costs ........................................................................................................................... [220]
Introduction
[1] Between 22 January 2010 and 5 November 2010, Robt. Jones Holdings Ltd (RJH) received $751,941.52 in discharge of a debt owed by Northern Crest Investments Ltd (NCI). The money was not paid by NCI itself, but by two Australian-registered companies, Columbus Property Marketing Pty Ltd and MSH No. 2 Ltd. On 2 June 2011, NCI was placed into liquidation by order of this Court.1
[2] The liquidators, Messrs Anthony McCullagh and Stephen Lawrence, apply under s 294 of the Companies Act 1993 (the Act) to set aside the payments to RJH as voidable transactions under s 292 of the Act. The liquidators’ position is that the payments made by Columbus represented a redirection of licence fees owed to NCI; and that the payments made by MSH2, a wholly owned subsidiary of NCI, were either licence fees collected by MSH2 as treasurer for NCI, or were an intercompany loan to NCI. The liquidators also seek an order requiring RJH to pay interest on the sums it received, calculated from the date of liquidation, and an order that RJH not participate in the liquidation.
[3] RJH’s primary defence is that the liquidators’ case does not meet the common law requirements for extending s 292 of the Act to payments made by a third party. In particular, it says the liquidators have failed to prove that the money paid to RJH was money belonging to NCI or owed to NCI under a licence agreement and, more generally, that the liquidators cannot establish on the balance of probabilities that the payments were “insolvent transactions” within the terms of s 292. Alternatively, it says that the present application is an abuse of process and that the Court should exercise its discretion under s 295 of the Act to order partial rather than full recovery of the money paid to RJH.
[4] The primary issue for this Court to determine is whether, as the liquidators contend, the payments to RJH are voidable transactions under s 292 of the Act. If the liquidators are successful on this issue, it will be necessary to consider the scope of any further orders setting aside the transactions and concerning the subsequent
conduct of the liquidation.
1 A reasons decision was issued the following day: Northern Crest Investments Ltd v Haywood
HC Auckland CIV-2010-404-7741, 3 June 2011.
The companies
[5] NCI is a New Zealand domiciled and registered company, incorporated on
12 August 1983. Its former names include Blue Chip Financial Solutions Ltd, Blue Chip New Zealand Ltd, New Call Group Ltd and The New Zealand Salmon Company Ltd. NCI had been listed on the Australian Securities Exchange, and for this purpose, registered with the Australian Securities and Investment Commission (ASIC) as a foreign company on 11 November 2005.
[6] At the time of its liquidation, the directors of NCI were Mr Laurie Eakin, Mr Marc Wilson and Mr David Sekel. Mr Mark Bryers was also a director of NCI until 25 May 2009. He continued to be involved with NCI after his resignation as director and was described in company records as a consultant. Other parties involved with NCI’s affairs included Mr Guy Robertson, an independent accountant, and Mr Michael Reeves, who acted as a consultant.
[7] NCI has a number of wholly owned subsidiaries, including MSH No. 1 Ltd and MSH2. Mr Eakin was the sole director of MSH2 at the relevant times.
[8] Columbus was registered with ASIC as an Australian-registered company on
24 July 2009. In the period between January 2010 and May 2010 when Columbus made payments to RJH, the director was Mr Robert Hughes. Columbus is not a subsidiary of NCI, nor did it form part of the related group of companies. For reasons that will become clear, however, I am satisfied NCI and Columbus were more closely connected than appearances might otherwise suggest.
The relationship between NCI and RJH
[9] On 29 July 2005, NCI (under its former name, Blue Chip New Zealand Ltd) entered into a deed of lease with RJH as lessor for the premises at Level 12, Qantas House, Queen St, Auckland. The lease was for a term of six years, commencing
7 March 2005. Under the terms of the lease, NCI was required to pay rental to RJH.
[10] In early 2008, NCI fell behind in rental and rates payments and RJH issued a a notice of intention to cancel the lease. NCI subsequently abandoned the leased premises and the lease was terminated on 25 August 2008.
[11] Between 2008 and 2010, RJH took a number of steps to enforce its rights under the lease. These included summary judgment proceedings filed on 27 May
2009 for damages resulting from NCI’s repudiation of the lease. On 23 September
2009, Associate Judge Gendall gave judgment in favour of RJH on quantum and liability in the amount of $285,133.07.2 A quantum hearing (for future damages) was allocated for 26 and 27 April 2010.
[12] By deed of settlement dated 15 October 2009, RJH and NCI agreed to settle the judgment debt of $285,133.07 and the proposed counter-claim by NCI. The terms of the October settlement agreement required NCI to pay $285,133.07 by
30 October 2009 and a further $120,000 by 30 November 2009. However, NCI
failed to make these payments when they fell due.
[13] On 22 January 2010 and 24 February 2010, Columbus made two payments to RJH totalling $285,133.07. The liquidators say that Columbus made a further payment of $4,000.00 on 2 March 2010, although the reasons for that payment are unclear.
[14] The parties subsequently negotiated a further settlement agreement (the April
settlement agreement). By a document titled “Admission of Claim” dated 19 April
2010, NCI agreed to pay an admitted sum of $450,000 to RJH in five instalments:
four payments of $100,000 to be made on each of 21 April 2010, 31 May 2010,
30 June 2010 and 30 July 2010, with a final payment of $50,000 being payable on
20 August 2010. Although there was no reference in the Admission of Claim to the amount of $120,000 which remained outstanding under the October settlement agreement, it seems clear that the obligation to pay this amount was extinguished by
the April settlement agreement.
2 Robt. Jones Holdings Ltd v Northern Crest Investments Ltd (2010) 11 NZCPR 206 (HC).
[15] On 20 April 2010 and 28 May 2010, Columbus made payments of
$100,025.00 to RJH. However, NCI failed to meet its obligations under the April settlement agreement in respect of the payments due in June, July and August 2010. RJH successfully sought judgment against NCI for the sum of $250,0003 and issued a statutory demand for that amount on 15 July 2010. The sum remained unpaid and on 6 August 2010 RJH applied for the liquidation of NCI, relying on the unsatisfied statutory demand.
[16] RJH withdrew its application for liquidation after reaching a further settlement agreement (the August settlement agreement) by which NCI agreed to pay the outstanding sum of $250,000 plus interest, scale costs and disbursements. Between 7 September 2010 and 5 November 2010, MSH2 made eight payments to RJH totalling $262,758.05.
[17] In summary, between January 2010 and 5 November 2010, RJH received
13 payments totalling $751,941.52 in full satisfaction of NCI's liability to RJH. It is not challenged that all payments were made on account of, and to reduce, NCI's indebtedness to RJH. There is no suggestion by RJH that either Columbus or MSH2 were independently liable for the amounts paid.
The liquidation
[18] On 25 November 2010, NCI applied to set aside a statutory demand issued by Ross Haywood, the former group financial controller for Blue Chip Financial Solutions (Australia) Ltd. The application was unsuccessful and on 2 June 2011
Associate Judge Christiansen made an order placing NCI into liquidation on the
basis that NCI was “hopelessly insolvent”.4
[19] It is apparent from the evidence that the liquidation was a difficult one. Mr Keene QC, who appeared on behalf of the liquidators, submitted that the complexity arose from two primary causes. The first, he said, was that by the time
the liquidation had started, all the records had been taken to Australia. Accordingly,
3 Robt. Jones Holdings Ltd v Northern Crest Investments Ltd HC Wellington CIV-2009-485-1013,
14 July 2010.
4 Northern Crest Investments Ltd v Haywood, above n 1, at [10].
accessing the records required proceedings in Australia. While Mr Lawrence (one of the liquidators) and others travelled to Australia, it was also necessary to instruct overseas agents.
[20] The second cause, Mr Keene said, was that anything to do with the Blue Chip group of companies is necessarily convoluted. The ledgers were kept in New Zealand dollars for some parts and in Australian dollars in other parts. He said it was very hard to piece together exactly what happened. This was not helped, he said, by a very negative attitude by the directors at the time of the liquidation.
[21] Mr Lawrence gave evidence that on 6 June 2011 he travelled to Australia to interview various individuals associated with NCI. He interviewed Mr Eakin, Mr Sekel and Mr Robertson, each of whom was uncooperative and refused to provide the information sought by the liquidators. As a result, the liquidators became concerned that the company records were at risk.
[22] Accordingly, the liquidators applied to the Australian courts for recognition under the Cross-Border Insolvency Act 2008 (Cth). An interim recognition order was made on 9 June 2011. Notices were issued on 14 June 2011 by the liquidators’ solicitors in Australia to the directors for delivery up of documents. The directors did not comply.
[23] Following non-compliance with the delivery up notices, the liquidators applied to the Australian courts for a search and seizure warrant under s 530C of the Corporations Act 2001 (Cth), and an order for delivery up of records. Both orders were granted on 24 June 2011. The orders were served and as a result, the 'books' of NCI were handed over by the directors by 28 June 2010. The remaining records of NCI at Level 2, 50 Pitt Street, Sydney, were seized pursuant to the warrant and taken into custody by the liquidators.
[24] Mr Christopher McCullagh,5 who assisted the liquidators, swore two affidavits regarding the state of the records available to the liquidators.
5 For the avoidance of doubt, Mr Christopher McCullagh is a different person from Mr Anthony
McCullagh, the latter being one of the liquidators.
Mr McCullagh said that when he attended NCI’s offices in Sydney, the documents to be seized were in disarray. Some of the documents were in shredder bins or lying loose. Other documents were in files, but the files were incomplete, with parts missing altogether. The state of disorder suggested to Mr McCullagh that someone had been through the documents with the intent to dispose of or destroy material held by the company. The identity of the person or persons involved is unknown although the liquidators suspect that the directors of NCI may have been involved.
[25] On 5 July 2011, following a review of the available documentation and interviews with NCI officers, the liquidators issued a voidable notice against RJH. A notice of objection was served by RJH on 1 August 2011. The liquidators then filed an originating application to set aside the transactions specified in the voidable notice on 16 July 2013. RJH filed its notice of opposition on 18 October 2013.
[26] Between 2013 and 2016, RJH pursued a number of interlocutory applications, including applications for further and particular discovery, orders setting aside the liquidators’ claim to privilege6 and leave to amend the notice of opposition.7 RJH also sought a review of Associate Judge Bell’s decision regarding its discovery application, which was dismissed in a decision of Downs J dated
21 October 2016.8
The impugned payments
[27] The payments which the liquidators seek to recover from RJH are as follows:
Date Source Amount 22 January 2010 Columbus Property Marketing Pty Ltd $150,000.00 24 February 2010 Columbus Property Marketing Pty Ltd $135,133.07 2 March 2010 Columbus Property Marketing Pty Ltd $4,000.00 20 April 2010 Columbus Property Marketing Pty Ltd $100,025.00 28 May 2010 Columbus Property Marketing Pty Ltd $100,025.00 Total Columbus payments $487,183.07
6 McCullagh v Robt. Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615.
7 McCullagh v Robt. Jones Holdings Ltd [2016] NZHC 263, [2016] NZCCLR 16.
8 Robert Jones Holdings Ltd v McCullagh [2016] NZHC 2529.
7 September 2010 MSH No.2 Pty Ltd $28,000.00 14 September 2010 MSH No.2 Pty Ltd $26,000.00 15 September 2010 MSH No.2 Pty Ltd $24,000.00 16 September 2010 MSH No.2 Pty Ltd $27,000.00 14 October 2010 MSH No.2 Pty Ltd $25,000.00 27 October 2010 MSH No.2 Pty Ltd $30,000.00 4 November 2010 MSH No.2 Pty Ltd $98,000.00 5 November 2010
MSH No.2 Pty Ltd $4,758.05
Total MSH2 payments $262,758.05 Total Payments $751,941.52
Section 292 of the Companies Act 1993
[28] The liquidators allege that the impugned payments are voidable transactions within the terms of s 292 of the Act. Section 292 relevantly provides:
292 Insolvent transaction voidable
(1) A transaction by a company is voidable by the liquidator if it—
(a) is an insolvent transaction; and
(b) is entered into within the specified period.
(2) An insolvent transaction is a transaction by a company that—
(a) is entered into at a time when the company is unable to pay its due debts; and
(b) enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
(3) In this section, transaction means any of the following steps by the company:
(a) conveying or transferring the company’s property:
(b) creating a charge over the company’s property:
(c) incurring an obligation:
(d) undergoing an execution process:
(e) paying money (including paying money in accordance with a judgment or an order of a court):
(f) anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
…
(5) For the purposes of subsections (1) and (4B), specified period
means—
(a) the period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b) in the case of a company that was put into liquidation by the court, the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order was made; and
(c) if—
(i) an application was made to the court to put a company into liquidation; and
(ii) after the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
…
[29] Accordingly, the liquidators must prove on the balance of probabilities that the payments made by Columbus and MSH2 to RJH were:
(a) Transactions by NCI;
(b) Insolvent transactions; and
(c) Made within the specified period.
[30] RJH accepts that the payments by Columbus and MSH2 were made within the specified period. However, as noted above, it disputes that the payments by those companies are transactions by NCI or that NCI was insolvent at the relevant times.
Were the payments by Columbus and MSH2 transactions by NCI?
[31] A complication which arises in the present case is that the payments which the liquidators seek to set aside are not payments made by NCI itself, but rather payments made by Columbus and MSH2. At first glance, that circumstance appears to be incompatible with the terms of s 292, which provides that a voidable transaction is a transaction “by the company” in liquidation. The liquidators however rely on a line of cases which establish that in some circumstances, a payment made by a third party to a creditor of the company in liquidation may be termed a “transaction by [the] company” for the purposes of s 292.
The law in relation to third party payments
[32] The authors of Heath and Whale on Insolvency summarise the law relating to third party payments in the following terms:9
In considering whether a payment made by a third party is in fact a payment by the company, the substance as well as the form of the transaction will be examined by the Court. It is a matter of fact in each case, based on the relationship between a third party payer and the company, whether the payment in question is a payment by the company. A payment by a third party may be deemed to be a payment by the company, where that payment is made at the direction of, or with the consent of, the company, and where either:
(a) the money with which the third party makes payment is, in reality, not its own, but that of the company (Westpac Banking Corporation v Nangeela Properties Ltd (in liq)); and
(b) the third party makes payment from money which it owes to the company (Chilton St James School v Gray).
9 Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (looseleaf ed, LexisNexis
NZ) at [24.41].
[33] Two cases which fall into the first of these categories are Westpac Banking Corporation v Nangeela Properties Ltd (in liq) and Levin v Market Square Trust.10 In the former, the liquidators sought to recover a payment made by the company’s solicitors to the appellant bank. Section 309(1) of the Companies Act 1955 provided that:
Every payment made … by any company unable to pay its debts as they become due from its own money, shall be voidable as against the liquidator, if–
(a) It is in favour of any creditor … with a view to giving that creditor
… a preference over the other creditors; and
(b) The … paying … of the same occurs within 2 years before the
commencement of the winding-up of the company.
[34] On appeal the bank argued that the payment had been made by a third party, namely the solicitors, rather than the company itself. Accordingly, the bank argued, the payment could not be described as a “payment made … by any company unable to pay its debts as they become due”. The Court of Appeal rejected the argument. The solicitors’ actions were performed in accordance with instructions given by the company and the money was paid from the proceeds of sale of property owned by the company. The payment was therefore considered to be a payment by the company in liquidation.
[35] In Levin v Market Square Trust, the appellant liquidators sought to recover payments made by a third party to the respondent, Market Square Trust (MST). MST had leased business premises to One Italy Ltd, the company in liquidation, which subsequently fell behind with the rent. A third party, Peek Developments Ltd, sought to purchase One Italy and therefore wished to secure an assignment of the lease. In order to secure MST’s consent to the assignment, Peek entered into a loan agreement with One Italy, whereby Peek loaned One Italy the amount needed to pay the arrears on the basis that the loan would be repaid when Peek completed its
purchase of One Italy’s business. However, rather than paying the loaned amount to
10 Westpac Banking Corporation v Nangeela Properties Ltd (in liquidation) [1986] 2 NZLR 1 (CA); Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 59.
One Italy, Peek instructed its solicitors, McVeagh Fleming, to pay the loaned amount to MST directly. The Court of Appeal held that although the payment had been made by McVeagh Fleming, the money in fact belonged to One Italy by virtue of the loan agreement. On that basis, the Court concluded that the payment by McVeagh Fleming was a payment of money by the company, in accordance with s 292(3)(e) of the Act.
[36] The second category of cases identified by the authors of Heath and Whale on Insolvency concerns transactions where a third party makes payment out of money owed to the debtor company (subsequently in liquidation). The net effect of such a transaction is to reduce or extinguish the liability owed by the third party to the debtor company and to reduce or extinguish the liability of the debtor company to its creditor.
[37] One case which falls into this second category is Chilton Saint James School v Gray.11 In that case, the liquidator sought to recover payments made by a third party, Broadtech Services Ltd, to the school. The payments were made at the direction of Mr Truman, the director of the company in liquidation, to meet the costs of his daughter’s tuition at the school. Greig J held:12
In this case it is impossible I think to say otherwise than that the payment was made by the company TCS. The payment was made in fact by Broadtech but it was from money which it owed to TCS for the transfer of the assets. Instead of receiving that money and then paying it out to its creditors or others TCS directed Broadtech to make the payment in its stead. That was clearly the act of the company just as much as was the direction to the solicitors in the Nangeela case. Broadtech would not have made a payment to the plaintiff without that direction and the payment was made by Broadtech out of funds which it owed to the company TCS. The transaction was a transaction by the company.
[38] Notwithstanding that finding, the liquidator was ultimately unsuccessful as the school was not a creditor of the company in liquidation.
[39] In another case, Porter Hire Ltd v Blanchett, the liquidators were successful in their application to set aside payments made by a third party to a creditor of the
11 Chilton Saint James School v Gray (1996) 9 PRNZ 349 (HC), affirmed on appeal Gray v Chilton
Saint James School (1997) 8 NZCLC 261,306 (CA).
12 At 354.
company in liquidation.13 The third party, Manson Developments Ltd, had contracted Yukich Brothers Ltd (subsequently in liquidation) to undertake certain works. Yukich in turn hired earthmoving equipment from Porter Hire Ltd. Rather than making payment to Yukich for its work, Manson paid more than $226,000 to Porter Hire to discharge Yukich’s debt. Associate Judge Doogue found as follows:
[105] What occurred, in my view, was a variation of the agreement between Manson and Yukich in terms of which Yukich authorised and bound itself to an arrangement in terms of which payments owing to it were to go directly to PHL. The arrangements also possibly included the creation of some contractual relationship between Manson and PHL, the net effect of which was that Manson agreed to paid [sic] to PHL money that it owed to Yukich.
[40] On that basis, Associate Judge Doogue concluded that the payments by Manson were a transaction by Yukich in that there was “a conveyance or transfer of property by the company”, as listed in s 292(3)(a) of the Act. In this respect, the Associate Judge departed from previous decisions of this Court and the Court of Appeal, which have held that payments by a third party can be a transaction of the company in terms of s 292(3)(e), “paying money”, rather than “conveying or transferring the company’s property”.
[41] It is clear that payments made by a third party can, in the circumstances identified by the authors of Heath and Whale on Insolvency, be considered a transaction by the company in liquidation. For the purposes of this judgment I adopt the more conventional analysis which treats payments by the third party as payments by the company under s 292(3)(e), as opposed to a transfer of property under s
292(3)(a). However the distinction may be immaterial, given the wide definition of “property” in the Act as “property of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includ[ing] rights, interests, and claims of every kind in relation to property however they arise”.14
[42] In order to establish that the payments by Columbus and MSH2 are transactions by NCI, the liquidators must establish that:
13 Porter Hire Ltd v Blanchett (2006) 9 NZCLC 264,070 (HC).
14 Companies Act 1993, s 2, definition of “property”.
(a) The payments by Columbus and MSH2 were made:
(i) From money owed by Columbus and MSH2 to NCI; or
(ii) From money belonging to NCI; and
(b)The payments were made at the direction of, or with the consent of, NCI.
[43] For completeness, I note the submission by Mr Keene that the question whether the money “belonged” to NCI is of no consequence in light of the Supreme Court decision in McIntosh v Fisk.15 That submission appears to be founded on a statement by the Court “that a payment of money by a company, whether of the company’s own money or not, is a ‘transaction’ within the meaning of the definition in s 292(3).”16 In my view, however, that submission is misconceived. The Court in McIntosh was concerned with circumstances where the company in liquidation made payment out of money belonging to other parties. That is not the issue in the present case, where the payment was made by a third party. I am satisfied that the Supreme Court decision in McIntosh v Fisk has no direct bearing on the law in relation to third party payments.
The licence agreements
[44] The outcome of this application turns in part upon licence agreements that were in force between NCI, MSH2 and Columbus at the relevant times. It is therefore helpful to begin by considering the nature and terms of the relevant agreements.
[45] There are four licence agreements in evidence before the Court. I address each in chronological order below.
15 McIntosh v Fisk [2017] NZSC 78 at [47] – [65].
16 At [56].
[46] The earliest licence agreement in evidence is an agreement between MSH2 as licensor and Columbus as licensee dated 28 January 2009 (the Jan09 agreement).17
NCI is not a party to the Jan09 agreement. However, the background section makes
reference to the “Master Licensor”, which is defined to be NCI:
AThe Master Licensor has developed a licensed system and the Master Licensor owns proprietary know how and trade secrets relating to the establishment and operation of the System.
BThe Master Licensor has expended time, effort and money to develop and protect the System.
CThe Master Licensor has granted the Licensor rights to the name and all other Intellectual Property in relation to the system and the right to licence the System.
DThe Licensor has agreed to allow the Licensee the right to own and operate the Business in accordance with the System upon the terms and conditions set out in this document.
[47] The Jan09 agreement states that the System “enables the Licensee to provide financial solutions to their customers through the referring, processing and sale of residential property and other investment solutions and related services and products.”18 One of the distinguishing features of the System is said to be a “Licence Owner Manual”.19 The terms of the agreement require the licensee to
conduct its business in strict accordance with the Licence Owner Manual.
[48] The fee structure under the Jan09 agreement requires the licensee to pay a licence fee on a monthly basis, reflecting the properties underwritten and settled by the licensee for the relevant month.20 The licence fee is defined as “15.0% of the sale value of every third property underwritten by the Licensee in the territory
[Australia] exclusive of GST”.21
17 Respondent’s Requested Documents – Not Agreed [RRD] at 164. Although the liquidators initially objected to the admission of the evidence in this bundle, that objection was largely withdrawn in the course of the hearing. Subsequent references to the RRD should be taken as references to the evidence which has now been admitted without further dispute.
18 Clause 1.1.
19 Clause 1.2.4.
20 Clause 2.1.
21 Schedule 1, Item 4.
[49] The Jan09 agreement is signed by Mr Bryers for MSH2 and by Mr Wilson for Columbus.22
[50] The next licence agreement is dated 26 November 2009 and is an agreement between NCI as licensor and Columbus as licensee (the Nov09 agreement).23 The Nov09 agreement is said to supersede all previous agreements with respect to its subject matter.24
[51] The Recitals in the Nov09 agreement state:
A. The Licensor is the owner of the Intellectual Property, the Trade
Names and the Trademarks.
B. The Licensor has agreed to allow the Licensee to use the Intellectual Property, the Trade Names and the Trademarks on the terms set out in this Agreement.
[52] Under the Nov09 agreement, the licensor grants to the licensee a non- exclusive, non-transferable licence to use the intellectual property and to perform the licensed services in the Commonwealth of Australia for a period of five years.25
Like the Jan09 agreement, the Nov09 agreement contains a clause requiring the licensee to conduct its business in strict accordance with a manual, in this instance described as a “Procurement Procedure Manual”.26
[53] The fee structure under the Nov09 agreement is more complex than that set out in the Jan09 agreement. Clause 9.3 provides:
Notwithstanding anything to the contrary contained or implied in paragraph
9.1 or Schedule 2, the Licensee agrees to pay to the Licensor:
(a) for the period to 31 March 2010, an agreed license [sic] fee of
$3,500,000; and
(b) during each subsequent 12 month period during the currency of this Agreement, the greater of 60% of the annual license [sic] fees forecast in paragraph 9.2 above and the cumulative total of the license [sic] fees calculated under Schedule 2.
22 See [6] above.
23 Agreed Bundle of Documents – Exhibits to Affidavits – Volume 1 [ABD1] at 145.
24 Clause 17.10.
25 Clauses 2.1 and 3.1.
26 See cl 7 and the definition of “manual” in cl 1.1.
[54] This lump sum payment, due only four months and five days after the signing of the contract, is unique to the Nov09 agreement. There is nothing in the terms of the contract that would indicate the reason for requiring a large lump sum payment of this kind.
[55] The Nov09 agreement is signed on behalf of both NCI and Columbus but the signatories are not identified. I note for completeness that there is a second copy of the Nov09 agreement which includes a handwritten notation on the cover page stating “(superceded on 1 April 2010)”. There is no evidence as to who wrote this note or when it was written.
[56] The third licence agreement is an agreement between MSH2 as licensor and Columbus as licensee dated 2 April 2010 (the Apr10 agreement).27 Clause 10.10 provides that the Apr10 agreement “supercedes all previous agreements, accords, understandings between the parties and specifically releases Northern Crest Investments Limited from any liability in any event.”
[57] The background to the Apr10 agreement provides as follows:
AThe Licensor has developed a licensed system and the Licensor owns proprietary know how and trade secrets relating to the establishment and operation of the System.
BThe Licensor has expended time, effort and money to develop and protect the System.
CThis agreement supercedes a previous agreement between the parties and has been modified by mutual consent as the relationship by mutual accord is no longer exclusive.
DThe new agreement takes into account the non exclusive relationship and in doing so reduces the consideration.
[58] A unique and somewhat confusing feature of the Apr10 agreement is that cl 14.1 of the agreement defines “Licensor” in two different ways:
Licensor includes its related Companies and in particular, in relation to ownership of the system, the Intellectual Property and the Marks.
…
Licensor means MSH No 2 Pty Limited (ACN 122 293 243).
27 Agreed Bundle of Documents – Exhibits to Affidavits – Volume 3 [ABD3] at 284.
[59] The Apr10 agreement grants a licence to Columbus to “Exploit the System commercially” and “Identify the Business in accordance with the System.”28 As in previous agreements, the nature of the licensed system is described as “enabl[ing] the Licensee to provide financial solutions to their customers through the referring, processing and sale of residential property and other Investment solutions and related services and products.”29
[60] The marketing of the system and the referral of customers is to be governed by the Licence Owner Manual.30 The licensee is also required to comply with provisions of the Licence Owner Manual in relation to accounting, insurance and use of the intellectual property/database.31
[61] The licence fee is $25,000 (including GST) in respect of each property sold by the licensee, which is said to include the cost of initial training.32
[62] The contract was signed by Mr Eakin for MSH2 and by Mr Hughes for
Columbus.33
[63] The final licence agreement in evidence is an agreement between MSH2 as licensor and Rutherford Franchising Pty Ltd as licensee dated 1 October 2010 (the Rutherford agreement). The terms of the Rutherford agreement are virtually identical to those contained in the Apr10 agreement, with two minor differences: first, there is no provision regarding the superseding of any previous agreement between the parties; and second, the licence fee is said to be $10,000 for each property sold by the licensee, rather than $25,000.
Theory of the case – the liquidators
[64] The liquidators say the payments made by Columbus and MSH2 fall within
28 Clause 1.3.
29 Clause 1.1.
30 Clause 1.5.2. See also cls 4.1, 4.6, 5.1, 6.2
31 See clauses 4.1, 4.6, 5.1 and 6.2.
32 Clauses 2.1 and 14.1; Schedule 1, Item 4.
33 See [6] – [8] above.
the established categories of cases where third party payments have been found to be payments by the company in liquidation.
[65] In respect of Columbus, the liquidators rely on the obligation under the Nov09 agreement that Columbus pay a licence fee to NCI. The liquidators’ case is that NCI directed Columbus to pay money owed in licence fees to RJH, rather than NCI, in order to discharge NCI’s debt to RJH. The liquidators accept that there is no written correspondence to evidence such a direction, but nevertheless submit that this is only available inference that can be drawn from the documents placed before the Court.
[66] In respect of MSH2, the primary submission for the liquidators is that the payments to RJH were made by MSH2 in its role as treasurer for the NCI group of companies at the request or direction of NCI. As treasurer, the liquidators say, MSH2 collected licence fees due under the Nov09 agreement and made payments to RJH on NCI’s behalf. Alternatively, the liquidators argue that the payments to RJH represented a loan by MSH2 to NCI.
[67] The liquidators acknowledge that the evidence in support of these submissions is in some places incomplete or inconsistent. One of the reasons for this situation, the liquidators say, is that a large number of documents were destroyed or otherwise disposed of by persons associated with NCI before they could be seized by
the liquidators.34 The directors of NCI were also uncooperative and refused to
provide relevant information when requested. The liquidators submit that this is a case in which the Court should exercise care not to impose an unduly onerous burden of proof upon the liquidators, in recognition of the fact that NCI has failed to maintain proper records to enable a clear trace of the relevant transaction.35
Theory of the case – Robt. Jones Holdings Ltd
[68] RJH argues that the payments by Columbus and MSH2 were made voluntarily and as such cannot be deemed transactions by NCI for the purpose of
s 292.
34 See [24] above.
35 Citing Levin v Rastkar [2011] NZCA 210 at [10].
[69] In respect of the payments made by Columbus, RJH submits that the liquidators cannot prove that these payments represented a redirection of licence fees. It says the liquidators are unable to prove the nature of the licence arrangements between the parties, whether NCI owned the intellectual property, or the legitimacy of the licence. Accordingly, the liquidators are unable to prove that Columbus owed any licence fees to NCI at all. RJH also emphasises the absence of evidence demonstrating any direction by NCI to Columbus requiring it to make payments to RJH on NCI’s behalf.
[70] RJH rejects the claim that MSH2 was acting as a treasurer for NCI. It argues that the evidence demonstrates MSH2, rather than NCI, was the true owner of the intellectual property and was entitled to receive payments under the licence agreements. RJH also rejects the liquidators’ alternative claim that the payments by MSH2 were a loan to NCI. It notes that MSH2 filed a claim in the liquidation for repayment of the loan, but that the liquidators rejected MSH2’s claim. And again, it says, there is no evidence of any direction by NCI to MSH2 requiring MSH2 to make payments to RJH on its behalf.
[71] The amended notice of opposition filed by RJH listed a number of other grounds for opposing the orders sought by the liquidators. The listed grounds of opposition included the following:
(a) The liquidators are not entitled to recover the payments made by Columbus and MSH2, because they were made by third parties rather than NCI itself;
(b)Columbus and MSH2 are not in liquidation and accordingly there is no jurisdiction to set the payments aside;
(c) Columbus and MSH2 are Australian-registered companies and accordingly this Court has no jurisdiction over payments made by those companies.
[72] These points were not formally abandoned, but were not pursued in the course of the hearing. In answer to the first of these points and as stated above, I am satisfied that payments made by third parties can in some instances be considered payments by the company in liquidation for the purpose of s 292.36 I am also satisfied that this Court has jurisdiction to determine this application. If the liquidators are successful in their application, the order setting aside the payments
will take effect against RJH, not Columbus or MSH2. Both NCI and RJH are New Zealand-registered companies and are therefore subject to the jurisdiction of this Court.
Were the payments by Columbus a transaction by NCI?
[73] Between January and May 2010, Columbus made five payments to RJH:
Date Source Amount 22 January 2010 Columbus Property Marketing Pty Ltd $150,000.00 24 February 2010 Columbus Property Marketing Pty Ltd $135,133.07 2 March 2010 Columbus Property Marketing Pty Ltd $4,000.00 20 April 2010 Columbus Property Marketing Pty Ltd $100,025.00 28 May 2010 Columbus Property Marketing Pty Ltd $100,025.00 Total Columbus payments $487,183.07
[74] The first three payments were made during the period of time when the Nov09 agreement between NCI and Columbus was clearly in force. The latter two payments, however, were made after the Apr10 agreement between MSH2 and Columbus had commenced. I will consider the two groups of payments in turn.
Were the payments by Columbus before 1 April 2010 a redirection of licence fees?
[75] The starting point in relation to this question is that the Nov09 agreement states that Columbus will pay a licence fee of $3,500,000 for the period between the
commencement of the licence on 26 November 2009 and 31 March 2010.37
36 See [32] – [43] above.
37 ABD1 at 153.
[76] However, contemporary documentary evidence shows that this amount was never paid in full. In January 2010, a financial report prepared by NCI stated under the heading “Revenue”:38
Revenue on settlements received to date amounts to $211k. In addition we have accrued a further $2.2m which equates to half of the revenue anticipated in the licence agreement.
[77] A short time later, in a board memorandum dated 24 February 2010, Mr Eakin wrote:39
(a) Background
Over a number of months, the Board expressed its concern about the delays in property settlements and the consequential impact on Northern Crest’s cash flow. Since November 2009, [Columbus] has settled 33 properties with a significant cashflow impact in favour of [NCI].
…
(ii) Debtors
[Columbus] has recently advised that [NCI] can expect to receive a minimum of $500,000 from [Columbus] in March, resulting from the release of the security deposit [Columbus] holds with Korda Mentha on the Aqua project. Prior to any additional cash payments from [Columbus], at least
$1.6 million will have been received by [NCI] from [Columbus] in the last five months of the financial year. As at the end of the financial year, that
would mean [Columbus] had accounted to [NCI] for approximately 46% of
the total licence fees accrued of $3.5 million as provided for in the Licence
Agreement.
[78] In March 2010, Mr Eakin prepared a further report titled “Northern Crest Executive Monthly Report for March 2010”.40 The report was labelled “private and confidential”. Under “Performance/Sales”, Mr Eakin wrote:
Under the licence agreement, Columbus is obliged to pay Northern Crest a minimum of $3.5 million for the year ended 31 March 2010 which reflected a component for receiving the licence as well as for sales performance. Up until 31 January 2010 Columbus had paid approximately $730,000 to Northern Crest out of a total accrual of $3,030,000. Columbus has since paid an additional $300,000 to Northern Crest, and they have recently advised that a further $500,000 minimum amount should be received by Northern Crest during March 2010, resulting from forecast net revenue exceeding $900,000 for the same month and the return of the Columbus
38 ABD1 at 238.
39 Agreed Bundle of Documents – Exhibits to Affidavits – Volume 2 [ABD2] at 178-179.
40 ABD1 at 138.
security deposit of $500,000 from the AQUA development. The balance of the fees owed ($1,970,000) should be paid prior to 31 May 2010.
[79] There are some inconsistencies in the amounts said to have been paid by Columbus during each period of time. Two points, however, are clear. The first is that although the Nov09 agreement appears on its face to require the payment of a single lump sum, Columbus was instead making piecemeal payments of a few hundred thousand dollars at a time. The second is that the payments made by Columbus up until the end of March were insufficient to satisfy its payment obligations. Together, these points lend weight to the liquidators’ submission that the payments by Columbus to RJH were a redirection of licence fees owed to NCI.
[80] There are also a number of relevant statements by the directors and employees of NCI. In an email dated 8 September 2010 from Mr Eakin to NCI’s lawyer, Mr Terence Stapleton, Mr Eakin stated:41
In respect of the payments made by Columbus on behalf of Northern Crest to RJHL, this was done merely to shortcut the process. The payments made by Columbus represent monies that are owed by Columbus to Northern Crest under the licensing agreement between both parties. They are not loans by Columbus to Northern Crest. We have approximately A$2 million in licence fees still outstanding from Columbus as at 31 March 2010, and a minimum of a further A$2.1 million under the Licence Agreement for the period from
1/4/10 to 31/3/11.
[81] On 7 June 2011, the liquidators met with Mr Robertson, who was previously employed by NCI to prepare its accounts. The liquidators’ notes of the interview record the following:42
Mr Robertson advised that the bulk of creditor payments went through MSH No. 2 or through Columbus and those made by Columbus were then deducted from property settlements. Mr Robertson said that all of this information is in the MYOB files that he has provided to the liquidator.
[82] Each of these statements supports the theory that the payments by Columbus to RJH were a redirection of licence fees, albeit there is reason to doubt Mr Eakin’s veracity in relation to other key issues in these proceedings.
41 ABD1 at 174.
42 ABD2 at 195.
[83] What of the MYOB files that Mr Robertson provided to the liquidators? Both parties presented expert evidence regarding the treatment of the Columbus payments in these records. The liquidators also called evidence from Mr Timothy Kerr, a chartered accountant. Mr Kerr was formerly an employee of PKF Corporate Recovery and Insolvency (Auckland) Ltd and assisted in the liquidation of NCI.
[84] Mr Kerr’s evidence was based upon an analysis of the audited financial statements and the accounting records of NCI and its subsidiaries.43 He attached a number of these records to his affidavit, including extracts from the MYOB general ledger data files for NCI (New Zealand and Australia) and MSH1 for the period during which Columbus made payments to RJH. Mr Kerr’s evidence in relation to the January, February and March payments can be summarised as follows:
(a) Each of the payments by Columbus to RJH (and other creditors of NCI) was initially recorded in NCI’s New Zealand general ledger as a loan from Columbus to NCI. By 31 March 2010, the balance of the Columbus loan stood at $362,535.94.
(b)On 31 March 2010, a journal entry was posted in NCI’s New Zealand general ledger, which had the effect of eliminating the balance of the Columbus loan while increasing NCI’s indebtedness to MSH1 by the same amount. In other words, the liability was transferred from the account for Columbus to MSH1. The journal entry was narrated “Reclassify Columbus loan”.
(c) On the same day, a journal entry was posted in MSH1’s general ledger described as the payment of an invoice, specifically “Invoice 2”. The accounting entry for this transaction recorded a debit to the “NCIL NZ Intercompany Account”, representing an increase in the amount owed
by NCI to MSH1; and a credit to the “Trade Debtors” account.
43 Mr Chesterman challenged the reliability of NCI’s audited accounts, particularly in light of a comment by the auditors “that in essence they simply signed off accounts that they were given to them [sic] by Guy Robertson”: ABD1 at 193. However, the important part of Mr Kerr’s analysis relies on NCI’s MYOB records. There was no suggestion by either party that the auditors had a hand in preparing or reviewing the MYOB records.
(d)On the same day, 31 March 2010, MSH1 issued an invoice to Columbus for a total of $716,898.68. The relevant transaction documentation records that this invoice was paid in five instalments. One of those instalments was an amount of $362,535.94 – a figure which coincided exactly with the total of the payments made by Columbus to creditors of NCI up until that time.
[85] Mr Chesterman, who appeared for RJH, cross-examined Mr Kerr about this process and, in particular, about the recording of payments by Columbus as a loan to NCI. Mr Kerr’s evidence was that although the accounts described these payments as a “loan”, the use of that term “is probably quite misleading if you’re not an accountant”.44 In reality, he said, the account named “Columbus loan” operated as a holding account. The payments by Columbus were permitted to accumulate there, but were cleared in the manner described above before any financial report was prepared.
[86] Mr Kerr was also asked in cross-examination about the impairment of the licence fee owed by Columbus under the Nov09 agreement. This impairment was disclosed in an interim financial report of the NCI group for the six months ending
30 September 2010. The reason for the impairment was described in the following terms:45
New licensee
Northern Crest has entered into a license [sic] agreement with Rutherford Franchising Pty Ltd. This license [sic] agreement will see the bulk of the residential investment property distribution activity channelled through Rutherford.
As a consequence of the Rutherford license [sic] agreement, Northern Crest has revised the agreement previously entered into with Columbus Property Marketing Pty Limited on 26 November 2009. The new agreement with Rutherford had the effect that Columbus no longer had any exclusivity over distribution.
In recognition of the projected reduction in revenues available to Columbus under the new licensing arrangements, [NCI] has arrived at a commercial settlement with Columbus, resulting in minimum performance standards
44 Notes of Evidence (NOE) at 210.
45 ABD1 at 313.
under the licence arrangements being substantially lowered, including a reduction in the minimum licence fee for the March 2010 year.
The effect of the settlement is a writing down of licence fee receivables from
March 2010 and as a consequence, Northern Crest will not now receive the
$3.47 million licence fee receivable from FY2010 and has fully impaired this amount as at 30 September 2010.
[87] Mr Kerr noted however, that although the licence fee was impaired in its entirety, NCI did recognise income during the period from November 2009 until
31 March 2010. In other words, he said, “some income was received but the … asset balance that they’d created was basically reversed.”46
[88] Mr Kerr’s analysis of the accounting treatment of the Columbus payments was supported by Mr John Hagen, who was called by the liquidators as an expert witness. Mr Hagen is a chartered accountant and has extensive experience in matters relating to accounting and financial reporting. He holds a Master of Business Administration degree in finance from the University of British Columbia and a Master of Commerce degree with first class honours from the University of Auckland. Mr Hagen is also a past Chairman of the Accounting Standards Review Board, which is responsible for the mandating of financial reporting standards in New Zealand; and a past Chairman of the Financial Reporting and Standards Board, the body which writes the Statements of Standard Accounting Practice prepared by the New Zealand Institute of Chartered Accountants.
[89] Mr Hagen’s opinion was that the treatment of the Columbus payments to RJH, as described by Mr Kerr, was “all standard accounting and there [was] nothing surprising in it at all.”47 When questioned further under cross-examination, Mr Hagen described the treatment of the Columbus payments as follows:48
It was recorded as a loan initially. What happened was that Columbus owed payments to NCIL under the licence agreement. Columbus – so Columbus owed money to NCIL. NCIL owed money to RJHL. Columbus paid money directly to RJHL on the instruction of NCIL and that money – those payments were initially recorded by NCIL as a loan from Columbus. One way to have treated them would have been just to have netted them off the amount that was owed by Columbus to NCIL but if you did that you would not be able to easily state or follow how much money had been paid by
46 NOE at 210.
47 Affidavit of John Carlaw Hagen sworn 21 December 2015 at [8].
48 NOE at 222.
Columbus to [RJHL]. So an easier way to keep track of the payments that had been made by Columbus to [RJHL] is to put them in an account called a loan and then you can immediately say “That’s the total amount that’s been paid.” My understanding is that at the end of the accounting period that sum was then journalled out of that loan account and offset against the amounts owed by Columbus to NCIL.
[90] This explanation is entirely consistent with that offered by Mr Kerr in his evidence.
[91] RJH called expert evidence from Mr Colin McCloy. Mr McCloy is a chartered accountant and a partner at PwC’s restructuring practice in Auckland. He has more than 20 years’ experience in insolvency work and has acted as a receiver of a number of high profile companies including Bridgecorp, Nathans Finance and Mainzeal.
[92] Mr McCloy noted that NCI’s accounting records for the relevant period showed a reduction in the amount owed by NCI to RJH and that the reduction was funded by a loan from Columbus. His evidence was that if the payments by Columbus to RJH represented a redirection of licence fees, he would have expected NCI to record these payments in an accrued revenue account, rather than a loan
account. In Mr McCloy’s view, the fact that the accrued revenue of $3,455,00049 due
under the Nov09 agreement was fully impaired would also be consistent with the payments by Columbus being a loan, rather than a redirection of licence fees.
[93] The first three payments by Columbus to RJH clearly fall within the period of time when the Nov09 agreement was in force. The terms of that agreement required Columbus to pay a licence fee of $3,500,000 to NCI for the period between
26 November 2009 and 31 March 2010. Given the surrounding context, the liquidators’ theory that the payments to RJH represented a redirection of licence fees is entirely plausible. This theory is supported by statements of individuals who were
involved in the affairs of NCI and, more importantly, by the contemporaneous
49 Mr McCloy in his evidence referred to an amount of $3,455,000 as being impaired by NCI. This figure in inconsistent with other documentary evidence regarding the impairment, but nothing turns on this point.
accounting records of NCI and MSH1. To the extent that there is a conflict between the evidence of Messrs Kerr and Hagen and that of Mr McCloy, I prefer the evidence of Messrs Kerr and Hagen. The evidence offered by these witnesses provided a compelling explanation for the treatment of the Columbus payments in both the NCI New Zealand and MSH1 general ledgers. The reference in the MSH1 accounting records to the payment of “Invoice 2” is particularly persuasive.
[94] I am satisfied that the payments by Columbus to RJH in January, February and March 2010 were a redirection of licence fees owed to NCI under the Nov09 agreement.
Were the payments by Columbus after 1 April 2010 a redirection of licence fees?
[95] The situation in respect of the payments by Columbus to RJH in April and May 2010 is more complex, for two reasons. The first reason is that the agreement between MSH2 and Columbus was signed on 2 April 2010 with a commencement date of 1 April 2010. Cl 10.10 of the Apr10 agreement explicitly provided:
Supercede
10.10This agreement supercedes all previous agreements, accords, understandings between the parties and specifically releases Northern Crest Investments Limited from any liability in any event.
[96] There may be some question as to the efficacy of this clause under the law of contract. Notwithstanding that uncertainty, however, I am satisfied that the Apr10 agreement was intended to supersede and did in effect supersede the Nov09 agreement between NCI and Columbus. It follows that NCI had no further entitlement to licence fees generated by Columbus after 1 April 2010. The second complicating factor is that, unlike the payments between January and March 2010, the MYOB accounting records in respect of the April and May 2010 payments are not tied to the payment of an invoice.
[97] Mr Kerr’s evidence in respect of this issue is important. He was asked under cross-examination about the effect of the Apr10 agreement on the April and May payments by Columbus to RJH:50
Q. But if from 1 April 2010, MSH is the licensor under that agreement dated 2 April 2010, shouldn’t the payments from Columbus be treated as MSH2’s income?
A. Not necessarily, there’s a couple of situations where that wouldn’t be the case. The income may have been earned in a prior period so the income could have been invoiced in a prior period which is quite often what happens, you know, you invoice someone and they pay later or, second of all, there could also be, you know, another licence agreement between Northern Crest and Columbus.
Q. So, are you saying that MSH, oh you’re saying the income could have been earned before 1 April by Northern Crest but paid at a later date?
A. Yeah.
[98] There is no evidence to support the existence of a further licence agreement
between NCI and Columbus. However, Mr Kerr’s suggestion that the April and May
2010 payments might have represented licence fees which accrued prior to 1 April
2010 cannot be dismissed out of hand. As I have noted, the terms of the Nov09 agreement provided that a licence fee of $3,500,000 was payable for the period between 26 November 2009 and 31 March 2010. As at 1 April 2010 the majority of this sum remained outstanding. It is distinctly possible, therefore, that the payments made by Columbus to RJH in April and May 2010 were intended as a belated redirection of licence fees owed to NCI under the Nov09 agreement.
[99] The MYOB accounting records provide support for this position. Mr Kerr in his evidence described the accounting treatment of the April and May 2010 payments as follows:
(a) Each of the payments by Columbus to RJH (and other creditors of NCI) was initially recorded in NCI’s New Zealand general ledger as a loan from Columbus to NCI. By 31 August 2010, the balance of the
Columbus loan stood at NZ$209,050.00.
50 NOE at 208.
(b)On 31 August 2010, a journal entry was posted in NCI’s New Zealand general ledger, which had the effect of eliminating the balance of the Columbus loan while increasing NCI’s indebtedness to MSH1 by the same amount. In other words, the liability was transferred from the account for Columbus to MSH1. The journal entry was narrated “Columbus Receipts ex MSH # 1”.
(c) On the same day, a journal entry was posted in MSH1’s general ledger narrated “Columbus Receipts Transferred to NOC NZ Creditors”. The accounting entry for this transaction recorded a debit to the “NCIL NZ Intercompany Account” and a credit to the “NCIL AUS Intercompany Account” of A$165,388.00.51 This transaction had no effect on NCI’s net indebtedness to MSH1.
(d)Also on the same day, a journal entry in NCI’s Australia general ledger recorded a debit to the “MSH1 Intercompany Account” and a credit to the “Accrued Income” account of A$165,388. This entry was narrated “Columbus Receipts transferred to NZ”.
[100] The net effect of these transactions can be expressed in relatively simple terms. Each of the payments by Columbus to creditors of NCI was recorded in an NCI account named “Loan – Columbus”. On 31 August 2010, the balance of the loan was cleared and, via a number of intermediate steps, was recorded instead as accrued income of NCI. This is a factor that weighs very strongly in favour of the liquidators’ case. It is also consistent with the statements of Mr Eakin and Mr Robertson that payments were made by Columbus to creditors of NCI and later
deducted from property settlements.52
[101] I am satisfied that the payments by Columbus to RJH in April and May 2010 were a redirection of licence fees owed to NCI under the Nov09 agreement.
51 Mr Kerr’s evidence was that the conversion of NZ$209,050.00 into A$165,388.00 was
consistent with contemporary exchange rates. In this respect his evidence was unchallenged.
52 See [80] and [81] above.
Was the Nov09 agreement a legitimate licensing agreement?
[102] The findings that payments by Columbus to RJH were a redirection of licence fees under the Nov09 agreement are meaningless, however, if the Nov09 agreement itself was a sham. RJH challenges the legitimacy of the Nov09 agreement for two principal reasons: first, that the liquidators are unable to prove the existence of the intellectual property that is supposedly the subject of the licensing agreement; and second, that if the intellectual property does exist, the liquidators are unable to prove that NCI owned the intellectual property. Mr Chesterman also challenged the legitimacy of the lump sum payment required under cl 9.3 of the Nov09 agreement, particularly in light of its subsequent impairment.
[103] In support of his challenge to the legitimacy of the licensing arrangements, Mr Chesterman also relied on the continued involvement of Mr Bryers in the affairs of NCI and his apparent connections with Mr Hughes, the director of Columbus. However without more, the Court cannot extrapolate from Mr Bryer’s reputation a finding that the licensing arrangements were a sham. The legitimacy of the licensing arrangements must be determined on the evidence which is before the Court.
The existence of the intellectual property
[104] Under the terms of the Nov09 licensing agreement, “intellectual property” is
broadly defined to mean:53
… the rights of the Licensor in and to its trade or business secrets, software, formulae, data, know how, techniques, designs, plans, confidential information, images, get up, logos and drawings, including the copyright in and to any of the foregoing, whether the same is registered or not together with all and any proprietary rights and to the Trade Names and the Trade Marks specified in Schedule 1 as amplified from time to time.
[105] Schedule 1 of the Nov09 agreement is left blank.
[106] There are a number of statements by individuals involved with NCI which raise questions regarding the existence of the intellectual property described in the
53 ABD1 at 147.
Nov09 agreement. On 6 June 2011, Mr Eakin met with one of the liquidators, Mr Lawrence, and the liquidators’ solicitor, Mr Dan Hughes. The notes of the meeting record the following interaction:54
Next we asked Mr Eakin what precisely NIC’s [sic] business was and
Mr Eakin described it like this:
He told us that NIC leased its intellectual property to MSH No. 2 Pty Limited which is a wholly owned subsidiary of NIC. Then it was on-leased to companies called Columbus Property Marketing Pty Ltd (‘Columbus’) and Rutherford Capital Pty Limited (‘Rutherford’) and that these companies had paid a fee of $10,000 per unit.
We pushed him on how this worked and Mr Eakin told us that it was
Columbus’s job to source property and introduce that to NIC for which a
$10,000 fee was paid. After that it was for Rutherford to sell the units that had been identified at a margin and it paid a fee of $10,000 for that as well.
…
Then Steve [Lawrence] asked Mr Eakin exactly what the intellectual property owned by NIC was. Mr Eakin was unable to answer the question. Dan [Hughes] pushed him further on this issue and asked him how the intellectual property came to be and he answered by saying that NIC had always owned the intellectual property and that it had built this up over time and that it was the creator of the intellectual property. Dan then said to him that begs the question as to where it is and what it is.
Mr Eakin agreed and said that he understood there was meant to be a manual somewhere and that Columbus was meant to be provided one but he wasn’t sure [whether] Columbus received this or not. We asked Mr Eakin again whether the intellectual property related to computer programming manuals or something else and he was unable to tell us what it was.
Steve pushed him further on the issue saying given that there had been representations that NIC was a company which owned intellectual property, it was unusual that the director could not specify what exactly the intellectual property was. Despite being pushed on a number of occasions, Mr Eakin was unable to identify what it is that NIC actually owned.
[107] The fact that Mr Eakin, a director of both NCI and MSH2, was unable to identify the nature of the intellectual property is surprising. On the other hand, Mr Eakin told the liquidators that “he was not a lawyer and did not know much
about the licences”.55
54 ABD1 at 188.
55 ABD1 at 189.
[108] Mr Eakin also referred to the existence of a manual. The Nov09 agreement makes reference to a “Procedure Procurement Manual”, while the Jan09 and Apr10 agreements refer to a “Licence Owner Manual”. In each case the agreement requires the licensee to conduct its business in strict accordance with the manual. Mr Lawrence under cross-examination acknowledged that the liquidators had never located a copy of the manual, nor in fact of any other substantial documents which
might have accompanied a licence agreement between NCI and Columbus.56 The
absence of any such documentation is a factor that weighs against the liquidators. I acknowledge, however, that a significant number of documents relating to NCI and its business were destroyed, most likely by the directors and employees of NCI, before the liquidators had an opportunity to gain access to those records.57
[109] The following day, 7 June 2011, Mr Lawrence and Mr Dan Hughes met with Mr Sekel, a non-executive director of NCI. At the time of the interview, Mr Sekel was a solicitor in the Australian firm, Sekel Oshry. The notes of the meeting record the following:58
We asked Mr Sekel whether he was familiar with the licensing agreement between NCI and MSH No. 2 and between MSH No. 2 and Columbus and Rutherford. Mr Sekel advised that he was familiar with these licences at least to the extent that he drafted the licence between NCI and MSH No. 2 [Dan to check].
…
We moved on to discussing the 4E Report and Mr Sekel advised that it sets out an accurate and up-to-date state of the company’s affairs and what its plans were. The report states that the company was applying for re-listing and for further capital. We asked Mr Sekel whether value was subscribed to the IP in the report and he responded that there was no valuation. When we suggested that this was unusual, Mr Sekel became defensive and said that there was nothing unusual about this.
[110] Mr Robertson was interviewed on the same day and, like Mr Sekel, was questioned about the licensing arrangements and the nature of the intellectual
property:59
56 NOE at 141.
57 See [24] above.
58 ABD2 at 160.
59 ABD2 at 195.
We then questioned Mr Robertson about the licences between NCI and MSH No. 2 and between MSH No. 2 and Columbus and Rutherford. Mr Robertson said that he had probably seen these licences but he did not take much notice of these and did not recall any details. Mr Robertson told us that the intellectual property was never raised as a balance sheet item in the accounts. We queried him on this as we believed this was the one and only asset of the company and Mr Robertson confirmed that this was the case. Mr Robertson noted that he believed that the IP was of questionable value and he had never been asked to include it in the accounts and he never seems to have questioned this position.
[111] A consistent theme across both of these interviews is that the intellectual property was never ascribed any value as an asset of NCI. Neither of the parties called expert evidence on this matter and as a result the Court is unable to determine whether, to use the language of Mr Sekel, there was anything unusual in this treatment of the intellectual property.
[112] Mr Chesterman also referred to the findings of Mr Saul Arnautovic, who was appointed as the administrator of MSH2 in June 2011. There are two documents arising from the administration which are particularly relevant to the existence of the intellectual property. The first is a report prepared by Mr Arnautovic dated 14 July
2011 and addressed to the creditors of MSH2. Under the heading “Assets Not
Specifically Charged”, Mr Arnautovic wrote:60
The company’s director [Mr Eakin] has also advised that MSH2 has at all times owned the Intellectual Property for the “NCI group”. At the date of this report, I have not been able to definitively ascertain the value of such Intellectual Property, having regard to the fact that the entities have not traded for some time.
I am not aware of MSH2 having any other assets.
Based on this information, it is prudent to consider the assets of MSH2 as unrealisable.
[113] In a letter to Mr Lawrence dated 22 September 2011, the solicitors acting for
Mr Arnautovic similarly advised:61
Referring to your query concerning the sale of [the] Company’s Intellectual Property (“IP”) we are instructed to respond that our client does not know exactly what the IP of the Company comprises, if indeed there is any
60 ABD2 at 228.
61 RRD at 55.
substance to it at all. There was certainly no readily identifiable and saleable
IP of the Company when the Administrator was appointed.
In the circumstances, during the course of the administration, the Administrator formed a view that the IP of the Company (if indeed there was any) had a commercial value of nil or close to nil. When the Company’s director offered a price of $10,000 for a collection of “assets”, including the Company’s IP, as part of a broader proposal that the Company execute the DOCA, the Administrator formed a view that it would be in [the] creditors’ best interest that the offer be accepted.
[114] The view which the Court takes of this evidence is necessarily connected with the view which the Court takes of the evidence regarding ownership of the intellectual property. If, as the liquidators contend, NCI was the proper owner of the intellectual property then the fact that the administrator of MSH2 was unable to locate “readily identifiable and saleable IP” carries less weight. On the other hand, it was a party to the Jan09 and Apr10 licence agreements along with Columbus. Under those circumstances it seems reasonable to expect MSH2 to have retained some relevant records detailing the existence and nature of the intellectual property which was the subject of those agreements.
