Reynolds v Burnard International Limited

[2016] NZHC 1292

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-227 [2016] NZHC 1292

UNDER

the Companies Act 1993

IN THE MATTER OF

the liquidation of PLANHORSE SYSTEMS LIMITED (In Liq)

BETWEEN

GRANT BRUCE REYNOLDS Applicant

AND

BURNARD INTERNATIONAL LIMITED

Respondent

Hearing:	13 June 2016
Appearances:	S J Ropati for Burnard International Ltd B Pamatatau for G B Reynolds
Judgment:	13 June 2016

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

John S Ropati, Auckland, for Burnard International Ltd
Whitlock & Co (M D Whitlock), Auckland, for  G B Reynolds

Counsel:

Bruce Pamatatau, Auckland, for G B Reynolds.

REYNOLDS v BURNARD INTERNATIONAL LIMITED [2016] NZHC 1292 [13 June 2016]

[1]      Mr Reynolds, the liquidator of Planhorse Systems Ltd, applied under ss 294 and 295 of the Companies Act 1993to set aside a voidable transaction, a payment of

$14,225.21 to Burnard International Ltd made on 10 June 2015.  The application was called  on  11  March  2016.    Burnard  International  Ltd  did  not  file  a  notice  of opposition and did not appear on 11 March 2016.  Associate Judge Sargisson made orders under s 295 of the Companies Act requiring Burnard International to pay Mr Reynolds $14,225.21 plus interest and costs.

[2]      Burnard International Ltd has now applied to set aside the orders made on

11 March 2016.  It has applied under r 10.9 of the High Court Rules.  That allows for a  judgment  to  be  set  aside  when  one  party does  not  appear  at  the  trial.    The application ought more properly to be considered under r 15.10, where judgment has been obtained by default.  In this case, Associate Judge Sargisson made the order at the first call in a miscellaneous liquidation list.   Little turns on whether r 10.9 or r 15.10 applies because the test under both rules is the same. The court may set aside if there has or may have been a miscarriage of justice.   Burnard International Ltd does not say that judgment was obtained irregularly.  Instead, it contends that even though judgment was obtained regularly, the judgment ought to be set aside to avoid a miscarriage of justice.

[3]      The approach on applications to set aside judgments obtained regularly by default is well established.  There are clear dicta from the Court of Appeal on the approach to be taken.  A useful starting point is that Court’s decision in Russell v Cox.1   The Court quoted the judgment of McCarthy J in Paterson v Wellington Free Kindergarten Association Inc:2

In approaching an application to set aside a judgment which complies with the rule, the Court is not limited in the considerations to which it may have regard, but three have long been considered of dominant importance.  This was accepted by the Chief Justice in the Court below and by all counsel in this  Court.   They are:  1 that  the  defendant  has  a substantial  ground  of defence; 2. that the delay is reasonably explained; 3. that the plaintiff will

1      Russell v Cox [1983] NZLR 654.

2      Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 (CA) at 983.

not suffer irreparable injury if the judgment is set aside. Atwood v Chichester (1878) 3 QBD 722; Hovell v Ngakapa (1895) 13 NZLR 298; Trengrove v Inangahua Hospital Board [1956] NZLR 587. But, whilst it appears from these cases that delay, if reasonably explained and if it does not create irreparable injury, is not of itself a good reason for refusing to set aside, we do not doubt that where the delay is substantial, as it is here, the Court can more readily conclude that injury would be caused.

The Court in Russell v Cox then went on to say:3

We think that in the light of Evans v Bartlam the passage to which reference has just been made should be read as doing no more than emphasising three matters which, as a matter of common sense and practice, the Court will generally regard as of importance in deciding whether it is just to set aside a judgment. But it should not be regarded as laying down a general rule that an application to set aside a judgment must satisfy these conditions as a necessary pre-requisite to the exercise of the discretion; it should be taken as doing no more than highlight factors which on any application to set aside a judgment may generally be regarded as relevant to an inquiry which will determine where the justice of the case will lie.4

The liquidator’s claim

[4]      The  liquidator’s  case  is  that  Planhorse  Systems  Ltd  was  ordered  into liquidation  on  18  September  2015  on  an  application  filed  on  26  June  2015. Mr Reynolds  was  appointed  liquidator.    Burnard  International  Ltd  is  a  freight forwarding company.  Planhorse Systems Ltd owed it $9,788.21.  That debt had been outstanding for some time, certainly from earlier than 2015.   Burnard instructed a debt collection agent who served a statutory demand on 23 February 2015.  When Planhorse did not comply with the demand, the debt collection agency arranged for a liquidation proceeding to be filed, relying on non-compliance with the statutory demand as evidence of insolvency.  The application was filed on 24 April 2015.  The first call date was 12 June 2015.

