Reynolds v Eurovision Limited

[2013] NZHC 3015

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2013-442-000262 [2014] NZHC 3015

IN THE MATTER             of the liquidation of Ebode Construction

Limited (In Liquidation)

UNDER  Section 292 of the Companies Act 1993

BETWEEN  GRANT BRUCE REYNOLDS as liquidator of EBODE CONSTRUCTION LIMITED (In Liquidation)

Applicant Liquidator

ANDEUROVISION LIMITED Respondent Creditor

Hearing:                   8 November 2013

Appearances:           B Pamatatau for Applicant

D J Ballantyne for Respondent

Judgment:                14 November 2013

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      Mr Reynolds is the liquidator of Ebode Construction Limited (Ebode).  He has applied to the court under s 292 of the Companies Act 1993 for orders that three payments  made  by  Ebode  to  Eurovision  Limited  (Eurovision)  be  set  aside  as insolvent transactions.  He has also applied for an order that Eurovision pay to him a sum comprising the total of the three payments less a credit, which I shall describe later.

[2]      The relevant facts may be stated briefly.   At all relevant times Ebode was building a house in Auckland.  On 14 March 2001 it contracted with Eurovision for the supply of timber and aluminium joinery for the house.  The total contract price

including GST was $124,522.  A deposit of 35 per cent of the contract price was

G REYNOLDS as liquidator of EBODE CONSTRUCTION LTD (In Liq) v EUROVISION LTD [2013] NZHC 3015 [14 November 2013]

required upon acceptance.  $5,806.35 was paid the next day, and the balance of the deposit was paid on 15 April 2011.

[3]      The contract  provided that  the balance of the  contract  sum  was  payable

14 days after delivery of the joinery to the site.   The joinery was delivered on

19 October 2011 so the balance was due on 3 November 2011.  On 10 November

2011 Eurovision sent an invoice for the balance of $74,250. This sum was paid thus:

On 18 November       $15,000

On 29 November       $20,750

On 22 December       $38,500

[4]      In December the director of Eurovision, Mr Roberts, and a staff member travelled to Auckland and on 20 December completed on-site work required on some of the joinery.  Evidently some of the larger items had been delivered unassembled and it was their task to assemble them, and complete glazing.  They also assisted the builder with fitting the joinery.

[5]      Ebode went into liquidation on 18 May 2012.  The liquidator found that the company had virtually no assets, apart from a debt owing by an associated entity which has proved to be irrecoverable as that entity is insolvent.   It had creditors approaching $400,000.

[6]      Section 292 of the Companies Act 1993 provides:

•     a transaction  by a  company is  voidable by the liquidator if  it  is  an insolvent transaction, and is entered within a specified period of the commencement of the liquidation

•     an insolvent transaction is a transaction by a company that is entered into at a time when the company is unable to pay its due debts, and which enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation

•     a transaction includes a payment of money

•     a transaction that is entered into within a restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its debts

•     the restricted period is a period of six months before the commencement of the liquidation.

[7]      The liquidator says that all the payments I have listed were made within a period  of  six  months  of  the  commencement  of  the  liquidation,  so  within  the restricted period, and therefore each payment is presumed, in the absence of proof to the contrary, to have been entered into at a time when Ebode was unable to pay its due debts.

[8]      Eurovision accepts this, but says that none of the payments was an insolvent transaction, as none enabled it to receive more towards satisfaction of Ebode’s debt to it than it would have received in the company’s liquidation.   The first issue is whether that is the position.

[9]      Section 296(3) provides:

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.

[10]     Eurovision says that in accepting each of the payments it acted in good faith, that it did not have reasonable grounds for suspecting that Ebode was or would become insolvent, and nor would a reasonable person in its position have so suspected, and it altered its position in the reasonably held belief that the payments were valid and would not be set aside.   The second, third and fourth issues to be

decided are whether Eurovision has proved each of these elements and can therefore rely on s 296(3) to prevent an order being made as the liquidator seeks.