[115] That is not to say, however, that there was no intellectual property in existence. There are a number of references in NCI’s documents to the intellectual property and to the licensing agreements with Columbus. For example, in an Executive Monthly Report for March 2010 marked “Private and Confidential”, Mr Eakin wrote:62
Northern Crest has developed intellectual property, business methodology, sales and marketing systems and has agreed to license both Hudson Red and Columbus, enabling these entities to utilise the systems and IP for certain considerations.
[116] In NCI’s financial report for the year ending 31 March 2010, the principal activities of NCI were similarly described as follows:63
The principal activity of the consolidated group for the year was licensing its intellectual property, and sourcing appropriate property for distribution by independent third parties who specialise in structuring investments in residential property for individual clients.
62 ABD1 at 138.
63 ABD1 at 249.
[117] More than a year later, a draft ASX announcement dated 12 April 2011 stated:64
Northern Crest Investments creates and licenses intellectual property to third party acquirers and distributors of property, who provide their clients with an approach to property investment which focuses on long term passive income streams and wealth creation.
[118] The consistency of the statements by NCI regarding the existence and purpose of its intellectual property is a factor that weighs in favour of the liquidators.
[119] The definition of “intellectual property” in the Nov09 licensing agreement is very broad. It includes trade and business secrets, data, know how, techniques and confidential information. In light of this broad definition and taking into account the evidence set out above, I am satisfied that there was at least some form of intellectual property in existence which was the subject of the licensing agreement.
The ownership of the intellectual property
[120] Mr Chesterman also questioned whether NCI owned the intellectual property that was the subject of the Nov09 agreement. The alternative possibility, advanced by RJH, is that MSH2 was at all times the owner of the intellectual property. If that were the case then it would follow, in Mr Chesterman’s submission, that NCI had no rights to the intellectual property and the Nov09 agreement would accordingly be invalid.
[121] There are a number of conflicting statements, particularly by Mr Eakin, concerning ownership of the intellectual property. As noted above, Mr Eakin in his interview with the liquidators on 6 June 2011 stated that “[NCI] had always owned the intellectual property and that it had built this up over time and that it was the creator of the intellectual property.”65
[122] By the time MSH2 was placed into administration, however, Mr Eakin had changed his account regarding the ownership of the intellectual property. As noted
64 ABD2 at 049.
65 ABD1 at 188.
above, in a report prepared during the course of the administration, Mr Arnautovic recorded that:66
The company’s director has also advised that MSH2 has at all times owned the Intellectual Property for the “NCI group”.
[123] On 22 July 2011, solicitors acting for the liquidators of NCI attended a creditors meeting in respect of NCI’s subsidiaries, including MSH2. A file note regarding the meeting records the following interaction:67
Mr Goldman [acting for the liquidators] then asked Mr Eakin in respect of item 7(iv) of the DoCA proposal in respect of the sale of goodwill, intellectual property and business, etc, who was it that owned the intellectual property and from which company would that intellectual property be transferred.
Mr Eakin stated that this intellectual property would be transferred by
MSH2.
Mr Goldman then asked Mr Eakin how it was that that position reconciled with the ASX reports which stated the intellectual property was owned by Northern Crest Investments.
Mr Eakin stated that this was not in the system and the ASX report was a report based on the group holdings.
…
Mr Goldman stated that there was a licence stating that [NCI] owned the intellectual property and that this was detailed in paragraph 2.3 of our second letter of 22 July 2011. Mr Goldman asked Mr Eakin how it could be that he would maintain his position that both MSH2 and Northern Crest own the intellectual property.
87 Affidavit of John Carlaw Hagen sworn 21 December 2015 at [8].
88 Affidavit of Colin Thomas McCloy sworn 19 August 2015 at [31]-[32].
[157] There is some confusion regarding the state of the 4 November 2010 payment in the NCI accounting records. A copy of the “Accrual” account from NCI’s New Zealand general ledger was annexed to Mr Kerr’s affidavit and clearly shows a debit of $100,000.00 on 4 November 2010, which appears to contradict Mr McCloy’s statement above. None of the witnesses annexed a copy of the “MSH No.2
Intercompany account” from NCI’s New Zealand general ledger and I am therefore unable to determine conclusively whether the payment on 4 November 2010 was recorded in that account. However, I do not consider that anything of significance turns on this point.
[158] The Court is not bound to accept uncritically the evidence of expert witnesses. However where, as here, the expert witnesses for both parties agree upon the factual matter in dispute, their shared opinion will be a factor that weighs heavily in the final determination.
[159] Mr Chesterman sought to discredit the liquidators’ claim that the MSH2 payments to RJH were a loan by reference to the subsequent conduct of the liquidators. He noted that MSH2 had filed a proof of claim for $280,000 in the liquidation of NCI on the basis that the payments to RJH had been a loan to NCI, but that the claim was rejected. Mr Kerr in his affidavit addressed this point as follows:89
Finally, Mr McCullagh previously indicated that the amounts received from
MSH may have been a loan to NCIL.
In this regard, I note that following the administration of MSH2, the administrators of MSH2 filed a proof of debt in the liquidation, claiming the sum of $280,871.50. The documents filed in support of the claim was [sic] a Balance Sheet for MSH2, showing that there was a [sic] intercompany loan of $280,871.50, and the (ledger) for MSH2 setting out the payments which had been made to RJHL, and other creditors of NCIL. …
The Liquidators had filed a claim in the administration of MSH2 for an amount which exceeded MSH2’s claim, accordingly, they formed the view that the claim had been extinguished by virtue of set-off, and rejected the claim.
[160] Mr Chesterman in his closing submissions acknowledged the liquidators’
reason for rejecting MSH2’s claim. However, he noted, the liquidators’ claim
89 Affidavit of Timothy Colin Kerr sworn 23 December 2015 at [45]-[46].
against MSH2 in its administration had been rejected and the liquidators had chosen not to challenge that decision.
[161] This precise point was not put to the liquidators in cross-examination. However, Mr Chesterman did question Mr Lawrence about another aspect of the administration, specifically the administrator’s decision to sell the assets of MSH2 to Nettlewood including the intellectual property which in the liquidators’ view belonged to NCI. This questioning led to the following exchange:90
Q. Following this you lodged a formal inquiry with the Australian
Securities and Investment Commission? A. Yes.
Q. And they replied to you that they were unable to comment on the administrator’s actions and to take matters further would involve a Court application, correct?
A. Yes.
Q. And you chose not to make a Court application? A. We took advice on that, we chose not to.
Q. So by not taking a Court application you have, aren’t you stuck with this version of events that MSH2 owned the intellectual property and sold it?
A. Like I say we took advice on that, so we didn’t take the matter any further. That advice would have been from our lawyers in Australia and likely New Zealand as well.
Q. And as a consequence of that advice you chose not to take action? A. Consequence of the advice we didn’t take any further action.
[162] This interaction reaffirms a familiar fact, namely that there are a number of reasons why a party might decide against pursuing a dispute, even if the party remains convinced of the merits of its case. For that reason, I do not consider that any significant weight should be placed upon the liquidators’ decision not to pursue the claim against MSH2.
[163] I am satisfied that the payments by MSH2 to RJH were a loan to NCI. In coming to this conclusion, I rely particularly on the evidence of Messrs Kerr, Hagen
90 NOE at 143-144.
and McCloy regarding the accounting records. I acknowledge that there are no documents recording any formal loan arrangement between MSH2 and NCI. However, MSH2 was a wholly owned subsidiary of NCI. The sole director of MSH2, Mr Eakin, was also a director of NCI. Mr Eakin and others through their actions in this liquidation and in other aspects of their dealings have demonstrated a particular disregard for due process and legal requirements. Under those circumstances, the absence of formal loan documentation is unsurprising.
[164] For the same reasons, I am satisfied that the payments by MSH2 to NCI were made with the knowledge and consent of NCI. It is simply not plausible to suggest, in the face of NCI’s accounting records, that NCI was not aware of the payments by MSH2 to RJH. There are also a number of emails and other communications between Mr Eakin and his associates regarding the MSH2 payments which confirm that those involved with NCI took an active part in facilitating the payments on behalf of NCI.
[165] I am therefore satisfied on the balance of probabilities that the payments by MSH2 to RJH between September and November 2010 were a transaction by NCI for the purposes of s 292 of the Act.
Were the payments by Columbus and MSH2 insolvent transactions?
[166] The second element which the liquidators must prove in order to show that the payments to RJH are voidable transactions is that the payments to RJH were insolvent transactions by NCI.
[167] An insolvent transaction is defined in s 292(2) of the Act as follows:
(2) An insolvent transaction is a transaction by a company that—
(a) is entered into at a time when the company is unable to pay its due debts; and
(b) enables another person to receive more towards the satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation.
[168] I consider each of these points in turn.
“The company is unable to pay its due debts” – the restricted period
[169] The onus of establishing that the company was unable to pay its due debts at the time of the transaction lies with the liquidators unless the payments occur within the restricted period. The restricted period is defined in s 292(6) of the Act as follows:
(6) For the purposes of subsection (4A), restricted period means—
(a) the period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b) in the case of a company that was put into liquidation by the court, the period of 6 months before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the court was made; and
(c) if—
(i) an application was made to the court to put a company into liquidation; and
(ii) after the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of six months before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
[170] Subsection (4A) provides that a transaction entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.
[171] There is disagreement between the parties as to when the restricted period commenced for the purposes of s 292. This disagreement arises from the circumstances of the liquidation. NCI was placed into liquidation by order of the Court on 2 June 2011 following an unsuccessful application to set aside a statutory
demand.91 Associate Judge Christiansen held that NCI was “hopelessly insolvent” and that an order for liquidation would be in the public interest, giving an opportunity to conduct an independent review of the directors’ actions in the preceding years.92
[172] The liquidators submitted that the “application to the court” for the purpose of s 296(6)(b) above should be the application by NCI to set aside the statutory demand on 25 November 2010. If that submission were accepted, the restricted period would commence on 25 May 2010. It would capture the last of the Columbus payments and all of the MSH2 payments.
[173] Mr Chesterman for RJH on the other hand submitted that the reference in s
296(6)(b) to “the application to the Court” should be read to mean an application for liquidation only. As there was no application for liquidation in the present case, the restricted period would be calculated by reference to the date of the liquidation order under s 296(6)(a) and would therefore commence on 2 December 2010. The payments by Columbus and MSH2 to RJH would fall outside the restricted period.
[174] This issue was considered by Associate Judge Bell at an earlier stage in the proceeding:93
[33] On Robt Jones’ submission, the case comes within s 292(6)(a) because (b) and (c) apply only to applications to put a company into liquidation. Applications to set aside statutory demands are directed at avoiding liquidation by challenging demands under s 289, even if unsuccessful applications might result in liquidation. I disagree on that interpretation of s 292(6)(b) because:
(a) Whereas s 292(6)(c)(i) expressly refers to an application to put a company into liquidation, s 292(6)(b) is not so limited. While the Court will make a liquidation order only on application, the subclause does not require that to be a liquidation application. On the wording, “application” includes an application under s 290.
(b) It is consistent with the legislative purpose of creating a presumption of insolvency in the period before the start of the proceeding that results in a liquidation order. If the presumption applies in the six months before a creditor
91 Northern Crest Investments Ltd v Haywood, above n 1.
92 At [10].
93 McCullagh v Robt Jones Holdings Ltd, above n 6.
begins a successful liquidation application (for example, relying on non-compliance with a statutory demand), it is also appropriate to apply the same presumption if the company unsuccessfully applies to set aside a statutory demand and the court is satisfied on dismissing the application that the company should go into liquidation forthwith, by-passing the normal steps of a liquidation application.