[5]      On 10 June 2015, $14,225.21 was paid to Burnard’s debt collection agency to cover the debt, plus collection costs.   The source of the funds was an Australian company, Pelikan Artline Pty Ltd.  Mr Reynolds included in his evidence a copy of a deed  made  on  10  June  2015.    Under  this  deed  Planhorse  transferred  certain

intellectual property to Pelikan.  The deed recorded that the sum of AUD$69,899.50

3      Russell v Cox, above n 1, at 659.

4      See also Mathieson v Jones CA198/92, 11 December 1992, pp 6-7; Jones v Chatfield [1993]

1 NZLR 617 (HC) at 621-622.

had  been  paid,  and  a  further  NZD$14,225  was  to  be  paid  to  a  bank  account nominated by Planhorse.  Mr Reynolds’ evidence includes a copy of banking records showing the payment made to the bank account of the debt collection agency.  The debt collection agent deducted its charges and accounted to Burnard for the balance.

[6]      Mr Reynolds considers that the payment was voidable under s 292 of the Companies Act 1993.  It was made within the restricted period under s 292(6), in that it was made within six months of the start of the proceeding which resulted in the liquidation  order.    Because the payment  was  made within  the restricted  period, Planhorse is presumed to have been insolvent at the time, unless the contrary is proved.     Mr  Reynolds’  evidence  also  went  towards  proving  the  company’s insolvency.  On his evidence realisations in the liquidation have come to $5,766.00, with  claims  from  unsecured  creditors  coming to  some  $340,000.    He  says  that Planhorse  had  not  been  trading  for  12  months  before  liquidation.    It  may  be necessary to add back also the Pelikan payment of AUD69,899.50 which it may be assumed went either to other creditors or to the directors personally.  But, even with that, it seems that by reason of the payment, Burnard has received more than it would in the liquidation.

[7]      In his first report as liquidator, Mr Reynolds said that officers of Planhorse had explained that the company had become insolvent because the company believed that it had secured a large contract to supply goods to a country in Africa.  It paid some money to secure the contract but the contract did not eventuate and it appeared that the company had been subject to a fraud.   In his affidavit he has attached documents suggesting that very large sums of money amounting to US$ Millions would come from the World Bank.  There may be something in his view that this was fraudulent, but I do not have to make any definitive findings on that.

[8]      Mr Reynolds took action in relation to the payment made on 10 June 2015. He wrote to Burnard about the matter and Burnard responded.  On 5 November 2015

Mr Reynolds served a notice under s 294 of the Companies Act on Burnard’s office at 33 Rennie Drive, Mangere.  That is Burnard’s principal place of business and its registered office.   Burnard’s lawyer sent a notice of objection, in which Burnard denied receiving the $14,225.21 from Planhorse.

[9]      Mr Reynolds issued a fresh notice under s 294, which made it clear that the payment of $14,225.21 was made by Planhorse or on its behalf.  That fresh notice was also served on Burnard’s Rennie Drive premises.   Burnard’s lawyer served a fresh notice of objection under s 294, denying that the payment was made by Planhorse or on its behalf.  The notices of objection specified that Burnard’s address for service was at the offices of the lawyer.

[10]     In February 2015, Mr Reynolds began his application under ss 294 and 295. The application and his affidavit were served on Burnard’s office at Rennie Drive - the same place where the notices under s 294 had been served.

[11]     As I remarked earlier, Burnard does not contend there was any irregularity in the way that judgment was obtained, but it is put out because the application was served on its registered office and principal place of business rather than at the address for service it had specified in its notices of objection.  Notwithstanding that, Mr Reynolds was entitled to serve the notice of application at the head office and registered  office  of  the  company.    That  was  valid  and  effective  notice  under s 387(1)(b) and (c) of the Companies Act.  Mr Reynolds could also have served at the address for service specified in the notice of objection.  That would have been effective under s 387(1)(f).  But the fact that the liquidator chose one valid method instead of another does not invalidate service.

[12]     Burnard  explains  that  it  did  not  deal  with  the  proceeding  because  the documents served on it were misplaced because of an administrative error.  It failed to instruct its lawyers or to take steps in a timely way through oversight.

[13]     I accept that Burnard has not been cavalier in its attitude towards this matter. In particular, it responded in a timely manner to the notices under s 294.   Once Mr Reynolds pressed for payment of the judgment sum, it also applied promptly to set  aside  the  orders.    I  also  accept  that  Mr  Reynolds  will  not  be  irreparably prejudiced if the orders are set aside.

[14]     So far, those aspects of Burnard’s application are favourable to it.  There is,

however, a crunch question. That is whether Burnard has a substantial defence to the

setting aside application.  To show a substantial defence, it may show that it is able to resist the entire application on liability or it may show that the relief ordered should be adjusted.   For an example of relief being adjusted on a setting aside application, see Reynolds v HSE Holdings Ltd.5

[15]     Burnard’s  defence  is  that  Planhorse  Systems  Ltd  did  not  pay  it  the

$14,225.21.  There are two aspects to that.  First, it says that it did not receive the payment; and second, it says that Planhorse did not make the payment.

