Shepherd v Wakefield Plant Limited

[2020] NZHC 439

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2019-485-8

[2020] NZHC 439

UNDER

the Companies Act 1993

IN THE MATTER

of the liquidation of Ebert Construction Limited

BETWEEN

IAIN BRUCE SHEPHARD AND JESSICA JANE KELLOW

Applicants

AND

WAKEFIELD PLANT LIMITED

Respondent

Hearing:

12 and 13 February 2020

Appearance:

H L Thompson for Applicants

R J Gordon and A S Kirk for Respondent

Judgment:

9 March 2020

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 9 March 2020 at 4.00pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar 9 March 2020

SHEPHARD & KELLOW v WAKEFIELD PLANT LTD [2020] NZHC 439 [9 March 2020]

[1]    The applicants are the liquidators of Ebert Construction Ltd (“ECL”). They allege five payments made by ECL to the respondent, Wakefield Plant Ltd (“WPL”), are voidable under s 292 of the Companies Act 1993 (“the Act”).

Context

[2]    ECL and WPL at all material times had the same directors and shareholders. ECL, WPL, with a third company, constituted a group of companies which banked with the Bank of New Zealand (“BNZ”). It was common ground that each of the companies in the group guaranteed to and gave security to the BNZ for the group’s obligations.

[3]    WPL had a facility with the BNZ upon which it could draw several million dollars1 (“the facility”). WPL from time to time would draw upon the facility and advance those funds to ECL. The advances allowed ECL to meet its obligations to suppliers and sub-contractors which fell due before ECL received payment from its clients. The advances were to smooth out ECL’s cashflow. The liquidators did not suggest the existence of this arrangement was itself indicative of insolvency issues within ECL.

[4]    When ECL was paid by its clients, it repaid the WPL advance which in turn paid the money back to the facility from which the funds were drawn. The inter-company balances between ECL and WPL would return to zero until ECL again needed to call on the facility in WPL’s name. This arrangement operated for an extended period before ECL’s receivership on 31 July 2018. While not a term used by counsel for the respondent, WPL’s position is that it was only a conduit for the funds sourced from the BNZ.

[5]    The notice to set aside voidable transactions challenged the following transactions which arose from the operation of the above arrangement:

1      Called a “CreditPlus” facility.

Wakefield Plant Limited - Inter-Company Advances / Repayments

Date	Funds Received	Funds Repaid	Party	Balance
0.00
3/05/2018	650,000.00	Wakefield Plant Limited	650,000.00
4/05/2018	650,000.00	Wakefield Plant Limited	0.00
16/05/2018	540,000.00	Wakefield Plant Limited	540,000.00
16/05/2018	65,000.00	Wakefield Plant Limited	605,000.00
17/05/2018	10,000.00	Wakefield Plant Limited	615,000.00
18/05/2018	590,000.00	Wakefield Plant Limited	1,205,000.00
18/05/2018	1,003,000.00	Wakefield Plant Limited	202,000.00
18/05/2018	202,000.00	Wakefield Plant Limited	0.00
6/06/2018	145,000.00	Wakefield Plant Limited	145,000.00
6/06/2018	89,000.00	Wakefield Plant Limited	56,000.00
7/06/2018	15,000.00	Wakefield Plant Limited	71,000.00
7/06/2018	38,000.00	Wakefield Plant Limited	109,000.00
8/06/2018	370,000.00	Wakefield Plant Limited	479,000.00
11/06/2018	20,000.00	Wakefield Plant Limited	499,000.00
12/06/2018	30,000.00	Wakefield Plant Limited	529,000.00
13/06/2018	10,000.00	Wakefield Plant Limited	539,000.00
14/06/2018	15,000.00	Wakefield Plant Limited	554,000.00
15/06/2018	760,000.00	Wakefield Plant Limited	1,314,000.00
15/06/2018	265,000.00	Wakefield Plant Limited	1,579,000.00
19/06/2018	5,000.00	Wakefield Plant Limited	1,584,000.00
19/06/2018	732,000.00	Wakefield Plant Limited	852,000.00
20/06/2018	1,185,000.00	Wakefield Plant Limited	2,037,000.00
21/06/2018	99,000.00	Wakefield Plant Limited	1,938,000.00
22/06/2018	1,938,000.00	Wakefield Plant Limited	0.00
4/07/2018	1,015,000.00	Wakefield Plant Limited	1,015,000.00
4/07/2018	570,000.00	Wakefield Plant Limited	445,000.00
5/07/2018	5,000.00	Wakefield Plant Limited	450,000.00
6/07/2018	320,000.00	Wakefield Plant Limited	770,000.00
6/07/2018	19,000.00	Wakefield Plant Limited	789,000.00
7/07/2018	20,000.00	Wakefield Plant Limited	809,000.00
12/07/2018	35,000.00	Wakefield Plant Limited	844,000.00
13/07/2018	345,000.00	Wakefield Plant Limited	1,189,000.00
16/07/2018	782,000.00	Wakefield Plant Limited	1,971,000.00
17/07/2018	8,000.00	Wakefield Plant Limited	1,979,000.00
17/07/2018	5,000.00	Wakefield Plant Limited	1,974,000.00
17/07/2018	642,000.00	Wakefield Plant Limited	1,332,000.00
17/07/2018	36,000.00	Wakefield Plant Limited	1,296,000.00
18/07/2018	55,000.00	Wakefield Plant Limited	1,241,000.00
19/07/2018	65,000.00	Wakefield Plant Limited	1,306,000.00
20/07/2018	1,306,000.00	Wakefield Plant Limited	0.00

[6]    When this proceeding was issued, only the last payment of $1,306,000 was challenged. The liquidators subsequently amended their application to challenge the payments from 17 July 2018 to 20 July 2018 totalling $2,044,000.

Liquidators’ position

[7]    The liquidators say they are entitled to focus on the fact that ECL paid a debt it owed to WPL. The funds made available by WPL to ECL were treated as inter-company advances, with the repayments being shown on WPL’s bank accounts as “inter-co repayment ECL”.

[8]    WPL had no security over ECL so the liquidators say that when ECL repaid the inter-company advance, WPL was preferred.

WPL’s position

[9]    WPL’s primary argument is that in substance the payments were to the BNZ which was a secured creditor of all companies in the group. If that is not accepted, then WPL says that this is a running account case. Alternatively, at the time of the payments, ECL was able to pay its due debts and it also relies on s 296 of the Act.

The nature of the payment: Discussion

[10]   The guarantee given by members of the group contain the following principal debtor clause:

18.6     Liability as principal debtor

As between the Guarantor and the Lender (but without affecting the obligations of any other Loan Party) the Guarantor is liable in relation to the Guaranteed Amounts as a sole and principal debtor and not as a surety.

[11]   Counsel for the liquidators accepted that this clause made ECL a co-debtor with WPL for amounts drawn by WPL under its facility.

[12]   Accordingly, ECL owed amounts it received from WPL to that company as it was an inter-company advance between them, and to the BNZ as a secured debt by

virtue of the principal debtor clause and the security documents. This was accepted by the liquidators.

[13]   The amounts repaid by ECL to WPL were part of what amounted to a revolving credit facility between them. With repayments to WPL being applied to reduce the facility, the payments by ECL also reduced the its indebtedness to the BNZ which arose by virtue of the principal debtor clause and securities.

[14]   Because BNZ was the true source of the funds advanced by WPL to ECL and because it was always intended that those funds would be restored by ECL, WPL says in substance its payments were of a secured indebtedness. The BNZ treated the group as one borrower as it had the benefit of the cross-securities. In substance, WPL says repayment by ECL directly into WPL’s BNZ bank account should be seen as a payment which did not allow WPL to receive more than the liquidation than it otherwise would have.