[175] Both parties agreed that the interlocutory decision of Associate Judge Bell did not bind this Court.
[176] With respect to the Judge, I consider that “the application” in s 292(6)(b) must refer to an application to put a company into liquidation. I acknowledge that there is a difference in wording between ss 292(6)(b) and (c). Section 292(6)(c) specifically refers to “an application… to put a company into liquidation”, whereas s
292(6)(b) merely refers to “an application”. Associate Judge Bell considered that this difference in wording was material. However in my view, the reference in s 292(6)(c) to “an application… to put a company into liquidation” provides relevant context that must inform the interpretation of s 292(6)(b).
[177] Other provisions in the Act similarly provide context and support a narrower interpretation of s 292(6)(b). There are only three sections in the Act which empower a court to make an order for liquidation:
(a) Section 241 empowers a court to make an order for liquidation on the application of the named persons, including a director, shareholder or creditor of the company.
(b)Section 291 empowers a court to make an order for liquidation following the hearing of an application to set aside a statutory demand against the company on the ground that the company is unable to pay its debts. This provision was applied by Associate Judge Christiansen to place NCI into liquidation.
(c) Section 174 empowers a court to make an order for liquidation on the application of a prejudiced shareholder, if the Court considers that it would be just and equitable to do so.
[178] An order under s 241 or s 291 requires the court to be satisfied that the company is unable to pay its debts. In those circumstances it may be reasonable to presume, as Associate Judge Bell noted in his decision, that the company was insolvent at least six months prior to the date of an application under either one of those sections.
[179] However, the same cannot be said in relation to s 174, which requires only that an order putting the company into liquidation would be a just and equitable remedy. An order putting a company into liquidation under s 174 is comparatively rare, but may be imposed when relationships between individuals involved in the company have deteriorated beyond repair.94 There is no requirement under that section that the company be insolvent at the time of making the order and it would unreasonable to impose a presumption that the company had been insolvent for at least six months prior to the making of an application for relief. Yet that is the result
that would follow, if “the application” in s 292(6)(b) were interpreted to mean any application leading to the liquidation of the company.
[180] For these reasons, I am satisfied that “the application” for the purposes of s 292(6)(b) refers only to an application to put a company into liquidation. That being so, the commencement of the restricted period in the present case must be determined in accordance with s 292(6)(a), being “the period of 6 months before the date of commencement of the liquidation”. That date, as I have already noted, is
2 December 2010. Accordingly, the liquidators bear the onus of proving, on the balance of probabilities, that NCI was insolvent at the time of the Columbus and
MSH2 payments.
94 See discussion in Company and Securities Law (looseleaf ed, Thomson Reuters) at [CA174.06]
and the cases cited therein.
Was NCI “unable to pay its due debts” at the relevant times?
[181] The principles to be applied when determining whether a company is able to pay its due debts are well established and are summarised as follows:95
(a) The test of insolvency is an objective one.
(b)The ability of the company to pay its debts is concerned with the position of the debtor at the time when the charge or payment is made or other specified act takes place.
(c) In considering the present position regard may be had to the recent past. Ability or inability to pay debts in the recent past may be relevant.
(d)In determining the ability to meet debts as they become due, account must be taken of outstanding debts.
(e) The words “as they become due” mean, as they legally become due.
(f) The reference to “payment from his own money” has not been interpreted strictly to require a debtor to keep sufficient cash on hand at all times for that purpose. It is a matter of striking a balance. It is not a matter of simply measuring assets against liabilities, and it is not a matter of whether, given sufficient time, assets could be realised and debts paid.
(g)The section is concerned with solvency, so there must be a substantial element of immediacy in the ability to provide cash from non-cash assets.
(h)If, as is well established, convertibility to cash of non-cash assets on hand may be taken into account in determining solvency, so too must
95 Heath and Whale, above n 9, at [24.48]; Re Universal Management (in liq) (1981) 1 NZCLC 95-
026 (HC) citing Re Northridge Properties Ltd (in liq) SC Auckland M46/75, 13 December 1977;
Levin & Ors v Titan Cranes Ltd [2013] NZHC 2628.
debts becoming due while that conversion takes place. Moreover, the words “as they become due” involve consideration of a debtor ’s position over a period not an instant of time.
(i)Ability to meet debt from borrowed funds is relevant. The possibility that a third party may prop up a company is not taken into account.
[182] Mr Keene in his closing submissions referred the Court to a significant number of documents which, in his submission, demonstrate that NCI was unable to pay its debts during the period of 2010. In my view, there are three categories of documents that are particularly relevant:
(a) Detailed re-constructed balance sheets prepared by Mr Kerr for NCI which demonstrate, as at the date of each payment by Columbus or MSH2 to NCI, significant deficiencies in both working capital and net assets;
(b)Documents which demonstrate an ongoing failure by NCI to pay its creditors from September 2009; and
(c) Documents which evidence RJH’s own efforts to recover money from
NCI.
[183] I discuss each of these points in relatively brief terms below.
[184] Mr Kerr prepared a number of documents showing his computation of the assets and liabilities of NCI between January and November 2010. His analysis was based on the MYOB accounting records provided to the liquidators by Mr Robertson.96
[185] The results of the computations are summarised in the table below. The net working capital at any particular date is comprised of the assets which are
immediately available to NCI (for example cash and accounts receivable) less any
96 Affidavit of Anthony John McCullagh sworn 16 July 2013 at [64].
immediate liabilities.97 The net assets at any particular date are comprised of all assets and liabilities of NCI.
Date of payment Value
Payment from Net working capital Net assets
22/01/2010 $150,000.00 Columbus -$926,789 -$5,891,178 24/02/2010 $135,133.07 Columbus -$838,646 -$6,047,571 02/03/2010 $4,000.00 Columbus -$771,033 -$5,897,882 20/04/2010 $100,025.00 Columbus -$1,759,469 -$7,653,403 28/05/2010 $100,025.00 Columbus -$1,644,058 -$7,940,188 07/09/2010 $28,000.00 MSH2 -$1,557,053 -$7,742,506 14/09/2010 $26,000.00 MSH2 -$1,537,053 -$7,792,035 15/09/2010 $24,000.00 MSH2 -$1,515,621 -$7,807,207 16/09/2010 $27,000.00 MSH2 -$1,492,056 -$7,839,207 14/10/2010 $25,000.00 MSH2 -$1,777,592 -$8,159,092 27/10/2010 $30,000.00 MSH2 -$1,746,286 -$8,202,236 04/11/2010 $100,000.00 MSH2 -$1,639,997 -$8,053,533 05/11/2010 $5,000.00 MSH2 -$1,639,997 -$8,053,533
[186] These figures did not include the full amount of the licence fee promised under the Nov09 agreement, being $3,500,000. Mr McCullagh’s evidence was that the accounting records for April and May 2010 showed an accrued income of A$2,678,274 as a current asset relating to income receivable under the Nov09 agreement; however, as the accrued income was subsequently impaired, this amount was excluded from Mr Kerr’s calculations. Mr Chesterman did not challenge this omission.
[187] However, in cross-examination Mr Chesterman questioned Mr Lawrence about the omission of licence fees owed by MSH2 to NCI. He noted that NCI had filed a claim for $5.29 million in the administration of MSH2 but that it had not included this amount amongst the assets of NCI. Mr Lawrence was unable to answer the question, noting that the preparation of accounts was not his area of expertise.
Mr Chesterman did not then raise this point in his cross-examination of Mr Kerr,
97 NOE at 191. Mr Kerr’s evidence was that “immediate” in this context would typically mean
within the next year.
who had prepared the reports, nor did either of the expert witnesses address this point in their evidence.
[188] As noted above, the assessment of whether NCI was able to pay its due debts at the time of the payments to RJH is not merely matter of measuring assets against liabilities.98 Nonetheless, the fact that NCI had a significant deficit in both its net working capital and its net assets during the relevant time period is a factor that weighs significantly in favour of the liquidators.
[189] The second category of documents which is relevant to the question of insolvency is the category of documents which demonstrate an ongoing failure by NCI to pay its creditors from September 2009. A summary of outstanding creditors dated 25 September 2009 shows that NCI owed debts of more than $1,400,000.99 Of that amount, $1,390,689.39 was at least 90 days overdue. Three creditors are particularly relevant:
(a) BDO Spicers (amount owed: $193,008.97); (b) Buddle Findlay (amount owed: $184,097);
(c) MinterEllisonRuddWatts (amount owed: $211,999.34).
[190] A few days later, on 30 September 2009, MinterEllisonRuddWatts filed liquidation proceedings against NCI.100
[191] A second summary of outstanding creditors dated 22 February 2010 shows that all but one of the September creditors remained outstanding.101 The situation in respect of the three creditors identified above had improved, but only slightly: BDO Spicers was owed $183,009; Buddle Findlay was owed $174,097; and
MinterEllisonRuddWatts was owed $194,017.
98 See [181](f) above.
99 ABD1 at 236.
100 ABD1 at 049.
101 The creditor that was paid, Walters Law, had been owed $800,000.00. It is not precisely clear how this debt was repaid, although it appears that a convertible note may have been involved: see para 3(a)(ii) in ABD2 at 047.
[192] These three creditors were the subject of a memorandum from Mr Reeves to the board of NCI dated 11 March 2010 regarding deeds of settlement.102 The memorandum relevantly provides:
As Board Members will be aware, all three organisations are longstanding “legacy” debtors of [NCI], following the company’s financial problems there [in New Zealand]. Over recent weeks, in accordance with the board’s wishes, Laurie Eakin and I have been in discussions with each of the parties to arrive at terms on which they would agree either to discontinue liquidation action (in the case of Minters) or not to proceed with action that might have been under consideration (in the case of Buddles and BDO).
…
2. Buddles Deed: This Deed will commit the sum of NZ$174,097.00, plus interest at 10 per cent on a diminishing basis per annum.
The payment instalments are as follows:
A. the sum of $5,000 immediately upon execution of the Deed
B. the sum of $5,000 no later than 30th day of April 2010
C. the sums of $10,000 no later than 30 May 2010 and 30 June
2010
D. the sums of $20,000 no later than the 30th day of each month from July 2010 to January 2011 (both months inclusive)
E. the sum of $4,097 plus interest at 10 per cent per annum on the diminishing balance, plus agreed costs on the 30th day of February 2011
[193] There is then a resolution, signed by Messrs Wilson and Eakin, in which the NCI directors resolve to approve payment to Buddle Findlay in the terms proposed by Mr Reeves. The deed of settlement itself, if it exists, is not in evidence. However, on 11 November 2010 Buddle Findlay issued a statutory demand to NCI. The demand itself is not in evidence. Notwithstanding that omission, I agree with Mr Keene’s submission that the only available inference is that the terms of the settlement agreed between NCI and Buddle Findlay had not been met.
[194] These documents demonstrate that from September 2009 until at least
November 2010, NCI was consistently in arrears and unable to meet its obligations to long-standing creditors, well after those debts had originally fallen due.
102 ABD1 at 053.
[195] The final category of evidence regarding solvency concerns the efforts made by RJH to recover money from NCI. This evidence was considered in the interlocutory decision of Associate Judge Bell as follows:103
[40] There is, however, one strand of the liquidators’ evidence which Robt Jones cannot take issue with. That is Robt Jones’ own efforts to recover payment from Northern Crest starting from the abandonment of the premises in 2008. Robt Jones’ efforts included the following:
(a) Four statutory demands: 5 September 2008, 20 November
2008 (only partly upheld), 25 September 2009 and 15 July
2010.
(b) Two summary judgment applications, both successful, one resulting in the judgment of 23 September 2009 and the second on 14 July 2010.
