Owens v T R Group Limited
[2016] NZHC 427
•14 March 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-836 [2016] NZHC 427
UNDER the Companies Act 1993 IN THE MATTER OF
the liquidation of Brothers Haulage
Limited (in liquidation)BETWEEN
COLIN DAVID OWENS AND DAVID STUART VANCE
Applicants
AND
T R GROUP LIMITED Respondent
Hearing: 23 February 2015 Counsel:
K C Francis and P J Arnold for the Applicants
C F J Reid for the RespondentJudgment:
14 March 2016
JUDGMENT OF ASSOCIATE JUDGE SMITH
Introduction
[1] Brothers Haulage Limited (in liquidation) (the company) was put into liquidation by this Court on 9 December 2014 on the application of the Commissioner of Inland Revenue. The company had been incorporated in February
2013, and had carried on the business of providing road freight services throughout
New Zealand.
[2] The respondent (T R Group) operates a business renting or leasing certain goods, including trucks and trailers. In April 2013 the company opened a trade credit account with T R Group, on T R Group’s standard terms and conditions.
Payment was to be made on the 20th of the month following invoicing.
COLIN DAVID OWENS AND DAVID STUART VANCE v T R GROUP LIMITED [2016] NZHC 427 [14
March 2016]
[3] The company rented vehicles from T R Group until 31 December 2013, under a series of individual rental agreements.
[4] The company paid T R Group a total of $59,000 by instalments between
5 February 2014 and 30 September 2014. The following table shows the dates and amounts of the payments:
Date Amount
5 February 2014
$5,000.00
14 February 2014
$20,000.00
21 March 2014
$8,000.00
30 April 2014
$8,000.00
30 May 2014
$8,000.00
30 June 2014
$8,000.00
15 August 2014
$1,000.00
30 September 2014
$1,000.00
Total
$59,000.00
[5] Mr Owens and Mr Vance (the liquidators) are the company’s liquidators. In the course of investigating the company’s affairs following their appointment, they formed the view that the payments listed in the table at para [4] above were
“insolvent transactions”1 within the meaning of s 292(2) of the Companies Act 1993
1 An “insolvent transaction” is a transaction entered into by a company at a time when the company is unable to pay its due debts, which 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
(the Act), which had been entered into within the “specified period” of two years prior to the commencement of the liquidation.2 They concluded that the payments were voidable under s 292(1) of the Act. The liquidators say that T R Group knew, or ought to have known, that the company was insolvent when it made the payments, and that T R Group should not be allowed to retain the payments to the detriment of the general body of creditors. They accordingly served notice to set aside the
transactions on T R Group, in accordance with the requirements in that regard which are set in s 294 of the Act.
[6] When T R Group served a timely objection to the liquidators’ notice,3 the liquidators applied to this Court for orders setting aside the transactions and ordering T R Group to pay the sum of $59,000 plus interest and costs.
[7] I now give judgment on that application.
T R Group’s opposition to the application
[8] In its notice of opposition, T R Group says that it had a continuing business relationship (a running account) with the company during the relevant period in
2014, within the meaning of s 292(4B) of the Act.
[9] Section 292, subsections (1), (2) and (4B), provide:
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, in the company’s liquidation.
2 Section 292(5) of the Act.
3 In accordance with the notice of objection procedures prescribed by s 294(3) and (4) of the Act.
receive, or would be likely to receive, in the company’s
liquidation.
…
(4B) Where—
(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties); and
(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then—
(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and
(d) the transaction referred to in paragraph (a) may only be taken to be an insolvent transaction voidable by the liquidator if the effect of applying subsection (1) in accordance with paragraph (c) is that the single transaction referred to in paragraph (c) is taken to be an insolvent transaction voidable by the liquidator.
[10] T R Group says that at the commencement of the liquidation, the running account showed that the level of the company’s net indebtedness was $23,588.29. It contends that the effect of s 292(4B) is that the various payments made by the company to T R Group from 5 February 2014 are to be treated as a single transaction for the purposes of the definition of “insolvent transaction”, and that, looking at the relationship as a whole, there is no “insolvent transaction” voidable by the liquidator under s 292.
[11] In the alternative, T R Group relies on s 296(3) of the Act. Section 296(3)
provides:
296Additional provisions relating to setting aside transactions and charges
…
(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other
enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—
(a) A acted in good faith; and
(b) a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c) A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
…
[12] T R Group says that during the specified period referred to in s 292(5) of the Act4 it acted in good faith, and a reasonable person in its position would not have suspected (and it did not have reasonable grounds to suspect) that the company was or would become insolvent. T R Group also contends that it gave value for the payments it received, or altered its position by continuing to accept payments from the company and by keeping the company’s account open in the reasonably held belief that the transfer of the property to it was valid, and would not be set aside.
The evidence
[13] The following summary of the facts is taken from the affidavits of the applicant Mr Vance, and from that of Mr Robson, a finance manager employed by T R Group.
Mr Robson’s evidence
[14] The company opened its account with T R Group by signing T R Group’s customer information form and terms of conditions in early April 2013. A personal guarantee was provided by Ms Isla Laing, a director and shareholder of the company,
on 9 April 2013.
4 The period of two years before the date of commencement of the liquidation and ending at the time the liquidator was appointed.
[15] The company’s account was for the supply of short-term rental trucks and related equipment. According to Mr Robson, the nature of the rental agreements was that the vehicles could be returned or recalled by either party at short notice.