[15]   WPL relies on Ebert Construction Ltd v Sanson, in which the Court said, “[t]he substance and reality of the transaction is more important than the form.” 2

[16]   President K s went on to set out three examples that counsel had referred to in that case. The third of those examples was as follows:3

Thirdly, where there is joint liability: companies D and E are jointly liable to C, and payment in full is made by E. If D were then to go into liquidation, its liquidator could not recover the payment even though the effect of the payment is to discharge a liability of that company to C, and even though the payment would give rise to a claim for contribution by E against D. The payment by E is not a payment by D, as a matter of both law and commercial reality.

[17]   The feature of the example is that payment is made to discharge a direct liability of the third party. Here where ECL paid the funds into WPL’s BNZ account, it reduced the group’s indebtedness to the BNZ accordingly.

2      Ebert Construction Ltd v Sanson [2017] NZCA 239; (2017) 14 TCLR 607 at [45].

3 At [50].

[18]   I consider the present circumstance falls within the above example given by the Court of Appeal in the Ebert Construction Ltd decision. The challenged payments had the effect of reducing a joint obligation shared by ECL and WPL to the BNZ. That effect is not altered by the fact that ECL did not make the payment as  a result of     a demand from the BNZ.

[19]   Again, the reality is that with ECL and WPL sharing the same directors and with the WPL facility being seen as a group facility routinely drawn upon by ECL, the repayments by ECL were intended to and did reduce the debt jointly owed to the BNZ by members of the group.

[20]   In my view, the payment by ECL to the BNZ, albeit it into an account styled in the name of WPL, was a payment by ECL to the BNZ which was intended to and did reduce its liability as co-debtor. That the BNZ account into which the funds were paid was in WPL’s name does not alter the fact that at that point ECL’s secured indebtedness to the BNZ reduced by that amount. Upon payment being made into the BNZ account the money became legally and beneficially the property of the BNZ and not the account holder.4

[21]   Absent from the above example from  Ebert  Construction  Ltd is that here,  D also owes E the debt they jointly owe to C. This additional factor is the focus of the liquidators’ claim. They say that the enquiry starts and stops with the fact that the payments were made from ECL’s BNZ account to WPL’s BNZ bank account to clear the inter-company indebtedness. It was common ground that in the liquidation of ECL, WPL would not be paid the amount of the inter-company debt had it still existed.

[22]   I do not accept that as a matter of commercial reality that is the correct way of looking at the transactions. The effect of the security documents was to create one group debt secured over all group assets. The payment moved funds from ECL’s BNZ account subject to the BNZ’s security to another account (WPL’s) over which the BNZ also had security.

4      See Rea v Russell [2012] NZCA 536; [2015] NZAR 1368 at [42].

[23]   The BNZ had rights of set-off against the accounts of the companies in the group under a deed of set-off dated 26 November 2014. WPL did not need to be concerned about making unsecured advances to ECL because by virtue of the group banking arrangements, WPL had the practical protection that the BNZ controlled all of the accounts, not to mention the common directorship of both accounts. Hence, my description of WPL being a conduit for the funds.

[24]   The evidence of the directors was that funds available to the group were moved about the group as required. Funds were returned to WPL because the draw-down left the facility overdrawn and incurring interest at a rate higher than ECL’s current account could generate. In a commercial and practical sense, WPL was secured for the amounts it advanced to ECL because of the group banking arrangements. I do not consider the narrow focus adopted by the liquidators to be consistent with the need to consider the substance and commercial reality of the transactions.

[25]   For these reasons, I determine that the transaction was not one that enabled WCL to receive more towards satisfaction of its debt than it would have received in ECL’s liquidation because the payment as a matter of law and commercial substance cleared ECL’s joint liability as co-debtor to the BNZ when it paid those funds into the BNZ account. If I am wrong in that regard, then I need to consider the second primary argument of WPL, that is the “continuing business relationship” defence.

Section 292(4B) Companies Act 1993 – the running account defence

[26] Counsel agreed on the legal principles. The operation of the “account” between ECL and WPL was similar to that of a revolving credit facility as shown by the table at [5] above. The amount owing fluctuated over time increasing and decreasing as and when payments were made. It was not argued that the running account defence is not available to suppliers of credit.