Admissibility of a document

[11]     Mr   Reynolds   produced,   as   an   exhibit   to   his   first   affidavit,   certain correspondence between him and Mr Roberts prior to the issue of this proceeding. One item was an email from Mr Roberts to Mr Reynolds which set out information which Mr Roberts wished to draw to Mr Reynolds’ attention, including a table of invoices and receipts.  At the end of the fourth paragraph of the email, Mr Roberts said:

... please accept this information without prejudice to our potential rights should we subsequently need to obtain that advice and follow that advice as to how we should proceed.

The reference to advice reflected reference, earlier in the email, to seeking legal advice.

[12]     Based on this statement Mr Ballantyne objects to this email being admitted in evidence, in its entirety.  Mr Pamatatau submits that the table in the email, at least, should be admitted as it is merely a statement of fact but otherwise accepts that the email should not be admitted.

[13]     In the context of the email written as a whole I find that the table cannot be dealt with separately from the balance of the email, which I find to have been written without prejudice, and therefore to be inadmissible.  Although I had read the email before this point was raised by Mr Ballantyne, I have not taken into account any of the information in the email in reaching my decision on this application.

First issue: did the payments to Eurovision enable the company to receive more towards satisfaction of the debt owing by Ebode than it would have received in the liquidation of that company?

[14]     This  question  is  to  be  answered  by  reference  to  the  liquidation  which occurred, not by reference to a notional liquidation at any other point.1   The evidence establishes that had Eurovision been an unsecured creditor for its unpaid invoices amounting to $74,250, and proved for that sum in the liquidation, it would not have recovered any part of that sum.   There were no assets to distribute to unsecured creditors.    The  liquidator  has  established,  therefore,  that  each  of  the  payments enabled Eurovision to receive more towards satisfaction of Ebode’s debt than it would have received in the liquidation.  As a result each of the payments was an

insolvent transaction in terms of the definition in s 292(2).

Second issue: did Eurovision act in good faith in accepting each of the payments?

[15]     In Madsen-Ries v Rapid Construction Ltd,2 the Court of Appeal said at [11]:

... the recipient of a disputed payment must show an honest belief that the transaction would not involve any element of undue preference either to itself or any guarantor ...  An awareness of financial difficulty, however, is not necessarily enough to establish a lack of good faith.

And at [29]:

... unless there is good reason to suspect otherwise, a creditor receiving a payment in the ordinary course of business is entitled to assume that the payment has been made validly.  ...

[16]     The  product  was  delivered  on  19  October  so  by  virtue  of  the  contract payment was due on 3 November.  However, Eurovision did not invoice the balance of the contract sum until 10 November.  The first payment of $15,000 was made on

18 November.  This was 15 days late, in terms of the written contract, but only eight days after the invoice was sent out.   A further payment of $20,750 was paid on

29 November,  and  the  final  sum  due  on  the  invoice,  $38,500,  was  paid  on

1      Porter Hire Ltd v Blanchett HC Auckland CIV-2005-404-3056 1 June 2006, Associate Judge Doogue.

2      Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489.

22 December.  The fact that the invoice was not settled in terms of the contract, or in any event immediately the invoice was rendered after the 14 day period had expired, might be seen as reason for Eurovision to be aware that all was not well, financially, with Ebode, and thus not to have acted in good faith in accepting the payments.

[17]     However, I am satisfied that it did act in good faith, for the following reasons. First, Ebode had paid the initial deposit in two instalments, the first, one day after the contract was entered but the second a month later.  Whilst this might also be seen as reason for Eurovision to be concerned about Ebode’s financial position, equally it shows that Ebode paid by instalments on the first invoice, and the fact that this occurred again might, in that context, not raise any suspicion on Eurovision’s part when it happened again.

[18]     Secondly, Mr Roberts says that the project manager for Ebode had advised him that Ebode’s normal practice in relation to payment for windows and doors was to pay for them from a progress payment made by the owner when the house reaches the lock-up stage of construction (which is necessarily after the products have been delivered and installed in order to render the house lockable).  Further, at the time the products had been manufactured and were delivered, he knew that Ebode was not quite ready to fit them, so the lock-up stage had not been reached, meaning that according to the project manager payment would be delayed until that occurred.