[16] In addition to the rental trucks, T R Group provided the company with telematics equipment, for which the company was billed $204.70 each month.
[17] Mr Robson produced a table showing the monthly amounts invoiced by T R Group to the company, and the payments received by T R Group on those invoices, for the period April 2013-December 2014. The table is reproduced below:
2013
Month Invoiced Invoices
Received
Balance
April
$2,263.65
-$4,784.00
-$2,520.35
May
$3,647.16
-$1,968.39
-$841.58
June
$8,236.99
$
$7,395.41
July
$8,047.84
-$7,600.11
$7,843.14
August
$4,914.50
-$204.70
$12,552.94
September
$11,361.97
-$13,248.23
$10,666.68
October
$20,176.87
-$10,871.38
$19,972.17
November
$27,671.61
$
$47,643.78
December
$42,452.63
-$10,000.00
$80,096.41
2014
January $240.18
$
$80,336.59
February
$204.70
-$25,000.00
$55,541.29
March
$204.70
-$8,000.00
$47,745.99
April $204.70
-$8,000.00
$39,950.69
May
$204.70
-$8,000.00
$32,155.39
June
$204.70
-$8,000.00
$24,360.09
July
$204.70
$
$24,564.79
August
$204.70
-$1,000.00
$23,769.49
September
$204.70
-$1,000.00
$22,974.19
October
$204.70
$
$23,178.89
November
$204.70
$
$23,383.59
December
$204.70
$
$23,588.29
2015
January $204.70
-$23,000.00
$1,407.09
[18] Several payments made by the company to T R Group in the period April- December 2013 were dishonoured: a payment of $5,166.59 was dishonoured in July 2013, and two payments totalling $20,176.87 were dishonoured in November
2013. By 31 December 2013, the company owed T R Group $80,096.41 in outstanding lease payments.
[19] T R Group stopped renting vehicles to the company in December 2013. No further vehicle rental agreements were entered into with T R Group from then until the date the company was put into liquidation on 9 December 2014.
[20] While there were no further truck rentals after December 2013, T R Group did continue to rent the telematic equipment to the company after that date. I am told that these items were installed in trucks which were either owned by the company or leased by the company from some supplier other than T R Group. T R Group continued to bill the company for the rental of the telematic equipment at the rate of $204.70 per month.
[21] Mr Robson says that T R Group took a flexible approach to payments made by the company. He says that there was no strict requirement that the company pay all invoice amounts owing each month before it entered into further rental agreements, and says that that understanding is reflected in the fact that after the first two months the company’s account was in credit in the amount of $2,520.35 for April 2013 and $841.58 for May 2013. He also refers to substantial payments made by the company in the months July to October 2013.
[22] Mr Robson’s evidence is T R Group’s “flexible” approach was driven by what he describes as the commercial realities of the transport industry. It is a very competitive industry, where margins are tight and cashflows uneven. T R Group took the view that it should try to forge a good working relationship with customers such as the company, to help them manage the ups and downs in their businesses. The flexible nature of the rental agreements also allowed T R Group to recall vehicles where there was a payment problem. In the case of the company, that occurred in December 2013, at a time when Mr Robson says the company was experiencing what appeared to be short-term cashflow and funding constraints. He says that T R Group recalled its vehicles in order to limit its overall exposure on the account.
[23] T R Group also took comfort in the fact that it had a personal guarantee from Ms Laing, although it was not entitled to call on that guarantee until after the appointment of liquidators of the company.
[24] In early August 2013, the company’s accountants forwarded to T R Group draft financial statements for the company for the year ending 31 March 2013, together with cashflow projections for the year to 31 March 2014. The company had applied in July 2013 for a long term lease of a logging trailer, and the draft financial statements were evidently submitted in support of that application. Mr Robson says that although that application did not proceed, as T R Group does not specialise in logging vehicles, he noted that the draft accounts showed that the company had positive equity (when adjusted for shareholder loans), and that the company was projecting a positive cashflow for the year ahead. Mr Robson says that the figures
provided by the company’s accountant gave him “further comfort later in the year that the company was just experiencing some temporary cashflow issues”.
[25] Mr Robson acknowledges the dishonoured payments in July and November 2013. He says that the July dishonour was quickly remedied, but accepts that the November dishonours proved “more problematic”, and that the state of the company’s account in December 2013 led to T R Group’s decision to take back the rental vehicles until regular payments were re-established.
[26] Mr Robson produced copies of internal T R Group file notes relating to the company’s account, covering the period May 2013 to November 2014. The following notes record matters relevant to the company’s account in December 2013:
4 December 2013 Spent a good 90mins with Frank [Kesner of the company] yesterday…once these are paid he can clear the Kiwi Assets loan and pay us and then bring on the new funding company which will help with things going forward from here…
11 December 2013 Frank returned my call, from yesterday, this morning, in short the Kiwi Assets loan has been repaid and the security has been removed from the property. Another lender has increased funding on the back of this loan being paid and this money will be used to pay us by the end of the week. Frank has been told that if no payment has been received by then the gear is to come back.
17 December 2013 …Brothers – paying October invoices [of
$20,176.87] on the 20th, November invoices [of $27,671.61] can then be taken by DD on usual date at the end of this month.
