Reynolds as Liquidator of Southern HSE Holdings Ltd (in liq) v HSE Holdings Ltd HC Whangarei CIV 2009-488-738

[2010] NZHC 1815

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2009-488-000738

UNDER  the Companies Act 1993

BETWEEN  GRANT BRUCE REYNOLDS AS LIQUIDATOR OF SOUTHERN HSE HOLDINGS LTD (IN LIQUIDATION) Applicant

ANDHSE HOLDINGS LTD Respondent

Hearing:         15 September 2010

Appearances: B K Pamatatau for Applicant

R Bowden for Respondent

Judgment:      17 September 2010 at 2:30 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 17 September 2010 at 2:30 pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar

Date: ………………….

Solicitors/Counsel:

John Gilding, Suite 3, 6 Vinery Lane, Whangarei
Whitlock & Co., PO Box 100449, Auckland

R Bowden, PO Box 1862, Whangarei

B Pamatatau, PO Box 2433, Shortland Street, Auckland

G B REYNOLDS AS LIQUIDATOR OF SOUTHERN HSE HOLDINGS LTD (IN LIQUIDATION) V HSE HOLDINGS LTD HC WHA CIV-2009-488-000738  17 September 2010

[1]     Southern HSE Holdings Ltd (“Southern”) provided medical services to businesses under a franchise from Company Health Services Ltd, now known as HSE Holdings Ltd (“HSE”).

[2]      In February 2009, Southern owed HSE $49,125.35.  It was insolvent.  That is clear from the financial accounts for the company for the year ended 31 March 2009. That year it made a trading loss.  There was also a capital deficiency of $87,000.

[3]      On 9 February 2009, Southern transferred medical equipment to HSE at a book value of $16,624.33.  Its debt was reduced by that amount.

[4]      On 22 June 2009, an application was made to the High Court for an order putting Southern into liquidation.  On 3 August 2009, an order was made putting  the company into liquidation.  Mr Reynolds was appointed liquidator.  His first report as liquidator shows no assets, and creditors amounting to $91,018.70.  He investigated the transfer of the medical equipment to HSE. He wrote to HSE on 29 September

2009 pointing out that the transfer of the medical equipment was an insolvent transaction under s 292 of the Companies Act 1993.   HSE replied promptly on 5

October 2009.     It clearly accepted that the transaction was insolvent, because it immediately offered to return the equipment.

[5]      If  the  liquidator  had  accepted  that  offer,  the  preferential  effect  of  the transaction of February 2009 would have been eliminated.  The medical equipment would have been returned to Southern so that it could be sold, and the proceeds of sale made available for the benefit of creditors generally.   The liquidator did not accept the offer. He said that HSE had received a payment of $16,624.30 and it was required to repay that sum.  He has maintained that position.

[6]      He served a notice to set aside under s 294 of the Companies Act on 17

February 2010.  The notice includes the following:

The liquidator [Grant Bruce Reynolds] of Southern HSE Holdings Ltd (In Liquidation) (the company) wants to have set aside the following transaction by the company that is voidable under s 292 of the Companies Act 1993:

A  payment  of  $16,624.23  made  by  the  Company   to  Company

Health Services Ltd by transferring the plant and equipment owned

by the Company to Company Health Services Ltd to set off against their debt and as recorded in the accounts for the Company on the

9 February 2009. ...

The  property  or  value  that  the  liquidator  wishes  to  recover  is

$16,624.23. ...

In giving this notice, the liquidator relies on the following grounds: (a)      The Payments constitute a transaction for the purposes of

s 292 of the Companies Act 1993; (b)      The transaction was made:

(i)at a time when a company was unable to pay its due debts;  and

(ii)      in  the  period  of  two  years  before  the  date  of commencement of the liquidation; and

(c)       The transaction enabled the creditor to receive more towards satisfaction of its debt  than  the  creditor  would otherwise have received or be likely to have received in the liquidation of the company;

(d)       The transaction occurred within the restricted period of the terms  of  s  292(6)  of  the  Companies  Act  1993  thereby creating a presumption that it was entered into at a time when the company was unable to pay its due debts.

[7]      The notice meets the requirements of s 294(2) of the Companies Act.

[8]      HSE did not reply to the notice.  It did not send a notice of objection under s

294(3).

[9]      The liquidator applied for these orders:

a)       That the payment pursuant to s 292 of the Companies Act by Southern to  HSE  totalling $16,624.23  in  February 2009  be set  aside  as  an insolvent transaction;

b)That HSE pay to Southern the sum of $16,624.23, plus interest and costs.

[10]     The grounds of the application alleged that the transfer of property was a payment under s 292(3)(e) of the Companies Act.

[11]     When the application was called on 14 June 2010, HSE did not appear.  That was a result of oversight by counsel.  I made orders setting aside the payment and requiring HSE to pay $16,624.23, plus interest and costs.

