Norris v Alternate Finance Limited HC Christchurch Civ-2011-409-002089

[2011] NZHC 1657

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-002089

UNDER  the Companies Act 1993

IN THE MATTER OF     a voidable transaction

BETWEEN  CLAIRE NORRIS AND WAYNE BAILEY Applicant

AND  ALTERNATE FINANCE LIMITED Respondent

Hearing:         1 November 2011 (Heard at Christchurch)

Judgment:      4 November 2011

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

as to setting aside of voidable transactions

[1]      The applicants as liquidators of Canterbury Management  Limited (CML) seek an order setting aside 22 payments as voidable transactions.  They invoke the provisions of s 292 Companies Act 1993.

The setting aside jurisdiction

[2]      Relevantly to this case s 292 of the Act provides a regime whereby –

1.        “Transaction” includes the payment of money: s 292(3);

2.A transaction by a company is voidable by the liquidator if it is an insolvent transaction and is entered into within the specified period: s

292(1);

CLAIRE NORRIS AND WAYNE BAILEY V ALTERNATE FINANCE LIMITED HC CHCH CIV-2011-409-

002089 4 November 2011

3.An insolvent transaction is a transaction by a company that is entered into at a time when the company is unable to pay its due debts and the transaction   enables   another   person   to   receive   more   towards satisfaction of the debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation: s

292(2);

4.A transaction which  is 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: s 292(4A);

5.Generally speaking, the “restricted period” is the period of six months before  the  making of  the  application  for  liquidation to  this Court together with the period commencing on the date of that application and ending at the time at which the Court order of adjudication was made: s 292(6);

6.Generally speaking, the “specified period” is the period of two years before the date of the application to the Court for a liquidation order together with the period commencing on the date of the making of the application and ending at the time the order of liquidation was made: s292(5).

The setting aside procedure

[3]      A liquidator who wishes to set aside a voidable transaction under s 292 (or a voidable  charge  under  s 293)  must  file  a  notice  with  the  Court  that  meets the requirement  of  s  294(2)  and  must  serve  that  notice  on  the  other  party  to  the transaction as soon as practicable.

The liquidators’ steps in this case

[4]      The liquidators, on 5 July 2011, filed (in the required form) a notice to set aside voidable transactions.  On the same date they served the notice upon Alternate.

[5]      On  14  July 2011 Alternate  served  on  the  liquidators a  written  notice  of objection.  Particulars of the reasons for objecting were given as required by s 294(3) of the Act.  Alternate recorded in its notice that in the event that liquidation followed Alternate would defend the matter.

[6]      As it transpired, this originating application was then filed and, following service of the originating application upon Alternate, there has been no opposition filed.

[7]      The matter proceeds on an undefended basis.

[8]      To the extent that transactions occurred within the restricted period, they are presumed  (by reason  of  s  292(4A))  to  have  been  entered  into  at  a  time  when Alternate  was  unable  to  pay  its  debts.    In  relation  to  transactions  outside  the restricted (six month) period but within the specified (two year) period, it is open to the liquidators to establish Alternate’s insolvency by evidence in the normal way.

[9]      Against that background I turn to the transactions in question.

The impugned transactions

[10]     The  liquidators  by  their  4  July  2011  notice  and  by  their  originating application impugned 22 transactions as voidable:

i.       Payment of the sum of $1,450.00 on the 9th of March 2010. ii.        Payment of the sum of $1,000.00 on 17th of March 2010.

iii.     Payment of the sum of $999.55 on 4th of May 2010. iv.       Payment of the sum of $999.55 on 11th of May 2010. v. Payment of the sum of $999.55 on 18th of May 2010. vi.      Payment of the sum of $999.55 on 25th of May 2010. vii.      Payment of the sum of $999.55 on 1st June 2010.

viii.   Payment of the sum of $999.55 on 8th June 2010. ix. Payment of the sum of $999.55 on 15th June 2010. x.         Payment of the sum of $999.55 on 22nd June 2010. xi.          Payment of the sum of $999.55 on 29th June 2010. xii.      Payment of the sum of $999.55 on 6th July 2010. xiii.   Payment of the sum of $999.55 on 13th July 2010. xiv.      Payment of the sum of $999.55 on 20th July 2010. xv.        Payment of the sum of $999.55 on 27th July 2010. xvi.         Payment of the sum of $999.55 on 3rd August 2010.

xvii.  Payment of the sum of $999.55 on 10th August 2010. xviii. Payment of the sum of $999.55 on 17th August 2010. xix.         Payment of the sum of $999.55 on 24th August 2010. xx.     Payment of the sum of $999.55 on 31st August 2010. xxi.     Payment of the sum of $999.55 on 7th September 2010. xxii.  Payment of the sum of $999.55 on 5th October 2010.

[11]     One of the liquidators, Claire Norris, has given evidence as to the matters which the liquidators established on their investigation of CML’s affairs.  Briefly, the key points of Ms Norris’s evidence and of the notice given to Alternate in July 2011

are as follows:

CML became indebted to Alternate for $63,292.99 on 30 July

2009.

Between 9 March 2010 and 26 October 2010 CML arranged for  one  of its  debtors,  East Coast Taverns  Limited,  to  pay

$22,441 to Alternate in reduction of the $63,292.99 debt.

The   22   payments   made   by   ECTL   to   Alternate   were transactions in terms of s 292(1) of the Act.  The decision of the Court of Appeal in Levin v Market Squire Trust [2007] NZCA 135 is authority for the proposition (arising also in a leased business premises situation) that payments made by a third party to another company’s creditor, on behalf and at the direction of the company, may constitute transactions. In this case, as in Levin v Market Squire Trust, the third party (here ECTL) made payments on behalf of another company (CML) to a creditor of CML (Alternate).   The substance of the arrangement  is  that  CML reduced  its  debt  to Alternate  by

$22,441.  I apply the decision in Levin v Market Squire Trust.

[12]     Mr  Singleton  referred  to  statements  made  by Alternate  in  its  notice  of objection  sent  to  the  liquidators  whereby Alternate  concedes  that  there  was  an arrangement whereby CML requested that sums owed by ECTL to CML be paid directly to Alternate.

[13]     Alternate’s  notice  of  objection  did  not  take  issue  with  the  fact  that  a

transaction was involved in terms of s 292(1).  Rather, Alternate made two points –

1.Alternate suggested that there was no issue of CML being unable to pay its due debts – that is of course not an answer as the question is an objective one as to whether in fact CML was insolvent or not (whether established by presumption or otherwise); and

2.Alternate went on to suggest that the transaction was not insolvent – it suggested that it would not receive more towards satisfaction of the debt owed to it than it would have in the company’s liquidation as Alternate was a secured creditor.  This ground of objection failed to take into account a prior secured financing statement registered by Alan and Lola Roberts, of which the liquidators have provided evidence.  (This is assuming that Alternate’s purchase money security interest was valid, which I do not need to determine given the other

findings).    CML was  liable  to  Alan  and  Lola  Roberts  for  debts exceeding $372,315, which the liquidators established CML could not meet.   CML had ceased to trade from January 2010, thereafter generated  no  income  and  had  no  other  means  to  make  loan repayments.

[14]     The liquidators provided in evidence their report on the financial affairs of CML (in liquidation).  They identify seven factors which supported the conclusion that the company had been trading insolvently from well before 9 March 2010 and through to the date of liquidation.  Factors included the reversal of cheques in the first half of 2010, the incurring of unarranged overdraft and subsequent bank penalties, the failure to account to the Inland Revenue Department for PAYE and holiday pay, and evidence of income not being banked.

[15]     In  these  circumstances  I  am  satisfied  both  that  the  payments  made  to Alternate during the restricted period were entered into at the time when CML was unable to pay its debts (the presumption under s 292(4A) applying) and that the remaining transactions were incurred within the specified period and were entered into at times when CML was unable to pay its due debts.   All payments enabled Alternate  to  receive  more  towards  satisfaction  of  the  debt  owed  by CML than Alternate  would  have  received  or  would  have  been  likely to  receive  in  CML’s liquidation.

[16]     I order –

1.        Pursuant to s 294(5) Companies Act 1993 the payments made by East

Coast Taverns Limited to Alternate Finance Limited on and between 9

March 2010 and 5 October 2010 in the total sum of $22,441 are set aside   as   voidable   transactions   on   the   part   of   Christchurch Management Limited (now in liquidation);

2.        Pursuant   to   s   295(a)  Alternate   Finance   Limited   shall   pay  to

Christchurch   Management   Limited   (in  liquidation)  the   sum   of

$22,441;

3.Alternate   Finance   Limited  shall  pay  to  the  applicants  in  this proceeding  a  sum  of  $3,980.89  on  account  of  the  costs  and

disbursements of this application.

Associate Judge Osborne

Solicitors:

Malley & Co, PO Box 16-595, Christchurch 8140