Vance v Shot Blast Services (Auck) Limited

[2012] NZHC 3613

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-000433 [2012] NZHC 3613

UNDER  the Companies Act 1993

IN THE MATTER OF     an application to set aside default judgment

BETWEEN  HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF MULTI CONSTRUCTION CONCEPTS (MCC) LIMITED (IN LIQUIDATION) Applicants

ANDSHOT BLAST SERVICES (AUCK) LIMITED

Respondent

Hearing:         10 December 2012

Appearances: K Berry for applicants

J D McBride for defendant

Judgment:      21 December 2012

INTERIM JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 21 December 2012 at 3pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

J Sumner/K Berry, Ford Sumner, PO Box 25 299, Wellington
B Cran, Knight Coldicutt, PO Box 106214, Auckland

Counsel:

J McBride, Barrister, Dryden Chambers, PO Box 1008, Shortland Street, Auckland

HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF MULTI CONSTRUCTION CONCEPTS (MCC) LIMITED (IN LIQUIDATION) V SHOT BLAST SERVICES (AUCK) LIMITED HC AK CIV 2012-404-000433 [21 December 2012]

[1]      The applicants are the liquidators of Multi Construction Concepts (MCC) Limited (in liquidation) (MCC). They have applied under s 294(5) of the Companies Act  1993  (the Act)  for  an  order  setting  aside  payments  made  by  MCC  to  the respondent, Shot Blast Services (Auck) Limited (Shot Blast).

[2]      The   liquidators   were   appointed   on   11   July   2008.      Following   their appointment they formed the view that seven payments made at various times in the year leading up to MCC being put into liquidation, totalling $26,517.75, were voidable transactions.  They served notice on Shot Blast of their wish to set aside those payments on the grounds that they were voidable because they were made within the specified period prior to liquidation, at a time when MCC was unable to pay its debts, and as a consequence Shot Blast received more in satisfaction of MCC’s indebtedness than would have been the case as a result of the liquidation.

[3]      Shot  Blast  objected  to  the  payments  being  set  aside.    Accordingly,  the liquidators brought this application.

[4]      Shot Blast initially failed to take steps, and the liquidators obtained judgment by default  at  the  first  call  of  the  application.    Shot  Blast  subsequently  applied successfully to set that judgment aside.1    In the course of hearing that application, Shot Blast withdrew its opposition to any payments received after 1 November 2007, being the date that the Companies Amendment Act 2006 came into force and the defence of receiving a payment in the ordinary course of business was removed from s 292 of the Act.

[5]      Just before this judgment was due to be issued, counsel for Shot Blast filed a memorandum  requesting  that  it  be  delayed  on  the  basis  that  Shot  Blast  had withdrawn its opposition in respect of the four payments received after 1 November

2007 due to an erroneous view of the law.  At the hearing, counsel had been of the view that Shot Blast had no defence under s 296 of the Act because it understood that defence to require either an alteration of position or the giving of value after the

payments were received. Counsel has since became aware of two recent High Court

1 Shot Blast Services (Auck) Ltd v Levin [2012] NZHC 2129.

decisions  which held that the s 296 defence extends to payments made in respect of services that have already been provided.2   Counsel submitted that Shot Blast has a strong defence to all of the impugned transactions, and asks that the application not be determined until inquiries have been made as to the status of any appeals against those decisions.   The liquidators oppose any delay in release of the judgment submitting that the hearing has concluded.

[6]      The existence of such a defence will not affect my decision in respect of the matter that was argued before me.  I have thus chosen not to delay release of this judgment, but instead to release it on an interim basis in respect of that argument only, and to reserve the position in relation to any s 2986 defence (including whether it can now be argued) until I have had the opportunity to hear counsel.

[7]      Accordingly, this decision will only address whether the first three payments received, totalling $15,414.75, were received in the ordinary course of business.