23 December 2013 … Spoke to Frank numerous times today, still saying he paid $10k on Friday, can’t show me proof though, said another $15k being paid tonight, in the meantime the gear will be back at both our PN and Wellington yards as of this afternoon until either payment is made or we give the units to a paying customer!
24 December 2013 Brother’s said that they will pay another $15k
yesterday, so this should show up on Friday…
[27] The company did not pay the $15,000 payment referred to in the last of those notes.
[28] According to Mr Robson’s evidence, things changed in January 2014, when the company advised T R Group that it had obtained new finance through Midlands Mortgage Trust (Midlands). Mr Robson says that the upshot was that the
company was (or would then be) able to resolve its cashflow problems. In support, Mr Robson produced a copy of an email dated 29 January 2014 from Mr Kesner of the company to Mr Arber, T R Group’s local sales representative. Mr Kesner forwarded a copy of an email dated 27 January 2014 which the company’s finance broker had received from Midlands. The Midlands’ email referred to an “attached offer”, and recorded the writer’s understanding that the company was “looking to get this settled this week”. The email chain forwarded by Mr Kesner to Mr Arber on
29 January 2014 included an email dated 27 January 2014 from the company’s broker, passing on Midlands’ email and offer to the company, in which the broker advised that he had told Midlands the company intended to settle the advance that week.
[29] Mr Arber passed this email correspondence on to his colleagues in T R Group’s finance team on 29 January 2014, advising that Mr Kesner was “certain that [the company] will be drawing down part of this loan this Friday (which the attached loan document refers to) to pay their bills off which includes our outstanding with them.”
[30] This advice appears to have been greeted with relief within the T R Group finance team. A member of that team, Ms Rensburg, replied to Mr Arber saying “…this is seriously great news!”.
[31] The company then made the payments of $5,000 on 5 February 2014 and
$20,000 on 14 February 2014 which are referred to in para [4] of this judgment.
[32] The payments made from 30 April 2014 appear to have been made pursuant to an agreement between T R Group and the company for reduction of the company’s indebtedness. That agreement was recorded in an email dated
14 April 2014 from Ms Rensburg of T R Group to the company. The email confirmed “the agreed payment plan”, to commence on 30 April 2014. Monthly payments of $8,000 were to be made on the 30th of April, May, June, July and August, and payment of $7,950.69 (the balance of the debt) on 30 September 2014. The company’s account was to remain on “stop” until the payment plan had been completed. The email cautioned that, should any default of payment occur, the
company’s account would immediately be sent to debt collectors and solicitors for
recovery of the balance.
[33] Mr Robson says that it was common in the industry for suppliers such as T R Group to put their customers on “stop”. He says that many of T R Group’s customers were on and off “stop” numerous times, depending on seasonality and how their cashflow worked.
[34] While there was a “stop” on any further truck or trailer rentals, the existing and ongoing rental of the telematics equipment remained in place throughout 2014, and was only terminated when the liquidators were appointed.
[35] Mr Robson says that the April 2014 payment plan worked well. It was only in July 2014 that a dishonour occurred. Some smaller, catch-up, payments were made in August and September 2014.
[36] Mr Robson contends that T R Group acted in good faith throughout. He says that it saw itself as a “secured” creditor of the company, because it had the ability to repossess the vehicles under its rental contracts with the company in event of default, and because it had the benefit of Ms Laing’s guarantee. Further, any dishonoured payments were usually remedied by the company. For those reasons, he says that T R Group decided to keep the account open, and decided against any other action (such as pursuing Ms Laing under her personal guarantee).
[37] By September 2014, however, T R Group’s finance team had come to the view that demand should be made for the balance of the debt (by then, $23,974.19). Demand was accordingly made on both the company and Ms Laing, on 23
September 2014. No further payments were received from the company, but Ms
Laing did honour her guarantee with a payment of $23,000 made in January 2015.
Mr Vance’s evidence
[38] In his evidence, Mr Vance expresses the opinion that the financial statements sent to T R Group in early August 2013 should not have given T R Group any comfort on the question of the company’s solvency. He points out that the accounts
for the six week trading period showed a net trading loss, negative equity, and an excess of current liabilities over current assets. While the projection for the 2014 year showed a cashflow surplus on an EBITDA5 basis, it also indicated a projected net trading loss after deducting depreciation and interest.
[39] In Mr Vance’s opinion, the company was unable to pay its due debts from no later than 23 December 2013. On that date another creditor served the company with a statutory demand, claiming $57,678. Mr Vance’s understanding is that this demand expired unsatisfied.
[40] It appears that T R Group was aware that the company was having difficulty paying its creditors at about this time. In his reply affidavit, Mr Vance notes that the email chain forwarded by the company to T R Group on 29 January 2014 contained a comment confirming that there were arrears owing to other creditors. There was specific reference (in the broker’s 27 January 2014 email to the company) to Petroleum Logistics, a company which later submitted an unsecured claim for
$45,000 in the company’s liquidation.
[41] Mr Vance refers to other evidence in support of his opinion that the company was insolvent from the beginning of 2014. A claim by the Commissioner of Inland Revenue for $190,478.28 (covering unpaid child support, Kiwisaver employee deductions, Kiwisaver employer contributions, PAYE Tax deductions, Goods and Services Tax, and Employer’s Superannuation Tax) had been accumulating since 30 April 2013. Also, the company’s bank statements from
31 December 2013 to 3 December 2014 show that the company was dishonouring payments to other creditors, in addition to T R Group. The company’s bank account was generally overdrawn in this period, and the intended $15,000 payment mentioned in the T R Group file note of 23 December 2013 was never paid.
