Petterson as liquidator of Hurlstone Earthmoving Limited v Allied Concrete Limited

[2013] NZHC 710

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-006612 [2013] NZHC 710

UNDER  The Companies Act 1993

IN THE MATTER OF     Hurlstone Earthmoving Limited (in

Receivership and Liquidation)

BETWEEN  DAVID ROSS PETTERSON AS LIQUIDATOR OF HURLSTONE EARTHMOVING LIMITED Applicant

ANDALLIED CONCRETE LIMITED Respondent

CIV-2013-404-1147

AND BETWEEN            DAVID ROSS PETTERSON AS LIQUIDATOR OF HURLSTONE EARTHMOVING LIMITED Applicant

ANDAML LIMITED Respondent

Hearing:         25 March 2013

Appearances: B Gustafson for Applicant

J V Ormsby and C L Webber for the Respondents

Judgment:      10 April 2013

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

10.04.13 at 4  pm, pursuant to

Rule 11.5  of the High Court Rules. Registrar/Deputy Registrar

Date……………

PETTERSON AS LIQUIDATOR OF HURLSTONE EARTHMOVING LIMITED V ALLIED CONCRETE LIMITED HC AK CIV-2012-404-006612 [10 April 2013]

Background

[1]     These proceedings have been brought by the liquidator of Hurlstone Earthmoving Limited (In Receivership and Liquidation) which I shall refer to as “HEL”.    HEL  was  at  relevant  times  engaged  in  civil  construction  projects  in different parts of New Zealand.

[2]      The respondents in the two proceedings are wholly owned subsidiaries of a company called HW Richardson Group Ltd which is based in Invercargill.  Both the respondents are involved in the business of manufacturing and selling concrete.  In the course of their business they sold concrete to HEL.

[3]      Just as the parties did, I shall refer to the respondent in proceeding CIV-2012-

6612 as “ACL” and the other respondent (in proceeding CIV-2013-1147) as “AML”.

[4]      The  following  is  the  chronology  of  relevant  events  with  relation  to  the payment that HEL made to ACL, followed by payments made to AML:

ACL

2004Approximate year of commencement of trading between parties

11 April 2011  Statutory demand served claiming

$69,986.60

3 May 2011  HEL pays $71,360.35

9 September 2011  HEL placed in liquidation

AML

22 March 2011  HEL pays AML $3651.48

20 June 2011  HEL pays AML $10,743.96

[5]      Dealing first with the payments to ACL, the applicant has sought to set aside the payments pursuant to s 292 and the following sections of the Companies Act

1993.  The respondent initially claimed that the payments was made pursuant to a security that it had in the form of a retention of title clause but it now accepts that it cannot invoke such a security.

[6]      ACL now contends:

a)       That the payment that it received in May 2011 related to concrete supplied on credit in January and February 2011 together with costs of credit and other costs;

b)The transaction sought to be set aside was not made at a time when the company was not able to pay its due debts;

c)        That:

i)        ACL received the payment in good faith; and

ii)A reasonable person in the respondent’s position would not have suspected, and the respondent did not have reasonable grounds  for  suspecting,  that  the  company  was  or  would become insolvent;

iii)The respondent gave value for the payment and altered its position in the reasonably held belief that the payment was valid and would not be set aside.

[7]      In relation to AML, the respondent contends that the payments received from HEL were to pay for supplies of concrete, with the debts having arisen prior to the specified period.

[8]      By way of reply the applicant says that:

a)       the respondent was aware that at that time of the transaction (that is the  payment)  HEL  was  experiencing  serious  financial  difficulties being the very reason the respondent issued the statutory demand;

b)The respondent has produced no evidence that it gave new value for the funds received under the transaction.

Overview of preferential transactions regime

[9]      It will be useful to consider the overall policy that underpins the preferential transactions regime which is contained in s 292 and the following provisions of the Companies Act 1993.  I agree with the following description of the rules which is to be found in the New Zealand Law Journal article to which I was referred:1

Voidable preference rules are designed to maximise the return to all creditors (as a class) by preventing an insolvent or almost company disposing of its assets in favour of some creditors at the expense of others and are a feature of most insolvency regimes worldwide.

[10]     I also respectfully agree with the following description of the operation of the statutory rules which is to be found in the judgment of Associate Judge Abbott in Shephard v Steel Building Products (Central) Limited:2

[51]     To avail itself of this defence, the recipient of the property or money in question has to demonstrate an honest belief that the transaction would not involve any element of undue preference.3   This is a subjective test.  If the recipient has actual or implied knowledge of the financial predicament of the company, and that it was being treated differently or preferentially to other creditors, it will not be able to claim that it received the payment in good faith.4

[11]     I note here that counsel for both parties also accepted that the authority of Re Orbit  Electronics  Auckland  (In  Liq)5   required  that  the  recipient  of  the  money honestly believe that the transaction would not involve any element of undue preference.

