Farrell and Rogan as Liquidators of Contract Engineering Ltd ((in Receivership) and (in Liquidation)) v Fences & Kerbs Ltd

• Jurisdiction: New Zealand
• Judge: Randerson J
• Judgment Date: 25 July 2013
• Neutral Citation: [2013] NZCA 329
• Docket Number: CA773/2012 CA864/2012
• Court: Court of Appeal
• Date: 25 July 2013

Between

Peter Esmond Farrell and Simon Paul Rogan as Liquidators of Contract Engineering Limited (In Receivership and In Liquidation)

Appellants

and

Fences & Kerbs Limited

Respondent

Between

Peter Esmond Farrell and Simon Paul Rogan as Liquidators of Contract Engineering Limited (In Receivership and in Liquidation)

Appellants

and

Acme Engineering Limited

Respondent

Between

Jeffrey Philip Meltzer and Lloyd James Hayward as Liquidators of Window Holdings Limited (In Liquidation)

Appellants

and

Hiway Stabilizers New Zealand Limited

Respondent

[2013] NZCA 329

Court:

O'Regan P, Randerson and French JJ

CA773/2012

CA783/2012

CA864/2012

IN THE COURT OF APPEAL OF NEW ZEALAND

Determination of remaining issues reserved following interim judgment which held that the giving of value under s296(3)(c) Companies Act 1993 (additional provisions relating to setting aside transactions and charges) had to be proved to have occurred at the time payment or other company property was received and did not include value given at the time antecedent debt was created — whether requirement for value to be given when payment was made by insolvent company to creditor might be satisfied by creditor receiving the payment in satisfaction of the antecedent debt — whether the requirement for value to be given when the payment was made to the creditor could be satisfied by the creditor forbearing to sue at the time of payment.

Counsel:

M D Branch, K I Bond and K F Shaw for Appellants in CA773/2012 and CA783/2012

B P Keene QC and J F Anderson for Appellants in CA864/2012

J P Temm and S A Hickman for Respondent in CA773/2012

S A Barker and E M Ritchie for Respondent in CA783/2012

G M Harrison and C Hunt for Respondent in CA864/2012

FINAL JUDGMENT OF THE COURT

• A All three appeals are allowed.

• B The appellants in CA773/2012 are entitled to judgment against the respondent for $57,944.16 together with interest thereon pursuant to the Judicature Act 1908 from the date on which the appellants' notice to set aside was served on the respondent in CA773/2012 until the date of payment.

• C The appellants in CA783/2012 are entitled to judgment against the respondent in the sum of $105,484.50 together with interest pursuant to the Judicature Act from the date on which the appellants' notice to set aside was served on the respondent in CA783/2012 until the date of payment.

• D The appellants in CA864/2012 are entitled to judgment against the respondent for $13,021.55 together with interest pursuant to the Judicature Act from the date on which the appellants' notice to set aside was served on the respondent in CA864/2012 until the date of payment.

• E No awards of costs are made in CA773/2012 and CA864/2012.

• F The appellants in CA783/2012 are entitled to costs against the respondent in this Court for a standard appeal and cross-appeal on a Band A basis together with usual disbursements.

• G The costs orders made in the High Court in all three appeals are set aside. Any remaining issues as to costs in the High Court are to be determined by that Court.

REASONS OF THE COURT

(Given by Randerson J)

Introduction

1 In our interim judgment delivered on 27 March 2013, 1 we determined that the giving of value under s 296(3)(c) of the Companies Act 1993 (the Act) must be proved to have occurred at the time the payment or other company property is received and does not include value given at the time the antecedent debt is created.

2 We reserved all remaining issues including issues raised on the cross-appeal by ACME in CA783/2012. The remaining issues are:

• (a) Whether the requirement for value to be given when the payment is made by the insolvent company to the creditor may be satisfied by the creditor receiving the payment in satisfaction of the antecedent debt.

• (b) Whether the requirement for value to be given when the payment is made to the creditor can be satisfied by the creditor forbearing to sue at the time of payment.

• (c) Whether the High Court was wrong to find that Contract Engineering Ltd was unable to pay its debts as they fell due at the time the relevant payments were made to ACME.

• (d) Whether the High Court was wrong not to award indemnity costs in favour of ACME.