[42] Mr Vance expresses a more sceptical view of the application to Midlands for finance. He notes that the application stated that repayment by the company was “unlikely in the short to medium term”, and that lending would not be considered by
a mainstream lender. The application also showed that the company’s current
5 Earnings before interest, tax, depreciation, and amortisation.
liabilities exceeded its current assets by approximately $86,000, and that total liabilities exceeded total assets by approximately $160,000. Security for the loan had to be provided by mortgage over a farm owned by a guarantor.
[43] Mr Vance produced a copy of draft accounts prepared by the company’s accountants for the financial year ended 31 March 2014. These accounts show that as at 31 March 2014:
(a) The company had a negative equity of $643,755.
(b) The company’s current liabilities ($862,570) were significantly in
excess of its current assets ($346,990).
(c) The net current asset position at 31 March 2014 showed a deficit of
$515,580.
[44] There is no suggestion that these accounts were shown to T R Group at any time before the company was put into liquidation.
[45] Mr Vance says that the March 2014 figures shown above were calculated on the basis that a debt of $156,855 then owing to the company by another company with the same shareholders and directors, was an asset of the company. However Mr Vance says that the other company was insolvent at the time, and ceased to trade in approximately April or May of 2014. If the debt owing by this other company were excluded, the negative equity at March 2014 would be adjusted to $800,610, and the current assets reduced to $190,135 (as against current liabilities of $862,570). The net current asset position in those circumstances would have been -$672,435.
[46] Mr Vance points out that by the beginning of February 2014 (when the first of the challenged payments was made), the company’s total debt with T R Group remained at over $80,000, and included amounts that had been outstanding since October 2013. The amounts of the payments which had been dishonoured in November 2013 had not been paid, and the company’s account with T R Group remained on “stop”.
[47] The T R Group internal notes record a conversation with Mr Kesner on 25
February 2014, in which Mr Kesner advised that, by then, only a portion of the Midlands loan had been drawn down, but that further payments would be coming at the end of the week. The note records that Mr Kesner could not tell the author how much would be coming: he suggested that they wait to see how much came through, and then go from there. The author of the note recorded that this was “not enough and I will get them to enter into a payment plan that they will have to sign, however if we get a good amount we will hold off”.
[48] From no later than October 2013, the company was obtaining trucks from alternative suppliers. Mr Vance says that one truck and three trailers were leased from Lupton Holdings Ltd in October and November 2013, and the company purchased an Isuzu vehicle in October 2013. Following T R Group’s termination of rentals to the company in December 2013, the company leased a number of replacement vehicles from Lupton Holdings Ltd in March 2014.
[49] Mr Vance rejects Mr Robson’s suggestion that in December 2013 the company was experiencing only “what appeared to be short-term cashflow and funding constraints”. The liquidators say that there was a fundamental change in the company’s financial position in December 2013, when its financial difficulties became much more serious. In Mr Vance’s view, the company was by then unable to pay its debts as they fell due, and it never recovered.
[50] In Mr Vance’s evidence, the company’s insolvency would have been apparent based on information of which T R Group was aware at the time, and/or further information that it could have requested.
[51] Mr Vance says that in May 2014 the company borrowed $1,200,000 from Lupton Holdings Ltd. Security was provided by a guarantor, rather than by the company. As at October 2014, the debt had increased to $1,561,008.16. Lupton subsequently issued a demand for that amount.
The issues in the case
[52] The following issues must be resolved:
(a) Were the payments shown in the table at para [4] of this judgment made as an integral part of a continuing business relationship between T R Group and the company, in the course of which the level of the company’s indebtedness increased and reduced from time to time as a result of a series of transactions forming part of the relationship? (The s 292(4B) defence);
(b) Can T R Group rely on the defence under s 296(3) of the Act?
[53] As to issue (2) it is not in dispute that T R Group gave value. The key issues are whether it has established that a reasonable person in its position would not have suspected that the company was, or would become, insolvent, and whether it acted in good faith. The liquidators say that T R Group has not satisfied those requirements.
Issue 1: Were the payments shown in the table at para [4] of this judgment made as an integral part of a continuing business relationship between T R Group and the company, in the course of which the level of the company’s indebtedness increased and reduced from time to time as a result of a series of transactions forming part of the relationship? (The s 292(4B) defence)
How the Courts have applied the relevant provisions of s 292
Insolvent Transaction – a transaction made at a time when a company is unable to pay its due debts (s 292(2))
[54] While ability to pay debts is concerned with the debtor’s present position, regard may be had to the recent past and whether the debtor has, in recent weeks, been able to pay its debts as they have become due. Convertibility of non-cash assets on hand may be taken into account in determining solvency, but so must debts
becoming due while that conversion takes place.6
Insolvent transaction - that enables another person to receive more towards satisfaction of a debt paid by the company than the person would receive, or would be likely to receive, in the company’s liquidation (s 292(2)(b))
[55] The liquidator need not prove that the body of creditors as a whole has been disadvantaged by the relevant transaction. Nor is the relevant comparison made on
6 Re Universal Management Ltd (in liq) (1981) 1 NZCLC 95-026 (HC) at 98,246.
the basis of a hypothetical liquidation on the date of the subject of transactions. All the liquidators must show is that the creditor received a greater payment than it would otherwise have received in liquidation.7
The requirements for a continuing business relationship
[56] The onus is on the respondent creditor to establish the “continuing business relationship”.8
[57] The following key principles were outlined by the Court of Appeal in
Timberworld Ltd v Levin:9
(a) A payment is part of a running account where there is a business purpose common to both parties which so connects a payment to subsequent debits as to make it impossible, in a business sense, to pause at any payment and treat it as independent of what follows.
