Scutter v Tawa Limited Partnership
[2022] NZHC 848
•28 April 2022
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE WHANGANUI-A-TARA ROHE
CIV-2021-485-364 CIV-2021-485-361
[2022] NZHC 848
UNDER the Land Transfer Act 2017 and the Companies Act 1993 IN THE MATTER OF
an application under section 143 of the Land Transfer Act 2017 and an application under Part 16 of the Companies Act 1993
BETWEEN
JOHN MARSHALL SCUTTER as
liquidator of MATRIX HOMES LIMITED (in liquidation) and MATRIX HOMES LIMITED (in liquidation)
Applicant
AND
TAWA LIMITED PARTNERSHIP
Respondent
Hearing (by VMR): 28 February – 1 March 2022 Counsel:
K P Sullivan and D P MacKenzie for the Applicant M Colson QC and C J Houlahan for the Respondent
Judgment:
28 April 2022
JUDGMENT OF GWYN J
Solicitors:
WCM Legal, Wellington
Gibson Sheat Lawyers, Wellington
MATRIX HOMES LIMITED (in liquidation) v TAWA LIMITED PARTNERSHIP [2022] NZHC 848
[28 April 2022]
TABLE OF CONTENTS
Introduction [1]
The entities[10]
The contract[17]
Relevant subsequent events [24]
The liquidation [27]
The insolvent transaction[29]
Issues for determination[50]
Is there a transaction in terms of s 292(3) of the Act?[52]
What constitutes the transaction? [52]
Were the payments advances or pre-payments under the contract?[53] Discussion [71]
Were the credit invoices a transaction for the purposes of s 292(3) of the Act?[101] Discussion [103]
Was there a creditor/debtor relationship between Tawa LP and Matrix?[110]
Conclusion on insolvent transaction[116]
Transaction at undervalue [117]
Discussion[128]
The caveat[132]
Discussion[146]
The Tawa LP charge[161]
Conclusion on Tawa LP Charge[168]
Result [169]
Costs [172]
Introduction
[1] These proceedings concern two related applications by the liquidator of Matrix Homes Limited (in liquidation) (Matrix), to have certain transactions set aside as voidable transactions, pursuant to s 292 of the Companies Act 1993 (the Act), and for an order that a caveat not lapse.
[2] The applications arise from a contract dated 27 September 2016 between Matrix and Tawa Limited Partnership (Tawa LP) for the construction by Matrix of 11 duplex style modular apartments (the apartments), to be sited at 4 William Earp Place, Tawa, Wellington.
[3] The applicant in both proceedings is the liquidator of Matrix, Mr John Scutter. Mr Sutter seeks:
(a)That the voidable transactions be set aside and an order made for payment by Tawa LP to Matrix of $2,167,619.
(b)An order that a caveat placed by Matrix over a property at 4 William Earp Place, Tawa, not lapse.
(c)An order setting aside the security interest registered by Tawa LP on 29 May 2018 over 17 of the apartments, as voidable, under s 293 of the Act.
[4] The liquidator’s position is that credit invoices issued by Matrix to Tawa LP allowed Tawa LP to take ownership of the apartments, that were Matrix’s property. Without the issue of the credit invoices, Tawa LP and its shareholders would have remained creditors of Matrix, in the amount of $3.3 million.
[5] In the alternative, the liquidator says that the transfer of the apartments to Tawa LP was at an undervalue and falls within either s 297 and or s 298 of the Act.
[6] Tawa LP’s primary defence is that the payments relied on by the liquidator were pre-payments made under the building contract between Tawa LP and Matrix, not shareholder advances, as the liquidator contends.
[7] Second, Tawa LP says that, even if the liquidator is correct that the payments were advances by Tawa LP’s shareholders, Tawa LP was not a creditor of Matrix and the credit invoices for those payments did not allow Tawa LP to receive more towards satisfaction of its debt than it would have done in the company’s liquidation. The requisite causal link did not exist.
[8] Finally, Tawa LP says the transfer of the apartments to Tawa LP was not at an undervalue as the apartments were significantly defective and Tawa LP had to spend
$2.1m to put them into a saleable state.
[9] In relation to the application that the caveat not lapse, Tawa LP says that Matrix does not have a caveatable interest in the property and the caveat should lapse.
The entities
[10] Tawa LP is a limited partnership, registered under the Limited Partnerships Act 2008 on 8 August 2016. Its general partner is Tawa Developments Ltd. Sean Murrie and Joseph Hannah are the directors of Tawa Developments Ltd and hold 70 per cent and 30 per cent, respectively, of its shares.
[11] Matrix was incorporated as Domino Housing Limited on 10 March 2014. Its purpose was to construct affordable, factory-build modular-style houses. The houses were to be constructed in Matrix’s factory and then moved to the purchaser’s site. Mr Murrie was initially the sole director and shareholder of Matrix. From December 2014, Matrix had a range of directors, but Mr Murrie remained its largest shareholder.
[12] Mr Murrie and Mr Hannah met in 2014. On Mr Murrie’s invitation, Mr Hannah became involved in Matrix.
[13] Mr Hannah and Mr Murrie were interested in undertaking a property development to showcase a duplex design. Matrix’s Shareholders’ Agreement prevented it from undertaking property developments, except with the unanimous consent of its shareholders. Mr Hannah and Mr Murrie therefore decided to advance a property development outside of Matrix.
[14] Mr Murrie was the registered proprietor of a property at 4 William Earp Place, Tawa, Wellington.1 He and Mr Hannah agreed by way of a Heads of Terms of Agreement2 that Mr Murrie would contribute the property at 4 William Earp Place and Mr Hannah would contribute $500,000 in exchange for a 30 per cent stake in Tawa LP.
[15] They reached broad agreement in December 2015, but Tawa LP was not registered until 8 August 2016.
[16] Tawa LP had trouble raising funds from banks and, consequently, the partners loaned it further funds over time. The shareholding in Tawa LP eventually became
56.5 per cent for Mr Murrie and 43.5 per cent for Mr Hannah.
The contract
[17] Tawa LP contracted with Matrix on 27 September 2016 to build 11 two-storey duplex apartments for a development on the property at 4 William Earp Place (the contract).
[18]The contract provided:
(a)The development was to consist of 11 duplex style modular apartments (22 units in total).3
(b)For a fixed price of $2.75m (including GST) plus any variations (original contract price).4
1 The certificate of title reference of the property at that time was CT 571918.
2 The copy before the Court is undated and unsigned.
3 Schedule, Part A.
4 Schedule, Part C.
(c)The Property was the place where the apartments were to be built, or located after they were built.5 The Property was identified as 4 William Earp Place, Tawa, Wellington.6
(d)The building of the apartments was expected to start on October 2016 and end by 15 February 2017.7 Matrix’s margin for the project was to be 30 per cent.8
(e)Progress payments were to be made on the completion of predefined stages.9 All amounts were inclusive of GST.
(f)The contract allowed Matrix to render invoices “at any time after a relevant stage of completion is reached”.10 Payment in full was required within five working days of the invoice being delivered11 and introduced the payment regime under the Construction Contracts 2002.12
(g)Progress payments were to be made 10 working days after the issue of an invoice.13
(h)Tawa LP was entitled to immediate possession of the apartments once it had paid Matrix the final contract price.14 The requirement to obtain a Certificate of Practical Completion was deemed “N/A” by the parties.15
(i)Matrix could allow Tawa LP to take possession of the apartments prior to full payment, provided Tawa LP provided Matrix with “such security
5 Clause 1.1 (q).
6 Schedule, Part A.
7 Schedule, Part B.
8 Schedule, Part G.
9 Schedule, Part E, option (a).
10 Clause 7.4.
11 Clause 7.6.
12 Clause 7.7.
13 Schedule, Part F.
14 Schedule, Part E.
15 Clause 17.1.
as [Matrix] may reasonably require for payment of any unpaid or disputed amounts”.16
(j)Tawa LP granted and agreed to execute a registrable, all-obligations mortgage to Matrix to secure its payment obligation under the contract.17
(k)Matrix was provided with a discretion to register a caveat against the title to the property, in respect of its interest as mortgagee.18
(l)Tawa LP was to be liable for any costs incurred by Matrix as a result of any default in making payment.19
[19]Each of Mr Murrie, Mr Hannah and Tawa LP paid amounts to Matrix:
(a)$1,937,000 from Mr Murrie (between 8 February 2017 and 3 October 2017).