[19]     Thirdly, Mr Roberts says Eurovision had no knowledge of Ebode’s financial difficulties at the time it rendered the invoice or received the payments; delays in the construction of the house to the lock-up stage were not out of the ordinary in the building industry, and very few of Eurovision’s invoices are paid within 14 days of delivery on site as its terms of trade require.

[20]     Fourthly,  Mr  Roberts  says  that  when  the  third  of  the  three  payments  in question was received on 22 December he understood that the project was on track and the work they had completed had allowed the lock-up stage to be reached.  He understood that completion of his company’s contract allowed Ebode to receive a payment from the owner under the building contract for the house which they would not otherwise have received.

[21]     Fifthly, Mr Roberts says it was not until 21 February 2012 that he learnt that Ebode was in financial difficulty.  In the meantime he had continued to believe that it was financially sound, noting that it had in fact bought the manufacturing franchise contract for the light-weight timbercrete blocks that were being used on the house as the previous franchise holder had ceased trading.  This led to a delay in building of the house; as there was a sound reason for this delay he did not infer any financial difficulty on the part of Ebode.

[22]     Mr  Reynolds,  in  his  first  affidavit,  says  that  he  does  not  have  direct knowledge of Eurovision’s good faith at the time it received the payments.

[23]     I find that Eurovision did act in good faith when it received the payments.  I accept Mr Roberts’ evidence in relation to the knowledge Eurovision had at that time.   I think it would be naive to take the view that payments by builders to subcontractors are made on time so commonly that when they are not, there are grounds for that reason alone to be suspicious.   Builders are often dependent on owners meeting invoiced instalments.   Where a project manager advises a subcontractor that the normal practice of Ebode is for windows and doors to be paid from progress payments made by an owner at the lock-up stage, a subcontractor whose products or services (here, both) are required in order for that to occur can scarcely be found not to have acted in good faith when it receives payments which reflect that precise position.

[24]     Accordingly  I  find  that  Eurovision  acted  in  good  faith  in  receiving  the payments.

Third issue: has Eurovision established that a reasonable person in its position would not have suspected, and Eurovision did not have reasonable grounds for suspecting, that Ebode was or would become insolvent?

[25]     In Madsen-Ries v Rapid Construction Ltd the Court of Appeal endorsed the following statement from Associate Judge Abbott in Meltzer v Allied Concrete Ltd:3

3      Meltzer v Allied Concrete Ltd [2013] NZHC 977.

[13] The Courts do not look for any single factor, but rather judge the matter on the basis of the contemporary knowledge of the recipient, including potentially countervailing factors, which tended to dispel suspicion at that time.   While cash-flow problems can raise a suspicion of insolvency, they must  be  viewed  in  context  and  apparent  cash-flow  problems  may  be explained simply by a habit of delay in payment.  Thus, a temporary lack of liquidity, is generally insufficient for a conclusion of insolvency.   When approaching the question of suspicion, it is important to apply commercial reality, derived from the particular industry, to the facts of the case.

[26]     The evidence to be considered on this issue is substantially the same as the evidence relevant to the second issue. Eurovision:

•     was not paid, generally, by those to whom it supplied products within the

14 day period specified in its contractual terms of trade;

•     was informed that Ebode paid for joinery required for lock-up when an instalment at the lock-up point was paid by the owner;

•    was aware that there were delays in reaching that point because of difficulties  Ebode  had  experienced,  and  overcome,  in  relation  to obtaining timbercrete cladding products;

•     was aware that Ebode had paid the deposit in two instalments;

•     was  aware  that  when  the  product  was  delivered  late  in  October  the building was not ready for its installation; part of it required assembly on site for that purpose, and glazing.

[27]     The factors I have identified should be seen in the context of the geographical separation of Ebode and Eurovision, the former in Auckland and the latter in Mapua, near Nelson.  The Court is aware that in the building industry, word will sometimes spread around that certain companies are in financial difficulty, but that is not in my view as likely to occur when the two companies work so far apart.   There is no evidence that Eurovision was in touch with any other subcontractors.  Its work was not dependent on the work of any party other than the builder.  It manufactured its componentry for the house in Mapua and freighted it to Auckland.  It was not until late in the piece that representatives of Eurovision went on site.   There is no suggestion in the evidence of the liquidator that there were any circumstances by

which  any  general  industry  knowledge  might  have  come  to  the  attention  of

Eurovision.