(b) The amount owing to a creditor is likely to fluctuate over time, increasing and decreasing depending on the payment made and the goods or services provided.
(c) The effect of a payment depends on whether it is paid (i) simply to discharge a debt owing to the creditor (including the permanent reduction of the balance of an account that is then owing) or (ii) as part of a wider transaction which, if carried out to its intended conclusion, would include further dealings giving rise to further amounts owing at the time of payment.
(d) A payment is part of a transaction that includes subsequent dealings even though it may reduce the amount of debt owing at the time of the payment, where it can be shown it is inextricably linked to further credits, and has the predominant purpose of inducing the provision of further supply and it is impossible to treat the immediate effect of the payment as the only effect.
(e) The manner or form of keeping account of credits and debits does not determine the effect of the payments. Rather, whether the payments are in fact part of a transaction with an effect distinct from the mere reduction of debt owing to the creditor by the debtor company, drives whether the series of transactions constitute a running account. The courts are concerned with the “business purpose”, the “business character” and the “ultimate effect” of the payments, in an objective sense.
7 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [38].
8 Rea v Russell [2012] NZCA 536, [2015] NZAR 1368 at [24].
9 Timberworld Ltd v Levin [2015] NZCA 111, [2015] 3 NZLR 365 at [34].
[58] The Court of Appeal in Timberworld emphasised the importance of applying the “continuing business relationship” rule with great care. It referred to the potential for “over-inclusion” of commercial relationships in the definition “trade creditors” to unjust effect, and stated that any such concern can be assuaged by a careful application of running account principles to individual cases.
[59] There must be an integral business connection between the payments in and out. The test for that is objective, and the Court looks to the effect of the transaction and not to the intent or state of mind of the debtor. The transactions must arise in the context of an ongoing business relationship where transactions for commercial purposes form part of the relationship. Payments that have as their sole object the reduction of indebtedness rather than supporting ongoing business do not fall into
such a category.10 Without an extra dimension such as that referred to in the running
account cases there could be no justification for treating the transaction as other than an insolvent transaction voidable under s 292(1).11
[60] The continuation of supply in a business relationship/running account situation does not necessarily mean that the final payment made by the debtor is to be treated as a payment made in the course of the business relationship. If the final payment was made “looking backwards rather than forwards; looking to the partial payment of the old debt rather than the provision of continuing services”,12 the payment may be voidable. In such a case, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor
to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired.13
[61] On the other hand, it is not the case that a total cessation of supply must occur before the continuing business relationship ceases – there can be some business
10 Rea v Russell, above n 8, at [57] and [59] citing S Richards & Co v Lloyd (1933) 49 CLR 49 at
62.
11 Galvanising (HB) Ltd v Fisk [2015] NZCA 529 at [58].
12 Airservices Australia v Ferrier (1996) 195 CLR 483 at 510 per Dawson, Gaudron and
McHugh JJ.
13 At 509.
carried out between the parties without the existence of the “continuing business relationship”.14
The liquidators’ submissions
[62] The liquidators submit that the continuing business relationship terminated in December 2013 when T R Group required the return of all the rental vehicles, and the company’s account was put on “stop”. T R Group refused to contemplate renting any more vehicles to the company until the debt was repaid. The liquidators submit that there is no evidence to suggest that either party regarded the payments made from 5 February 2014 as having been made with the intention of inducing T R Group to enter into further truck leases or rentals. That subject was not broached. The company leased trucks from a different supplier, and after December 2013 it appears to have had neither the ability nor the intention of obtaining further rentals on credit from T R Group.
[63] The continuing supply of the telematics services does not mean that a continuing business relationship/running account continued to exist after
31 December 2013. The proper focus is on the purpose of the payments, rather than simply whether any further supplies were made. The liquidators rely on subpara (c) from Timberworld as set out at para [53] above – the question is whether the payments were “backwards-looking”, to repay past debt, or “forward-looking”, to secure further supplies on credit (referring to Airservices Australia v Ferrier, and
Clifton v CSR Building Products).15
[64] The liquidators also rely on the New Zealand Court of Appeal cases of Rea v Russell and Galvanising (HB) Ltd v Fisk16 for the proposition that payments that have as their sole object the reduction of indebtedness rather than supporting ongoing business do not fall into the continuing business relationship/running
account category.
14 Clifton v CSR Building Products Pty Ltd [2011] SASC 103 at [75]. In that case, the cessation of the continuing business relationship arose from the issue of a legal letter of demand.
15 Airservices Australia v Ferrier, above n 12, and Clifton v CSR Building Products Pty Ltd, above n 14.
16 Rea v Russell, above n 8, and Galvanising (HB) Ltd v Fisk, above n 11.
T R Group
[65] Mr Reid submits that the claim raises an important question as to whether, at law, T R Group is permitted to rely on its present practices of re-taking possession of rental vehicles after default, maintaining an open account (but with no new supplies) and entering into a payment plan, without contravening the Act’s voidable transaction regime.
[66] Mr Reid submits that T R Group’s decision to retake possession of the vehicles was not viewed by it as an ending of the trading relationship. He refers in that regard to Mr Robson’s references to the “flexibility” of the rental agreements, and warns against the dangers of “reasoning backwards” from the December 2014 liquidation to reach the (unjustified) conclusion that the parties must have known the company’s financial position was hopeless in February 2014. He submits that Mr Robson’s affidavit and the contemporaneous documents do not support any such conclusion. On the contrary, T R Group was engaged in working constructively with the company to maintain their business relationship during the relevant period.
Discussion and Conclusions on Issue (1)
[67] In my view the payments fall outside the scope of a continuing business relationship.
[68] First, the existence of ongoing payments for the rental of the telematics equipment does not in this case affect the status of the impugned payments. The Court must look not to the manner or form of the keeping of accounts, but to the business purpose and the ultimate effect of payments.17 In this case the parties appear to have treated the telematics equipment as being on a “separate track” from the rentals of the trucks, and there can be no suggestion that the challenged payments
were made with the purpose of persuading T R Group to rent more trucks to the company, or to persuade T R Group to continue to supply the telematics equipment. The “stop” on truck rentals remained in place after December 2013, and if the purpose of the payments had been in part to secure ongoing or future truck rentals,
one would have expected to see some reference to a lifting of the “stop” in the
17 Timberworld Ltd v Levin, above n 9, at [34].
communication between the parties. There is no suggestion in the evidence that that
was the parties’ intention.
[69] It was for T R Group to show that the payments were made as part of a continuing business relationship, and I consider it has failed to discharge that onus. In my view, the purpose of the payments was “backward-looking” and therefore outside the definition of a continuing business relationship. There was a stop on further supply, and the company was renting vehicles elsewhere. And it cannot be enough for the debtor in this situation to say that it was possible that it might engage in future business with the creditor.
[70] Mr Robson pointed to the apparent flexibility of the rental agreements, and in particular to T R Group’s ability to recall equipment supplied by it. But the fact that it was possible for the parties to resume business after the payment of the account cannot be enough to displace the predominant purpose of the payments which was to clearly reduce the debt.
[71] T R Group submitted that it was “working constructively” with the company to “maintain their business relationship” from December 2013 to September 2014. But T R Group’s internal notes make it clear that its focus during that period was in fact the recovery of the outstanding debts. As early as 25 February 2014 it was looking to get a repayment plan in place, without any reference to resuming supplies of trucks to the company, and although some payments were subsequently made by the company (and T R Group held off insisting on a payment plan), a payment plan was put in place on 14 April 2014.
[72] The very existence of the April 2014 payment plan is a strong indicator that the payments made pursuant to it were for the purpose of meeting the requirements of the plan, which was plainly to reduce the company’s debt to the respondent. There was nothing “forward looking” about it.
[73] I conclude that the “predominant purpose” of the payments was not induce the provision of further supply, but to discharge the debts. The continuing business relationship rule is inapplicable, and the answer to Issue (1) is no.
Issue (2): Can T R Group rely on the defence under s 296(3) of the Act?
The section 296(3) defence – what is meant by having “reasonable grounds for suspecting”, in s 296(3)(b)?
[74] There must be more than a mere idle wondering whether something exists or not; a positive feeling of actual apprehension or mistrust is required. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. There must be something in the circumstances which would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes – a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as
between the payee and the other creditors.18
[75] The following passage from the judgment of Associate Judge Abbott in Meltzer v Allied Concrete Ltd, was endorsed by the Court of Appeal in Madsen-Ries v Rapid Construction Ltd:19
[13] The Courts do not look for any single factor but rather judge the matters on the basis of the contemporary knowledge of the recipient, including potential countervailing factors, which tended to dispel suspicion at the time. While cash-flow problems can raise a suspicion of insolvency they must be viewed in context; apparent cash-flow problems may be explained simply by habit of delay in payment. Thus, a temporary lack of liquidity is generally insufficient for a conclusion of insolvency. When approaching the question of suspicion, it is important to apply commercial reality, derived from a particular industry, to the facts of the case.
Lack of good-faith – s 296(3)(a)
[76] The Court of Appeal also observed in Madsen-Ries v Rapid Construction Ltd
that:20
An awareness of financial difficulty, however, is not necessarily enough to establish a lack of good faith. An example is Grant v Shears & Mac Ltd where the High Court found that the creditor had acted in good faith despite a threat to serve a statutory demand as a result of late payment.
18 Trans Otway Ltd v Shephard Ltd [2005] NZSC 76, [2006] 2 NZLR 289 at [21].
19 Meltzer v Allied Concrete Ltd [2013] NZHC 977; Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489, [2015] NZAR 1385 at [20].
20 At [11] (citations omitted).
The liquidators’ submissions
[77] The liquidators submit that there were numerous factors that should have created in the minds of the credit team at T R Group at very least a “slight opinion but without evidence” that the company was unable to pay its debts when the first challenged payment was made on 5 February 2014. The liquidators submit that as a matter of commercial common sense it is difficult to envisage a more powerful combination of factors indicating that a reasonable creditor should have had grave concerns about the solvency of the company. T R Group’s close monitoring of the company’s accounts suggest that it shared those concerns.
[78] The liquidators refer to Mr Vance’s opinion on the objective insolvency of the company as at 31 December 2013, including his opinion that T R Group should not have derived any comfort from the draft financial statements which were provided by the company in August 2013.
[79] The liquidators also say that the “good faith” element of the s 296(3) defence has not been proved. The onus under s 296(3)(a) is on T R Group, and while the test under s 296(3)(a) is a subjective one (requiring the recipient of the disputed payment to show an honest belief that the transaction would not involve any element of undue preference either to itself or a guarantor), the recipient is likely to fail that test where it has actual or implied knowledge of the debtor company’s financial difficulties. That may be the case where, for example, the debtor company’s cheques are dishonoured, there is a failure to pay debts on time, or there are other circumstances indicating that the debtor has serious cashflow problems. An awareness of financial difficulty, however, is not necessarily enough to establish a lack of good faith – a creditor may be acting in good faith even when threatening a statutory demand for
late payment.21
[80] The liquidators submit that T R Group was sufficiently aware of the company’s serious financial difficulties by the time the first payments were made in February 2014, that it cannot make out its case of “good faith” under s 296(3)(a). By
January 2014 the debt had risen to over $80,000, some of which had been
21 Madsen-Ries v Rapid Construction Ltd, above n 19, at [11].
outstanding since October 2013. Significant payments had been dishonoured in November 2013, and by the end of December 2013, T R Group was concerned to limit its overall exposure on the account. The company had been put on “stop”.
[81] The liquidators submit that, for those reasons, T R Group has no defence under s 296(3) of the Act.
T R Group’s submissions
[82] Mr Reid submits that Mr Robson’s evidence that T R Group had no reasonable suspicion of insolvency, either objectively or subjectively, is credible. He submits that the evidence is consistent with the parties working through the company’s cashflow difficulties together. In Mr Reid’s submission evidence of the company’s financial difficulty sufficient to create a reasonable suspicion of insolvency was not present until the end of September 2014. At that point, demand was made on the company and the guarantor for payment of the remaining debt ($23,974.19).
[83] Mr Reid relies on the passage from the judgment of Associate Judge Abbott in Meltzer v Allied Concrete which is quoted at para [59] above and on the Court of Appeal’s observation in Madsen-Ries that an awareness of the debtor’s financial difficulty is not necessarily enough to establish a lack of good faith on the part of the creditor who receives the challenged payment. In Madsen-Ries the Court of Appeal upheld the Associate Judge’s conclusion that the creditor assumed cash flow difficulties were temporary and that good faith on part of the creditor had been established.
Discussion and conclusions on Issue (2)
[84] T R Group submitted that the present claim raised an important point of law as to whether it could rely on its present practice of retaking possession of rental vehicles after default, maintaining an open account but with no new supplies, and entering into a payment plan, without contravening the Act’s voidable transaction regime.
[85] That submission is, I think, misconceived. Each case has to be judged on its own merits, and the questions will always be those posed by s 296(3) of the statute: did the person receiving the property act in good faith, would a reasonable person in that person’s position have suspected that the debtor was or would become insolvent, and did the person receiving the property in fact have reasonable grounds for suspecting the actual or impending insolvency of the debtor? The conduct of T R Group in this case is obviously relevant to the conclusions I have reached, but that is not to say that the same result would necessarily follow with a different debtor in a different business relationship.
[86] I conclude that, as at early January 2014, a reasonable person in T R Group’s position would have suspected that the company was or was likely to become insolvent. In the months leading up to that point several events occurred that must have created a positive feeling of apprehension that the company was or would become unable to pay its debts as they fell due. Debt almost doubled between November and December 2013, and in November 2013 payments relating to October supplies were not honoured. The promise to make a further payment in December 2013 was then not met, and T R Group took its trucks back and decided to withhold future supplies.
[87] These occurrences alone must have created a strong impression within T R Group that the company was, or was likely to become, insolvent. The recall of the vehicles to protect its position, while not on its own determinative, is a strong indicator of T R Group’s escalating concerns about the capacity of the company to pay its debts – it clearly did not consider the company was then good for further credit.
[88] In my view this was not some relatively minor blip which could reasonably have been put down to the company going through temporary cashflow difficulties. The company’s accounts provided to T R Group in August of 2013 had projected a net trading loss after interest and depreciation, and the November payment dishonours would surely have been regarded with concern by T R Group. Arrears known to be owing to other creditors, including Petroleum Logistics, and the
company’s failure to honour a promise to make a payment in December, could only
have deepened that concern.
[89] So by mid-January 2014, T R Group had every reason to believe that the company was either then insolvent or was likely to become insolvent. The question is whether T R Group had reason to change that belief before it received the payments which the liquidators now challenge.
[90] There is no doubt that on 29 January 2014 Mr Kesner gave Mr Arber to understand that the company had received an offer of finance from Midlands, and that it intended to accept that offer and start drawing down on the new loan almost immediately. It appears from Mr Arber’s email to his colleagues at T R Group on
29 January 2014 that he had received a copy of at least some of the documents associated with the Midlands loan offer, and Mr Robson acknowledged in his affidavit that the “relevant finance documents” were those produced by Mr Vance in exhibit “U” to his affidavit. Mr Vance’s exhibit “U” was a [Midlands] loan application dated 24 January 2014. I will infer that the loan application form produced by Mr Vance was the document that Mr Arber received from the company on 29 January 2014, and passed on to his colleagues in the finance team.