(b)$565,000 from Mr Hannah (between 22 March 2016 and 27 January 2017).
(c)$830,000 from Tawa LP (between 30 May 2017 and 6 July 2018).
[20] No invoices were rendered by Matrix under the contract between 27 September 2016, the date of the contract, and 31 March 2018.
[21] Matrix rendered three invoices to Tawa LP in April 2018 (the credit invoices), as follows:
(a)INV-3467 dated 1 April 2018 for a credit of $1,937,000, described as “Transfer loan amount to invoice”.
16 Clause 17.4.
17 Clause 20.5.
18 Clause 20.6.
19 Clause 20.10.
(b)INV-3468 dated 1 April 2018 for a credit of $565,000, described as “Transfer loan amount to invoice balance”.
(c)INV-3469 dated 15 April 2018 for a credit of $830,000, described as “transfer balance of shareholder loans to customer credit” (referred to by Mr Scutter as the “Pre-Payment Invoice”).
[22] In April 2018, Matrix rendered three invoices to Tawa LP for the final contract price (the contract invoices), as follows:
(a) INV-3307 dated 15 April 2018 for $2,833,669.96.; (b) INV-3342 dated 15 April 2018 for $109,634.40. (c) INV-3460 dated 24 April 2018 for $54,314.59.
[23] Matrix did not receive any cash flow from the contract invoices. The contract invoices are all recorded as paid, with no balance owing by Tawa LP. The liquidator’s evidence is that Tawa LP appears to have been treated as having paid the contract invoices through the credit invoices and the pre-payment invoice, as detailed at [21] above.
Relevant subsequent events
[24]In April 2018 Tawa LP obtained ownership of the apartments.
[25]On 3 December 2018 the property was transferred from Mr Murrie to Tawa LP.
[26] In September 2020 title in each of the individual apartments was transferred to individual purchasers.
The liquidation
[27] On 18 July 2018, Mr Murrie placed Matrix into receivership, pursuant to a general security agreement (GSA) originally granted to the Bank of New Zealand, of which Mr Murrie had taken assignment. Matrix’s remaining physical assets were sold
off by the receivers with the only credit or distribution made for some staff wages, holiday pay and PAYE. The receivers gave notice of the end of the receivership on 13 November 2018.
[28] On 16 October 2018, Mr Scutter (a licensed insolvency practitioner and a chartered accountant) was appointed as Matrix’s liquidator by special resolution by majority of those shareholders entitled to vote and voting on the question. Matrix had creditors of more than $8.7 million.
The insolvent transaction
[29] The liquidator’s notice under s 292 of the Act sought to set aside the following transactions:20
1.1Invoices rendered by Matrix Homes to Tawa LP purporting to credit Tawa LP as follows (the Credit Invoices):
Date Amount ($) Reference Description 01/04/2018
1,937,000
Invoice No. 00003467
Transfer loan amount to invoice
01/04/2018
565,000
Invoice No.
00003468
Transfer loan amount to invoice
balance
15/04/2018
830,000
Invoice No. 00003469
Transfer balance of shareholder loans to customer credit
[30] Subsequently, by Notice of Originating Application,21 the liquidator sought to have the credit invoices INV-3467 and INV-3468 (but not INV-3469) set aside as a voidable transaction and to set aside as voidable under s 293 of the Act a charge granted by Matrix to Tawa LP on 28 May 2018.
[31]The liquidator relies on the following grounds.
[32] Matrix and Tawa LP entered into the contract, for a fixed price of $2.75 million (including GST), plus any variations.
20 Notice to Set Aside an Insolvent Transaction under section 292 of the Companies Act 1993, 22 February 2021.
21 Notice of Originating Application by Applicant (1) To Set Aside Voidable Transaction and Charge and/or (2) For the Recovery of a Transaction for Inadequate Consideration or at Undervalue, 16 July 2021.
[33] Matrix rendered invoices to Tawa LP under the contract for the final contract price, by way of the contract invoices, detailed at [22] above, dated:
(a) 15 April 2018 for $2,833,669.96;
(b) 15 April 2018 for $109,634.40; and (c) 24 April 2018 for $54,314.59.
[34] The credit invoices purported to credit Tawa LP with payment of the contract invoices.
[35] The credit invoices were rendered at a time when Matrix was unable to pay its due debts.
[36] By purporting to pay the contract invoices through the credit invoices, Tawa LP received the apartment development without having to pay for it.
[37]The transactions thereby allowed Tawa LP to receive:
(a)more towards satisfaction of a debt than would otherwise have been owed by Matrix (i.e. the apartment development itself); and
(b)more than it would have received, or would be likely to have received, in Matrix’s liquidation (i.e. a claim to the apartment development).
[38] Tawa LP is a related party to Matrix because it is a close business associate under s 291A of the Act.
[39] The credit invoices occurred within the related party period, being within two years prior to the date Matrix was placed into liquidation.
[40] The credit invoices were not an integral part of a continuing business relationship.
[41] Tawa LP did not receive the benefit of the credit invoices in circumstances where:
(a)it acted in good faith;
(b)a reasonable person in Tawa LP’s position would not have suspected that Matrix was, or would become, insolvent; and
(c)Tawa LP did not give value for the transactions or alter its position in the reasonably held belief that the transactions would not be set aside.
[42] The liquidator alleges that the credit invoices are a voidable transaction within the terms of s 292 of the Act. Section 292 provides that a transaction is voidable by the liquidator if it is an insolvent transaction and entered into within the specified period. The onus is on the liquidator to show that the transaction in question is an insolvent transaction.
[43]Section 292(2) defines insolvent transaction as follows:
292 Insolvent transaction voidable
…
(1A) A transaction by a company is voidable by the liquidator if it—
(a)is an insolvent transaction; and
(b)is entered into with a related party of the company within the related party period.
(2)An insolvent transaction is a transaction by a company that—
(a)is entered into at a time when the company is unable to pay its due debts; and
(b)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.
[44] Section 292(3) provides that transaction “means any of the following steps by the company”:
(a)conveying or transferring the company’s property:
(b)creating a charge over the company’s property:
(c)incurring an obligation:
(d)undergoing an execution process:
(e)paying money (including paying money in accordance with a judgment or an order of a court):
(f)anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
[45] The liquidator relies on ss 292(3)(a) and (f). He says that the issue of the credit invoices enabled Tawa LP to walk away with the apartments – a valuable asset – without paying for them and instead of being a creditor of Matrix in the liquidation for the advances.
[46]Under s 292, a transaction is voidable by the liquidator if it:
(a)is a transaction of a defined kind; and
(b)is entered into at a time when the company is unable to pay its due debts; and
(c)is entered into within the specified period prior to commencement of liquidation; and
(d)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.
[47] The liquidator seeks payment of the value of the apartments, rather than their conveyance back to Matrix. The liquidator relies on s 295 of the Act, which allows the court, when a transaction or charge is set aside, to make a range of orders, including an order for payment of a specified amount.
[48] It is not disputed that Matrix was unable to pay its due debts at the time the credit invoices were issued. Mr Scutter says that Matrix was balance sheet insolvent from the date of its incorporation. Mr Murrie disputes that, but Tawa LP has provided no evidence to say that Matrix was solvent as at April 2018 and does not rely on this ground of defence. Mr Scutter’s evidence is that Matrix was unable to pay its due
debts by at least 31 March 2018, having stopped paying PAYE to IRD from November 2017.
[49] Nor is it disputed that the transaction was entered into within the specified period prior to commencement of liquidation. Tawa LP is a related party to Matrix.22 The related party period for which Tawa LP can be scrutinised is the period of two years prior to Matrix’s liquidation (i.e. from 16 October 2016).23
Issues for determination
[50] Tawa LP disputes whether the credit invoices are a transaction within the terms of s 292 and whether the transaction enabled Tawa LP to receive more towards satisfaction of the unsecured debt owed by Matrix to Tawa LP than it would have received, or would have likely received, in the company’s liquidation. Those overarching issues raise a number of more specific questions.
[51]The questions for determination are:
(a)Is there a transaction within s 292(3) of the Act?
(i)What constitutes the “transaction”?