[12]     HSE applied under r 15.13 of the High Court Rules to set aside or vary the orders made on 14 June 2010.   HSE also sought an order under s 295(b) of the Companies Act that the property transferred in February 2009 be returned to Southern.

[13]     Rule 15.13 says:

Any judgment obtained by default may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.

[14]     On applications under r 15.13, it is normal to consider the application against these factors:

a)       That the defendant has a substantial ground of defence;

b)       That the delay is reasonably explained;  and

c)        That the plaintiff will not suffer irreparable injury if the judgment is set aside (Russell v Cox [1983] NZLR 654 at 659.)

[15]     While these are guiding matters, the governing consideration is whether or not a miscarriage of justice has or may have occurred.

[16]     In this case, HSE was properly served.   The liquidator followed relevant rules.  The judgment was regularly obtained.

[17]     The parties agreed that the liquidator would not suffer irreparable injury by the setting aside of the judgment if he were compensated by way of costs.   The liquidator also accepted that HSE ought not to suffer because of the oversight of counsel not appearing on 14 June 2010.

[18]     Instead, the argument focused on whether HSE has a substantial ground of defence.   The parties agreed that on a rehearing, no further evidence would be adduced.   Accordingly, on the application for setting aside, I could determine the substantive merits of the liquidator’s application.

[19]     HSE accepts that at the time of the transaction in 2009, Southern was unable to pay its debts.   It also accepts that the transaction allowed it to receive more towards satisfaction of the debt due to it than it would have received in the liquidation.   There is no contest that there was an insolvent transaction.   The differences were about the nature of the insolvent transaction.   These differences emerged in the competing submissions as to the relief that should be granted under s 295, which reads:

295     Other orders

If a transaction or charge is set aside under section 294, the Court may make

1 or more of the following orders:

(a)an order that a person pay to the company an amount equal to some or all of the money that the company has paid under the transaction:

(b)an order that a person transfer to the company property that the company has transferred under the transaction:

(c)an order that a person pay to the company an amount that, in the Court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction:

(d)an order that a person transfer to the company property that, in the Court’s opinion, fairly represents the application of either or both of the following:

(i)       money that the company has paid under the transaction:

(ii)      proceeds of property that the company has transferred under the transaction:

(e)an  order  releasing,  in  whole  or  in  part,  a  charge  given  by  the company:

(f)an order requiring security to be given for the discharge of an order made under this section:

(g)       an order specifying the extent to which a person affected by the setting aside of a transaction or by an order made under this section is entitled to claim as a creditor in the liquidation.

[20]     The liquidator submitted for an order for payment under s 295(a) on the basis that Southern had made a payment to HSE.  On the other hand, HSE contended for an order under s 295(b) on the basis that it had received a transfer of property.

[21]     There is no expert evidence  as to the value of the second-hand medical equipment.  An affidavit by Dr McLeod, a director of HSE, says that Southern had not used the equipment much.  HSE has not used the equipment at all.  He says the equipment is in the same condition as it was when it was sent from Christchurch.  It is available for immediate transfer.   He says that the equipment was not worth

$16,624.33 either at the time of transfer or now.   The liquidator’s reluctance to receive the equipment suggests that he shares Dr McLeod’s view as to its value.

[22]     The liquidator relies on the Court of Appeal’s decision in Trans Otway Ltd v Shephard [2005] 3 NZLR 678. In that case, Newman Carrying Ltd owed Trans Otway $94,996.73. In an agreement for sale of assets by Newman to Trans Otway, Newman agreed to sell its client list for the sum of $94,976.73. The agreement provided:

The purchaser will pay to the vendor the sum of $94,776.73, including GST, for such client details, such payment to be made by the purchaser acknowledging that the vendor has made full payment of all sums due and owing to the purchaser.

[23]     At [30]-[35], the Court of Appeal held that the effect of this clause was that Newman had made a payment to Trans Otway.    The Supreme Court1  accepted the correctness of this finding.    The focus of its decision was whether the transaction was preferential under s 292(2)(b) of the Companies Act.

[24]     This case is different from Trans Otway Ltd v Shephard.  In this case, there was  a  simple transfer  of assets,  medical  equipment,  for  an  agreed  value  which reduced the indebtedness of Southern.  A transfer of physical assets is not a payment. This is apparent from the decision of the Court of Appeal.   At [27], it quoted a footnote from Mann on the Legal Aspect of Money (6th ed) 205 at para 7.04:

Thus, if the parties agree that the debtor shall hand over his car in discharge of a debt of £10,000, the car does not thereby become “money” nor does the

1 [2006] 2 NZLR 289.

act of delivery amount to “payment”, for the parties have varied the original contract by discharging the monetary obligation without payment. ...

