Vance v Musgrave
[2016] NZHC 1012
•18 May 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-409-781 [2016] NZHC 1012
UNDER the Companies Act 1993 IN THE MATTER OF
the liquidation of Tru2U Limited (in liquidation)
BETWEEN
DAVID STUART VANCE AND GRANT STEPHEN JARROLD
Applicants
AND
CHRISTINE MUSGRAVE Respondent
Hearing: 16 May 2016 Counsel:
K C Francis and P J Arnold for the Applicants
No appearance for the RespondentJudgment:
18 May 2016
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The applicants (the liquidators) are the liquidators of Tru2U Ltd (in liq) (“the company”). The company was put into liquidation by the Court on the application of the Commissioner of Inland Revenue. The liquidation order was made, and the liquidators appointed, on 30 April 2015.
[2] The liquidators now apply under s 292 and 293 of the Companies Act 1993 (the Act) for orders:
(1)under s 293 of the Act, setting aside the charge evidenced by a loan agreement (the loan agreement) made between the company, Distribution International Ltd (Distribution), Simon and Donna Musgrave, and the respondent on 20 December 2013, giving the
respondent a security over the assets of the company; and
DAVID STUART VANCE AND GRANT STEPHEN JARROLD v CHRISTINE MUSGRAVE [2016] NZHC
1012 [18 May 2016]
(2)in the alternative to order (1) above setting aside the transaction evidenced by the loan agreement, under s 292 of the Act; and
(3)setting aside an alleged transaction made in January 2015, under which the values of certain assets of the company which the respondent had taken in the exercise of her security were set off against the debt owed to the respondent; and
(4)directing the respondent to pay the liquidators the amount of that claimed set-off, namely $96,408.54.
[3] The liquidators also ask for costs.
[4] The liquidators served a notice under s 294 of the Act on the respondent on
10 June 2015, setting aside the charge and the transactions associated with the loan agreement and the claimed set-off. The respondent did serve a notice of objection dated 7 July 2015, and she initially instructed a solicitor, Mr C Reid, to represent her in this proceeding. However she has not filed any notice of opposition, and in the course of a teleconference convened on 10 May 2016 Mr Reid advised that the respondent is not able to fund a defence to the application, and will not be opposing the making of the orders which are sought. Mr Reid was excused from appearing at today’s hearing.
Background
[5] In his evidence in support of the application, Mr Vance says that the company operated as a health supplements manufacturer and supplier, based in Christchurch. His understanding is that the respondent is Mr Simon Musgrave’s aunt.
[6] The loan agreement was a relatively simple document. It referred to the respondent as “the lender”, and recorded that she had advanced significant funds, in multiple instalments, to Simon and Donna Musgrave, the company, and Distribution, in support of their business plans. Simon Musgrave was the sole director of the company when it was put into liquidation.
[7] The loan agreement recorded that no security had been provided in the past for the lending. It went on the record that the respondent had been an employee of the company, but had resigned and was no longer actively involved with the company. The “Background” section of the loan agreement recorded that, given that the respondent’s involvement in the company was over, “it is appropriate that security is provided for [the respondent’s] lending”.
[8] The loan agreement recorded that interest on the respondent’s advances was payable at the rate of 7.5 per cent per annum, calculated on a daily basis and compounded monthly. A schedule of the advances made by the respondent was attached to the loan agreement.
[9] With the exception of an advance of $750 recorded on 14 October 2013, all of the advances related to the period December 2007-December 2012. Mr Vance says that the balance as at 31 December 2013 was $102,900.14.
[10] The loan agreement provided for Simon and Donna Musgrave to provide personal guarantees to the respondent. To further secure the advances the respondent had made, the loan agreement provided that:
In the event that any action is taken against the Borrowers, jointly or severally, to initiate receivership, bankruptcy or liquidation, ownership of the following shall pass to [the respondent] in lieu of repayment of the loan, with immediate right of possession;
- all rights to the Tru2U brand, including product brands (Sleep Support etc)
- all trademarks registered or otherwise, relating to Tru2U
- all rights to Tru2U brochure, poster, label and bottle design
- all ingredients and finished product owned by Tru2U, whether on hand or in contracted storage
- all Tru2U brochures, posters, labels and bottles on hand
- rights to intercept emails and phone calls made to Tru2U, and accept all orders and product queries, whether by email, fax or phone
- the website at including all orders and payments
- those supply agreements entered into by Tru2U Ltd which [the respondent] may choose to accept
[11] The loan agreement contained an acknowledgement that a security interest could be registered on the Personal Property Security Register by the respondent.
[12] The respondent wrote to Simon and Donna Musgrave on 15 September 2014, requiring repayment of the loans within 90 days. The total amount of the loans was then said to be $127,037.97. The respondent noted that if Simon and Donna Musgrave were unable to repay, she would have no choice other than to call on her security and take ownership of the company’s assets which were secured by the loan agreement.
[13] Simon and Donna Musgrave did not repay the loans, and nor did the company. On 19 December 2014 the respondent wrote to the company and to Simon and Donna Musgrave giving notice of the default, and advising the loan balance (then said to be $128,741.98).
[14] On 30 January 2015, the respondent wrote to Simon and Donna Musgrave advising that she had taken possession of specific company assets under the loan agreement. In her letter, the respondent acknowledged that the value of the assets she had taken from the company was $96,408.54.
[15] On the same date, the respondent wrote to the company advising that she had taken possession of these assets, acknowledging that the value of the assets taken was $96,408.54.
[16] On 30 January 2015, Mr Simon Musgrave wrote to the respondent on behalf of the company, acknowledging that the respondent had taken possession of a number of the company’s assets under the charge created by the loan agreement. Mr Simon Musgrave said in his letter:
Our valuation of those assets, based on the cost of production, is as follows:
- stock, ingredients, and components on hand: $69,558.33 plus GST
- brochures on hand, $18,900 @ 22.62 cents each at last production:
$4,275.18 plus GST
- a nominal value of $10,000 plus GST for the brand and marketing materials design
- this totals $83,833.51 plus GST, or $96,408.54
The liquidation
[17] Creditors’ claims in the liquidation total $265,938.17, including a claim of over $200,000 by the Commissioner of Inland Revenue. The respondent filed a claim in the liquidation for $128,741.98, but that claim has not been admitted by the liquidators. They have taken the view that the claim overlooks the benefit received by the respondent as a result of her taking the company assets, at the agreed values, in January 2015.
[18] There have so far been insufficient realisations in the liquidation to make any distribution to unsecured creditors.
Relevant provisions of the Act
[19] Section 292 of the Act provides that certain “transactions” entered into by the
company are deemed to be voidable by the liquidator of a company in liquidation if : (1) the transaction is an insolvent transaction (as defined in s 292); and
(2) the transaction is entered into within the “specified period” (as
defined in s 292(5));
[20] Section 293 of the Act provides that a charge over any property or undertaking of a property is voidable by the liquidator if -
(i) the charge was given within the “specified period” (as defined
in s 293(6)); and
(ii)immediately after the charge was given, the company was unable to pay its due debts.
[21] Sections 292 and 293 of the Act materially provide:
292 Insolvent transaction voidable
(1) A transaction by a company is voidable by the liquidator if it—
(a) is an insolvent transaction; and
(b) is entered into within the specified 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.
(3) In this section, 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.
…
(4A) A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts.
…
(5) For the purposes of subsection (1)…specified period means—
…
(b) 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 was made; and
…
(6) For the purposes of subsection (4A), restricted period means—
…
(b) in the case of a company that was put into liquidation by the court, the period of 6 months 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
…
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 specified period; and
(b) immediately after the charge was given, the company was unable to pay its due debts.
(1A) Subsection (1) does not apply if—
(a) the charge 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) the charge is in substitution for a charge given before the specified 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.
…
(6) For the purposes of subsection (1), specified period means—
…
(b) 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 the application and ending on the date on which, and at the time at which, the order of the court was made; and
…
(7) For the purposes of subsection (2), restricted period means—
…
(b) in the case of a company that was put into liquidation by the court, the period of 6 months before the making of the application to the court together with the period commencing on the date of the making of the application and ending on the date on which, and at the time at which, the order of the court was made; and
…
[22] Under s 294 of the Act, a transaction or charge that is not automatically set aside as a result of the respondent’s failure to serve a timely notice of objection to the liquidator’s setting aside notice, may be set aside by the Court on the liquidator’s application.1
[23] Section 295 of the Act sets out various orders the Court may make if a transaction or charge is set aside under s 294. Those orders include:
…
(c) an order that a person pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction:
(d) an order that a person transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:
…
(ii) proceeds of property that the company has transferred under the transaction
(e) an order releasing, in whole or in part, a charge given by the
company…
Discussion and conclusions
[24] I accept that the loan agreement created a charge over the property or undertaking of the company within the meaning of s 293 of the Act. The charge comprised in the loan agreement was given within the period of two years before the commencement of the liquidation of the company, and was thus given within the
“specified period” as defined in s 293(6) of the Act.
1 Section 294(5) of the Act.
[25] I am also satisfied that, immediately after the charge was given, the company was unable to pay its due debts. Mr Vance has given comprehensive evidence on that issue, and I accept his opinion that when the loan agreement was made on
20 December 2013 (and immediately after that date), the company was unable to pay its due debts.
[26] It is not necessary to set out in detail Mr Vance’s evidence on that issue, but in summary:
(1)the company had significant outstanding obligations to the Inland Revenue Department (in particular in relation to GST) which had remained outstanding for approximately four years (since July 2009);
(2)the company had failed to remain current with payments of rent and outgoings due to its landlord, which in October 2013 served a letter of demand threatening to issue a Property Law Act notice.;
(3)the company recorded a significant operating deficit in the financial year ended 31 March 2013;
(4)the company’s 31 March 2013 financial statements recorded as an asset a significant debt of over the $300,000 owed by a related company. However, the related company had ceased trading two years prior to these financial statements, and this debt was uncollectable. When this alleged asset is recognised at its appropriate value (nil), the company was insolvent in the balance sheet sense.
[27] On the issue of the outstanding tax obligations, Mr Vance notes that the Inland Revenue Department’s summary of account records interest and penalties (in addition to the core tax debt) of over $100,000 as at 5 May 2015.
[28] I conclude that the liquidators have made out their case that the charge created by the loan agreement was voidable by the liquidators under s 293 of the Act.
[29] I note for completeness that s 293(1A) does not apply – the charge created by the loan agreement secured advances the respondent had already made, and the loan agreement was not entered into in substitution for any other charge.
[30] There will accordingly be an order under s 294 of the Act setting aside the charge created by the loan agreement.
[31] I am also satisfied that the company made a “transaction” or “transactions” (under s 292(3)(b) and (c)) when it entered into the loan agreement, within the specified period of two years referred to in s 292(5) of the Act. For the reasons set out above, I also accept that the transaction or transactions was/were entered into at a time when the company was unable to pay its due debts.
[32] The transaction or transactions will constitute “insolvent transaction(s)” if it or they enabled the respondent to receive more towards satisfaction of the debt owed to her by the company than she would receive, or would be likely to receive, in the company’s liquidation.
[33] Mr Vance says in his evidence that if the value of the company assets taken by the respondent (assumed by him to be $96,408.54) was available to creditors in the liquidation, it is unlikely that a distribution to non-preferential creditors such as the respondent could have been made, due to insufficient funds being available after costs of the liquidation and payment of the claims of the preferential creditors.
[34] I accordingly conclude that the creation of the charge over the company’s property, and the incurring of the obligation which permitted the respondent to take possession and ownership of the company’s property, constituted an insolvent transaction entered into within the specified period referred to in s 292. The liquidators are accordingly entitled to an order under s 294 setting aside the transactions entered into by the company in creating the charge over the company’s property comprised in the loan agreement, and in incurring the obligation in the loan agreement which permitted the respondent to take the company’s secured assets in the event of default.
[35] The liquidators apply also for an order under s 292 of the Act setting aside what they contend was a transaction entered into by the company in January 2015. They submit that the arrangement described in the correspondence of
30 January 2015 constituted an agreed set-off, under which the respondent took assets of the company and gave an agreed credit of $96,408.54 for those assets. In his affidavit, Mr Vance expresses the view that this “transaction” occurred within the “restricted period” of six months defined in subs 6 of s 292, with the result that the “transaction” must be presumed to have been made at a time when the company was unable to pay its debts. Mr Vance adds that he is not aware of any evidence that would indicate that the company was not insolvent as at January 2015.