(ii)Were the payments advances or pre-payments under the contract?
(iii)Was the transaction an insolvent transaction?
(b)Was there a creditor/debtor relationship between Tawa LP and Matrix?
(c)Related to (b), did Tawa LP receive more towards the satisfaction of its debt than it would have received in the liquidation?24
22 Section 291A. See above [10]-[16] as to the relationship of the parties.
23 Section 292(5)(a).
24 See McCullagh v Robt Jones Holdings Ltd [2017] NZHC 2182 at [198]-[199].
Is there a transaction in terms of s 292(3) of the Act?
What constitutes the transaction?
[52] The liquidator defines the “transaction” as the credit invoices dated 1 April 2018 relating to the payments by Mr Murrie and Mr Hannah. The pre-payment invoice that was included in the 22 February 2021 Notice is not relied on. Mr Scutter’s evidence is that during negotiations he was prepared to give Tawa LP “the benefit of the doubt” for its advances of $830,000 and thereby reduce the amount owing by Tawa LP from $2,997,619 to $2,167,619, in the hope that a resolution could be reached. However, having seen Tawa LP’s opposition and, in particular, the assertion in relation to a “conditional” contract, he did not consider it was entitled to the benefit of any doubt at all. His view now is that Tawa LP is in the same position as Messrs Murrie and Hannah. Nevertheless, the application seeks orders requiring payment of $2,167,919 from Tawa LP to Matrix, rather than the full $2,997,619.
Were the payments advances or pre-payments under the contract?
[53] Tawa LP says the payments were pre-payments under the contract and cannot constitute a voidable transaction. The liquidator says the payments were shareholder advances, but even if they were pre-payments, they still constitute a voidable transaction.
[54] In support of his primary submission that the payments were advances, the liquidator refers to, first, the credit invoices themselves which refer to “Transfer loan amount to invoice ($1,937,00)”; “Transfer loan amount to invoice balance ($565,000)”; and to the pre-payment invoice “Transfer balance of shareholder loans to customer credit ($830,000)”.
[55] Second, he notes that the amounts in the record of the advances match the invoices. The liquidator also observes that Mr Hannah advanced $425,000 to Matrix before the contract was entered into in September 2016, of which at least $225,000 was advanced before Tawa LP existed in August 2016, making it plainly impossible for those amounts to be pre-payments under the contract.
[56] Third, Mr Scutter says that the advances are coded as loan advances in Matrix’s accounts. He relies for that assertion on the fact that the account number is recorded in Matrix’s accounts under its current liabilities. He says that was unique to Tawa LP.
[57] Mr Scutter also says that had the payments been progress payments for work that was yet to be invoiced, they would have been coded as ‘Customer Deposits’ and GST paid on those receipts. This is how Matrix dealt with its sales in the ordinary course. Mr Scutter refers to two contracts for two other individual customers, where the sales receipted on those two contracts align with the payment schedules in the contracts and have all been coded by Matrix as sales, with GST paid on them. Here, the payments were coded as loans so that no GST was due. Matrix deferred any GST payments, the sales being dated at the time of the contract invoices and the GST return. The liquidator says that tax treatment of the payments was inconsistent with them being progress payments (i.e. sales).
[58] In addition, the liquidator says that the advances went into Matrix’s general expenses bank account and were used as working capital for apartments and other projects and to meet payments as they fell due.
[59] Mr Scutter relies on the draft financial statements for Matrix to 31 March 2017, prepared and signed off by Deloitte. Mr Scutter says the Deloitte statements show that the relevant payments made by Messrs Murrie and Hannah to Matrix were recorded as liabilities to associated persons.
[60] The primary submission for Tawa LP in response is that it made pre-payments towards the contract. Tawa LP and Matrix treated their dealings informally, because of the close relationship between them, and that is reflected in the accounting arrangements. These were not shareholder loans and there was, therefore, no insolvent transaction that can be set aside.
[61]Tawa LP notes:
(a)The contract was in place (entered into in September 2016). It was for
$2,750,000, including GST but with variations to be added. The
contract required progress payments which reflected Matrix’s business model. Given Matrix’s obvious cashflow issues, together with the contractual requirement for progress payments, it would have made no commercial sense for Matrix to require no progress payments.
(b)By accepting that the $830,000 from Tawa LP (INV-3469) was a progress payment, the liquidator accepts that invoices are not a necessary precursor to a progress payment.
(c)Both Mr Murrie and Mr Hannah have sworn in their affidavits that the payments made were payments under the contract. Their evidence is that it would have made no commercial sense to lend money to Matrix other than making payments under the contract, because both would assist Matrix with cashflow. Neither Mr Murrie nor Mr Hannah have been called for cross-examination and the Court ought not to go beyond their evidence.
(d)Mr Hannah acknowledges that he did lend money to Matrix, but those loans were made during 2015 ($100,000 each on 6 October 2015 and 23 November 2015) and were properly documented. He obtained security for those loans and they incurred interest of 15 per cent per annum.
(e)Tawa LP’s draft accounts for 2017 to 2019 record the payments as payments towards the contract.
(f)Although Matrix’s MYOB records the payments as liabilities in its accounts, that is not the same as a loan.
[62] On the last of those points, the respondent says that internal MYOB Matrix records do not record the payments as shareholder loans, or any other kind of loans. They record the payments using the word “Tawa”. The payments are treated as a liability and placed beside customer deposits. Mr Murrie says that the reason for the different accounting treatment of Tawa LP’s payments within Matrix’s accounts
(compared to other customers) was, in part, due to the “poor performance” of Matrix’s accounts person, Ms Bryant. Mr Murrie alleges that Ms Bryant found it difficult to understand the conditional nature of the building contract and the need for progress payments under it to be treated differently, despite numerous explanations.
[63] Similarly, Mr Murrie says the responsibility for a further incorrect recording of a transfer credit invoice rests with Paul Fenton. Mr Fenton’s business is an MYOB and Xero consultancy and he assisted Matrix with MYOB General Ledger restructuring, management reporting, year-end software file management and work in progress reporting.
[64] Mr Murrie says that Mr Fenton wrongly applied the credit to Shareholder Loan accounts rather than to Tawa LP, and, that Mr Murrie was not aware of this error until Mr Scutter pointed it out. Mr Murrie says that the fact that the payments are recorded as liabilities is of no moment; as he puts it, an accounting entry cannot create a debtor/creditor relationship.
[65] Mr Murrie says it was not unusual for pre-payments to be used as part of general working capital and not targeted to any specific project.
[66] Counsel for the respondent, Mr Colson, submits that the GST issue is a red herring. Given the uncertainty of Matrix being able to deliver the apartments, Matrix treated the contract as conditional, but only for the purposes of GST. Mr Murrie said he had received accounting advice to that effect. It was conditional until Matrix showed it could successfully build the apartments. Only at that point did the contract became unconditional and Matrix become liable to pay the GST. Matrix did not have to account for GST at the time the payments were received, but rather at the time the final build invoice was issued. The payments had been received, so they had to be accounted for, but this was not easy to implement under Matrix’s accounting system. The payments were recorded in liability accounts, as they were customer deposits. It was done this way because no invoices had yet been issued because of the conditional nature of the contract.
[67] Tawa LP also submitted that a pre-payment regime falls outside of s 292 of the Act. It relies in particular on the Supreme Court’s decision in Allied Concrete Limited v Meltzer.25 In that case, Arnold J said:26
To be an insolvent transaction there must be a payment made by the company to another in the context of a debtor/creditor relationship, which results in the creditor receiving more than it would in a liquidation. It follows that a “cash on delivery” supply to a technically insolvent company does not involve an insolvent transaction as the payment for the goods or services is not referable to a debtor/creditor relationship.
[68]And William Young J said:27
The reasons given by Arnold J treated as axiomatic that a cash on delivery (and therefore a fortiori a pre-payment) arrangement is not subject to avoidance - … section 292 is engaged only by transactions which result in full or partial satisfaction of a debt. The essence of pre-payment or cash on delivery transaction is that credit is not provided and accordingly there is no debt… I would be reluctant to suggest that there is scope for uncertainty. That is because I think that:
(a)there is no such scope; and
(b)any suggestion that pre-payment or cash on delivery transactions are subject to avoidance would have appreciable and adverse commercial consequences.