First issue: Whether the requirement for value to be given when the payment is made by the insolvent company to the creditor may be satisfied by the creditor receiving the payment in satisfaction of the antecedent debt

3 The respondents in all three appeals submitted on the basis of Australian authorities that value may be given at the time the creditor receives payment from the insolvent company by its receipt in satisfaction of the antecedent debt. Particular reliance was placed on the decision of the Court of Appeal of New South Wales in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd. 2 We discussed this decision in our interim judgment. 3 We accepted that Buzzle supports the proposition that valuable consideration under the equivalent Australian legislation may be given by the satisfaction and release of the antecedent debt. We also noted that it appears to be accepted in Australia that it will not generally be difficult to establish that valuable consideration has been given, referring to passages from McPherson's Law of Company Liquidation. 4

4 In our interim judgment we found, however, that there were material differences between s 296(3) of the Act and its Australian equivalent, s 588FG(2) of the Corporations Act 2001 (Cth).

5 We are not persuaded that the Australian approach should be adopted in New Zealand. Our reasons are broadly in line with those canvassed in the interim judgment in support of our conclusion that value had to be given at the time of the payment. We do no more than summarise those reasons but we provide additional reasons where appropriate to address the specific issues identified.

6 First, the objective and effect of the voidable transaction regime is not to do justice or achieve fairness between a particular creditor and the debtor company. It is to achieve fairness amongst all creditors inter se. As a general rule, the

well-established pari passu principle requires that creditors of a company who are in the same class share on a pro rata basis in the company's funds available for distribution

7 Second, the voidable transaction provisions of the Act attempt to strike a balance between the interests of all creditors in being able to share the assets of the company and the interests of particular creditors who believe that payments made to them have been validly received and that they ought not to be required to pay them back.

8 Third, the object of the avoidance provisions under the Act is to swell the pool of funds available to the company to be shared rateably amongst all creditors of the same class in accordance with the pari passu principle. The mere receipt of payment in satisfaction of a debt due to a creditor does nothing to swell the pool of available funds for creditors. Rather, it has the effect of diminishing the company's creditors to the extent of the payment while reducing the company's assets by the same amount.

9 Fourth, for the reasons given in our interim judgment, the proposition advanced by the respondent creditors would seriously undermine the policy rationale for the avoidance provisions and would render s 296(3)(c) practically redundant.

10 Fifth, the proposition advanced by the creditors would amount to a significant change in policy direction from the approach adopted prior to the 2006 amendments to the Act in a way that was not signalled by Parliament.

11 Sixth, we consider that the use of the term “value” rather than “valuable consideration” in s 296(3)(c) is not purely semantic. The New Zealand legislature specifically adopted the different concept of “value” in s 296(3) in contrast to the words “valuable consideration” used in the preceding parts of the same section. 5 “Valuable consideration” is also the term used in the Australian section.

12 Seventh, the Australian authorities relied upon by the creditors are distinguishable and, in any event, the New Zealand legislation has not followed the Australian legislation in material respects. In Buzzle the Court of Appeal of New South Wales accepted without discussion, the proposition that the satisfaction and release of an antecedent debt is valuable consideration for the purposes of s 588FG(2)(c) of the Corporations Act. 6 The Court accepted that valuable consideration did not require full consideration. However, for reasons already noted, we are satisfied that the requirement to give value at the time of the payment under s 296(3)(c) was intended to have a different meaning from the phrase “valuable consideration” used in the Australian legislation.

13 Finally, the fact that the creditor must pay back the amount received in satisfaction of the antecedent debt does not by itself establish relevant detriment to the creditor as discussed in previous New Zealand authorities.

14 Mr Harrison for Hiway Stabilizers and Mr Barker for ACME placed particular reliance on the decision of the Full Court of the Federal Court of Australia in PT Garuda Indonesia v Grellman 7 in which it was held that, for the purposes of ss 120 and 121 of the Bankruptcy Act 1966 (Cth), a transfer of property in satisfaction of an antecedent debt constituted valuable consideration for a payment in discharge of that debt. 8

15 However, the statutory context was quite different from s 296(3) of the Act. Sections 120 and 121 are concerned with the transfer of property at an undervalue or dispositions with intent to defraud creditors. The Court in Garuda was concerned with the payment of money combined with a transfer of a house from the bankrupt to his employer in satisfaction of a debt owed to the employer. The legislation required the trustee in bankruptcy to show that the...