[12]     Then dealing with the requirements of s 296(3)(b), Associate Judge Abbott’s

judgment continues:

1 Trish Keeper “Maximising Returns to Creditors” [2011] NZLJ 401.

2 Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189 (footnotes in original).
3 Re Orbit Electronics Auckland Ltd (in Liq) 1989 4 NZCLC 65 170 (CA).
4 Graham v Pharmacy Wholesalers (Wellington) Ltd CA37/04, 17 December 2004.

5 Above n 3.

[55]     This takes me to the second aspect of the defence, namely whether Metalcraft has shown that a reasonable person in its position would not have suspected, and that Metalcraft did not have reasonable grounds for suspecting, that Hightower was or would become insolvent.

[56]     The first part of this requirement requires an objective analysis by reference to a reasonable person having the knowledge and experience of the “average business person”.  This hypothetical creditor is assumed to have the full range of information available to Metalcraft.

[57]     The second limb of this requirement requires consideration of what was known to Metalcraft (its subjective position) and whether that provided reasonable grounds for suspecting insolvency (thus importing an objective element).

[13]     There is of course a third subsection of s 296(3), the requirements of which I

will discuss in due course.

The position of ACL

[14]     Although they had traded since 2003, ACL ceased trading with HEL in April

2010 following unreliability on the part of HEL in making payments for products that had been supplied to it.   However, in December of that year HEL applied to reopen a trading account to enable it to acquire concrete for its Purewa Tunnel project in Auckland.  ACL agreed to supply concrete on the basis that it would be paid for on the 20th of the month following supply.  During the period January 2 and February 2011 ACL invoiced HEL for 11 separate amounts totalling $69,986.60. That amount was paid 3 May 2011 along with interest and legal fees amounting to a total of $71,360.35.  That is the payment that the liquidator seeks to set aside.

[15]     Evidence was given for ACL by Ms Thompson.   She is a credit controller employed by ACL.  She said that the company received a payment in good faith and without a suspicion that HEL was or would become insolvent.  There was nothing out of the ordinary in the trading relationship at the time when the May payment was received.  She said that HEL had always been slow to pay and that ACL had always had to be “proactive” in pursuing payment.  She said that HEL had a long trading history and was a company of significant assets.  She said that she did not have any knowledge or suspicion that the company was being treated differently from any other creditor of HEL when the payment was made.

[16]     She disclosed that ACL had trouble getting in touch with the principal of

HEL to discuss fresh problems with payment that arose in March 2011.  On 9 March

2012 she advised HEL that their account was being placed in the hands of lawyers. The same day HEL advised that there had been problems with getting payment for the Purewa project from KiwiRail, that it had been short paid $400,000 on the latest instalment of the price, but that matters were now resolved and there should be no further  problems  and  payment  would  be  sent  to  ACL  shortly.    None  of  this impressed ACL.  The company advised HEL the next day that it had breached its undertakings, and that “a deal is a deal”.  Approximately a week later in response to a query from HEL, Ms Thompson advised that ACL would not be resuming supply of concrete.

[17]     On 31 March 2011, ACL issued a statutory demand under s 289 of the

Companies Act 1993 which was subsequently served on HEL.

Good faith

[18]      It is necessary for ACL to prove that when it received the payment, it had an honest belief that by doing so it would not be obtaining a preference over other creditors.  This is required by s 296(3)(a).

[19]     Ms Thompson was not required for cross-examination at the hearing before me.  That factor is not determinative.  While the company, through Ms Thompson, has deposed that it acted in good faith in this respect, the Court is required to test that assertion   against   the   factual   background   as   it   must   have   been   known   to Ms Thompson at the time when the payment was received.

[20]     All that Ms Thompson apparently had to go on was that HEL had always been a slow payer and that pattern was now continuing following the opening of the account in relation to the Purewa contract.  It is not implausible that it did not occur to her that the continuing late payments from HEL were symptomatic of the insolvency or that she failed to foresee that within a period of four months HEL would be in liquidation.  She could be sanguine without being dishonest about the prospects that HEL would be able to carry on business into the future.  It would only

be in the event of an insolvency that issues concerning preference to ACL would arise.

[21]     My conclusion is that ACL has established the required good faith under s

296(3)(a).

Grounds to suspect HEL was insolvent

[22]     The first issue that I propose to deal with in relation to s 296(3)(b) is whether a reasonable person in the position of ACL would not have suspected that HEL was or would become insolvent.  Both parties accepted that the explanation of what the expression “suspected” means given in the case of Queensland Bacon Pty Ltd v Rees ought to be adopted.6   Kitto J took the view that:

A suspicion  that  something  exists  is  more  than  a  mere  idle  wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust amounting to ‘a slight opinion, but without sufficient evidence’ … consequently, a reason to suspect that a fact exists is more than a reason to consider or look at the possibility of its existence.