[69] In response, the liquidator says that even if he is wrong and the payments were, as Tawa LP alleges, pre-payments towards the contract, nevertheless there is still a voidable transaction. The liquidator notes that the comments in Allied Concrete relied on by Tawa LP are obiter, but in any event, the comments are made in the context of a case that was about an insolvent company paying invoices for supply of goods and services to that insolvent company. Allied Concrete concerned cash on delivery supply to an insolvent company or a pre-payment made by an insolvent company. There is no debtor/creditor relationship there because the insolvent company has paid in full. That is the opposite of the facts here. The Supreme Court was not considering the reverse situation of pre-payment to an insolvent company for it to supply goods. Similarly, in Robert Jones Holdings Limited v McCullagh,28 also relied on by the respondent, it was a third party paying off an insolvent company’s debt obligation.
25 Allied Concrete Limited v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141.
26 At [18].
27 At [185]-[187].
28 Robt Jones Holdings Limited v McCullagh [2019] NZSC 86, [2019] 1 NZLR 641.
[70] Third, the liquidator says that Allied Concrete relates to the orthodox situation of invoices being rendered and payments made. Here, Tawa LP was a creditor for payments made before any invoices were issued. There was no invoice.
Discussion
[71]As Mr Scutter observes, the credit invoices are unusual in three respects:
(a)They were issued to Tawa LP in respect of payments made by Mr Murrie and Mr Hannah, i.e. Tawa LP received the credit, not the parties making the payments.
(b)The advances were used by Matrix as general working capital.
(c)The credit invoices predate the contract invoices.
[72] No invoices were rendered by Matrix to Tawa LP before the contract invoices, on the basis of which Tawa LP could have made payment. If they were indeed progress payments, then it is unclear why they were made at a time when no invoices had been rendered by Matrix. Some of the payments made by Mr Hannah pre-date the contract and cannot have been pre-payment for work that Matrix had not yet agreed to undertake.
[73] There is nothing in the Tawa LP accounts that records the payments as pre- payments under the contract.
[74] Nor is there any relationship between the asserted pre-payments and the milestones under the contract.
[75] The credit invoices refer to “loan amount” and the pre-payment invoice refers to “shareholder loans”.
[76] The record of the advances in the MYOB Account Transactions [Accrual] match the credit invoices.
[77] As Mr Scutter notes, the relevant account number is recorded in Matrix’s accounts under its current liabilities. Mr Scutter explains that that is unique when compared with the treatment of other customers. Matrix allocated a separate general ledger account code to capture these advances, but did not do so for other customers.
[78] While Mr Murrie asserts that the different accounting treatment of Tawa LP’s payments, within the Matrix accounts, was due to error or incompetence by Ms Bryant and/or Mr Fenton, the email correspondence between Mr Murrie and Ms Bryant indicates that Mr Murrie had instructed her to code an advance as a loan, rather than as a customer deposit, because GST was payable on the latter, but not on the former.
[79] Mr Murrie emailed Ms Bryant on 24 May 2017: “It’s fairly simple that it is a deposit paid, but recorded as a loan at this stage to avoid GST as we are able to make this choice.” Ms Bryant replied to Mr Murrie on 25 May 2017: “Your words were ‘code it as a loan’… This is the only deposit that has ever been coded as a loan.”
[80] The Matrix MYOB accounts did not code the advances as sales, nor did Matrix pay GST on them, as would have been required if they were progress payments.
[81] In relation to the $400,000 offset on Tawa LP’s ledger on 8 February 2017, Mr Murrie emailed Ms Bryant on 7 August 2017:
I don’t understand the $400k sale being in there? Is that cash or an invoice? I can’t see how a sale and a customer deposit end up in the same account, and on the same side of the ledger.
[82] Ms Bryant responded to Mr Murrie on 8 August 2017: “I am checking with Beth re the $400,000. It is a loan but I entered it as an invoice and coded it to the loan account.” Later that day she emailed:
Beth also said I shouldn’t have recorded the $400,000 as a sales invoice as all sales invoices should have GST charged on them. She suggested I credit the Tax invoice and show the $400,000 as being coded direct to the loan account.
[83] On 21 August 2017, Ms Bryant emailed Mr Murrie: “All those amounts have been coded as Joseph’s shareholder loan (i.e. the 100, the 300k, the 100k and the 40k).”
[84] I conclude that the payments were coded as loans, on Mr Murrie’s instructions, so that no GST would be due on the payments.
[85] Mr Fenton’s evidence is that Mr Murrie asked him how to offset the sales invoices with the advances and the credit invoices. Mr Fenton explains that one way to transfer a balance sheet liability such as a loan to a sales invoice in MYOB is to create a negative (“credit”) invoice, coded to the relevant balance sheet account. This credit is then offset against the open invoice, marking it as closed, or paid.
[86] Mr Fenton says that he did convert the Tawa LP orders to invoices, in Mr Murrie’s presence and under his instruction. Mr Fenton entered credit invoices in order to transfer payments from loan accounts to the Tawa LP invoices, in accordance with Mr Murrie’s instructions. He refers to his contemporaneous time log to this effect. A Journal Security Audit of the Matrix accounts is consistent with Mr Fenton’s account of events, showing that Mr Murrie created the contract invoices and credit invoices in May 2018, notwithstanding his evidence that he never saw the credit invoices until he received them from the liquidator.
[87] In his affidavit in reply, Mr Scutter annexed the Financial Statements for Matrix for the year ended 31 March 2017, prepared by Deloitte Limited. The Statements were prepared and signed off by Deloitte and were drafts only to the extent that they were not signed off by the Directors.
[88] Mr Colson for Tawa LP objected to the Deloitte Statements being admitted in evidence, on the basis that they were hearsay (coming in only in Mr Scutter’s evidence in reply and not through Deloitte) and the respondent had not had an opportunity to respond. The respondent was given an opportunity to file any evidence in reply to the Deloitte Statements. In response, Mr Murrie emphasised that Deloitte was engaged to assist in a planned capital raising, because it was beneficial to have a set of accounts prepared by a big firm. Mr Murrie notes that the draft accounts prepared by Deloitte were discussed with him, but not with the other Matrix directors. He does not recall any discussion with Deloitte about how the Tawa deposits should be categorised. Mr Murrie also notes that Note 4 (Associated Persons) to the Deloitte statements does not refer to liabilities or “advances”.
[89] Having regard to Mr Murrie’s additional evidence and Mr Scutter’s response,29 I am satisfied that the Deloitte statements were based on Matrix’s MYOB accounts and information provided by Matrix, together with discussions with Mr Murrie. They comprise the formal financial statements of Matrix and reflect the updated end of year transactions and changes.
[90] The statements show that the payments made by Sean Murrie and Joseph Hannah to Matrix were recorded as liabilities to associated persons. While the Deloitte statements do not specifically state that the amounts under Note 4 are liabilities, that is plain, in my view, from the overall analysis. The Deloitte statements tend to confirm the other documentary evidence but my conclusions below as to the nature of the credit invoices do not depend on the Deloitte statements.
[91] Mr Colson says I should put aside the issue of GST. However, Tawa LP appears to use the asserted conditionality of the contract as the reason why the credit invoices are legitimate and to support the fact that Tawa LP has paid the contract invoices in full. Although there are separate proceedings in relation to the GST, the treatment of it lies at the heart of the arrangements put in place here. If the contract was “conditional” for one purpose it should have been conditional for all purposes, but clearly was not. If it was not conditional in relation to the IRD, then GST ought to have been paid on the “progress payments”. There is nothing in the contract about it being “conditional” in any respect.
[92] As Mr Scutter notes, GST was not paid on any payments received and later recognised by the credit invoices. If Matrix believed, as submitted to the Court, that the advances were progress payments, it ought at the very least to have made provision for up to 15 per cent of those payments to be payable to the IRD as GST. (The GST liability on the contract invoices was $390,993.78). If that liability to the IRD had been paid as and when the “progress payments” from Tawa LP had been received, it would have reduced the amount of refunds that Matrix received on its GST returns and would have changed Matrix’s financial situation for the worse.
29 The respondent objected to Mr Scutter’s further evidence, in response to Mr Murrie, being admitted. I have received the evidence on the basis that it is plainly relevant (it responds directly to Mr Murrie’s criticism of earlier evidence from Mr Scutter) and it is Mr Scutter’s own analysis, as the liquidator who has closely analysed Matrix’s accounts.