[25]     The Court of Appeal made the same point at [37]–[38] in distinguishing the Trans Otway transaction from that in Moller Johnson Motors (Hawera) Ltd v R D & S M Taplin Contracting Ltd (in liq) HC New Plymouth M54/97, 13 March 1998.  In that case, a creditor accepted a stockpile of logs in partial satisfaction of a debt.  In Trans Otway the Court of Appeal clearly accepted that the transfer of a stockpile of logs was not a payment, and on that point distinguished that case from its own.

[26]     For the liquidator’s argument to apply, there would need to be an agreement for Southern to sell the equipment to HSE for $16,624.33 and there would be a term of the agreement that payment of the price was to be by HSE acknowledging that Southern had paid $16,624.33 off the debt due to it.  There is no evidence that there was such an agreement.   The liquidator relied on a journal entry of Southern on

9 February 2009.   It is headed “Memo:transfur of asserts to chsl and removal of franchise”.(sic)  The journal entry is consistent with a bare transfer of assets and is not evidence of the sort of agreement required  for the liquidator’s  argument to succeed.

[27]     There was no payment to be set aside.  What is set aside is the transfer of medical  equipment  to  HSE,  and  the  reduction  of  Southern’s  indebtedness  by

$16,624.33.

[28]     Section 295 provides for a range of orders that may be made on a transaction or charge being set aside.   When a transaction under s 292 is set aside, the relief should be directed at eliminating any preferential benefit a creditor has received. More extensive relief is not required. While the creditor benefiting from an insolvent transaction should not be allowed to retain a preferential advantage, nor should he be punished for having received such a benefit.  There is nothing in the legislation that calls for a punitive approach.  The various remedies in s 295 allow for the exercise of a discretion to mould an outcome appropriate for the case.

[29]     It is inappropriate to require HSE to make a payment to Southern.  First, it did not receive a payment so that an order for payment cannot be made under

s 295(a).   Second, there is no valuation evidence that would allow the Court to determine the value of the benefits HSC received on the transfer of the equipment for ordering a payment under s 295(c).  Given the clear acceptance by the parties that the equipment cannot be worth $16,624.23, to require HSE to pay that sum would go beyond eliminating the preferential effect of the insolvent transaction.

[30]     The appropriate remedy is to order the transfer of the medical equipment to Southern.  The liquidator complains that the equipment will have depreciated in the meantime.  However, HSE made a prompt offer to transfer the equipment in October

2009.  The liquidator rejected that offer.  HSE ought not to be required to carry any greater burden, simply because the liquidator did not accept HSE’s offer.

[31]     The liquidator also takes the point that HSE did not respond to the notice to set aside. His argument is that it is now too late for HSE to revisit the notice to set aside.  The liquidator claims that HSE should pay backmoney, even though it never received a payment.

[32]     Such a hard-nosed procedural approach is not called for. It needs to be borne in mind that people who have to deal with these provisions in practice are not only lawyers and insolvency practitioners, but also ordinary business people, credit managers, and business consultants. An insistence on procedural niceties risks preventing the legislation working effectively.  A creditor who does not give a notice of objection under s 294(3) cannot later contend that the insolvent transaction should not be set aside. However, at the stage where relief is ordered under s 295, the Court can examine the insolvent transaction so as to determine the most appropriate way of giving relief to eliminate any preferential benefit.  This approach is consistent with that taken by Chambers J in his discussion of the authorities in McKinnon v Falla Holdings NZ Ltd (in liq) (1998) 8 NZCLC 262,034 at 262,040–262,042.

[33]     The liquidator’s setting aside notice was misdirected in that it claimed that the insolvent transaction was a payment rather than a transfer of medical equipment. It would be unduly severe to strike down the notice as invalid because of this error. Similarly, it would be unduly severe to hold that HSE, who recognised that the transaction was insolvent, cannot argue at the s 295 stage that the appropriate relief

should be a transfer of assets rather than a payment.  The fact that HSE did not file a notice of objection under s 294(3) does not stand in the way of it submitting as to the appropriate relief under s 295.

[34]     I am satisfied that the orders made on 14 June 2010 are a miscarriage of justice, because the incorrect relief under s 295 was ordered.

[35]     I make these orders:

a)        The orders of 14 June 2010 are set aside;

b)        The  transfer  of  medical  equipment  from  Southern  to  HSE  on

9 February 2009 and the reduction of Southern’s indebtedness to HSE

by $16,624.33 are set aside;

c)       HSE shall send at its own expense the medical equipment it received in February 2009 to Southern to an address notified by the liquidator within 10 working days of this judgment.  If the liquidator does not give notice within that time, the equipment is to be transferred to the registered office of Southern at 108 Rockfield Road, Penrose, Auckland;

d)HSE will pay the liquidator costs on the 2B scale on the application under r 15.39, plus disbursements as fixed by the Registrar;

e)       Leave is reserved to apply further, if there are any difficulties over the transfer of the equipment.

R M Bell

Associate Judge