[23]     To much the same effect, although briefer, is the definition of the word

“suspect” in the Oxford English Dictionary:7

To imagine something evil, wrong, or undesirable in (a person or thing) on slight or no evidence; to believe or fancy to be guilty or faulty, with insufficient proof or knowledge; to have suspicions or doubts about, be suspicious of.

[24]     I was also referred to the case of Sutherland v Eurolinx Pty Ltd8  in which Santow J drew attention to a number of features in the process of determining whether there was or should have been the requisite suspicion, pointing out that it is a question of looking, not in hindsight but through the contemporary eyes of the parties,  at  the  commercial  circumstances  then  prevailing  between  them.    This involves ascertaining which of the factors were apparent to the payee and the cumulative impact that knowledge of them should have had, or did have, upon the

payee, and bearing in mind that there may be potentially countervailing factors and

6 Queensland Bacon Pty Ltd v Rees (1967) 115 CLR 266 at 303.

7 Lesley Brown (ed) The New shorter Oxford English Dictionary on historical principles (4th ed, Clarendon Press, Oxford, 1993) vol 2 at 3162

8 Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230, 37 ACSR 477 at 483-484, [43]-[48].

circumstances to be weighed in the balance which could tend to dispel suspicion at the time.

[25]     The only comment that I would make on the passage from Sutherland is to note that the burden of proof of establishing such countervailing factors and circumstances rests with the creditor who of course has had the opportunity to give evidence about all matters which it considers relevant to the question that the Court is required to resolve.

[26]     Insolvency in the statutory context under consideration would not appear to be different from the concept that appears throughout the Companies Act and which refers to the inability of a party to pay its debts when they fall due for payment. Neither party submitted that it was materially different.  That leads to the question of what a reasonable person would have made of the failure on the part of HEL to meet the liability that it owed to ACL.

[27]     Both the creditor companies acknowledged that there had been a history of tardy payments on the part of Hurlstone and that threats of enforcement had had to be  taken.    The  point  was  made  for  each  creditor  that  mere  proof  of  financial difficulty is not sufficient.  The submission was made that financial difficulty is not

to be equated with insolvency.   In reliance on Australian authority,9  it was also

submitted that the conclusion of the insolvency “ought to be clear from a consideration  of  the  debtor’s  financial  position  in  its  entirety,  and  generally speaking, ought not to be drawn simply from the evidence of a temporary lack of liquidity.”

[28]     The question, then, is what relevance the length of the period during which there has been non-payment of liabilities owed has on the question which the Court has to determine pursuant to s 296(3)(b).   Is it something that can reasonably be viewed as pointing to the fact that the company was either insolvent or at risk of

insolvency?

9 Sandell v Porter (1966) 115 CLR 666 (HCA) at 670.

[29]     The most common reason for businesses failing to pay their debts is because they cannot.   Cases are not unknown where a business holds back payment of its creditors as a matter of election even though they could pay their debt.  They might be motivated when doing so by the wish to reduce interest charges that they would otherwise have to pay, for example.   Sometimes the failure to pay debts may be attributable to something as simple as poor office administration.

[30]     It is however a matter of the facts of each particular case.  There will be other cases where a business fails to pay even after a high degree of pressure is imposed on it such as cutting off supply of materials, freezing credit accounts, and thereafter escalating to threatening appointment of receivers or calling up of any security held for the debt where those remedies are available.  In other cases, the debtor will have placed the debt in the hands of debt collection agencies or solicitors for enforcement and then issued Court proceedings i.e. the issue of statutory demands and/or winding up proceedings.  Where steps of this kind have been taken, common sense indicates that the likely cause of the problem is that the debtor has not paid because it cannot. Non-payment is not a result of inadvertence or of a deliberate decision to not pay an account that the debtor could pay if it was minded to.

[31]     As  well,  where  the  debtor  is  dependent  upon  continuing  the  trading relationship with the creditor, so that he or she will be caused difficulties if that comes to an end, it is unlikely that the creditor will withhold payment which could result in the termination of the relationship, unless he or she is driven to doing so. HEL must have known that if it did not pay its accounts promptly there was a real risk of that happening.   It was at risk because HEL required continuing concrete supplies for the Purewa contract.  Yet it did not pay the accounts promptly with the predictable result that ACL declined to make further supplies.