[93] The counterfactual of the respondent’s conditional contract argument is that if the condition had not been met (i.e. Matrix had not been able to satisfactorily build the apartments) Matrix would have retained the apartments (even if only the constituent materials) as an asset, which the liquidator could have sold.. Tawa LP would then have been an unsecured creditor for its pre-payments.
[94] Ultimately, the Court has to determine the issue of whether the transaction was an insolvent transaction, by considering all the relevant circumstances and the evidence and deciding how reliable it considers each witness to be and how much weight to attribute to each source of information.30
[95] The payments were recorded in the Matrix accounts as “current liabilities”. I do not accept Mr Murrie’s evidence that there was an inaccuracy in the recording of the payments, and that this was the result of the incompetence of Matrix staff or consultants.
[96] Nor do I accept Mr Murrie’s evidence that he had not previously seen the credit invoices. I prefer Mr Fenton’s evidence that it was in fact Mr Murrie who created (or instructed the creation of) the credit invoices and the contract invoices in May 2018. That account is consistent with the Journal Security Audit of the Matrix accounts.
[97] Mr Murrie said he had advice from an accountant that the contract could be treated as conditional for GST purposes, but the accountant is unnamed and no such advice was provided to the liquidator, or put before the Court. The respondent does not refer to having sought or obtained any legal advice on the issue. There are no Board reports, or any other Matrix documents, that refer to the “conditionality” of the contract. The submission that the contract was conditional, for any purpose, until it was clear that Matrix could in fact build the contracts, is inconsistent with Tawa LP making supposed pre-payments under the contract. One might ask why it would do so if its principals, wearing their Matrix hat, were uncertain as to Matrix’s capacity to perform the contract.
30 Robt Jones Holdings Ltd v McCullagh (No 2) [2018] NZCA 358 at [106].
[98] Overall, I find Mr Murrie’s evidence inconsistent and unsatisfactory. Nor does Mr Hannah’s evidence provide any greater clarity. The totality of the evidence indicates an intention by Mr Murrie and Mr Hannah to recharacterise the payments, after the event, to prefer Tawa LP’s interests on Matrix’s insolvency over other unsecured creditors. The timing of events is consistent with that conclusion: the alleged “pre-payments” were all completed in September 2017, but the apartments were not transferred to Tawa LP for a further six months. The contract invoices were issued in April 2018, shortly after the financial year-end, with a new GST period commencing on 1 April 2018 and with receivership looming.
[99] The informality of the arrangements between Matrix and Tawa LP is no answer. That looseness and lack of formality is exactly the problem and, as Mr Sullivan’s submissions for the liquidator emphasised, the very reason why the voidable preference regime extends back 18 months longer for related parties than for arm’s length parties.
[100] I conclude that the payments were advances to Matrix and not pre-payments under the contract.
Were the credit invoices a transaction for the purposes of s 292(3) of the Act?
[101] The liquidator points to s 292(3) of the Act, under which transaction means a number of steps taken by a company. The applicant relies on Trans Otway Limited v Shephard31 and Moller Johnson Motors (Hawera) Limited v RD and SM Taplin Contracting Limited (in liquidation)32 where the Court took a broad approach to the definition of transaction. In Trans Otway the relevant “transaction” was the selling of a client list, which was not impugned in the liquidator’s notice. The Court of Appeal agreed that was a transaction, being a “transfer of property by the company”, within the definition of “transaction” in s 292(1)(a).33 The Court of Appeal found that another “transaction” was selling of the first schedule assets.
31 Trans Otway Limited v Shephard [2005] 3 NZLR 678 (CA).
32 RD and SM Taplin Contracting Limited (in liquidation) High Court, New Plymouth, M54/97, 13 March 1998, Morris J.
33 Trans Otway Limited v Shephard, above n 31, at [36].
[102] The respondent emphasises that the liquidator has made no application to set aside the transfer of the apartments from Matrix to Tawa LP34 and questions whether the credit invoices can be characterised as voidable transactions in terms of s 292(3). It relies on the fact that Matrix has not paid money or, it says, transferred property. The respondent acknowledges that, in principle, a set-off can be a payment for the purposes of s 292, as in Trans Otway, but relies on subsequent cases35 to say that the issue of a credit invoice is not a transaction.
Discussion
[103] The phrase “conveyance or transfer of property” in s 292(3)(a) of the Act has been given the widest possible meaning by the courts and has been said to embrace every means by which property may be passed from one person to another.36
[104] Section 292(3)(f) (“anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it”) was added to the definition of “transaction” by the Companies Amendment Act 2006. This catch-all provision arguably allows the definition to catch all intermediary steps as well as any thing done or not done as a consequence of any transaction that has been entered into by the company.
[105]The notice to set aside an insolvent transaction dated 22 February 2021 says:
5.5By purporting to pay the Contract Invoices through the Credit Invoices, Tawa LP received the Development37 without having to pay for it.
5.6Accordingly, the Transactions thereby allowed Tawa LP to receive:
(a)more towards satisfaction of a debt than would otherwise have been owed by Matrix Homes (i.e. the Development itself); and
(b)more than it would have received, or would be likely to have received, in Matrix Homes’ liquidation (i.e. a claim to the Development).
34 Notice of Objection to Liquidator’s Notice to Set Aside an Insolvent Transaction under s 292 of the Companies Act 1993, 12 April 2018.
35 Farrell v E & E Aps [2012] NZHC 417; and Reynolds v HSE Holdings [2010] NZHC 1815.
36 Gathercole v Smith (1881) 17 Ch D 1 at 7.
37 The “Development” is the construction of 11 duplex style modular apartments.
[106] Tawa LP’s emphasis on the credit invoices as the insolvent transaction is too narrowly focused. Matrix owed a debt to Tawa LP (repayment of the advances) and Tawa LP owed a debt to Matrix (payment for the apartments). Matrix issued three contract invoices for the contract price of the apartments. The contract invoices were deemed to be paid by the credit invoices. The conveyance of the apartments from Matrix to Tawa LP only occurred when the contract invoices were deemed paid. That deemed payment occurred when the credit invoices were rendered. It was the credit invoices that had the effect of conveying the apartments to Tawa LP. Without the credit invoices, Tawa LP, Mr Murrie and Mr Hannah remained creditors of Matrix. The “transaction” – the issuing of the credit invoices – and the transfer of the apartments to Tawa LP were interlinked.
[107] The absence of a payment by Matrix is not fatal; it is the transfer of property, through the means of the credit invoices, that is a “transaction” within s 292(3), as in Farrell v E & E Aps. I agree with Mr Sullivan, for the applicant, that s 292(3)(f) provides the causal link between the credit invoices and the transfer of the apartments.
[108]As the Court of Appeal said in Trans Otway:38
But a liquidator is not bound to challenge all transactions or none: a liquidator can pick and choose. The fact that the liquidators here have not challenged the transfer of the client list is of no relevance when it comes to assessing whether the transaction they have impugned is indeed voidable under s 292(2).
[109] I conclude that the issue of the credit invoices was a transaction for the purposes of s 292 of the Act.
Was there a creditor/debtor relationship between Tawa LP and Matrix?
[110] As discussed earlier, in the liquidator’s notice to set aside an insolvent transaction, he relied upon both credit invoices and the pre-payment invoice. But the notice of originating application by the applicant, dated 16 July 2021, relies on only the two credit invoices, INV-3467 dated 1 April 2018 and INV-3468 dated 1 April 2018. It does not rely on INV-3469 ($830,000), the “pre-payment invoice”.
38 Trans Otway, above n 31, at [36].
[111] Mr Colson argues that the liquidator’s decision not to challenge the pre- payment invoice, in respect of Tawa LP, is in effect a concession that Tawa LP was not a creditor of Matrix at the time of the transaction and an acceptance that the $830,000 paid by Tawa LP directly was a pre-payment under the contract. The Supreme Court has held that a pre-payment does not create a debtor/creditor relationship.39
[112] The respondent says that the only way the liquidator can get around his “concession” in relation to Tawa LP is by conflating the parties and referring to “Tawa LP, Sean Murrie and Joseph Hannah” as creditors, when Tawa LP is a legal entity and is the only party sued in the proceeding.