(c) Three settlements: October 2009, April 2010 and August
2010. Northern Crest defaulted under each.
(d) Two liquidation proceedings filed on 23 November 2009 and
6 August 2010, both withdrawn after payment or settlement.
[41] The abandonment of the lease points to insolvency. After receiving notice of non-payment of rent, Northern Crest simply left the premises without notice and without making any orderly arrangements to terminate the lease, including paying outstanding rent to Robt Jones. From that time on, Robt Jones had two years of debt-collecting efforts to recover payments due. It is particularly telling that Northern Crest entered into settlement agreements under which it was allowed time in which to pay, yet under each settlement agreement, it failed to pay on time. The explanation is obvious. Northern Crest did not have the funds to pay Robt Jones.
[196] I agree with those conclusions.
[197] Taking all of these matters into account, I am satisfied that the payments by Columbus and MSH2 to RJH were made at a time when NCI was unable to pay its due debts, in accordance with s 292(2)(a) of the Act.
Did RJH receive more money than it would have received in the liquidation?
[198] In order to demonstrate that the payments by Columbus and MSH2 to RJH
were insolvent transactions by NCI, the liquidators must show that those payments
“enable[d] another person to receive more towards the satisfaction of a debt owed by
103 McCullagh v Robt. Jones Holdings Ltd, above n 6.
the company than the person would receive, or would be likely to receive, in the
company’s liquidation.”104
[199] The Court of Appeal in Levin v Market Square Trust considered the meaning of these words, holding:105
[35] The first interpretative issue is whether the liquidator must prove only that the creditor has likely received more than would otherwise have been the case in the liquidation or whether the liquidator must in addition prove that the general body of creditors has been disadvantaged as a result of the treatment afforded to one of their number.
…
[37] We turn to the first of these interpretative conundrums. Ms Cameron submitted it was “a strain on the plain meaning of the words to read the section as requiring the general body of creditors to be worse off”. She urged us to approve those High Court decisions holding that the paragraph meant what it said, without the gloss placed upon it by some judges. Even if she was wrong in that submission, however, she said the liquidator in this case had satisfied either test. Mr Greer on the other hand urged the other interpretation. He submitted we should apply “the underlying philosophy behind s 292 which is to ensure that the general body of creditors is not disadvantaged as a result of the treatment afforded one of their number.”
[38] We are clear Ms Cameron’s submission is correct. All the liquidator must show in order to satisfy s 292(2)(b) is that the creditor received a greater payment that he or she would otherwise have received in the liquidation. In that regard we approve the High Court decisions of Chatfield v Mercury Energy Limited (1998) 8 NZCLC 261,645 and Cobb & Co Restaurants Limited v Thompson (2004) 9 NZCLC 263,638.
…
[42] This approach is also consistent with the plain wording of s
292(2)(b), which requires a comparison between the amount the creditor actually received from the company and the amount that creditor would have received as part of the general body of creditors in the liquidation had the payment not been made.
[200] Mr Chesterman, while acknowledging the effect of this decision, nonetheless submitted that s 292(2)(b) was not satisfied since the payments to RJH did not result in a diminution of NCI’s net assets: the debt to RJH was simply replaced by a debt
owed to MSH2 and Columbus. In support of this submission, Mr Chesterman relied
104 Companies Act, s 292(2)(b).
105 Levin v Market Square Trust, above n 10.
upon a statement in the recent Supreme Court decision Allied Concrete Ltd v Meltzer
where the Court held:106
[A] key purpose of the voidable transaction regime is to protect an insolvent company’s creditors as a whole against a diminution of the assets available to them resulting from a transaction which confers an inappropriate advantage on one creditor by allowing that creditor to recover more than it would in a liquidation. The pari passu principle requires equal treatment of creditors in like positions (in these appeals, unsecured creditors) and facilitates the orderly and efficient realisation of the company’s assets for distribution to creditors.
[201] If anything, this passage reinforces the Court of Appeal’s decision in Levin v Market Square Trust. There is no reason to depart from the plain meaning of the text in s 292(2)(b).
[202] It is clear that the payments by Columbus and MSH2 enabled RJH to receive more in satisfaction of NCI’s debt that RJH would have received in NCI’s liquidation. Mr McCullagh’s evidence was that there is no money, and never has been any money, in the liquidation available for distribution.107 More than
$10 million is owed to unsecured creditors and there are contingent claims totalling some $36 million.
[203] But for the payments by Columbus and MSH2, RJH would be an unsecured creditor of NCI. Its debt would have remained unpaid. Having been paid out in full, RJH has received more than it would have received in the liquidation.
Conclusion
[204] I am satisfied on the balance of probabilities that the payments by Columbus and MSH2 to RJH between January and November 2010 were insolvent transactions
by NCI.
106 Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141 at [1](a) (emphasis added).
107 Affidavit of Anthony John McCullagh sworn 16 July 2013 at [85].
Were the payments to RJH voidable transactions by NCI?
[205] I am satisfied on the balance of probabilities that the payments by Columbus and MSH2 to RJH between January and November 2010 were insolvent transactions by NCI and that the transactions were made during the specified period.
[206] I am therefore satisfied, on the balance of probabilities, that these payments were voidable transactions by NCI within the terms of s 292 of the Act.
Was there an abuse of process by the liquidators?
[207] RJH alleges that there has been an abuse of process on the part of the liquidators. In its amended notice of opposition dated 24 November 2015, there were two particulars under this head as follows:
(a) The liquidators failed to sufficiently investigate the validity of the alleged licence or loan arrangements when the circumstances indicated further enquiries were needed prior to making the current application against RJH;
(b)The liquidators have pursued this application for the purpose of recovering their fees incurred prior to filing the originating application and with knowledge that there was no prospect of any recovery for the pool of creditors.
[208] In his submissions Mr Chesterman added to those particulars by submitting that the filing of the notice to set aside voidable transactions dated 4 July 2010 was premature, there was a large level of fees quickly incurred without funding, a subsequent failure of the liquidators to use their powers to properly investigate the claim or the liquidation and non-disclosure to RJH of information essential to its defence.
[209] The question of when a liquidator’s conduct will constitute an abuse of process has been considered by the New Zealand courts in a number of cases. In the leading High Court decision ANZ National Bank Ltd v Sheahan the Court was asked
to determine whether an order requiring the respondent to be examined by the liquidators should be granted.108 One of the submissions put forward for the respondent was that the proposed examination would represent an abuse of process. Heath J held:109
[61] A useful summary of principles applicable when determining whether a proposed examination is or is not an abuse of process can be found in the judgment of the Full Court of the Federal Court of Australia, in Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England. In summary:
(a) Whether there is an abuse of process will depend on the purpose of the application and the circumstances of the case. Generally, for an abuse of process to be found, it is necessary that the offensive purpose be, at least, the predominant purpose.
(b) If an applicant for an examination order has the purpose of obtaining a forensic advantage not otherwise available, his or her conduct is likely to amount to an abuse of process.
[210] Also helpful is the following summary of the principles regarding abuse of process taken from a decision of the High Court of Australia, Rogers v R:110
Inherent in every court of justice is the power to prevent its procedures being abused. Although the categories of abuse of procedure remain open, abuses of procedure usually fall into one of three categories: (1) the court’s procedures are invoked for an illegitimate purpose; (2) the use of the court’s procedures is unjustifiably oppressive to one of the parties; or (3) the use of the court’s procedures would bring the administration of justice into disrepute. Many, perhaps the majority of, cases of abuse of procedure arise from the institution of proceedings. But any procedural step in the course of proceedings that have been properly instituted is capable of being an abuse of the court’s process. In Walton v Gardiner, Mason C.J., Deane and Dawson JJ. said that the jurisdiction to stay proceedings that are an abuse of process “extends to all those cases in which the processes and procedures of the court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness.”
[211] Applying these cases, the present proceedings will constitute an abuse of process if the liquidators acted for an improper or illegitimate purpose.
[212] I do not consider that this threshold has been met. There is nothing in the evidence which suggests that the decision to issue a voidable transaction notice to
108 ANZ National Bank Ltd v Sheahan [2012] NZHC 3037, [2013] 1 NZLR 674.
109 Footnotes omitted.
110 Rogers v R [1994] HCA 42, (1994) 181 CLR 251 at 286 (footnotes omitted).
RJH on 4 July 2011 was motivated by any improper or illegitimate purpose. In particular, the fact that any money received from RJH is likely to be absorbed by the liquidators’ fees is irrelevant. The liquidators have a duty under the Act to take possession of the assets of NCI and to distribute those assets to its creditors.111 As part of that duty, the liquidators are required to identify and act upon voidable transactions of NCI, as they have done. The duty does not cease to exist simply
because any money so recovered is required by statute to be paid towards the
liquidators’ fees.112
The orders sought by the liquidators
[213] The liquidators seek the following orders:
(a) An order under s 294 of the Act setting aside the payments received by RJH from Columbus and MSH2 between 22 January 2010 and
5 November 2010;
(b)An order under s 295(a) of the Act requiring RJH to pay to NCI the amount of $751,941.52, being an amount equal to the value of the voidable transactions;
(c) An order requiring RJH to pay interest at the rate of five per cent per annum from the date of the liquidation order, being 2 June 2011; and
(d)An order under s 295(g) of the Act that RJH is prevented from taking any further part in the liquidation.
[214] Mr Chesterman submitted in closing that the amount of the order sought under s 295(a) should be adjusted to reflect alleged misconduct on the part of the liquidators in the course of the liquidation. To the extent that Mr Chesterman’s criticisms allege an abuse of process, I have already found that there was no such
abuse. Any remaining matters should go to costs, rather than relief. The High Court
111 Companies Act, s 253.
112 Companies Act, s 312.
in Reynolds v HSE Holdings Ltd considered the purpose of an order for relief under s
295 of the Act, holding:113
[28] Section 295 provides for a range of orders that may be made on a transaction or charge being set aside. When a transaction under s 292 is set aside, the relief should be directed at eliminating any preferential benefit a creditor has received. More extensive relief is not required. While the creditor benefiting from an insolvent transaction should not be allowed to retain a preferential advantage, nor should he be punished for having received such a benefit. There is nothing in the legislation that calls for a punitive approach. The various remedies in s 295 allow for the exercise of a discretion to mould an outcome appropriate for the case.
[215] I agree with that statement of principle. It follows that the orders sought in [213](a) and [213](b) flow as a natural consequence of the finding that the payments by Columbus and MSH2 to RJH are voidable transactions under s 292 of the Act. There will be an order requiring RJH to pay interest at the rate of five per cent per annum from the date of the liquidators’ appointment, being 2 June 2011.114
[216] However, I do not consider there is any basis for making the order sought in [213](d). Mr Keene did not provide any authority in support of his submissions on this point, nor am I aware of any case where an order of that nature has been made. As noted in Reynolds above, an order for relief under s 295 is not intended to be punitive in nature. I decline to make an order that RJH is prevented from taking any further part in the liquidation.
Result
[217] The payments by Columbus and MSH2 to RJH between January and November 2011 totalling $751,941.52 are voidable transactions of NCI. I make an order setting those payments aside.
[218] I order RJH to pay the sum of $751,941.52 to NCI.
[219] I order RJH to pay interest at the rate of five per cent per annum on the sum
of $751,941.52 from the date of the liquidator’s appointment, being 2 June 2011.
113 Reynolds v HSE Holdings Ltd HC Whangarei CIV-2009-488-738, 17 September 2010.
114 See McIntosh v Fisk [2017] NZSC 129.
Costs
[220] Costs are reserved. Submissions for the liquidators should be filed within
15 working days of receipt of this judgment and submissions for RJH within a further 15 working days thereafter.
Gordon J
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