[27]   The argument focused on the purpose of the payments by ECL. Mr Thompson for the liquidators submitted that in a running account, the purpose of the payment will usually determine whether the creditor has received a preference. If the sole purpose of the payment is to discharge an existing debt, it has a preferential effect. But if the purpose is to induce the creditor to provide further goods or services as well as to

discharge an existing debt, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired.

[28]   Mr Thompson accepted if there was a running account here, because it resulted in a nil balance, that would mean that the liquidators’ claim would fail.

[29]   Mr Gordon for WPL, relying on Timberworld Ltd v Levin, made a similar submission.5 He said that if it can be shown that a payment is inextricably linked to further funds being made available then the running account exception will apply.

What was the business purpose of the transactions?

[30]   The arguments presented  were  really  different  sides  of  the  same  coin.  Mr Thompson submitted there was no evidence that the payments were made by ECL for the purpose of inducing further credit from WPL. He said there was no need for ECL to induce further credit as the companies were part of one group and the directors’ evidence was that funds were moved around the group as was thought necessary. Indeed, the evidence was that the money was simply moved around by management as needed without the directors’ specific knowledge.

[31]   WPL’s submission built on the idea, as I have put it, that WPL was simply    a conduit for the funds. In that regard, I note there was no suggestion WPL sought to recover from ECL interest use of the facility incurred or to charge an interest rate to ECL. The true supplier of the funds was the BNZ through its facility. Because of its nature as a revolving credit facility, the account had to be restored from time to time in order to permit further funds to be drawn down. The liquidators did not dispute the obvious proposition that once the limit of a facility had been reached, no further funds could be drawn on that facility.

[32]   The arrangements between ECL and WPL were not arms-length. Critically, they shared the same Board. That the movement of funds was left to senior management rather than requiring Board approval each time, reflected the reality of

5      Timberworld Ltd v Levin [2015] NZCA 111; [2015] NZLR 365; (2015) 14 TCLR 78 (CA).

the group arrangements but also the fact that the draw-downs were always repaid when ECL’s cashflow permitted it.

[33]   While there was  no  direct  evidence  as  to  the  attitude  of  the  BNZ,  it  is a reasonable assumption that the BNZ was relaxed about the operation of the arrangement given the draw-downs were routinely repaid. Ultimately, it was the BNZ as the source of the funds that had to remain satisfied that the facility should remain open and regular repayments would be part of ensuring the continuation of the facility particularly as WPL’s facility was intended to reduce over time. The test is objective and looks to the effect of the transaction and not to the intent of the debtor.6

[34] The arrangement whereby ECL drew on WPL’s facility dated back many years. It continued uninterrupted up until the payments set out at [5] above. It was clear to me from the cross-examination of the directors that in the period leading up to receivership, both viewed the availability of the WPL facility as a given. Given they controlled WPL in one sense that is understandable, but given ECL’s dependence on the BNZ’s support, the availability of the facility as a monthly cashflow top-up could only be relied on if ECL continued to make payments as it had in the past.

[35]   I am satisfied that the repayments were “… for commercial purposes, an integral part of a continuing business relationship…”7 between ECL and WPL. The commercial purpose was ECL’s continued ability to be able to draw on the WPL facility.

[36]Section 292(4B) of the Act provides that:8

(4B)     Where—

(a)a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties);

6      Rea v Russell, above n 4 at [57].

7      Companies Act 1993, s 292(4B).

8      Companies Act, s 292(4B) (emphasis added).

The relationship may be one to which other persons are parties – here the continuing business relationship included the BNZ with whom, as the supplier of the funds, the group had to and did maintain a good relationship.

[37]   I consider that s 292(4B) of the Act applies to the transactions sought to be challenged by the liquidators. I find that there was a continuing business relationship in respect of the transactions. Given the payments net out to nil, it follows that the liquidators’ application would fail on this ground if I am wrong on the first point relied on by WPL.

Unable to pay due debts

[38]   These transactions happened within the specified period, liquidation occurring on 3 October 2018. Under s 292(4A) of the Act, as these transactions occurred within the restricted period they are presumed, unless the contrary is proved, to have been entered into when the company is unable to pay its due debts.