The application and opposition

[8]      The  liquidators’ application  was  supported  by  an  affidavit  sworn  by  the liquidator Mr H D Levin on 31 January 2012, and another affidavit sworn by Mr Levin on 23 April 2012 in reply to Shot Blast’s application to set aside the default judgment.  Mr Levin has given evidence that Shot Blast was put into liquidation on

11 July 2008 on an application by the Commissioner of Inland Revenue (filed on 17

March  2008).     Accordingly,  the  specified  period  within  which  an  insolvent transaction is voidable by the liquidator3 ran from 17 March 2006, and the restricted period within which MCC is presumed to be unable to pay its debts4  ran from 17

September 2007.

[9]      Mr  Levin  says  the  liquidators  have  received  creditors’  claims  totalling

$263,227.07 ($36,890.31 of which is preferential debt).   He has identified nine invoices issued to MCC by Shot Blast between 30 April 2007 and 20 June 2007 (all

2 Farrell v Fences & Kerbs Ltd [2012] NZHC 2865; Meltzer v Hiway Stabilizers New Zealand Ltd

[2012] NZHC 3281.

3 Companies Act 1993, s 292(1) and (5).

4 Companies Act, s 292(4A) and (6).

within a year of the date of commencement of liquidation) for a total of $34,017.75, and the seven payments already mentioned (the first on 29 June 2007 and the last on

2 July 2008).  Accordingly, the first payment was made within the specified period, and the other six were within the restricted period.

[10]     Mr Levin says these payments were made at times when Shot Blast was unable to pay its debts as they fell due: indeed, he considers that Shot Blast was insolvent from at least March 2001, as it had paid no income tax for the period ending 31 March 2001.  Shot Blast has also failed to pay GST since early 2004 and ACC levies since April 2006.  He contends that the payments resulted in Shot Blast receiving more than it would receive in the liquidation (to the extent of the total amount received of $26,517.75): due to the size of the preferential debt and lack of assets for distribution, unsecured creditors (as Shot Blast would have been) would not get a distribution in the liquidation.

[11]     Mr Levin further says that the payments, when considered in context, could not be said to have been made in the ordinary course of MCC’s business.   He supports his view by referring to the pattern of invoicing and payment:

(a)       the invoices were issued in “batches” (three were issued on 30 April

2007, one on 14 May 2007, a further three on 30 May 2007, and two on 20 June 2007); and

(b)all payments were well outside the Shot Blast’s terms of trade (he relied  on  email  advice  from  one  of  Shot  Blast’s  directors,  Dawn Styles,  in  April  2009  that  its  standard  terms  of  trade  were  that payment was to be made by the 20th  of the month following the invoice, or within seven days in the case of large amounts): there was no payment at all until just over a week after the last of the invoices was issued and the following six payments were made over the following 12 months.

[12]     Mr Levin contrasted the payments to Shot Blast with MCC’s failure to pay its much larger debts to the Commissioner of Inland Revenue and to the ACC (referred to in paragraph [8] above), and says that Shot Blast was clearly being preferred.

[13]     Shot Blast’s notice of opposition is confined to the three payments made between 29 June 2007 and 8 October 2007.   It says that these were made in the ordinary course of business.  In that respect it relies on the judgment in this Court on its application to set aside the default judgment5 as well as an affidavit by one of its two  directors,  Mrs  Styles,  sworn  on  4  April  2012  and  filed  in  support  of  its application to set aside.  In that affidavit, Mrs Styles says:

(a)      Shot Blast is a small family company that prepares flooring surfaces for application of a surface coating.   Its clients tend to be the contractors that apply the coating.  She says that she and her husband (a co-director) had known MCC’s director since about 2003 as MCC was  an  authorised applicator  for a waterproofing membrane used, amongst other things, on car parks and factory floors.  MCC engaged Shot Blast from time to time to grind and shot blast floors for it. Some of the jobs carried out for MCC were quite big (such as preparing car parks) whilst others were smaller.

(b)2007 and 2008 were difficult times in the construction industry and the tightening of the economy meant that cash flows became tight for everyone.  Shot Blast had to accept that its clients were not paying it as promptly as previously and that there would sometimes be delays in payment.  She said that, in those times, any work was welcome.