[113] Mr Scutter rejects that suggestion and says that, in hindsight, he was overly generous in not pursuing the $830,000. While initially he was prepared to give Tawa LP the benefit of the doubt for its advances of $830,000, Mr Scutter says that if he had known about the conditional contract argument now advanced by the respondent, he would have sought to set aside the Tawa LP advance too. At the time he decided not to, as a pragmatic choice, in order to reduce the amount owing in the hope of settlement. Having seen Tawa LP’s opposition, Mr Scutter formed the view that Tawa LP is not entitled to any benefit in relation to that sum. That is because Tawa LP’s position is the same as that of Mr Hannah and Mr Murrie – Tawa LP made up-front advances to Matrix without any invoice requiring those payments. Through the “credit invoices”, Tawa LP has been preferred in Matrix’s liquidation where otherwise it would have been an unsecured creditor for the advances. Mr Scutter does not make a “concession” about the $830,000.
[114] Under the contract invoices, Tawa LP had a payment obligation to Matrix, consistent with the contract. The credit invoices were rendered to Tawa LP and purported to credit Tawa LP. Matrix treated Tawa LP as being in credit for the contract invoices, through the means of the credit invoices. By virtue of the credit invoices, Tawa LP itself received the benefit of the advances, including those from Messrs Murrie and Hannah. The effect of the credit invoices was to transfer the apartments to Tawa LP. Matrix was insolvent at the time. Through the credit invoices, Tawa LP
39 Allied Concrete Limited v Meltzer, above n 25, at [185]-[187]; Robt Jones Holding Limited v McCullagh, above n 28, at [87] and [93].
has significantly improved its position on Matrix’s liquidation. As at 30 April 2018, Tawa LP is better off by $3,332,000, plus the value of the apartments, than it was at 31 March 2018 (i.e. before the credit invoices were issued).
[115] That is a complete answer to Tawa LP’s claim that the credit invoices in relation to Mr Murrie and Mr Hannah did not allow Tawa LP to receive more towards satisfaction of the debt owed by Matrix than it would receive or be likely to receive in the company’s liquidation.
Conclusion on insolvent transaction
[116] I am satisfied on the balance of probabilities that the credit invoices were an insolvent transaction by Matrix and that Tawa LP received more towards the satisfaction of the debt owed to it by Matrix than it would have received, or been likely to receive, in Matrix’s liquidation.
Transaction at undervalue
[117] The liquidator’s alternative submission is that the transfer of the apartments to Tawa LP falls within either s 297 and/or 298 of the Act. Given my finding at [116] above, it is not necessary to determine this point, but I will do so for completeness.
[118]Section 297 provides:
Recovery in other cases
297Transactions at undervalue
(1)Under subsection (2) the liquidator may recover from a person (X) the
amount C in the formula A − B = C, where—
(a)A is the value that X received from a company under a transaction to which the company was or is a party; and
(b)B is the value (if any) that the company received from X under the transaction.
(2)The liquidator may recover the difference in value (that is, C in the formula in subsection (1)) from X if—
(a)the company entered into the transaction within the specified period; and
(b)either—
(i)the company was unable to pay its due debts when it entered into the transaction; or
(ii)the company became unable to pay its due debts as a result of entering into the transaction.
(3)For the purposes of this section,—
(a)transaction has the same meaning as in section 292(3):
(b)specified period means—
(i)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
(ii)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 that application and ending on the date on which, and at the time at which, the order of the court was made; and
(iii)if—
(A)an application was made to the court to put a company into liquidation; and
(B)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.
…
[119] Section 297 of the Act allows the liquidator to recover from another party to a transaction the amount by which the value that the other party received from the company exceeded the value (if any) that the company received from the other party under the transaction. The liquidator can do so only if the company entered into the transaction (which has the same meaning as in s 292(3) of the Act) within two years of liquidation and the company was unable to pay its debts when entering into the transaction or as a result of entering into the transaction.
[120] The liquidator says that Tawa LP received the value of the apartments. Matrix and Tawa LP agreed in the contract invoices that the value of the apartments was
$2,997,619. However, Tawa LP paid only $830,000 for the apartments (INV-3469), with the remaining amounts contributed by Matrix’s shareholders.
[121] Matrix was unable to pay its debts when it transferred the apartments to Tawa LP, inside the two year period prior to liquidation. The liquidator is, therefore, able to recover the difference in value that Tawa LP received for the apartments and what it paid and the liquidator seeks an order to recover $2,167,619.
[122] As a further alternative, the liquidator seeks to recover the same amount from Tawa LP under s 298 of the Act, Tawa LP being a related party. Section 298 relevantly provides:
298Transactions for inadequate or excessive consideration with directors and certain other persons
(1)Where, within the specified period, a company has acquired a business or property from, or the services of,—
(a)a person who was, at the time of the acquisition, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(b)a person, or a relative of a person, who, at the time of the acquisition, had control of the company; or
(c)another company that was, at the time of the acquisition, controlled by a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(d)another company that was, at the time of the acquisition, a related company,—
the liquidator may recover from the person, relative, company, or related company, as the case may be, any amount by which the value of the consideration given for the acquisition of the business, property, or services exceeded the value of the business, property, or services at the time of the acquisition.
(2)Where, within the specified period, a company has disposed of a business or property, or provided services, or issued shares, to—
(a)a person who was, at the time of the disposition, provision, or issue, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(b)a person, or a relative of a person, who, at the time of the disposition, provision, or issue, had control of the company; or
(c)another company that was, at the time of the disposition, provision, or issue, controlled by a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or
(d)another company that, at the time of the disposition, provision, or issue, was a related company,—
the liquidator may recover from the person, relative, company, or related company, as the case may be, any amount by which the value of the business, property, or services, or the value of the shares, at the time of the disposition, provision, or issue exceeded the value of any consideration received by the company.
…
[123] Section 298 allows the liquidator to recover from a related party the amount by which the value of the property disposed of exceeds the value received in return. That is the difference between $2,997,619 disposed of, against the $830,000. Again, the liquidator seeks an order to recover $2,167,619.
[124] The respondent notes this claim cannot succeed if the Court accepts its primary submission that the payments were made pursuant to the contract.
[125] The respondent also says that, under s 297, where there is a transaction for less than market value, key evidence of market value is required to sustain a claim40 and the onus of proof of undervalue is on the liquidator. Here, the liquidator has called no evidence on the value of the apartments as at the date of the transaction, but proceeds on the assumption that the value was $2,750,000, including GST, being the price under the contract.
[126] The evidence for Tawa LP, on the other hand, is that the apartments were significantly defective. They suffered water ingress after being left outside Matrix’s factory. Some apartments were significantly damaged and required gib and/or kitchens to be removed. Matrix did not complete this work before its receivership. Tawa LP needed to spend an additional $2.1 million on the apartments between 2018 and 2020 to put them into a saleable state. Mr Hannah has produced invoices for this remedial work.
[127] The liquidator says he is entitled to rely on the value of the property set by the parties in the April 2018 contract invoices. They agreed the value at a time when they knew or must have known the condition of the apartments. It is not for the liquidator to come along later and try to work out a value, having regard to defects not notified until years later – that would be an impossible task.
40 Insolvency Law and Practice (Thomson Reuters, Online Ed) at [CA297.02(2)(a)].
Discussion
[128] The issue of defects in the apartments and the need for remedial work was not raised by Tawa LP at the time the defects became apparent. No remedial work was notified by Tawa LP under the contract,41 or claim made in the liquidation.
[129] Section 297 requires that the difference in value between the two transactions (the payment and the transfer of something of value) be measured. It is not possible in this case to assess the market value of the apartments as no independent valuation was obtained. In Glenvar Vault Capital Ltd (in liq) v Foster Crescent Ltd, the liquidator submitted that the difference in value should be assessed by the market value found by the registered valuer, but Powell J preferred the price negotiated with the vendors.42
[130] Here, I apply the value set by the parties by way of the contract invoices. As the liquidator notes, the contract invoices were issued at a time when Messrs Murrie and Hannah must have known of the alleged defects.
[131]Under this alternative claim, the liquidator would be entitled to recover
$2,167,619, being the difference between $2,997,619 disposed of, and the $830,000.