[32]     Despite counsel for the creditor companies making the point that mere proof of financial difficulty is not sufficient, there is authority that the failure to make payments when due does give rise to an inference of insolvency.   In the English Court of Appeal case of Re Taylor’s Industrial Flooring Limited a creditor was seeking a winding up of the company.  The creditor had not served the equivalent of what in New Zealand is described as a statutory demand under s 289 Companies Act

1993.  In that case there had been a history of non-payment of undisputed invoices. The Judge at first instance did not consider that the failure to pay pointed to insolvency.  In the Court of Appeal, Dillon LJ dealt with that point in the following

way:

The short answer to the judge's view is twofold. They run together. The first limb is that if a debt is due and an invoice sent and the debt is not disputed, then the failure of the debtor company to pay the debt is itself evidence of inability to pay. That appears from the judgment of Harman J in Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114; (1986) 2 BCC 98,942. The WLR headnote states correctly that,

“where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that, accordingly, the defendants could properly swear to their belief in the plaintiff company's insolvency and present a petition for its winding up …” The judge refers in passing to a statement by Vaisey J in an earlier case ( Re a Company (1950) 94 SJ 369 ):

“Rich men and rich companies who did not pay their debts had only themselves to blame if it were thought that they could not pay them.” It is not right to say, as was submitted to us by Mr Sterling,

“well, it may be just that they do not want to pay and so you cannot from non-

payment of an undisputed debt deduce inability to pay.”

[33]     In my respectful opinion, those conclusions are reflective of common sense.

[34]     I do not regard it as being relevant to the question of what a reasonable person would make of repetitive non-payment of undisputed invoices that it had been the experience of ACL for many years that HEL was a slow payer.  All that means is that inferentially it could be concluded that HEL had been insolvent for a long time.

[35]     I also do not consider that the views of the High Court of Australia in Sandell v Porter which I have noted earlier assist ACL.   In the context of s 296 there is nothing to suggest that a reasonable person would have had to have access to full information about the company of the kind contemplated in that case before it could have reasonable grounds for the suspicion that the company was insolvent.  Section

296(3)(b) is concerned with the actual circumstances which confront the creditor and what is relevant is the reasonableness of the creditor’s belief based upon those circumstances.  It would not be an answer to an application under s 296 for a creditor

to say that because it did not know of the financial circumstances of the debtor in detail, there was no reason to have suspected actual or impending insolvency.

[36]     Counsel for the applicant, Mr Gustafson, referred me to decided cases in which companies which had served statutory demands on the debtor subsequently found themselves in the position of having to prove the matters required by section

296(3)(b).   One such case was Chicago Boot.10    The Court on appeal in that case

would not go so far as earlier judgments when they concluded that a party who serves a statutory demand will have real difficulty in later asserting that it did not have concerns about the solvency of the debtor.   White J in the  Chicago Boot decision noted that service of a statutory demand as a means of enforcing collection of an unpaid debt was not per se objectionable.11    The fact that a statutory demand had been served did not necessarily reflect the view on the part of the creditor that the company was insolvent.  That said, White J continued,

[83]      Nevertheless, the fact that a creditor as an act of last resort, considers the service of the statutory demand to be appropriate will usually be a very relevant consideration.

[37]     The circumstance in this case that ACL served a statutory demand was of considerable  significance.    There  is  no  evidence  about  the  extent  to  which  the relevant employee/s of ACL considered the significance of service of a statutory demand.   Even  if  the  company’s motive in  instructing the solicitors  to  issue a statutory demand was simply to enforce the debt, it seems likely that the employees would have had some understanding of the consequences of HEL not paying the debt within the 15 working day period allowed for that purpose by the statutory demand. It would seem likely that a credit manager in the position of Ms Thompson would know that the expiry of the statutory demand without payment would constitute evidence available to ACL in winding up proceedings that HEL was insolvent.  Even if the employee did not know that, it would seem likely that a responsible solicitor acting would have given advice on that subject.  To summarise, it is likely that the company would have known that the issue of the statutory demand was a serious

step because of its potential to facilitate the seeking of a Court ordered liquidation.

10 Chicago Boot Company Pty Ltd v Harris Scarfe Ltd (Receivers and Managers Appointed) (in Liq)

[2011] SASCFC 92, 282 ALR 378.

11 At paragraph 21.

If  that  is  correct,  it  adds  some  weight  to  the  evidence  pointing  towards  the company’s understanding that HEL was insolvent.  Such a step is less likely to be taken by a company against a client in circumstances where there are no concerns about the client’s solvency than in cases where the reverse is true.

[38]     I do not overlook the fact that ACL said that it was influenced in its view about the solvency of HEL by the fact that it was in business on a large scale and that it had been in business for some years.  Also Mr Ormsby submitted to me that amongst the relevant factors the Court ought to take into account were that “it was Allied’s belief that any cashflow problems Hurlstone was experiencing were temporary and caused only through disagreements with KiwiRail over payments due to Hurlstone.   Hurlstone explained to Allied that the cashflow problem was an

extraordinary situation.”12

[39]     There was reason to consider at the time that this explanation may or may not have been true.   A reasonable person would have taken the view that it was very much dependent upon all of the factual circumstances.   Of course, if HEL had demonstrated over the trading period between the two companies that it was punctilious about making payments when required, the explanation that was offered for a late payment which was out of character may have been acceptable.  However, the situation just described was a long way distant from HEL’s.   Given HEL’s history, a reasonable person in ACL’s position could well be excused for doubting the explanation and treating it as, at best, wishful thinking on the part of HEL.  Such a person may have taken the view that the latest failure to pay on time was further evidence of a chronic inability on the part of HEL to pay its debts as they fell due.

