Iain Bruce Shephard and Andrew Robert Croad v Steel Building Products (Central) Ltd

• Jurisdiction: New Zealand
• Judge: Judge Abbott
• Judgment Date: 13 February 2013
• Neutral Citation: [2013] NZHC 189
• Docket Number: CIV 2010-443-000313
• Court: High Court
• