Petterson v Crombie
[2014] NZHC 1371
•18 June 2014
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2013-441-223 [2014] NZHC 1371
UNDER section 293(1A)(b) Companies Act 1993 IN THE MATTER OF
Nature Green New Zealand Limited (in liquidation)
BETWEEN
DAVID ROSS PETTERSON as liquidator of NATURE GREEN NZ LIMITED (in liquidation)
Applicant
AND
COLIN IAN CROMBIE Respondent
Hearing: 3 April 2014 Counsel:
D M Hughes and L M Van for Applicant
N Gray for RespondentJudgment:
18 June 2014
RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH
Contents
Background........................................................................................................................................ [2] Sections 293 and 296(3) of the Act ................................................................................................. [21] The Respondent’s Opposition ........................................................................................................ [23] The Parties’ Submissions ................................................................................................................ [24]
The Liquidator .............................................................................................................................. [24] The Respondent ............................................................................................................................ [40]
Discussion......................................................................................................................................... [52]
Was the 2012 GSA a “substituted charge”? .................................................................................. [54] Did the value of the property subject to the 2012 GSA at the date of the substitution exceed the
value of the property subject to the 2010 GSA? ........................................................................... [67]
Is the Liquidator estopped from recovering the sum of $212,728.79 received by Mr Crombie in
DAVID ROSS PETTERSON as liquidator of NATURE GREEN NZ LIMITED (in liquidation) v COLIN IAN CROMBIE [2014] NZHC 1371 [18 June 2014]
February 2013?................................................................................................................................ [73]
Is the liquidator precluded from recovering the $212,728.79 from Mr Crombie by s 296(3)(b) of the Companies Act?......................................................................................................................... [80]
Orders: ............................................................................................................................................. [87]
[1] The applicant (the liquidator) is the liquidator of Nature Green (NZ) Limited (in liquidation) (Nature Green). By originating application dated 4 November 2013 (the application), the liquidator applies for orders:
(a) under s 293 of the Companies Act 1993 (the Act), setting aside a General Security Agreement dated 8 June 2012 (the 2012 GSA) given by Nature Green to the respondent, Mr Crombie;
(b) that a financing statement registered on the Personal Properties
Securities Register (the PPSR) on 11 June 2012 in respect of the 2012
GSA, be removed from the PPSR;
(c) directing Mr Crombie to pay to Nature Green the sum of $212,728.79, being the net amount received by Mr Crombie following the sale of certain leaf stock secured by the 2012 GSA, or in the alternative an order that Mr Crombie pay to Nature Green the amount the Court considers represents the benefit received by him under the 2012 GSA; and
(d) costs.
Background
[2] Nature Green was a charitable company established to promote and exploit the development of Ginkgo Biloba trees grown in New Zealand for the production of dried leaf and powdered extract for sale to the domestic and international markets.
[3] In 2010, Mr Crombie advanced $250,000 to Nature Green, repayable by two instalments of $100,000 and $150,000 on 31 March 2011 and 31 March 2012 respectively.
[4] To secure the loan, Nature Green granted Mr Crombie specific security over the 2010/2011 Ginkgo leaf stock purchased by Nature Green. The security was given by General Security Agreement dated 14 April 2010 (the 2010 GSA). The loan was limited to $250,000 plus interest, credit fees, charges, and other costs and expenses.
[5] Mr Crombie advanced the $250,000 to Nature Green on 15 April 2010.
[6] At the time of the 2010 GSA, the 2010/2011 leaf stock was secured under a prior security Nature Green had given to the ANZ bank (the bank). On 26 April
2010, the bank agreed to subordinate its interest in the 2010/2011 leaf stock, under a deed of priority of charges executed by the bank and Mr Crombie.
[7] Nature Green fell behind with its interest payments, but in November 2011 it secured a sale of 60 tonnes of the 2010/2011 leaf stock which was subject to the
2010 GSA, to an Italian company called Indena. The proceeds of this sale (€180,000) were received by Nature Green on or about 23 December 2011. Mr Crombie was entitled to receive those proceeds as the holder of the first ranking charge over the 2010/2011 leaf stock, but the proceeds were never paid to him. Instead, they were deposited into Nature Green’s foreign currency account with the bank. Thereafter, the proceeds were applied by Nature Green to its expenses, and converted to New Zealand dollars to repay its overdraft with the bank.
[8] Nature Green then sought further funding from the bank, but in view of Mr Crombie’s prior ranking security over the 2010/2011 leaf stock the bank declined to provide further funding. Nature Green then sought a release of the 2010 GSA by Mr Crombie, so that it could obtain further funding from the bank and to permit the balance of the 2010/2011 leaf stock to be sold.
[9] On 19 April 2012, Mr Crombie advised the bank that he would release his first ranking security over the 2010/2011 leaf stock, in return for new security over Nature Green’s 2012 leaf stock.
[10] Nature Green then sold the balance of the 2010/2011 leaf stock to Indena for
€125,385 (NZ$187,487.15). That sum was paid to the bank to reduce Nature
Green’s overdraft.
[11] The discharge of the 2010 GSA was documented by deed of discharge of security interest dated 8 June 2012. Contemporaneously, Nature Green granted Mr Crombie security over its 2012 leaf stock pursuant to the 2012 GSA. No new value was provided by Mr Crombie for the 2012 GSA.
[12] A financing statement evidencing Mr Crombie’s interest under the 2012 GSA
was registered on the PPSR on 11 June 2012.
[13] On 3 July 2012, Nature Green was put into liquidation.
[14] A deed of priority of charges giving the 2012 GSA first ranking security over the 2012 leaf stock was completed by the bank on 6 July 2012.
[15] The liquidator was appointed at a meeting of Nature Green creditors held on
29 October 2012. In the course of his early investigation into the affairs of Nature Green he obtained copies of documentation relating to the 2012 GSA, and spoke to Mr Crombie about it. Mr Crombie advised him that the 2012 GSA was given in substitution for the 2010 GSA he had held, and the liquidator initially accepted that view, treating the 2012 GSA as a valid substituted security under s 293(1A)(b) of the Act.
[16] On 2 November 2012 the liquidator sent an email to Mr Knight, a former director of Nature Green, with a copy to Mr Crombie. In the email the liquidator said:
Having reviewed the records of Nature Green regarding the leaf I have concluded that it is the property of Colin Crombie pursuant to his registered charge. Therefore any arrangements regarding the sale or otherwise of the
leaf should be completed with Colin. The Liquidator has no ongoing interest in the leaf stock.
[17] And in a report dated 1 November 2012 to Nature Green’s liquidation
committee, the liquidator stated:
(a) On 8 June 2012, Crombie agreed to discharge his 2010 security interest. The consideration for the discharge was the execution by Nature Green of a new GSA securing the 2012 leaf crop that by that time had been purchased by the company from the growers. Again, the bank agreed to Crombie having a priority ahead of itself and duly executed a deed to that effect on or about 6th July 2012.
(b) Having reviewed these documents I formed the opinion that the
2012 leaf crop is the property of Crombie and therefore his to dispose of in accordance with his security.
(c) Accordingly I have advised Colin Crombie by letter that: (i) The 2012 leaf stock is his, pursuant to his security.
(ii) The Liquidator formally disclaims any interest in that stock.
(iii) All risks of storage, shipping, sale and currency conversion are to his account and not the company.
(iv) He will have to make his own arrangements for its storage, shipping and realisation (I understand that John Knight is assisting in the process).
[18] The 2012 leaf stock was subsequently sold to Indena, and a net amount of
$212,728.79 was paid to Mr Crombie on 20 February 2013.
[19] The liquidator says that he subsequently realised, as a result of the discovery of further Nature Green records, email traffic between the directors of Nature Green and Mr Crombie (recovered from the computers of Napier City Council after a notice had been issued to the Council under s 261 of the Act), and files and records received from the bank, that Mr Crombie’s initial advice that the 2012 GSA was a substituted security, was incorrect. The liquidator now contends that the 2012 GSA secured past indebtedness owed by Nature Green, was granted by Nature Green within the “specified period” (as that expression is defined in s 293 of the Act) and is not protected by the s 293(1A)(b) saving for charges given in substitution for charges given before the specified period.
[20] Correspondence followed between the solicitors for the parties, and on
22 August 2013 the applicant served on Mr Crombie a notice to set aside the 2012
GSA. Mr Crombie made a timely objection to the notice to set aside, and the present application was then filed.
Sections 293 and 296(3) of the Act
[21] Section 293 of the Act provides:
293 Voidable charges
(1) A charge over any property or undertaking of a company is voidable by the liquidator if—
(a) the charge was given within the specified period; and
(b) immediately after the charge was given, the company was unable to pay its due debts.
(1A) Subsection (1) does not apply if:
(a) the charge secures money actually advanced or paid, or the actual price or value of property sold or supplied to the company, or any other valuable consideration given in good faith by the grantee of the charge at the time of, or at any time after, the giving of the charge; or
(b) the charge is in substitution for a charge given before the specified period.
(2) Unless the contrary is proved, a company giving a charge within the restricted period is presumed to have been unable to pay its due debts immediately after giving the charge.
(3) Subsection (1A)(b) does not apply to the extent that—
(a) The amount secured by the substituted charge exceeds the amount secured by the existing charge; or
(b) The value of the property subject to the substituted charge at the date of the substitution exceeds the value of the property subject to the existing charge at that date.
(4) Nothing in subsection (1) of this section applies to a charge given by a company that secures the unpaid purchase price of property, whether or not the charge is given over that property, if the instrument creating the charge is executed not later than 30 days after the sale of the property or, in the case of the sale of an estate or interest in land, not later than 30 days after the final settlement of the sale.
(5) For the purposes of subsection (1A)(a) and subsection (4) of this section, where any charge was given by the company within the period specified in subsection (1) of this section, all payments received by the grantee of the charge after it was given shall be deemed to have been appropriated so far as may be necessary—
(a) Towards repayment of money actually advanced or paid by the grantee to the company on or after the giving of the charge; or
(b) Towards payment of the actual price or value of property sold by the grantee to the company on or after the giving of the charge; or
(c) Towards payment of any other liability of the company to the grantee in respect of any other valuable consideration given in good faith on or after the giving of the charge.
(6) For the purposes of subsection (1) of this section, specified period means—
(a) The period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b) In the case of a company that was put into liquidation by the Court, the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of the application and ending on the date on which[, and at the time at which, the order of the Court was made[; and]
(c) If—
(i) An application was made to the Court to put a company into liquidation; and
(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
(7) For the purposes of subsection (2) of this section, restricted period
means—
(a) The period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b) In the case of a company that was put into liquidation by the Court, the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of the application and ending on the date on which[, and at the time at which, the order of the Court was made; and
(c) If—
(i) An application was made to the Court to put a company into liquidation; and
(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
[22] Section 296(3) provides:
296 Additional 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.
The Respondent’s Opposition
[23] Mr Crombie accepts that the 2012 GSA will be a voidable transaction under s 293(1) of the Act unless it is saved by the exception at s 293(1A)(b) as a substituted security. Mr Crombie also accepts that any substituted security will be limited to the value and extent of the existing charge at the time of substitution (s 293(3)(b)). However, Mr Crombie says that the liquidator is estopped from resiling from his
decisions that the 2012 GSA was a valid substituted security and to allow Mr Crombie to dispose of the 2012 leaf stock and use the proceeds of sale as he did. In the alternative, Mr Crombie says that s 296(3) of the Act applies, with the result that the Court cannot order the recovery by Nature Green of the $212,728.79 received by Mr Crombie on the sale of the 2012 leaf stock to Indena.
The Parties’ Submissions
The Liquidator
[24] For the liquidator, Mr Hughes submitted that Mr Crombie’s security was extinguished following the sale of the 2010/2011 leaf stock. The 2012 GSA was over different leaf stock (the 2012 leaf stock), and no new value was given by Mr Crombie when Nature Green granted the 2012 GSA. The 2012 GSA secured antecedent debt.
[25] Mr Hughes also submitted that no estoppel can arise, as it would not be unconscionable for the liquidator to resile from his representation. The liquidator was not fully informed prior to giving his consent to the sale of the 2012 leaf stock and to Mr Crombie retaining the proceeds of that sale. The liquidator also denies that any defence is available to Mr Crombie under s 296(3).
[26] Mr Hughes submitted that the onus is on the chargeholder to bring itself within one of the statutory exceptions.1
[27] Mr Hughes referred in his submissions to a number of provisions of the
Personal Properties Securities Act 1999 (the PPSA).
[28] First, s 25 of the PPSA provides that all rights, duties or obligations that arise under a security agreement or the PPSA are to be exercised or discharged in good faith and in accordance with reasonable standards of commercial practice.
[29] Secondly, s 40 of the PPSA provides that a security interest in collateral attaches when certain conditions are met, one of which is the provision of value.
1 Citing Re Australian Co-operative Development Society Ltd [1977] Qd. R 66.
[30] The third section of the PPSA to which Mr Hughes referred was s 45. It provides as follows:
45 Continuation of security interests in proceeds
(1) Except as otherwise provided in this Act, a security interest in collateral that is dealt with or otherwise gives rise to proceeds—
(a) continues in the collateral, unless the secured party expressly or impliedly authorised the dealing; and
(b) extends to the proceeds.
Example
Person A has a security interest in person B’s car. Person B sells the car without person A’s consent.
Person A has a security interest in the car and in the money received by person B from the sale of the car.
(2) The amount secured by a security interest in collateral and the proceeds is limited to the value of the collateral at the date of the dealing that gave rise to the proceeds, if the secured party enforces the security interest against both the collateral and the proceeds. Example
Person A has a perfected security interest in person B’s car.
The car had a value of $6,000 at the date that person A advanced $4,000 to person B.
Two years later, without person A’s consent, person B sells the car for
$3,500, which is the value of the car at that time.
Person A enforces its security interest in the car and the proceeds.
Person A can recover only $3,500 as the amount secured by person A’s security interest.
[31]
The final section of the PPSA to which Mr Hughes referred was s 95.
It
provides as follows:
95 Priority of creditor who receives payment of debt
(1) A creditor who receives payment of a debt owing by a debtor through a debtor-initiated payment has priority over a security interest in—
(a) the funds paid:
(b) the intangible that was the source of the payment: (c) a negotiable instrument used to effect the payment.
(2) Subsection (1) applies whether or not the creditor had knowledge of the security interest at the time of the payment.
(3) In subsection (1), debtor-initiated payment means a payment made by the debtor through the use of—
(a) a negotiable instrument; or
(b) an electronic funds transfer; or
(c) a debit, a transfer order, an authorisation, or a similar written payment mechanism executed by the debtor when the payment was made.
Example
Person A has a perfected security interest in person B’s (a car dealer’s)
inventory (cars).
Person B sells some of the cars and deposits the cash proceeds into a cheque account.
Person B draws a cheque and pays person C (an unsecured creditor).
Person C’s interest in the cheque has priority over person A’s security interest in the cheque.
[32] Mr Hughes acknowledged that there was nothing invalid or defective in the
2010 GSA. But he submitted that there was a partial extinguishment of the security granted under the 2010 GSA following the first leaf sale. In Mr Hughes’ submission, the proceeds from the first leaf sale (60 tonnes sold to Indena in November 2011 for €180,000) were governed by the terms and conditions of the
2010 GSA, and s 45 of the PPSA. Once the proceeds were paid into the bank’s overdrawn account, they were no longer identifiable or traceable in terms of the PPSA. Accordingly, Mr Hughes submitted that Mr Crombie’s security interest in the proceeds was extinguished at that point, and his security was reduced accordingly.
[33] Mr Hughes then submitted that the balance of the 2010/2011 leaf stock was sold in May 2012 (no later than 21 May 2012), before the 2012 GSA was taken. As at the date the 2012 GSA was taken, Mr Crombie’s security had been completely
released. No new value was given for the 2012 GSA; accordingly, attachment did not occur under s 40 of the PPSA.
[34] Mr Hughes referred to the Court of Appeal decision in Parsons v Norris in submitting that a “substance over form” approach should be taken in assessing whether a charge was a substituted charge.2 Applying that approach, he submitted the following matters suggest that the 2012 GSA was not a substituted security, but a fresh security:
(a) The 2010 GSA was released on 19 April 2012 when Mr Crombie gave his consent to the release.
(b)A number of events then occurred, including the sale of the balance of the 2010/2011 leaf stock with Mr Crombie’s consent, all before the
2012 GSA was documented.
(c) Mr Crombie was aware when he took the 2012 GSA that the value of the security under the 2010 GSA had been diminished as a result of the first leaf sale.
(d) No new value was given by Mr Crombie.
(e) A new financing statement was registered to support the 2012 GSA.
No explanation has been given as to why a new financing statement was registered, when it was open to Mr Crombie to register a financing change statement.
[35] The liquidator’s case is that the 2012 GSA could only qualify as a true substitution if the effect of the transaction was to leave Nature Green and its creditors in no worse a position than they otherwise would have been in.
[36] On the issue of whether Mr Crombie might have a defence under s 296(3) of the Act, Mr Hughes noted that the three limbs of the subsection are cumulative. He
referred to the Court of Appeal decision in Farrell v Fences & Kerbs Ltd in support of the submission that proof of all three elements in s 296(3) of the Act is to be established at the time the payment or other company property is received.3 In the case of s 296(3)(c), the giving of value must be proved to have occurred at the time the charge was taken, and does not include value given to the company at the time the antecedent debt was created.
[37] The liquidator says that Mr Crombie was aware that Nature Green was, or would become, insolvent at the time the 2012 GSA was entered into. He says the s 296(3) defence also fails as Mr Crombie provided no new value for the 2012 leaf stock.
[38] On the estoppel argument, Mr Hughes submitted that it was not reasonable for Mr Crombie to rely on the liquidator’s representation, as Mr Crombie was aware of matters which he ought to have raised with the liquidator in seeking his consent to the sale. Specifically, it was contended that the issues in relation to the sale of the
2010/2011 leaf stock ought to have been disclosed to the liquidator. Although Mr Crombie denied knowledge of the sale in November 2011 and of Nature Green’s affairs generally, the liquidator says that Mr Crombie was kept in the loop by the directors of Nature Green about the company’s finances, the market, and potential sales of leaf stock. Nature Green provided detailed director’s reports to Mr Crombie in writing, and there were also face to face meetings. Mr Crombie knew that Nature Green had defaulted on its first loan repayment, and he was an experienced lender/businessman.
[39] Mr Hughes submitted that the liquidator’s conduct had not been unconscionable in any way. The liquidator did not change his mind: he reassessed his position when further material came to his notice which he judged to be contrary to Mr Crombie’s initial advice about the status of the 2012 GSA. Even if Mr Crombie believed he had a valid substituted security, in exercising his rights under the 2012 GSA, s 25 of the PPSA required him to disclose information that could impact on the liquidator’s decision.
The Respondent
[40] For Mr Crombie, Mr Gray submitted that the liquidator has put forward no legal basis to support the proposition that he was entitled to change his mind on the validity on the 2012 GSA. Having made the decision he did, the liquidator was bound by it. Mr Crombie relied on the liquidator’s email disclaiming any interest in the 2012 leaf stock, and he altered his position, telling the Liquidator that he was doing so. Mr Crombie then achieved the sale of the leaf stock, paying related expenses out of the gross proceeds of sale. He applied the net proceeds by reinvesting them to form part of his investment portfolio, thereby further altering his position in reliance on the liquidator’s decision.
[41] Mr Gray submitted that Mr Crombie’s reliance on the liquidator’s advice was reasonable. Mr Crombie did not have the knowledge of Nature Green’s affairs for which the liquidator now contends, and in any event any such knowledge would have no bearing on the reasonableness of his reliance on the liquidator’s decision and representations. Mr Crombie understood that his secured interest extended to the proceeds of sale of the leaf stock, and whatever knowledge he did or did not have relating to the sales of 2010/2011 leaf stock was irrelevant to the preservation of his security interest, first in the collateral and then in the sale proceeds.
[42] Mr Gray summarised Mr Crombie’s position on the estoppel argument by submitting that the liquidator played such a part in Mr Crombie’s belief that he was entitled to sell the 2012 leaf stock and apply the proceeds of sale, that it would be unfair or unjust if the liquidator were now allowed to change his mind and require Mr Crombie to repay the monies. Allowing liquidators to simply change their minds at some time in the course of a liquidation, irrespective of any reliance placed on earlier decisions, would be to allow the creation of an unacceptable level of commercial uncertainty.
[43] Turning to the sales of the 2010/2011 leaf stock, Mr Gray submitted that Nature Green, the bank and Mr Crombie were all aware that when payment was received from abroad for the first 60 tonnes of the 2010/2011 leaf stock, the money would be paid into Nature Green’s accounts with the bank (first into the foreign
currency account, and then into the overdraft account). Mr Gray submitted that the priority agreement between the bank and Mr Crombie is central: the bank agreed in April 2010 that Mr Crombie would hold a first ranking secured charge over these proceeds, and in those circumstances the bank received the sale proceeds as constructive trustee for Mr Crombie. The bank’s receipt of the first sale proceeds as trustee for Mr Crombie was said to provide a complete answer to the liquidator’s position concerning the first sale proceeds. Mr Gray submitted that, because the first sale proceeds were subject to the trust, they remained identifiable or traceable personal property for the purposes of s 45 of the PPSA. To say otherwise would be to defeat the equity the imposition of the trust is to achieve, and would allow the bank to act, without any recourse against it, as if it had never entered into the priority arrangement with Nature Green. Equity does not allow that and nor does s 25 of the PPSA.
[44] Mr Gray submitted that it made no difference that some of the first sale proceeds were applied to trade creditors before the balance was paid from the foreign currency account into the overdraft account.
[45] Mr Gray further submitted that s 95 of the PPSA does not extend to a creditor with actual knowledge at the time of receipt, that a payment is being received in breach of the security agreement (or, in this case, with actual knowledge of the priority arrangement to which the bank was itself a party).4 The same facts support the argument that the bank did not act in good faith, in breach of s 25 of the PPSA.
[46] In respect of the second sale of 2010/2011 leaf stock (40 tonnes sold in May
2012), Mr Crombie says that at minimum the 2010 GSA still provided security over that 40 tonnes when the 2010 GSA was discharged and the 2012 GSA executed on
8 June 2012. He submitted that the actual date of the sale of the final 40 tonnes of the 2010/2011 leaf stock to Indena does not matter, as Mr Crombie’s security interest under the 2010 GSA extended to the proceeds of the sale, and those proceeds were not paid to Nature Green until 19 June 2012, after the 2012 GSA had been granted. Mr Gray submitted that in those circumstances the 2012 GSA must qualify as
substituted security, at least to the extent of the second sale proceeds
4 Citing Stiassny v CNI Forest Nominees Ltd [2012] NZSC 106.
(NZ$187,487.15), that value being less than the indebtedness secured by the 2012
GSA under s 293(3)(b).
[47] Mr Gray drew attention to the fact that Mr Crombie’s willingness to release his security under the 2010 GSA was expressly on the basis that he would receive in return security over the 2012 leaf stock. That is confirmed in the 2012 GSA itself,5 which expressly stated that the 2012 GSA was given in substitution for the 2010
GSA. All parties (Nature Green, Mr Crombie, and the bank) proceeded on the basis that Nature Green could go ahead and sell the remaining 2010/2011 leaf stock in the knowledge that a substituted GSA would be given over the 2012 stock and that, in the meantime, Mr Crombie’s position as first ranking creditor would not be compromised.
[48] Mr Gray submitted that there is no merit in the liquidator’s argument that the
2012 GSA diminished the assets of Nature Green. In the normal course, the substitution of one charge for another will not materially prejudice other creditors if they would not have had access to the charged property to begin with.6 “Value” was given for the 2012 GSA, as the definition of that expression in s 16 of the PPSA includes antecedent debt.
[49] On the defence under s 296(3) of the Act, Mr Gray submitted that Mr Crombie acted in good faith in taking the 2012 GSA as a substituted security. He pointed out that the liquidator does not assert any lack of good faith.
[50] He also submitted that a reasonable person in Mr Crombie’s position at the time the 2012 GSA was taken would not have suspected on reasonable grounds that Nature Green was or would become insolvent. He submitted that the business was a seasonal one, with a developing customer base. It had prospective sales in the pipeline, and the bank had been willing to continue to advance further monies, knowing that it ranked second as a secured creditor (over the leaf stock) behind Mr Crombie. A suspicion of insolvency should not be assessed with the benefit of
hindsight, and Mr Crombie was not privy to the exchanges between Mr Knight and
5 Clause E(a)(vi).
6 Parsons v Norris, above n 2, at [21].
his lawyer and the bank, or to the financial records of Nature Green. It was not known or suspected until some weeks later that the shareholders would put Nature Green into liquidation.
[51] As for the s 296(3) requirement that Mr Crombie must have given value or altered his position, Mr Gray submitted that Mr Crombie did both. Value was provided by Mr Crombie agreeing to allow the sale of the final 40 tonnes of
2010/2011 leaf stock and to take substitute security to allow that to happen. Further value was provided when Mr Crombie allowed the proceeds of that sale to be paid to the bank. Mr Crombie also altered his position in the reasonably held belief that the
2012 GSA was valid and would not be set aside.
Discussion
[52] The following issues fall for determination:
(a) Was the 2012 GSA a “substituted charge” within the meaning of s 293(1A)(b), given “in substitution for” a charge given before the specified period?
(b)If the answer to that question is “yes”, did the value of the property subject to the 2012 GSA at the date of the substitution exceed the value of the property subject to the 2010 GSA at that date (s 293(3)(b) of the Act)?
(c) If, and to the extent that, s 293(1A)(b) does not apply to the 2012
GSA, is the liquidator nevertheless estopped from recovering the sum of $212,728.79 received by Mr Crombie on 20 February 2013?
(d) Is the liquidator precluded by s 296(3) of the Act from recovering the
$212,728.79 from Mr Crombie? [53] I will address each question in turn.
Was the 2012 GSA a “substituted charge”?
[54] First, the liquidator does not dispute that the 2010 GSA was a valid security given over the 2010/2011 leaf stock. Nor is it disputed that the 2010 GSA was given before the “specified period”, as that expression is defined in s 293(6) of the Act. The liquidator’s contention appears to be that Mr Crombie released his security under the 2010 GSA at some time before the 2012 GSA was granted by Nature Green. That argument is built around the contention that Mr Crombie either agreed to, or acquiesced in, the first sale of 2010/2011 leaf stock to Indena, and either agreed to, or acquiesced in, the proceeds of that sale being used by Nature Green for its own purposes, namely payment of trade creditors and reducing its overdraft with the bank. As for the second sale of the 2010/2011 leaf stock, which formed the collateral for the 2010 GSA, the liquidator contends that the sale occurred at latest in May 2012, and the 2012 GSA was not signed until 8 June 2012. Accordingly, the collateral for the 2010 GSA no longer existed at the time the 2012
GSA was concluded, and there was no longer any “charge” for which the 2012 GSA
could be substituted.
[55] For his part, Mr Crombie has stated that he was not even aware of the first sale of 2010/2011 leaf stock to Indena, and still less aware that the proceeds of that sale had been misapplied by Nature Green and (wrongly) taken by the bank. The liquidator strongly disputes Mr Crombie’s claimed lack of knowledge, pointing to various references to sales or prospective sales of leaf stock in emails or reports provided by Nature Green to Mr Crombie in 2011.
[56] In the view to which I have come, it is not necessary to resolve that dispute. It seems to me to go only to the question of the amount secured by the 2010 GSA, and not to the continuing existence of Mr Crombie’s security interest under the 2010
GSA at the time of the June 2012 signing of the 2012 GSA.
[57] On the worst case for Mr Crombie, only part of the collateral under the 2010
GSA was lost when the proceeds of the first sale were paid to Nature Green’s
creditors and to the bank. There remained a further quantity of approximately
40 tonnes of 2010/2011 leaf stock on hand in early 2012, and there is nothing in the
evidence to suggest that Mr Crombie either intended to, or did, give up his security interest in that stock.
[58] The 40 tonnes of 2010/2011 leaf stock was still owned by Nature Green when, on 19 April 2012, Mr Crombie and Mr Knight agreed that Mr Crombie would release his security over the remaining 2010/2011 leaf stock, in exchange for a new security to be provided over the 2012 leaf stock. Mr Crombie’s intention to take substituted security over the 2012 stock was confirmed in the email he sent to the bank on 19 April 2012 saying:
This email is to confirm that I am prepared to release the security I hold over the Ginkgo stock purchased by Nature Green in 2010 and 2011 in return for security over the 2012 stock.
[59] It is not in dispute that the bank agreed, and the release of the 2010 GSA and the execution of the 2012 GSA were duly completed on 8 June 2012.
[60] Mr Hughes produced at the hearing a copy of Nature Green’s commercial
invoice to Indena for the final 40 tonnes of 2010/2011 leaf stock. It was dated
26 April 2012, and referred to shipment from Napier on 2 May 2012, with an estimated time of arrival in Le Havre, France on 16 June 2012.
[61] In his affidavit, the liquidator stated that the proceeds of NZ$187,487.15 were received and paid by Nature Green to the bank on 19 June 2012. 7
[62] The critical point here is that both under the 2010 GSA and pursuant to s 45 of the PPSA, Mr Crombie’s security interest in the remaining 2010/2011 leaf stock extended to the proceeds of sale of that leaf stock, and there is nothing in the evidence which would suggest that Mr Crombie ever surrendered his security interest in those proceeds. (The fact that he may have agreed to the sale taking place falls far short of an agreement to surrender his interest in the proceeds of that sale.)
[63] Consistent with the April 2012 arrangements between Mr Crombie, Nature Green and the bank, the 2012 GSA recorded that it was given in substitution
for the 2010 GSA.8
7 Paragraph 44.
[64] In all of those circumstances, I do not accept the liquidator’s submission that the charge over Nature Green’s property comprised in the 2010 GSA had been released, or otherwise no longer existed, at the time the 2012 GSA was executed. I am satisfied on the evidence that the charge comprised in the 2012 GSA was given in substitution for the charge comprised in the 2010 GSA.
[65] The fact that the bank may not have executed the deed of priority of charges, given the 2012 GSA priority over the bank’s charge on the 2012 leaf stock, until after the date of Nature Green’s liquidation, does not affect that conclusion. Whether first ranking or second ranking, the 2012 GSA was either given in substitution for the
2010 GSA or it was not. I have found that it was.
[66] It is perhaps unfortunate that the liquidator apparently had not seen Mr Crombie’s 19 April 2012 email to the bank when the present proceeding was commenced.9 Mr Crombie’s 19 April 2012 email made it clear that he was only prepared to release the 2010 GSA on the basis that he would receive substituted security over the 2012 leaf stock.
Did the value of the property subject to the 2012 GSA at the date of the substitution exceed the value of the property subject to the 2010 GSA?
[67] Mr Gray submitted that, at the time of the execution of the 2012 GSA, Mr Crombie retained existing securities over collateral worth not less than the sum of $212,728.79 which was eventually recovered by Mr Crombie on the sale of the
2012 leaf stock. I have found that Mr Crombie did hold security over the proceeds of the second sale of the 2010/2011 leaf stock. Those proceeds were worth NZ$187,487.15. Mr Gray submitted that Mr Crombie retained additional security, in the form of his interest as beneficiary under a constructive trust, under which he says that the bank held the proceeds of the first sale of the 2010/2011 leaf stock in trust for Mr Crombie. Mr Gray submitted that the bank, as a party to the deed of priority relating to the 2010 GSA, well knew that neither Nature Green nor the bank had the
right to retain the proceeds of the first sale of 2010/2011 leaf stock, and acted
8 Clause E(a)(vi).
9 At paragraph 42 of his first affidavit, the Liquidator said “I cannot locate any written
confirmation from Mr Crombie on or about 19 April 2012 to the ANZ about a release of the
2010 GSA.”
wrongfully in applying those proceeds in reduction of Nature Green’s overdraft, and in the payment of certain of Nature Green’s trade creditors. He submitted that the proceeds are traceable to the bank, and that Mr Crombie retained an interest in those proceeds which qualified as a “charge” for the purposes of s 293(1A)(b).
[68] Mr Hughes argued that, when the proceeds of the first sale were paid by Nature Green to its creditors and/or in reduction of its overdraft, there was a co-mingling of funds and/or dissipation of the proceeds, such that Mr Crombie’s security interest was lost (to the extent of those proceeds).
[69] I cannot accept Mr Gray’s submissions on this point. Even aside from the
liquidator’s “co-mingling” point, it seems that:
(a) Section 293(1A)(b) is concerned with an earlier charge given by the company. When Nature Green applied the proceeds of the first sale to pay creditors, and in reduction of its overdraft with the bank, it lost control of those funds, and it seems to me that any claim Mr Crombie might have in rem in respect of those proceeds (assuming them to be identifiable) would be a claim against the bank. Any relevant charge would not have been a charge given by Nature Green, which I apprehend to be required by s 293(1A)(b).
(b) If, and to the extent, Mr Crombie relies on events occurring after July
2010 as creating the relevant “charge” for the purposes of s 293(1A)(b), any such “charge” would have been created within the “specified period” of two years before the date of commencement of the liquidation. There could be no substitution within s 293(1A)(b) in those circumstances.
[70] Accordingly, I am of the view that the value of the property subject to the only existing charge at the date of the substitution was NZ$187,487.15, being the value of the proceeds of the second sale of 2010/2011 leaf stock as at the 8 June
2012 substitution date. Accordingly, I find that, as at the date of the liquidation, the only sum validly secured by the 2012 GSA was the sum of NZ$187,487.15.
[71] The fact that the deed of priority was not completed by the bank until a few days after the liquidation does not, in my view, affect Mr Crombie’s entitlement to security under the 2012 GSA for that NZ$187,487.15. The relevant provisions of the Act are concerned with pari passu treatment of creditors within the same class. In my view, unsecured creditors cannot have been affected by an agreement by two creditors holding specific security over particular assets to vary the order in which
their securities should rank.10
[72] I do not see anything in the PPSA which would affect the foregoing conclusions. In particular, I am not satisfied that there is evidence of bad faith on the part of Mr Crombie under s 25 of the PPSA. I accept that he was entitled to expect Nature Green and the bank to honour their commitments under the 2010 GSA and the deed of priority relating to that document. In view of the application of s 293(3)(b), the result under s 293 is that Mr Crombie receives no more than he would have received had the 2010 GSA not been released and the 2012 GSA never been executed.
Is the Liquidator estopped from recovering the sum of $212,728.79 received by
Mr Crombie in February 2013?
[73] As a preliminary point, I note that because of my conclusion that the value of the property protected by the 2012 GSA is $187,487.15, Mr Crombie’s claim in estoppel need only be considered in respect of the balance retained by him following the sale of the 2012 leaf stock.
[74] The parties do not dispute the applicable legal principles that must be shown by the party seeking to rely on an estoppel. These are:
(a) a belief or expectation has been created or encouraged through some action, representation, or omission to act by the party against whom the estoppel is alleged;
(b)the belief or expectation has been reasonably relied on by the party alleging the estoppel;
10 See Parsons v Norris, above n 2, at [19]–[21].
(c) detriment will be suffered if the belief or expectation is departed from;
and
(d)it would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.
[75] As for requirement (a), there is no doubt that the liquidator’s disclaimer of any interest in the 2012 leaf stock was a representation that encouraged Mr Crombie to believe that he would be entitled to security over the 2012 leaf stock to the full value of that leaf stock (or to the full extent of the debt owed by Nature Green to Mr Crombie if that would be less).