[40]     My conclusion is that the first part of s 296(3)(b) has not been proved: it has not been established that a reasonable person would not have suspected insolvency. Further, the second element of s 296(3)(b) has not been established as it has not been shown that ACL did not have reasonable grounds to suspect that that company was

or would become insolvent.

12 Thompson 26/11/2012 at "F" BOD122.

Did ACL give value?

[41]     The third element that a creditor in the position of the respondent has to establish is that at the time when it received the property it gave value for the property or altered its position in the reasonably held belief that the transfer of the property to it was valid and would not be set aside.

[42]     The parties took opposing views on the meaning of the statutory requirement. Ms Webber who presented part of the submissions concerned with this section on behalf of the respondent said that the respondent was able to satisfy this position by demonstrating that by its actions in supplying concrete, which was the provision of goods that gave rise to the debt in the first place, the applicant “gave value”.  I do not accept that such a submission reflects the true meaning of the section.

[43]     There have been several authorities which have looked at the meaning of the section and have come to different views.   In the first place, in the only Court of Appeal decision that deals with s 296(3)(c), a different conclusion from that argued for by the respondents was reached.13   The case in question was Levin v Rastkar.14

[44]     As Mr Gustafson noted, at paragraph 56 of that judgment the Court noted:

[56]     To successfully invoke s 296(3), the respondent must show that she gave value for the property, or altered her position in the reasonably held belief that the company’s payment to Amarine was valid and would not be set aside.  She did not give value to the company when she directed that the company make the payment.

[45]     So the question of whether or not the party receiving the payment gave value for the property is to be read as relating to the transfer of the property which the creditor received - which is the transaction that the court is being asked to set aside.

[46]     The second point that Mr Gustafson raised concerned the actual wording of the section.  Mr Gustafson referred to s 5(1) of the Interpretation Act 1999 which

states:

13 Levin v Market Square Trust [2007] NZCA 135; [2007] 3 NZLR 591 concerns the “good faith”

element of s 296(3) and due to the conclusion on that point, does not go on to consider “value”.

14 Levin v Rastkar [2011] NZCA 201.

(1)      The meaning of an enactment must be ascertained from its text and in the light of its purpose.

[47]     Mr Gustafson pointed out that s 296(3)(c) reads:

... if the person from whom recovery is sought (A) proves that when A

received property ... A gave value for the property or altered A’s position.

[48]     Mr Gustafson submitted that a fair reading of the text is that, when the insolvent transaction subject matter was received by the creditor, it gave value or changed its position.   The parties were not able to agree that that was what the section meant.  That issue will have to be resolved in this judgment.

[49]     Subsection 3 as a whole is concerned with recovering transfers of property pursuant to an insolvent transaction.   The transaction is not to be set aside under s 292 and the other relevant sections on the grounds that the original transaction was not supported by consideration or that the transaction resulted in detriment.

[50]     The approach that I consider to be preferable puts the focus not on whether “value” was provided when the original transaction giving rise to the debt was entered into, but focuses on the circumstances that applied at the time when payment of the debt took place.  That is to say, the preferable approach views the purpose of the provision as being to ensure that even if the underlying transaction was a valid one and the resulting debt was enforceable, payment of that debt should nonetheless be set aside because of the timing of it.

[51]     In the first place, the section invites attention to the point of time when the person from whom recovery is sought “received property".  The property in question is the property which the liquidator seeks to recover.  In the factual circumstances of this  case,  the  property  comprises  the  payments  that  were  received  during  the specified period.   Such “value” as the respondents gave at the time when they supplied concrete to HEL is irrelevant.

[52]     In any case, it is difficult to understand why the Court in the context of recovering voidable payments made during the specified period by way of payment of debts should be required to undertake an enquiry into matters usually associated

with the enforceability at common law of the underlying obligation which gave rise to the debt since repaid.  There would be no need for such a review of whether the original transaction was one for which value was given when it is recalled that one of the primary obligations of the liquidator15 is to establish which claims are admissible in the liquidation and which are not.   There is a broad discretion reposed in the liquidator which should be sufficient to extend to disallowing claimed liabilities

because they represent obligations of the company which were not incurred in return for  “value”.    As  well,  a  person  seeking  to  retain  property  received  during  the specified period has to demonstrate good faith - an obligation that would be difficult to discharge if the original transaction had not been one involving the giving of value on the creditor’s part.