[39]   Mr Gordon focused on the fact that s 292(2A) of the Act requires that the transaction had been entered into when ECL was unable to pay its due debts rather than the fact that it may not have paid all its due debts. That is not to say that WPL accepted ECL had due debts it chose not to pay but its position was even if there were debts arguably due on 20 July 2018 and unpaid, ECL had the ability to  pay them.  Mr Gordon accepted the onus was on his client to rebut the presumption.

[40]   I would  have  concluded  that  WPL  had  not  rebutted  the  presumption.  Mr Thompson relied on David Browne Contractors Ltd v Petterson, as authority for the proposition that the question of ability to pay debts is not assessed on the dates of payment of the challenged transactions.9 Future debts should also be taken into account if they are “reasonably temporally proximate”.10 The Supreme Court said:11

What is reasonably temporally proximate will, …. fall to be considered in light of the facts of the particular case. If a reasonable and prudent business person would be satisfied that there is sufficient certainty that a contingent debt will,

9      David Browne Contractors Ltd v Petterson [2017] NZSC 116; [2018] 1 NZLR 112.

10 At [91].

11 At [91].

within that relevant period, become legally due then it must be taken into account.

[41]   I was not provided with any expert evidence to assist me in determining what would be a reasonably temporally proximate time period in this case. The exercise will not be straightforward. Mr Gordon emphasised that ECL in recent years had a turnover of $150m to $200m a year. It had some 15 projects at different stages of completion. There were potentially issues as to when retentions would fall due, claims on unsuccessful projects, some of which nearing completion and some only part way through and at least at face value what appeared to be the non-payment of some $1.3m of trade suppliers on 20 July 2018. The PricewaterhouseCoopers (“PwC”) report of 11 June 2018 noted two per cent of creditors were 60 days or older confirmation that some due debts were not being paid.

[42]   The evidence was not such as to make any definitive decision about how much, if anything was due to trade suppliers but unpaid as at 20 July 2018, nor what time period thereafter should be taken into account. The onus on that regard rested with WPL and I would have concluded that that onus had not been discharged.

Alteration of position

[43]   The final alternative defence is under s 296(3) of the Act. It was not suggested that WPL acted in bad faith in receiving the payment. The focus was on whether:12

A reasonable person in [WPL’s] position would not have suspected, and [WPL] did not have reasonable grounds for suspecting, that [ECL] was or would become, insolvent.

[44]   In the months leading up to receivership the directors were alert to issues represented by three projects in the North Island that had been unsuccessful. ECL was working closely with PwC in respect of cashflow issues and received reports from PwC on 15 May 2018 and 11 June 2018. ECL identified a cashflow shortfall expected to take effect around May 2018. That date was revised to July 2018 and ultimately to later in the year.

12     Companies Act, s 296(3)(b).

[45]   The directors kept the BNZ informed of this and had initially sought to obtain an increased facility from the BNZ of $4m. That, however, was replaced by shareholder advances of $3.5m in cash from two shareholders. The uncontradicted evidence was that the intention was that those funds initially introduced as debt would be converted to equity by way of preference shares. That money was introduced as debt, that being a quicker way to get the funds into the company.

[46]   I queried whether the shareholders who contributed the funds were also personal guarantors and I was advised that they were not. Accordingly, the shareholders introduced funds which they were not ultimately exposed to.

[47]   Despite the work the directors were doing in  monitoring ECL’s position,   Mr Thompson suggested that they were “flying blind” when it came to the projections that they obtained. I do not accept that submission.

[48]   There was no evidence and indeed no submission that the work done by the directors to enquire into the failing projects was unreasonable. The PwC reports do not contain qualifications that PwC was provided with insufficient or poor quality information preventing it providing useful advice. PwC in their report of 11 June 2018 said:  “Overall, the Company’s FY19 performance forecasts have been prepared on  a comprehensive basis, utilising detailed source data.”