[91] The Midlands loan application showed that the company (and an apparently related company, Hill Top Logging Ltd) had an existing facility of $310,000, and were seeking a further advance of $362,000. The proposed term was two years, with drawn down on 31 January 2014.
[92] The purpose of the new finance was described as being to pay off $70,000 owing to Kiwi Assets Finance Ltd, pay off creditors of $150,000, and provide
$120,000 for working capital. The other $22,000 would cover fees on the advance.
[93] The security proposed was a mortgage over certain farm land in the Wairarapa and General Security Agreements over the two companies. The form of application included short details of the statement of financial position as at September 2013, which showed that liabilities exceeded assets by $159,653. Current liabilities were shown as exceeding current assets by approximately $86,000.
[94] The application form recorded that the two companies were projecting an operating surplus of $442,389 in their budgets for the year to December 2014. The author of the document commented that they appeared to have the capacity to service the proposed loan with cashflow projections which had been provided.
[95] Mr Vance says that the company remained insolvent, and its financial position continued to worsen. In his opinion this would have been reasonably apparent to a creditor such as T R Group. He says that the loan application revealed the parlous state of the company’s finances, noting that repayment was said to be “unlikely in the short to medium term”.
[96] Those comments may be accurate as far as they go, but the application was supported by what appears to have been relatively strong security (generally, over property put up by a guarantor), and Midlands presumably concluded that the companies would be able to service the new loan. Repayment would not be due for two years, and T R Group was clearly given to understand on 29 January 2014 that the loan (presumably on the terms shown in Mr Vance’s exhibit “U”) had been approved.
[97] In my view, it was reasonable at that point for T R Group to have concluded that the company was no longer insolvent, and that it had or would very soon have sufficient funds to pay all its debts as they fell due. Funding of $150,000 had been sought to cover outstanding creditors, and (as far as T R Group could have known) that sum would have been ample to cover the amount of approximately $80,000 then owing to T R Group. $120,000 would be available for working capital.
[98] And of course the company then began to make payments. The first payment was $5,000 made on 5 February, and the second payment was $20,000 made on 14
February.
[99] But by 25 February the T R Group internal notes record renewed uncertainty:
Spoke to Frank today, only a portion of the loan has been drawn down, further payments coming at the end of this week. He can’t tell me how much so suggest we wait to see how much comes through and then go from there
— not enough and I will get them to enter into a payment plan that they will have to sign, however if we get a good amount we will hold off.
[100] There was then a significant delay until the third payment ($8,000) was made on 21 March 2014. By then it must have been clear to T R Group that the company had not in fact arranged sufficient finance to pay off its bills, including the outstanding debt owing to T R Group. The warning bells should have been ringing loud and clear at T R Group when no further payment had been received by mid- March 2014. By then, a reasonable creditor in T R Group’s position would have suspected that the company was either insolvent, or likely to become insolvent.
[101] Mr Robson referred to T R Group’s comfort in having Ms Laing’s guarantee, and to its ability to repossess the vehicles. But those facts cannot speak to whether T R Group ought to have suspected that the company was or might become insolvent. They simply show that T R Group had less reason to be concerned if the company was insolvent than might otherwise have been the case.
[102] Mr Robson deposed that if T R Group had had any concerns about the company’s solvency, it would have pursued payment under the guarantee. But that does not appear to be consistent with his statement that recourse to the guarantee was not available to T R Group until after the appointment of the liquidators. Certainly the guarantee represented a form of “security” for T R Group, but of itself it did not affect the solvency of the company, or T R Group’s views about the solvency of the company.
[103] In respect of the first two challenged payments, I conclude that, at the times these two payments were received, T R Group did not in fact suspect that the company was insolvent. Nor did it then have reasonable grounds for suspecting that the company was or would become insolvent. I am satisfied also that T R Group acted in good faith in receiving those two payments, for the same reasons as are set out above.
[104] There is no argument that T R Group provided value for the first two payments, as required by s 296(3)(c). I accordingly conclude that the s 296(3)
defence has been made out in respect of the payments received by T R Group on
5 February 2014 and 14 February 2014.
[105] By 21 March, however the position had changed. The conversation with Mr Kesner on 25 February 2014,22 put with the company’s earlier defaults, should have given T R Group strong grounds to suspect that the Midlands finance (or at least enough of it to cover the outstanding debt) had not come through, and that the company was then insolvent, or likely to become insolvent. There will accordingly be orders setting aside the payments listed in para [4] of this judgment which were
made on and after 21 March 2014.
Orders
[106] I make the following orders:
(a) Setting aside the payments (totalling $34,000) made on
21 March 2014, 30 April 2014, 30 May 2014, 30 June 2014,
15 August 2014, and 30 September 2014, as set out in para [4] of this judgment.
(b)Directing T R Group to pay the $34,000 to the liquidators, with interest at the rate of 5 per cent per annum calculated from the date of the liquidation.
(c) If counsel are unable to agree on costs, memoranda may be submitted.
Any memorandum from the liquidators is to be filed and served within 15 working days of this judgment. Any reply memorandum is to be filed and served by T R Group within 15 working days of its
receipt of the liquidators’ memorandum.
22 Referred to at [99] of this judgment.
Solicitors:
Meredith Connell, Wellington for the applicants
Gibson Sheat, Wellington for the respondent
Associate Judge Smith
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