[53]     Further, it could also be argued that enquiries into whether a creditor “gave value” in  relation  to  the original  transaction  are dealt  with  under  s  297  of the Companies Act which deals with transactions at undervalue with a company that is in liquidation.

[54]    It is also helpful to consider the policy behind the voidable transaction legislation.  As to that, it would seem that the provisions are intended to reflect the wider objectives behind the process of liquidation which has been described in the following terms:16

The primary object of liquidation proceedings has therefore been described as the collection and distribution of the assets among unsecured creditors after payment of preferential debts. The long title to the Act includes a reference to providing “straightforward and fair procedures for realising and distributing the assets of insolvent companies”. The objectives of the law in this area have also been identified as:

to maximise returns to creditors;

to provide a fair and equitable regime for making claims (at the heart of which is the pari passu principle);

...

15 Under section 304 of the Act

16 P Heath and M Whale (eds) Heath and Whale on Insolvency (online ed, LexisNexis) at paragraph

20.1.

[55]     The allocation of the resources of a company in liquidation are to be applied equally to the debts of the various creditors throughout a period commencing from when the company became insolvent, which obviously predates the date when the liquidation order was made by the Court or a resolution was passed.  It is difficult to see how the fact that a creditor may have given value at the time the original debt was incurred can have any relevance when it comes to distinguishing the case of a creditor  who  has  actually  managed  to  obtain  payment,  in  distinction  from  the position of the bulk of the creditors who have not.  As a generalisation, all of the creditors (including those who were not fortunate enough or sufficiently streetwise to get payment) will have supplied good consideration for debts which they now seek to be paid.

[56]     On the other hand, if all that a creditor had to do in order to receive a preference over the general body of creditors, was to show that it acted in good faith and did not receive its payment in circumstances where insolvency ought to have been suspected, then it may be that the large bulk of the remaining creditors could protest that they behaved in the same way and yet would not be receiving any degree of preference.

[57]     It is to answer the last-mentioned concerns that the legislature requires that there be some special circumstance relating to the circumstances in which the payment was received which would result in it being unjust for the creditor to now have to disgorge the payment which it obtained.  If this approach is correct, then in terms of temporality, the relevant circumstances which distinguish the position of the individual creditor from the general body of creditors will have occurred during the specified period.  This approach therefore harmonises with the concentration of the words of s 296(3) on the time “when A received the property”.

[58]     My conclusion is that it is unlikely that the legislature intended for the Court, when considering whether a creditor ought to give back a payment received during the specified period, to be focusing on the circumstances of the original transaction which, after all, may have occurred long before the commencement of that period.

[59]     It is not a straightforward task to ascertain what the legislature meant when it imposed a requirement that “A gave value”.  The question of what would qualify as the giving of value does not need to be considered in general terms in the circumstances of this case.   Obviously the Court would have to examine in the circumstances of each case as it arose whether there was some substantial advantage accruing to the debtor.   In the circumstances of this case, it is not necessary to engage in such an enquiry.  This is because the only way in which it is argued that the creditor gave value relates to the original transaction out of which the disputed debt arose.  Having regard to the view that I take on the meaning of the section, the giving of value in that context does not bring the case within s 296(3)(c).

[60]     If the approach that I have taken to interpretation of the section is correct, ACL is not able to point to any circumstance that would amount to giving value.  It is  therefore  not  able  to  prove  the  matters  that  it  is  required  to  prove  under  s

296(3)(c).

The position of AML

Background

[61]     The liquidators are seeking to have set aside payments made to AML by an

HEL as follows:

a)        22 March 2011 in the sum of $3651.48; and b)           20 June 2011 in the sum of $10,743.96.

[62]     The payments relate to concrete which AML supplied to HEL between 26

January 2011 and 3 March 2011.  The January invoices were paid on 22 March and the February and March invoices on 20 June 2011.

Good faith

[63]     When reviewing the application which has been made in regard to AML, the same exercise has to be undertaken as was followed in relation to ACL.  The first point is whether when it received the payments AML did so in the absence of any

belief that receiving the payments could have the effect of conferring on it a preference when its position was compared with other creditors.

[64]     The  credit  controller  for  AML,  Ms  McLeod-Young,  has  said  that  AML received the payments in good faith.  She said there was nothing out of the ordinary in the trading relationship between AML and HEL which indicated to her company that HEL was in financial difficulty at the time of the payments.  She said that the HEL payments were received in June 2011 on February and March invoices that had been outstanding for 90 to 100 days “which was not unusual”.  She said that AML did not have knowledge or suspicion that it was being treated differently from any other creditor of HEL in receiving the payments.