The caveat
[132] The liquidator also seeks an order that caveat no. 12074422.1 lodged by Matrix over the land at 4 William Earp Place, Tawa, not lapse.
[133] The caveat was lodged by Matrix on Mr Scutter’s instruction, on 17 March 2021, to secure Tawa LP’s obligations under the contract. In doing so, Matrix relied on cls 20.5, 20.6 and 20.7 of the contract. Tawa LP has applied for the caveat to lapse so that it can sell the property for the benefit of Mr Hannah as mortgagee. An interim order that the caveat not lapse was granted by Associate Judge Johnston on 3 August 2021.
41 Clause 7.6 of the contract allows the Owner five working days after receipt of invoice to write to the Builder with the amount the Owner considers payable and specifying the reason why the invoice is disputed.
42 Glenvar Vault Capital Ltd (in liq) v Foster Crescent Ltd [2020] NZHC 2432.
[134] The liquidator submits that the caveat is necessary as security for the payment obligation that will arise from Tawa LP to Matrix if the Court gives judgment in the liquidator’s favour. The liquidator relies on cl 20.6 of the contract which provides for Matrix, as the builder, to register a caveat against the title to the property.
[135] Even if the liquidator’s claim does not succeed, he says the caveat should still be sustained in terms of cl 20.6 of the contract, “until any dispute in connection with this Contract has been finally and conclusively resolved and all the Owner’s [Tawa LP’s] obligations under this Contract have been fully discharged.”
[136] If Tawa LP’s primary submission succeeds, then it argues the caveat must be lapsed as there is no debt under the contract. However, it says that the caveat should lapse in any event, for three reasons. First, the right asserted by Matrix is at best a contractual right, not a proprietary interest. Second, at the time of the contract the property was not owned by Tawa LP and it had no right or power to give that security. Third, the definition of “property” in the contract does not encompass the land covered by the caveat.
[137] As to the first submission, Tawa LP says that, in order to sustain the caveat, Matrix must have an arguable case that it has a proprietary interest in the property.43 It does not, relying as it does only on a contractual right.
[138] As to the second submission, there must be a valid claim at the time the caveat was lodged, even though confirmation of the existence of the interest may be after the caveat is lodged. The caveat claims an interest as at September 2016, when the contract was entered into. But at the time of the contract (27 September 2016) Mr Murrie owned the property. It was not transferred to Tawa LP until 3 December 2018. Tawa LP could not agree to mortgage what it did not own. Clause 20.6 was of no effect.
[139] Third, in any event, the respondent says, while cl 20.6 of the contract provides for Matrix to register a caveat against the title to the property in respect of its interest as mortgagee, the definition of property at cl 1.1 of the Contract is “the place where
43 Land Transfer Act 2017, s 138(1)(a) and (b).
the Building is to be located after completion, as identified by the address…”. The objective interpretation of that definition, in the context of the contract for the apartments, is the land on which the apartments were to be placed. The evidence of Mr Murrie and Mr Hannah is that Tawa LP never intended to use all of the land at 4 William Earp Place for the location of the apartments, only part of it.
[140] Consistent with that intention, in December 2018, Tawa LP entered into a sale and purchase agreement to purchase the property from Mr Murrie. After the property was purchased by Tawa LP and the apartments were placed on it, the property was subdivided and separate titles issued for the apartments on 23 September 2020, to allow them to be sold. The sale and purchase agreement between Mr Murrie and Tawa LP was conditional on that part of the land which was not required for siting of the apartments (Balance Land) to be held on trust and re-conveyed to Mr Murrie upon subdivision of the land. Tawa LP holds the Balance Land as a trustee, for Mr Murrie.
[141] The caveat was lodged on the Balance Land44 on 17 March 2021 – some six months after the creation of the separate titles. It was, therefore, clear at that time that the Balance Land was not, in terms of the definition of “property” in the contract, “the place where the Building is to be located”. The parties only intended an agreement to mortgage to be granted over the land where the apartments were to be located. That does not include the Balance Land. There was, therefore, no agreement to mortgage the Balance Land.
[142] The submission for Tawa LP is that Mr Murrie and Mr Hannah both knew that Mr Murrie retains the beneficial interest in the property under the sale and purchase agreement. They were also both directors of Matrix. They cannot “unknow” the existence of Mr Murrie’s interest. This knowledge must be attributed to Matrix. Matrix cannot claim an interest in the Balance Land (mortgage) that would defeat Mr Murrie’s equitable rights.
[143] Tawa LP notes that there is a conditional sale and purchase agreement in place, whereby the mortgagee, Mr Hannah, seeks to sell the Balance Land. The agreement
44 The certificate of title reference for the Balance Land is CT 960987. The certificate of title reference for the original title to the property is CT 571918.
includes a condition that the caveat be removed. The date for fulfilment of the condition is 29 April 2022.
[144] Mr Sullivan for the liquidator, says that the validity of the caveat is fully answered by the definition of “property” in the contract and the clear contractual right to lodge a caveat. Tawa LP’s submissions that the property was not actually the property and that Tawa LP had no ability to grant security over the property, by way of the contract, are examples of the difficulties Tawa LP has found itself in because of its related party dealings with Matrix, and are not sustainable.
[145] Even if the Balance Land is in Mr Murrie’s name, under the Heads of Terms of Agreement Mr Murrie had agreed to transfer the land to Tawa LP. Mr Murrie and Mr Hannah are the very people entering into the contract; it was entirely within their remit to limit the definition of property by adding, for example, “such of the land where the apartments are situated.” They did not do so.
Discussion
[146]The following principles apply to this application:
(a)The summary procedure involved in an application of this kind is unsuited for the determination of disputed questions of fact.45
(b)The onus is on the caveator to demonstrate that it holds an interest in the land which is sufficient to support a caveat.46
(c)The caveator must put before the Court a reasonably arguable case to support the interest it claims.47
(d)An order for removal of the caveat will only be made if it is clear that there was either no valid ground for lodging it in the first place, or that such valid ground as then existed no longer does so.48
45 New Zealand Limousin Cattle Breeders Society Inc v Robertson [1984] 1 NZLR 41 (CA) at 43.
46 Sims v Lowe [1988] 1 NZLR 656 (CA) at 660.
47 Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA) at 106.
48 Sims v Lowe, above n 46, at 659-600.
(e)There is a residual discretion, once a reasonably arguable case has been established, as to whether to make an order removing the caveat. This will be exercised only cautiously.49
[147] The first question is whether Matrix has a caveatable interest in the property. The caveat itself sets out the claimed interest:
As Mortgagee pursuant to an equitable mortgage contained in clause 20.5,
20.6 and 20.7 of a Fixed Price Building Contract dated 27 September 2016 between the Caveator and Tawa Limited Partnership a Mortgagor.
[148]Clauses 20.5, 20.6 and 20.7 of the contract provide as follows:
20.5In consideration of the Builder entering into this Contract the owner irrevocably grants to and agrees to execute in favour of the Builder:
a)A registrable all obligations mortgage (Memorandum of Mortgage RGL 2011/4300, or the most current Auckland District law Society all obligations Memorandum, which is registered at the various land registries of Land Information New Zealand) over all of the Owner’s estate and interest in the Property (the “Mortgage”) to secure payment of the Builder’s invoices and any other sums payable to the Builder pursuant to this Contract; and
b)An unconditional irrevocable power of attorney in favour of the Builder to execute the Mortgage on the Owner’s behalf, whether or not the Builder has made demand on the Owner to do so.
20.6The Builder may, in the Builder’s sole and unfettered discretion and at any time, register a caveat against the title to the Property in respect of the Builder’s interest as mortgagee, and the Owner must not challenge or context the Builder’s right to maintain the caveat unless and until any dispute in connection with this Contract has been finally and conclusively resolved and all the Owner’s obligations under this Contract (or arising out of any adjudication or settlement of such a dispute) have been fully discharged.
20.7The rights to perform all acts and do all things under all or any of the terms and provisions contained or implied in the mortgage or conferred by statute may, (without any obligation whatsoever) be performed and done by the Builder in the capacity of attorney pursuant to clause 20.5.