(c)      MCC was one of these clients – Shot Blast did a number of jobs for it through 2007 and payment was sporadic.

(d)Mrs Styles confirms the evidence given by the liquidators as to the invoices that were issued and the payments that were made in relation

5 Shot Blast Services (Auck) Ltd, above n 1.

to them, but says that the timing of payments was not unusual and did not suggest to Shot Blast that MCC was in financial difficulty:

There was absolutely nothing unusual about any of this.  We were  receiving  regular  payments  to  reduce  the  debt  that Multi Construction owed us and everyone was operating in an environment where cash flows were more restricted than they had been.   There was nothing to suggest that Multi Construction was experiencing serious financial difficulties and we were never told anything that might have given us that impression.   I never instructed solicitors to pursue the debt and we never sent any letters demanding payment or threatening legal action.  All that I did was call Rueben [the director of MCC] from time to time to ask and put [sic] some money through to reduce his debt to us, which he did. The payments seemed routine to us and there was nothing to suggest otherwise.

....

We are a small family business that relies on clients like Multi Construction to stay afloat.   We had no idea that Rueben  was in  financial strife.   The  delayed  payment  is routine in our industry.  We accepted the payments from him in good faith, with no knowledge that we might be asked to have to pay it back, and relied on his payments to provide working capital for our business, to enable it to stay afloat during a very difficult economic time for everyone in our industry.

[14]     In  his  further  affidavit  in  reply,  Mr  Levin  disagreed  with  Mrs  Styles’ evidence.   He referred to his affidavit in support of the present application, then noted Mrs Styles’ evidence that she called MCC’s director from time to time to ask for money to be put through to reduce its debt; he said that he considered that that was inconsistent with her evidence that there was nothing unusual about the timing or method of the payments made by MCC and nothing to suggest that it was in financial difficulty.

The issue for determination

[15]     Until 1 November 2007, a transaction was voidable on the application of the liquidator if it met the requirements in s 292(2) of the Act.  However, that section expressly provided that, even if the other requirements were met, the transaction would not be voidable if it took place in the ordinary course of business.  This saving

of a transaction in the ordinary course of business was removed from an amended s

292 by s 27(2) of the Companies Amendment Act 2006, but remains available for transactions occurring before 1 November 2007.6

[16]     The  three  payments  which  Shot  Blast  challenges  were  made  before  1

November 2007, being:

$5,373.00 on 29 June 2007

$2,083.50 on 21 September 2007

$7,958.25 on 8 October 2007.

[17]     The sole issue in this case is whether these three payments were made in the ordinary course of business.

[18]     The issue is complicated by s 292(3) which, as it was before the amendment, provided that a payment in the restricted period was presumed to be other than in the ordinary course of business.  The effect in this case is that the liquidators have the onus of showing that the first payment was not in the ordinary course, whereas Shot Blast must first rebut the presumption in relation to the second and third payments.7

Principles as to ordinary course of business

[19]     The phrase “the ordinary course of business” has been considered in many cases and at the highest level.  It was considered by the Privy Council, in the context of voidable transactions under the Act, in Countrywide Banking Corporation Ltd v Dean,8   In that case their Lordships expressed the opinion that the phrase had to be considered in its legal (statutory) context and using the actual setting in which the transaction took place as the reference point for an objective assessment of what the phrase should mean in that context.9   That decision, and subsequent applications of it by New Zealand courts, were considered by the Court of Appeal in Waikato Freight

and Storage (1988) Ltd v Meltzer.10   The Court of Appeal noted the point made by

6 Companies Amendment Act 2006, s 27(5); Levin v Rastkar [2011] NZCA 210 at [55].

7 Thompson v ASB Bank Ltd (2004) 9 NZCLC 263,602 (HC).
8 Countrywide Banking Corp Ltd v Dean [1998] 1 NZLR 385 (PC).
9 At 394.

10 Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 (CA).

their Lordships in Countrywide that the meaning had to be determined in its statutory context  and,  after  reviewing  the  legislative  purpose  of  the  voidable  transaction regime, commented that it was evident that:11

Parliament thereby intended a commercially unremarkable payment to stand, even if having preferential effect.  It must have been Parliament’s view that otherwise the ordinary processes of commerce would be unduly undermined.

[20]     The Court then said:12

As the Privy Council noted, the proper approach to the phrase "ordinary course of business" is an objective one but against the actual setting in which the payment or other transaction took place....  To show that a payment or other transaction took place in the ordinary course of business, the recipient creditor has to show that there was nothing abnormal – nothing out of the ordinary – about the payment or transaction in the commercial context in which it took place....

[21]     The Court  proceeded  to  consider what  was  required  in  determining  “the actual setting” before summarising the overall approach as follows:13

In our view the judicial approach has become over-complicated and over- refined. The  question  is whether,  at  the  time  it  was  made,  the  relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned.  So  too  is  the  previous  commercial  relationship  between  the parties. The observer spoken of in the Privy Council is in reality the Court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether on the evidence before the Court the transaction or payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?

[22]     When determining whether a payment has been made in the ordinary course of business, no account is taken of the intent or purpose of the company in making the payment.   However, if the creditor receiving the payment is aware of the company’s intent to prefer, that can be an indicator that it is not in the ordinary

course.14

11 At [18].

12 At [19].
13 At [31].

14 At [32].

[23]     A creditor will be aware that it is being treated preferentially when, on the balance of probabilities, it was “practically inevitable” that the creditor knew the company was  insolvent, and that if it went into liquidation the payment would diminish the pool of assets available to creditors.15

The arguments

[24]     Counsel for the liquidators submitted that they had discharged the onus on them  generally  to  show  that  the  payments  were  not  in  the  ordinary  course  of business.  She referred to Mr Levin’s evidence that Shot Blast was insolvent at the time (it was not meeting its tax obligations), and submitted that an objective observer would  see  the  batch  invoicing,  the  delayed  payment,  and  the  failure  to  relate payments to specific invoices as a response to abnormal financial circumstances rather than acts in the course of ordinary business operations.   She submitted that Mrs Styles’ evidence went no further than a general assertion that the payments were in the ordinary course, and in particular was insufficient to rebut the presumption that the payments within the restricted period were outside the ordinary course.  She argued that Mrs Styles’ evidence that industry conditions were difficult, that Shot Blast had had to accept that its customers could not pay promptly (and within the terms of trade) and that she had to make calls seeking payments, supported the liquidators’ contention that the payments were made out of the ordinary course.

[25]     Counsel for Shot Blast submitted that these payments were unexceptional, routine commercial transactions made in the ordinary course of business.  He argued that  the objective observer would  have seen  nothing abnormal  in  the  payments which, though made later than the standard terms of trade, were clearly in fulfilment of MCC’s contractual obligation rather than a response to insolvency.16   He relied on the finding in the judgment on Shot Blast’s application to set aside that these payments were unexceptional.17   He referred to Mrs Styles’ evidence that it was not unusual, in the circumstances of the day, to wait for its customers to be paid (they

were all small businesses, reliant on payments from their own customers for their

15 Graham v Pharmacy Wholesalers (Wellington) Ltd CA 37/04, 17 December 2001 at [75].

16 Relying on Carter Holt Harvey Ltd v Fatupaito (2003) 9 NZCLC 263 (HC) at [22] and [31].

17 Shot Blast Services (Auck) Ltd v Levin [2012] NZHC 2129 at [44].

cash flow) and it was not in a position to turn away work simply on the basis of what he described as “lumpy payments”.  He submitted that Shot Blast had rebutted the presumption in relation to the late payments, and said that Mrs Styles' evidence as to industry conditions, Shot Blast’s decision to accept “lumpy payments”, and its lack of knowledge of any other financial difficulties, was sufficient to establish that these

were not abnormal payments.18

Discussion

(a)      The application to set aside the original judgment

[26]     As mentioned previously, counsel for Shot Blast argued that this Court had already  determined  that  the  payments  in  question  were  unexceptional  in  the judgment setting aside the initial default judgment.   He pointed out that that application was determined on the same evidence as that before the Court on this application and on the same (substantive) arguments.  He submitted that that gave rise to an issue estoppel which was determinative of this application.

[27]     I do not accept this submission.  Although I accept that the same evidence is before the Court, the Court had not been asked to give a final determination on the issue in the setting aside application.  On an application to set aside a judgment, the Court has to be satisfied with the applicant’s reasons for failing to appear, and that

the applicant has an arguable case.19   In coming to that conclusion it had to address

the nature of the substantive application, and consider the evidence and arguments for the party applying to set aside.  Whilst I accept that in the course of the judgment the Court came to a view on the point now before the Court (whether the payments were in the ordinary course of business), it was not required to give a final view on that matter and I do not understand it to have done so.  The Court accepted that Shot Blast had an arguable defence to the liquidators’ application, but clearly left the matter open for a final determination.

(b)      Consideration generally

18 Counsel submitted that it was not open to the liquidators to challenge Mrs Styles’ evidence on these

points given that it had not cross-examined her on them – relying on s 92 of the Evidence Act 2006.

19 Russell v Cox [1983] NZLR 654 (CA).

[28]     I accept Mrs Styles’ evidence that conditions in the construction industry were difficult in 2007, and that Shot Blast as a matter of practice extended credit to its customers (including MCC) beyond its standard terms.  It is understandable, in the  industry  conditions  of  the  day,  that  Shot  Blast  would  wish  to  give  good customers latitude on timing of payment, rather than turn away business (she produced accounts showing that Shot Blast’s sales in the 2007/2008 year were 25% down on the previous year).  The evidence is that Shot Blast had had a good trading relationship with MCC up to that point and, being a small family business, it is understandable that it would take a sympathetic view of its customers’ cash flow constraints.  The need to put the question of whether a payment was abnormal, or out of the ordinary, into the commercial context at the time was emphasised in the Court

of Appeal’s judgment in Carter Holt Harvey Ltd v Fatupaito:20

[21] What the creditor has to show in order to prevent the payment being set aside is that an objective observer would have seen nothing abnormal about the transaction in the commercial context as it existed for the company at the time when the payment occurred: Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 at paras [19] and [22]. Where the impugned payment was made as part of an ongoing business relationship, rather than being a one-off event, the hypothetical observer – who is in reality the Judge

– should primarily have regard to the prior course of conduct of the company towards the recipient creditor and towards its creditors generally. The normality or abnormality of the payment, in the particular circumstances in which it occurred, also falls to be examined against the practices of solvent companies engaged in similar businesses, but it would not necessarily follow that because other such companies sometimes make payments of the same character, that in itself means that the subject payment can be considered ordinary in the course of the subject company’s business at the time at which it was made. It is to be stressed that the comparison is with the behaviour of solvent companies. As the Privy Council said in Countrywide Banking Corporation  v  Dean  [1998] 1 NZLR 385 at 394, while there is to be reference to business practices in the commercial world in general, the focus must still be the ordinary operational activities of businesses as going concerns, not responses to abnormal financial difficulties.

[22] The business context of course includes the particular contractual context. It is therefore necessary to take account of the circumstances in which the company became obliged to make the payment. It is necessary to ask why the payment was made when it was: can it be described simply as a routine  payment  which,  though  made  late,  was  in  fulfilment  of  the company’s  contractual  obligation  rather  than  a  response  to  its  current situation of insolvency? This question is to be answered without regard to any subjective intention or purpose of the company to prefer the creditor unless that intention or purpose was known to the creditor: s 292(4). We

20 Carter Holt Harvey Ltd, above n 16, at [21]–[22].

have already recorded that it is common ground that Carters was unaware of

the debtor company’s insolvency and of any intention that it be preferred.