[16]     As to the submission that it did not receive the payment, Burnard claims that it assigned the debt to its debt collection agent, and accordingly the debt collection agent was the creditor, not it.  The evidence does not support that.  Burnard relies on a letter of demand by the debt collection agent to Planhorse dated 16 October 2014. The letter has a heading which refers to an overdue account with Burnard, and begins:

The above debt has been assigned to us for collection.

This is claimed to be evidence of an assignment of the debt.   That is a misunderstanding of the way that “assigned” has been used here.  “Assignment” can refer not only to a transfer of property but also to giving a task to somebody. All that the letter is saying is that the debt collection agency has been given the task of collecting the debt from Planhorse.  It does not mean that the debt has been assigned to the agency.  The absence of any transfer of the thing in action is borne out by the fact that the statutory demand issued by the agency identifies Burnard as the creditor and the liquidation proceeding also shows Burnard as the creditor, not the debt collecting agency.  The statement of claim or the liquidation proceeding does not say that the debt has been assigned.   It is correct that payment was made to the debt collecting agency, but it was simply acting as a debt collector in receiving payment, deducting its fee, and accounting to its principal.  In that, there was an agency.  The receipt of the payment was on behalf of Burnard.   In short, Burnard received the

payment as creditor.

5      Reynolds v HSE Holdings Ltd, HC Whangarei, CIV-2009-488-738, 17 September 2010.

[17]     As to the second limb, Burnard says that Pelikan Artline paid $14,225.21 directly to the bank account of the debt collection agency.  Its point is that the funds received by the agency did not come from Planhorse but from Pelikan Artline.

[18]     At the same time, Burnard treated the payment as discharging Planhorse’s

liability to it.  It withdrew its liquidation application as a result of the payment.

[19]     Under the deed between Planhorse and Pelikan Artline, the sum of $14,225 was to become the property of Planhorse.  Planhorse directed that it was to be paid into a bank account nominated by it.   Evidently it nominated the bank account of Burnard’s debt collection agency - as is shown by the banking records.  Case law has established that a company may discharge debts by using property other than its own.   I dealt with a similar situation in McCullough v Robt Jones Holdings Ltd.6

I said:

A number of cases have recognised that when a company arranges for one of its debtors to pay a debt by sending the funds to a creditor, the company’s indebtedness to the creditor is reduced by the amount of the payment and the transaction is a payment under s 292.While a payment must be made by the company, it need not come from the company’s property.  In such cases the debtor discharges its indebtedness to the company at the same time that the company reduces its debt to its creditor.   In these cases the source of the payment does not matter to the creditor:  it applies the payment towards the company’s debt.

[20]     Authorities in support of that approach are: Westpac Banking Corporation v Nangeela Properties Ltd (In Liq),7 Chilton St James School v Grey,8 Levin v Market Square Trust,9  and Anzani Investments Ltd v Official Assignee.10     Applying that principle, I regard the payment of the $14,225.21 as a payment made by Planhorse to Burnard, even though it sourced the funds from Pelikan Artline.

[21]     For these reasons I do not consider that Burnard has a substantial defence that the transaction does not come within s 292 of the Companies Act.  Burnard has not

raised any other defences.  For completeness, I record that I see no basis on which it

6      McCullough v Robt Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615 at [26].

7      Westpac Banking Corporation v Nangeela Properties Ltd (In Liq) [1986] 2 NZLR 1 (CA).

8      Chilton St James School v Grey [1996] 7 NZCLC 261,119 (HC) (although the payment was not made to a creditor of the company in that case).

9      Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591.

10     Anzani Investments Ltd v Official Assignee [2008] NZCA 144 at [22][24].

could claim a defence under s 296(3) of the Companies Act.   While Burnard no doubt acted in good faith, and also gave value for the debt in terms of the Supreme Court’s decision in Allied Concrete Ltd v Meltzer,11 it would not be able to run that defence because it would fail on the suspicion ground.  It had served the statutory demand, which had not been complied with, and it had applied for liquidation on the insolvency ground.   It  could not sensibly argue that it did not have reasonable grounds for suspecting that Planhorse was insolvent.

[22]     I  add  that  the  relief  ordered  by Associate  Judge  Sargisson  seems  to  be appropriate.   She ordered repayment with interest to run only from 9 December

2015.  Costs were appropriately fixed under Part 14 of the High Court Rules.

[23]     In summary, I cannot see a basis on which Burnard could say that it has missed the opportunity to present a substantial defence to the voidable transaction application.  Accordingly, because there is no substantial defence, I am satisfied that there has not been any miscarriage of justice when Mr Reynolds obtained judgment by default against Burnard.   Putting the matter another way, even if Burnard had taken steps within time, its defence would, in my judgment, have failed.  Because I am satisfied that there is no likelihood of a miscarriage of justice, I dismiss the setting aside application.

[24]     I order costs on a 1B basis.  If counsel cannot agree costs memoranda may be filed.

………………………................

Associate Judge R M Bell

11     Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141.