49 Pacific Homes Ltd v Consolidated Joineries Ltd [1996] 2 NZLR 652 at 656 (CA).
[149] There is some uncertainty whether the right to lodge a caveat may be granted by contract.50 The authors of Hinde McMorland & Sim note that a contractual clause granting the right to caveat will have some effect, even if it does not found a caveatable interest. An application by the registered proprietor to remove it would be a breach of contract, so the application should fail. Dr McMorland explains this as a suggestion that the term of the contract should be read as a promise not to take steps for the removal of a caveat lodged pursuant to the contractual term. But the clause granting the right to caveat will bind only the registered proprietor.51
[150] However, what is clear is that when the effect of the contract, apart from the clause purporting to give the right to caveat, confers a caveatable interest, such as an equitable mortgage, the clause is otiose.52
[151] Here, pursuant to cl 20.5 of the contract, Tawa LP agreed to grant and execute a mortgage over “all of the Owner’s estate and interest in the Property …”. No such mortgage was executed, but an equitable mortgage arises. Matrix therefore had a caveatable interest.
[152] Tawa LP’s second submission is that the definition of the property in the contract should be read down. Clause 1.1(q) of the contract defines property:
“Property” means the place where the Building Work is to be performed, or, if the Building is to be partly or wholly constructed off-site (the place where the Building is to be located after completion, as identified by the address and/or legal description entered in Part A of the Schedule.
[153] Part A of the Schedule describes the property as “4 William Earp Place, Tawa, Wellington”. No legal description is entered. While it may be that Messrs Murrie and Hannah had agreed as between them, that “property” in fact meant some smaller part of the entirety of the land at 4 William Earp Place, Tawa, that understanding was not reflected in the contract. Any such limitation on Matrix’s contractual right to security
50 Hinde McMorland & Sim Land Law in New Zealand (looseleaf ed, LexisNexis) (HMS) [10.009(y)]. See also, Don McMorland “Can a right to lodge a caveat be granted by contract?” Butterworths Conveyancing Bulletin October 2014, 89.
51 McMorland, above n 50, at 89.
52 At 89.
over the property needed to be explicit and it was in the power of Mr Murrie and Mr Hannah to draft the definition accordingly, at the time. They did not do so.
[154] Nor do I accept the respondent’s argument that the caveat cannot be maintained because Tawa LP had no right or power to give that security, not itself being the owner of the property at the time the contract was entered into. Messrs Murrie and Hannah were the directors and shareholders of Tawa LP (as well as being the majority shareholders and two of the directors of Matrix) at the time the contract was entered into. Under the Heads of Terms of Agreement between Mr Murrie and Mr Hannah, Mr Murrie’s contribution to their joint venture (Tawa LP) was to transfer the land to Tawa LP, but he did not in fact do so immediately. The respondent cannot now seek to use that omission in order to avoid liability under the contract, where Tawa LP has had the benefit of the contract since 2016.
[155] The respondent also relies on a sale and purchase agreement between Mr Murrie and Tawa LP to purchase the land at 4 William Earp Place, Tawa, on condition that the Balance Land was to be held on trust and reconveyed to Mr Murrie on subdivision of the land. Tawa LP holds the Balance Land as a trustee for Mr Murrie, who retains the beneficial interest in the property. The respondent says that:
Mr Murrie and Mr Hannah both knew this. They were also both directors of Matrix. They cannot “unknow” the existence of this interest of Mr Murrie. Matrix cannot claim an interest in the Balance Land that would defeat Mr Murrie’s equitable rights.
[156] I do not accept that submission. Matrix was not party to the sale and purchase agreement. There is no evidence of Matrix having been formally notified of the agreement or of it giving consent to what, on the face of it, was a limitation of its rights under the contract. There is no evidence of Mr Murrie or Mr Hannah discussing it with any other of the Matrix directors individually or at a Board meeting. Mr Murrie and Mr Hannah were both wearing several hats at the time – as directors and shareholders of Tawa LP and also directors and shareholders of Matrix. They both also had personal interests in play, Mr Murrie as the vendor under the sale and purchase agreement and Mr Hannah as mortgagee.
[157] Mr Murrie and Mr Hannah had the information about the sale and purchase agreement in their capacity as directors of Tawa LP. They executed the agreement on behalf of Tawa LP. It was Tawa LP, through Messrs Murrie and Hannah, which had knowledge of the terms of the agreement, not Matrix.53 In those circumstances, I am not prepared to impute their knowledge of the terms of the sale and purchase agreement to Matrix.
[158] Finally, I note that Tawa LP has a contractual obligationnot to challenge the caveat until any dispute in connection with the contract has been finally and conclusively resolved and all of Tawa LP’s obligations under the contract have been fully discharged.54
[159] Tawa LP remains the registered proprietor of the property. The caveat supports Matrix’s rights, including an equitable mortgage, under the contract. There is a dispute about payment under the contract. Tawa LP has given a contractual promise not to contest Matrix’s right to maintain the caveat “unless and until any dispute in connection with the contract has been finally and conclusively resolved”.55 I conclude that Matrix has a reasonably arguable case to support the lodging and maintenance of the caveat.
[160] While the Court has a residual discretion, once a reasonably arguable case has been established, whether to make an order removing the caveat, that discretion should be exercised cautiously.56 In the circumstances of this case, I do not think it is appropriate to exercise the discretion. The caveat should subsist until compliance by Tawa LP with the orders made in this judgment. As to Mr Hannah’s interests, I note that the liquidator has previously offered that the Balance Land could be sold, with the sale proceeds being held in Trust on the basis of appropriate undertakings. To date the parties have not accepted that offer.
53 See Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 3 NZLR 7 (PC), at 10-12. And, for example, Kolmar Investments Ltd v Hannah & Co Ltd HC Auckland CIV-404-001861, 27 August 2004, at [33]-[34].
54 Clause 20.6 of the contract.
55 Clause 20.6 of the contract.
56 Pacific Homes Ltd v Consolidate Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.
The Tawa LP charge
[161] The liquidator has also applied to set aside a financing statement registered by Tawa LP over 17 of the apartments on 8 June 2018, with Matrix being the debtor (the Tawa LP Charge).
[162] The respondent says that the Tawa LP Charge was to secure Matrix’s performance under the contract for which Tawa LP had paid all amounts due in full.
[163]Section 293 of the Companies Act relevantly 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 restricted period; and
(b)immediately after the charge was given, the company was unable to pay its due debts.
(1AA) A charge over any property or undertaking of a company is voidable by the liquidator if—
(a)the charge was given to a related party within the related party period; and
(b)immediately after the charge was given, the company was unable to pay its due debts.
(1A) Neither subsection (1) nor (1AA) applies to a charge that—
(a)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)is in substitution for a charge that,—
(i)in the case of subsection (1), was given before the restricted period:
(ii)in the case of subsection (1AA), was given before the related party 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.
….
(5)For the purposes of subsection (1A)(a) and subsection (4), where any charge was given by the company within the period specified in subsection (1) or (1AA) (as relevant), 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.
(5A) For the purposes of subsections (1) to (2), 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
…
[164] Section 294 sets out the procedure to be followed by a liquidator for setting aside transactions and charges.
[165] Under s 293 of the Act, a charge over any property of a company is voidable by the liquidator if the charge was given within the restricted period (six months prior to liquidation), and, the company was unable to pay its debts (which is presumed to be the case within the restricted period). The Tawa LP Charge was registered on 8 June 2018, within the restricted period.
[166] The Tawa LP Charge was registered after Tawa LP had received the apartments. The respondent says the apartments have now all vested in third parties and the charge is no longer in issue. It concedes that the charge is now irrelevant.
[167] As the liquidator says, it would be unfair if Tawa LP were to remain a secured creditor for any money it has to return to Matrix.
Conclusion on Tawa LP Charge
[168]I find that the Tawa LP Charge is voidable and should be set aside.
Result
[169] I find that the credit invoices are an insolvent transaction. Tawa LP is ordered to pay to Matrix $2,167,619.
[170]The Tawa LP Charge is set aside.
[171]I order that caveat no. 12074422.1 not lapse.
Costs
[172] I reserve costs, not having heard from counsel as to these. If counsel are unable to settle costs, as the Court would expect them to do, then they may come back to the Court by memoranda within 15 working days of the date of this judgment. I can indicate my preliminary view that the liquidator, as the successful party, is entitled to costs on a 2B basis.
Gwyn J
2
7
0