[36] It is not clear to me that there was in fact any “transaction” (as that expression is defined in s 292(3)) entered into by the company in January 2015. First, it is not clear that the company conveyed or transferred any property to the respondent, or incurred any new obligation to her, at that time. The respondent appears to have acted unilaterally under the loan agreement, which had been entered into a little over one year earlier. The company did not pay any money in January
2015, and I take the expression “execution process” used in s 292(3)(d) to refer to execution by an officer of the Court, not the action of a lender seizing secured property under his or her security. It may be that the company has done or omitted to do something for the purpose of giving effect to the transaction or transactions which clearly was (or were) comprised in the loan agreement (s 292(3)(f)), but that is not clear on the evidence.
[37] I conclude that there is insufficient evidence of the company making a “transaction” as defined in s 292, within the 6 months restricted period provided for in s 292(6).
[38] The final matter is whether an order should be made directing the respondent to pay the sum of $96,408.54 to the liquidators.
[39] In her letter to Simon and Donna Musgrave dated 30 January 2015, the respondent stated that, based on information given to her by the Musgraves, she accepted their estimate of the value of the goods repossessed at $96,408.54.
[40] In his reply letter of 30 January 2015, Simon Musgrave acknowledged that the respondent had taken possession of a number of assets belonging to the company in satisfaction of the security created by the loan agreement. Mr Musgrave noted in his letter that many of the ingredients and finished stock were perishable, and that the company did not have a viable alternative buyer immediately available to it. For those reasons, he authorised the respondent to sell the assets, for the values stated, immediately.
[41] Mr Musgrave put the value of stock, ingredients and components on hand at
$69,558.33 plus GST (total $79,992.08). There is no evidence that the respondent has been able to sell the stock, ingredients and components for this figure, but the figure is said to have been based on the cost of production, and the respondent has not put forward any evidence to suggest that she was unable to sell the stock, ingredients and components at the agreed value. In those circumstances I conclude that the liquidators have sufficiently shown that the sum of $79,992.08 fairly represents a benefit the respondent has received because of the transactions comprised in the loan agreement.
[42] At the hearing on 16 May 2016 I granted leave to the liquidators to file a further affidavit, directed to the values of $10,000 plus GST and $4,275.18 plus GST which Mr Simon Musgrave and the respondent had attributed to the brand and marketing materials design, and the brochures. As the liquidation order was made only three months after Mr Musgrave and the respondent settled on those figures there appeared to be a possibility that these items may not have had the values attributed to them in the 30 January 2015 correspondence.
[43] The liquidators have provided a further affidavit from Mr Daniel Nicolls, a senior analyst employed by the liquidators’ firm. Mr Nicholls gives evidence of a number of communications he had with Mr Simon Musgrave following the liquidators’ appointment, in which Mr Musgrave confirmed that the Tru2U business is now being operated by a trust called the “Health Brands Trust t/a Tru2U”. Mr Nicholls produced a copy of an invoice from this entity dated 29 April 2015, which prominently features what appears to be a Tru2U device mark. He also produced a copy of what appears to be the home page of the website at
on which various health supplement products are advertised, with free delivery.
[44] Mr Nicholls’ evidence sufficiently establishes that the values of the brochures and the brand and marketing materials design have not been lost as a result of the liquidation of the company, and that there is no basis for a finding that they are worth less than the values attributed to them by Mr Simon Musgrave and the respondent in the 30 January 2015 correspondence. I accordingly find that the liquidators have sufficiently shown that the sums of $10,000 plus GST and $4,275.18 plus GST (for the brand and marketing materials design and the brochures respectively) fairly represent benefits the respondent has received because of the transactions comprised in the loan agreement.
Orders
[45] I make the following orders:
(1)Under s 293, setting aside the charge created by the loan agreement over the property or undertaking of the company.
(2)Under s 292, setting aside the transactions comprised in the loan agreement by which the company (i) created the charge over its property and (ii) incurred the obligation which permitted the respondent to take possession and ownership of the company assets taken by her in or about January 2015 (as listed in the letter dated 30
January 2015 from Mr Simon Musgrave to the respondent, exhibit
“N” to the affidavit of Mr Vance in this proceeding).
(3) The respondent is to pay to the company the sum of $96,408.54.
(4)The liquidators are entitled to their costs, which are fixed on a 2B basis. The liquidators are also entitled to recover any disbursements, which are to be fixed by the Registrar.
Associate Judge Smith
Solicitors:
Meredith Connell, Wellington for the applicants
No appearance for the respondent
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