[76] But I am not persuaded that Mr Crombie has proved circumstances meeting the estoppel requirements of detriment and unconscionability listed at paragraph [74](c) and (d) above. As for (c), Mr Crombie would have to have acted or abstained from acting in such a way that he would suffer harm over and above his disappointed expectation.11 I am unable to identify any such harm. Steps taken by Mr Crombie to sell the 2012 leaf stock would have been taken by him anyway as the holder of a
GSA over that leaf stock which was valid up to the figure of $187,487.15, and Mr Crombie does not suggest that his decision to reinvest the $212,728.79 was dependent on him receiving that particular sum of money. I am satisfied that Mr Crombie, in reinvesting the proceeds, did rely on the expectation created by the liquidator, but not detrimentally so. Mr Crombie’s estoppel claim fails on this element.
[77] As for (d), the general approach to the question of unconscionability is for the courts to look at the reasonableness of the reliance from the promisee’s point of view, rather than the promisor’s subjective intentions, which are relevant as a secondary consideration.12 In this case, Mr Crombie’s point of view was that he would receive the proceeds from the 2012 stock based on the liquidator’s representation, and could use the full proceeds as he saw fit. But in my view the
question of unconscionability cannot be divorced from the statutory framework
11 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 429 (HCA).
12 James Every-Palmer “Equitable Estoppel” in Andrew Butler (ed) Equity and Trusts in New
Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at [19.2.4(2)].
within which the liquidator was operating (in essence, as a representative of Nature Green’s unsecured creditors). At least in the absence of significant detriment to Mr Crombie (and I have found that none has been proved), I do not think it can be considered unconscionable for the liquidator to have sought in the interests of the general body of unsecured creditors, to correct a decision which he later concluded had been made in error.
[78] In all of those circumstances, I am not satisfied that Mr Crombie has made
out his case on the “unconscionability” aspect of the estoppel claim.
[79] Mr Crombie’s claim in equitable estoppel fails accordingly.
Is the liquidator precluded from recovering the $212,728.79 from Mr Crombie by s 296(3)(b) of the Companies Act?
[80] Section 296(3) is concerned with the recovery by a liquidator of property. Before the court can order recovery of property or its equivalent value by a liquidator, the onus is on the person from whom recovery is sought to prove a number of matters, including:
(b) a reasonable person [in the position of the person receiving the property] would not have suspected, and ... did not have reasonable grounds for suspecting, that the company was, or would become, insolvent. (the Court’s emphasis)
[81] In this case, I am of the view that the particular “property” is the $212,728.79 received by Mr Crombie on 20 February 2013, after Nature Green was already in liquidation. If that is correct, Mr Crombie clearly cannot satisfy the condition under s 296(3)(b) of the Act.
[82] I acknowledge that Mr Crombie might argue that the “property” which he received was the security interest under the 2012 GSA, and that the liquidator is now seeking to recover the equivalent value of that property.
[83] The definition of “property” in s 2 of the Act is:
Property means property of every kind whether tangible of intangible, real or personal, corporeal or incorporeal, and includes rights, and claims of every kind in relation to property however they arise.
[84] I accept that Mr Crombie’s security interest under the 2012 GSA comes within this definition. Nature Green formally granted the 2012 GSA on 8 June 2012, and a financing statement for Mr Crombie’s interest was registered on the PPSR on
11 June 2012 – both dates before Nature Green was placed in liquidation on 3 July
2012. This leaves open the question of whether Mr Crombie had, or would have had, reasonable grounds to suspect that Nature Green was or would become insolvent at the time the 2012 GSA was given.
[85] But I do not need to embark on that inquiry for this reason. It seems to me that, as a matter of construction of the Companies Act, s 296 (which deals with property) and s 293 (which deals with charges) cannot have been intended to produce different results where the property and the charge are one and the same. If, as I have found, the effect of s 293 is that the value of Mr Crombie’s security interest under the 2012 GSA was no greater than the value of his interest under the 2010
GSA at the time of substitution, then s 296 cannot in my view be invoked to undermine that finding.
[86] Section 296(3) therefore does not assist Mr Crombie.
Orders:
[87] Relief is granted in the following terms:
(a) the 2012 GSA is set aside to the extent of $25,241.64;
(b) the 2012 GSA is upheld as a valid charge to the extent of
$187,487.15, under ss 293(1A)(b) and 3(b) of the Companies Act
1993. Mr Crombie is entitled to retain this sum;
(c) the parties may file memoranda on costs, within 14 days of the date of this judgment.
[88] In respect of the balance of $25,241.64 which I have found was not secured by the 2012 GSA, counsel are requested to file memoranda on the appropriate orders to be made. (It may be that an order should be made for payment of this sum to the liquidator, or it may be that Mr Crombie holds the sum on trust for the bank as second-ranking charge holder over the 2012 leaf stock). Counsel’s memoranda should also address the need (or otherwise) for the order which the liquidator sought removing the registration of the 2012 GSA from the PPSR.
[89] The liquidator is requested to file his memorandum addressing those issues within 14 days of the date of this judgment. Mr Crombie may file a reply
memorandum within 14 days after his receipt of the liquidator’s memorandum.
Solicitors:
Kensington Swan, Auckland for Applicant
Sainsbury, Logan & Williams, Napier for Respondent
Associate Judge Smith
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