[28]     In my opinion, in these circumstances, Eurovision did not have reasonable grounds for suspecting that the company was or would become insolvent, and a reasonable person in its position would not have so suspected.

Fourth issue: did Eurovision alter its position in the reasonably held belief that the payments were valid and would not be set aside?

[29]     In Madsen-Ries v Rapid Construction Ltd the Court of Appeal said:

[25]   A creditor’s alteration of position following receipt of a payment must be a conscious one; it must show that it would not have undertaken that course but for receipt and a belief in the payment’s validity.  ...

[26]   ... we accept that a contemporaneous alteration in position is sufficient, provided the decision is a conscious one to act in reliance on the payment ...

...

[30]   In assessing whether there is an alteration of position under s 296(3)(c) the question is whether a creditor has acted to his or her detriment.  In Baker Timber Supplies v Apollo Building Associates (Tauranga) Society Ltd (in liq))  Fisher J  properly  described  the  main  purpose  of  s  311A(7)  (now s 296(3)) as:

to assist a creditor if he has deliberately gone down one path in the reasonable expectation that he has received a valid payment, only to find that he is not only required to repay the money but that in the meantime he has also lost a valuable alternative opportunity.   In other words, he must have acted to his detriment on the strength of the insolvent company’s payment.

[30]     Mr Ballantyne says that under the contract the property in the products did not pass until Ebode had paid all amounts owing for it, and that until such time as ownership of the products passed to Ebode, Eurovision could have given notice in writing to Ebode to return the goods at which point the right of Ebode to obtain ownership of the goods, or any other interest in the goods, ceased.  In the event of Ebode not returning the goods to Eurovision, Eurovision could retake possession of

them.4

4      Terms and conditions clause 10.

[31]     Mr Ballantyne says that instead of assembling and installing the product in the house on 20 December, Eurovision could have exercised these rights.  He says that Eurovision altered its position by not doing so on 20 December.   Instead it installed  the  products  that  day,  doing  so  in  the  reasonably  held  belief  that  the progress payment due from the owner of the building once the lock-up stage had been reached would be made and would result in payment of the balance of its account, which occurred two days later on 22 December.

[32]     Mr  Ballantyne  submits  that  the  assembly  and  installation  work,  and  the payment, must be regarded as one event.  He says that builders rely on this sort of sequence in the ordinary course of business – that is, builders complete work in order to reach a point where payment can be made.  He says that to regard the installation and payment as other than one event would put suppliers such as Eurovision in a risky position: they would have to require payment before installation in order to avoid losing the right to remove the goods, but the goods are only installed in reliance on the fact that they are going to be paid.  He said that if the contract can be interpreted to allow the goods to be removed even after installation, if not paid for, the detriment is in the cost of undertaking the assembly and installation work including  travel  to Auckland  to  undertake  it,  and  the  possible  cost  of  damage associated with removing the products after installation.

[33]     Mr Pamatatau says that Eurovision made a commercial decision to instal the products into the house, and having done so it had no right to repossess the products, even if they were not paid for, because once they are attached to the building they become fixtures and title passes to the owner.   At that point the retention of title clause is regarded as a clause giving security over the goods, but if the security is not registered  it  is  extinguished.5    Therefore  the  right  to  repossess  was  lost  on

20 December at least in relation to the items which had been installed.

[34]     Mr Pamatatau also notes that in Farrell & Ors v Fences & Kerbs Ltd & Ors,6

the Court of Appeal decided that alteration of position must be proved to  have

5      Kiwi Packaging Ltd v Isaac & Morris CA106/99, 23 February 2000, per Blanchard J at [21].

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

occurred at the time the payment is made, or subsequently, and does not include alteration of position at the time the antecedent debt is created.

[35]     It follows from this, in my view, that an alteration in position is not sufficient for the purposes of s 296(3) if it occurs after the antecedent debt is created, at any time prior to the payment in issue.   To find otherwise would be inconsistent with Madsen-Ries v Rapid Construction Ltd  where reference is made to a course of conduct which necessarily follows both receipt of a payment and a belief in its validity.  Although the Court of Appeal accepted that contemporaneous alteration of position is sufficient, still the decision to alter position must be “a conscious one to act in reliance on the payment”.