[29]     In that context I do not regard the patterns of invoicing and payment as putting the three payments in question outside the ordinary course of business:

(a)      I do not see anything in the liquidators’ point that the invoices were rendered in batches.  Had this occurred shortly before liquidation, it might have justified an inference that Shot Blast had heard that MCC was in financial difficulty.   However, these invoices were issued a year before liquidation and I see no reason to draw any inference out of the fact that up to three invoices were issued on a given date: there is nothing intrinsically unusual in that.

(b)I accept that there is no explicit evidence that the payments were made in respect of particular invoices, but each of the three payments in dispute can nevertheless be reconciled to specific invoices:

(i)The payment on 29 June 2007 ($5,373) matches the total of invoices 1594 and 1596;

(ii)The payment on 21 September 2007 ($2,083.50) matches the total of invoices 1597 and 1605; and

(iii)The payment on 8 October 2007 ($7,958.25) is the amount of invoice 1620.

(c)      The liquidators’ more cogent criticism (that payments were made to reduce the outstanding balance to a round figure, or were themselves rounded payments unrelated to any invoice) are more appropriately directed towards the four later payments (in respect of which I have reserved my decision).

(d)Although  there  was  a  delay  in  making  the  three  payments  (two months in the case of the first payment and five to six months in the

case of the second two), Mrs Styles has explained the context for that delay and there is no other evidence to suggest any pressure being exerted to extract the payments.   In the circumstances, I accept that although the payments were late, they can be explained in terms of cash flow into MCC and they were made in response to MCC’s contractual obligations rather than under any pressure as a result of concerns about MCC’s financial position, and particularly any suspicion as to insolvency.

(e)      I do not see any need to draw an adverse inference from Mrs Styles’ evidence generally (as to hard times within the construction industry and Shot Blast’s election to allow further credit) or the fact that she would call MCC from time to time to enquire about payment.  That is all consistent with her evidence as to the pattern of trading at that time.

[30]     Mrs Styles’ evidence that it is not unusual in the construction industry for payments to be irregular in terms of timing, that she called MCC periodically to see if further funds could be forthcoming but not out of any concern as to its financial position, and that Shot Blast had no knowledge of MCC’s financial difficulties, was challenged in a general way by Mr Levin but without any direct evidence on these points.   The liquidators initially gave notice of their wish to cross-examine Mrs Styles, but later decided not to do so.  I see no reason to reject Mrs Styles’ evidence. It has been challenged, in submissions, on the basis that it is mere assertion.  It is difficult to see, particularly after this period of time, what more she could have said (particularly  in  the  absence  of  any  cross-examination).    In  the  circumstances, although the evidence could be more detailed, there is no reason to reject it.

[31]     Counsel for the liquidators drew attention to an inconsistency between a statement by Mrs Styles in any email to the liquidators in 2009 as to Shot Blast’s terms of trade (credit limited to the 20th  of the month following invoicing) and her evidence on this application that Shot Blast did not insist on those terms in the difficult times of 2007 and 2008.  She pointed out that the suggestion that the terms of trade had been relaxed was not advanced as support for payment in the “ordinary

course of business” until a letter from Shot Blast’s solicitors in April 2011.  I am not persuaded that this warrants a rejection of Mrs Styles’ evidence.  The circumstances of Mrs Styles’ statement to the liquidators in 2009 are not in the evidence before the Court and, the terms of her email suggest that the information was given generally, and not in relation to the point now in issue.

Decision

[32]     I am satisfied on the evidence before the Court that the liquidators have not discharged their onus in respect of the first payment, and that Shot Blast has rebutted the presumption in respect of the second and third payment.  I find that Shot Blast is entitled to resist the liquidators’ application on the grounds that the three payments still in question were made in the ordinary course of business.  As the request for leave to argue a defence under s 296 has still to be considered, I make no other

orders at this time, and reserve costs on the point that I have determined.

Associate Judge Abbott