[49]   Mr Shephard in cross-examination did not disagree with that view. In the same report PwC said: “The confidence level for forecast future work in FY19 is strong…”

[50]   Again, Mr Shephard did not disagree with that. There is no suggestion that the quality of information going to PwC after 11 June 2018 deteriorated.

[51]   The directors can only make decisions on information they have at the time. In the absence of the evidence that the directors failed to make reasonable enquiries, I would have concluded that WPL (which has the same knowledge as ECL given the commonality of directors), did not have reasonable grounds to suspect ECL was or would become insolvent. The introduction of $3.5m in cash about a month prior to receivership, in my view, was real-world confirmation that the shareholders

contributing the funds, one of whom was also a director, did not at that time have reasonable grounds for concern.

[52]   Cross-examination of WPL’s directors was based on the idea that they did not have a full understanding of the potential downside from ECL’s failing projects, particularly given that those projects, Library Lane and Union Green, had been worsening over the months. The directors’ evidence in summary was that they were aware that there were issues with those projects and that is why there were ongoing reviews of each project. Their position was that they could only work with the information they had. They recognised the need to continue to monitor the distressed projects. In my view, that was a reasonable and responsible response to the lack of certainty about the projects. This was not a case of the directors turning a blind eye to issues, they were actively investigating them and feeding the results of those investigations through to PwC and the BNZ.

[53]   The directors of WPL were not directly taxed on the reasonableness of their position, nor was there expert evidence that the approach taken by the directors to obtaining reports on the projects was unreasonable or that they failed to take proper advice on the information they had to hand.

[54]   There was some criticism that Mr Hale, a director of WPL, had said that ECL’s assessment of the Union Green project was their “best guess”. Later in his evidence when asked about the Union Green project, Mr Hale said in response to it being put to him that the review of that project had not been completed and that he did not know which way the review was going to go he said:13

We had a much better idea where it was going, yes, we were at the – we don’t have a crystal ball, we can only look at the information in front of us and assess it accordingly and that’s what we were doing.

[55]   Mr Hale went on to say the directors were making provision for further losses on the project, but at that stage they believed they could be managed. I accept the directors’ evidence that they considered at the time of the impugned payment that ECL

13     Mr Hale, NOE pg 78, line 18.

had the ability to keep trading and that it was only with the report they received on 24 July 2018 that the risk of insolvency arose.

[56]   The evidence was that after 20 July 2018 the situation deteriorated virtually overnight. It was put to Mr Foster that the potential for significant losses from the Union Green project only became known overnight. While the Union Green project had been known to be a distressed project, it was the report received 24 July 2018 which led to the directors to conclude that ECL could not responsibly continue to trade.

[57]   The significance of the report of 23 July 2018 (which was provided to the directors of ECL on 24 July 2018) is that it projected the possibility that there would be significant losses on the Union Green project that had not previously been quantified. Prior to that date, some loss on the Union Green project had been taken into account but what had previously been thought to be the likely outcome in respect of the Union Green project (Option 1 in the forecast cashflows in the report) became the most optimistic of the four projected cashflows. I accept Mr Hales’ explanation that the significance of the report was that it meant ECL could not accept the offer of bank support made on 24 July 2018. The offer of support was conditional on further reporting on the Union  Green project.  Unless  bank support could be secured then   a bond upon which further payments on another major project was dependent would not be received. In the absence of the income from that project the projected cashflows could not be achieved. By this time, the impugned payments had been made.

[58]   The liquidators did not challenge the credibility of either of the deponents for WPL.

[59]   I have said, it was not suggested that WPL acted in bad faith. I would have concluded that WPL had satisfied the requirements of s 296(3)(b). It was not disputed that WPL had given value in the reasonably held belief that the payments were valid as required by s 296(3)(c). It follows that I would have concluded that WPL had established that it was entitled to the defence available under s 296.

Costs

[60]   Counsel agreed that costs would follow the event on a 2B basis. There is an order that the applicants are to pay costs to the respondent on a 2B basis plus disbursements as fixed by the Registrar.

Associate Judge Lester

Solicitors:

McMahon Butterworth Thompson, Auckland MinterEllisonRuddWatts, Wellington