[36]     In this case, it is not established that the steps relied on by Eurovision were taken  in  reliance on  the payment  of 22  December.    Rather,  the steps  taken  on

20 December were in reliance on the expectation of payment upon completion of the lockup stage of the building, which Eurovision was assisting in achieving and which, on the evidence before me, did lead to the payment being made two days later. Because the installation of the products was necessarily prior to the lockup stage being reached, and the lockup stage was necessarily prior to payment by the owner, itself prior to payment to Eurovision, it cannot in any realistic sense be described as a contemporaneous transaction; nor can the decision to proceed with installation realistically be described as “a conscious one to act in reliance on the payment”.

[37]     For these reasons Eurovision has not established that it acted to its detriment in reliance on the payment of $38,500 which it says was made on 22 December

2011.

[38]     As I have said, two earlier payments were made on 18 and 29 November, which the liquidator also seeks to set aside.  At the time these payments were made, it seems that Eurovision retained title to the products which had been delivered to the site late in October.  The evidence in relation to exactly when each separate item of external joinery was installed in the building is hazy at best, as it concentrates on installation of the larger items which had to be assembled on site before installation, but there is also reference to installation of other items at that time, and to Ebode not

being ready to fit the joinery at the time of delivery.  Given this, and the length of time  between  delivery  to  the  site  in  Auckland  on  or  about  19  October,  and installation work two months later, it is a reasonable inference in my view that much of the joinery, if not all of it, would have remained on site pending installation when the first two payments of the final account were made.

[39]     Mr Roberts says that if Eurovision had been aware of any circumstances that would cast doubt on Ebode’s ability to meet its obligations it would not have undertaken any further work under the contract without full payment in advance. The further work required was, of course, some assembly and glazing.

[40]     Mr Roberts also says that as they had received two instalments towards the account they had “no problems travelling to Auckland” to complete the remaining work. This would not have been done otherwise; rather, the joinery would have been repossessed.

[41]     I am satisfied that in relation to the payments made on 18 November and

29 November ($35,750) Eurovision has established that it altered its position in the reasonably held belief that the payments were valid and could not be set aside.  The alteration of position was foregoing the right to repossess, travelling to Auckland, and completing assembly, installation and glazing work.

Outcome

[42]     The  three  payments  made  by  Ebode  to  Eurovision  on  18  November,

29 November and 22 December 2011 were insolvent transactions in terms of s 292. In  terms  of  s  296(3),  Eurovision  acted  in  good  faith  in  accepting  each  of  the payments, and a reasonable person in its position would not have suspected, and Eurovision did not have reasonable grounds to suspect, that Ebode was or would become insolvent, at the time the payments were received.

[43]     In relation to the payments made on 18 November and 29 November 2011, Eurovision has established that it altered its position in the reasonably held belief that they were valid and would not be set aside.   In relation to the payment of

$38,500 on 22 December 2011 Eurovision has not established that it altered its position in the reasonably held belief that this payment was valid and would not be set aside.

[44]     Although  the  liquidator  sought  orders  that  all  three  payments,  together totalling $74,250 be set aside as insolvent transactions, he sought an order that Eurovision pay only the sum of $62,445.25.  The difference ($11,804.75) relates to invoices rendered by Eurovision to Ebode for other work done for Ebode.   The liquidator accepts that these unpaid invoices should be credited to Eurovision, and has reduced his claim by the invoiced sums.

[45]     Pursuant to s 295 I order that Eurovision pay to the liquidator the net sum of

$26,695.25.

[46]     The liquidator seeks interest from the date of filing the application, 4 June

2013.   He is entitled to interest as sought, and I direct that Eurovision will pay interest from that date to the date of judgment.

[47]     Each party has succeeded in part.  I reserve costs, and invite memoranda not exceeding three pages within five working days, if costs cannot be agreed.   My

provisional indication is that there should not be an award of costs.

J G Matthews

Associate Judge

Solicitors:

Malcolm Whitlock, Auckland. C & F Legal, Nelson.