[65]     The requirement of good faith poses a subjective criterion which the payee must satisfy.  The only evidence that was given on this issue for the company was that of Ms McLeod-Young.   While she was cross-examined, there was no cross- examination on the subject of good faith.

[66]     There is nothing about the background which requires the Court to view the evidence that Ms McLeod-Young has given on this point as inherently improbable or unreliable.   I conclude that the first subparagraph of the statutory test has been satisfied.

Grounds to suspect that HEL was insolvent

[67]    The liquidator took the position that when it came to establishing what information AML had about the financial circumstances of HEL, the enquiry should not be restricted to what the relevant employee of AML, Ms McLeod-Young, had had communicated to her but also as a matter of fact the Court could have regard to information in the hands of her counterpart employee in ACL, Ms Thompson.  Mr Gustafson for the liquidator wanted in particular to establish that having regard to their work practices and the environment in which they work, what was known to Ms Thompson about HEL could safely be assumed to be known by Ms McLeod- Young as well.

[68]     The applicant said that this was the correct approach because there was a close link between the two companies and in particular between the credit controllers of the two companies, Ms Thompson and Ms McLeod-Young.   Counsel for the applicant attempted to demonstrate that both companies pooled the information that they had about HEL.   This came about because Ms Thompson and Ms McLeod- Young worked in the same premises, and indeed side-by-side.  They have the same postal address and fax number.  Ms Thompson was the direct point of contact for any queries regarding AML when Ms McLeod-Young was away from the office.  In fact Ms Thompson was in direct contact with HEL with regard to the receipt of the second AML payment and exchanged some e-mails detailing the problems that they were having with HEL.   As well, the submissions were made that both AML and ACL supplied concrete to HEL pursuant to the same Credit Application Form dated

22.12 2010.  Mr Gustafson pointed out that Ms Thompson advised HEL on 3 March

2011 that HEL’s account had been placed on stop credit and that “given her role as credit controller for AML, Ms McLeod-Young must also have been aware of this fact.”

[69]     Quite apart from the actual sharing of information, Mr Gustafson submitted that because the two staff members are employed by the same holding company, information that the one had must be imputed to the other.

[70]     Mr Ormsby submitted that the two women were responsible for separate client accounts.   Ms McLeod-Young gave evidence that she and Ms Thompson worked independently and did not actively share information about the credit management of a customer.   He said that the two companies are separate entities which are run separately and accordingly the knowledge of ACL should not be imputed to AML.

[71]     Ms McLeod-Young said that the holding company of which AML was a subsidiary had 26 subsidiary companies.  She said that she was responsible for AML and two other companies in the group.   She said that she had just under 7000 customers under her control and that Ms Thompson had just under 5000.   She estimated that about 20% of the customers were held in common and “so there is no way we can cope with exchanging every common customer’s information”.

[72]     Ms McLeod-Young agreed that both she and Ms Thompson reported to a Mr Officer who was the general manager of both ACL and AML.   It was further evidence that she acted autonomously in making decisions about matters such as stopping credit and instructing solicitors to enforce delinquent accounts.  She agreed that she reported to Mr Officer.   She said that Mr Officer got lists  of overdue companies on a regular basis from both companies.

[73]     It was the submission of Mr Gustafson that the “directing minds” of the two companies must have known about the problems with HEL.   As I understand his submission, the “directing minds” would include the two credit controllers and also Mr Officer.

[74]     The particular matter of fact that the liquidator claimed Ms McLeod-Young knew about was the issue of the statutory demand which ACL issued in March 2011. The short point was that if AML had known about the statutory demand at the time when it received the payments, that fact would have a bearing upon the suspicion of insolvency which is relevant under s 296(3)(b).

[75]     At some point, Ms McLeod-Young knew that HEL was indebted not only to her  company  but  also  to  ACL.    She  explicitly  accepts  that  in  May 2011  in  a conversation she had with a representative of HEL, she was told that the debtor would be paying off the ACL liability in priority to that which was owed to AML. She also said that she had been aware that HEL “was also slow at paying ACL over this time,” which I take to be a reference to the period March through May 2011.

[76]     One   particular   background   fact   that   may   have   significance   is   that Ms McLeod-Young went on leave 10 June 2011.  She was away for 3 1/2 weeks. That means that she must have been absent from work when the payment which HEL made on 20 June 2011 was received.   However, she resisted any suggestion that during her absence Ms Thompson would have had responsibility for the continuing management of the AML debt.  She said the automated message response that she left when she went on leave advised that “for any urgent credit issues please contact Wendy Thompson”.  The applicant wanted to establish that Ms Thompson had taken over control of the HEL file at the relevant time because that would

establish that AML had notice by that means of the fact that at the time when the payment was made, the payee knew that a statutory demand had been served on the debtor, HEL.

[77]     Similar attempts were made to show that the general manager of both ACL

and AML had knowledge of the common features of both companies’ debts.

[78]     In the end, I do not regard the issue of service of the statutory demand as being of critical importance.  The statutory demand had not been served by the date that AML received the March payment.

[79]     While AML did not serve a statutory demand itself, it did send a seven-day letter of demand to 24 February 2011, 4 March 2011 and 16 May 2011.  Further, Ms McLeod-Young says that the company was “put on stop” as part of the 4 March letter.  This meant that from that date the company was being advised that further supplies on credit were not available to it.  She stated her view that these letters were “sent  as  a  matter  of  process  and  not  because  AML  had  concerns  about  the company’s financial situation”.

[80]     In summary, the position that was disclosed at March 2011 when the first of the impugned payments was received was that HEL had been in substantial arrears in making payments of undisputed debts.  The position was that by that time, HEL was either 60 or 90 days in arrears.

[81]     Brief mention also needs to be made of the relevance of the belief that AML apparently had that it held security over the assets of HEL with regard to the debt. Ms McLeod-Young does not mention whether that played any part in the level of assurance which the company, according to her, felt about the debts which HEL owed.   It has since transpired that a security which AML thought it had was not effective.

[82]     It is not necessary to repeat the observations made when dealing with the case of ACL about circumstances in which a deliberate choice not to pay a disputed debt will  give  rise  to  an  inference  of  insolvency.    I  refer  here  to  the  discussion  at

paragraph [32] and following earlier in this judgment.  In my judgment, it cannot be

said that a reasonable person in AML’s position did not have, in the words of s

296(3)(b) reasonable grounds for suspecting that the company was, or would become insolvent.  Any reasonable person with a proper understanding of what the concept of insolvency involves, would have taken the view in March 2011 that HEL was insolvent.  The position is, if anything, strengthened with regard to the June payment by the fact that the omission to pay had by then extended out to 120 days.  The fact that such delays were in no sense novel in the trading relationship between AML and HEL is neither here nor there.  My conclusion is that AML is unable to prove the required elements set out in subsection (3)(b).

[83]     Because  of  the  conclusions  that  I  have  reached  above,  it  is  not  strictly necessary to consider whether AML has established the requirements of s 296(3)(c) , namely that it gave value for, or altered its position in the reasonably held belief that the payments were valid and would not be set aside.  I dealt with this issue in the part of  this  judgment  dealing  with  the  claim  that  ACL  had  given  value.    It  is  not necessary to repeat in its entirety what I said about payment for the supplies of concrete qualifying as the giving of value for the purposes of subsection (c).  In my view they do not so qualify.

[84]     The further issue is raised that in reliance upon receipt of the payments, AML

discharged its financing statement from the Personal Properties Security Register on

15 July 2011.  Because that security proved to be invalid, the purported relinquishing of it on the part of AML did not constitute actual detriment stemming from a change of position.  It follows that the company has not satisfied this requirement of section

296(3) either.

Summary of conclusions

[85]   The conclusions in this judgment are first that it is accepted that both respondents acted in good faith in accepting the payments that they did.  The next conclusion is that HEL’s repeated failure to pay undisputed debts throughout the period  under  scrutiny  in  this  proceeding  gave  rise  to  an  inference  that  it  was insolvent during that time.  Further, the respondents have not been able to prove that a reasonable person in the position of the respondents would not have suspected that

the company was insolvent.   As well, the belief that the two respondents had that

HEL was not insolvent was not supported by reasonable grounds.

[86]     Finally, the conclusion of the Court is that to qualify as the giving of value under s 296(3)(c), something more is required than proof that the original debt, payment of which has given rise to allegations of preferential dealing, was supported by proper consideration.

Postscript

[87]     Since  drafting  this  judgment  the  Court  of  Appeal  decision  in  Farrell  v Fences17 has come to hand which determines authoritatively that the point at which “value”  is  to  be  given  is  at  the  time  when  the  alleged  preferential  payment  is received by the creditor.

Orders

[88]     I  grant  the  orders  which  are  sought  in  paragraphs  1.1  and  1.2  of  the originating  applications  in  proceeding  CIV  2012-404-  6612  and  CIV2013-404-

1147.

[89]     My provisional view is that that costs should be payable on a 2B basis.   I suggest that it should be relatively straightforward to decide which of the parties should pay costs because of the provisions of r 14.2 High Court Rules.  However, if either party wishes to be heard on the matter of costs they are to file submissions within 10 working days.  Such submissions, if made, are not to exceed four pages in

length.

J.P. Doogue

Associate Judge

17 Farrell v Fences & Kerbs Ltd [2013] NZCA 91.

Solicitors:

Lowndes Jordan, Auckland

(Counsel: Mr Bret Gustafson – [email protected])

Wynn Williams, Christchurch – [email protected]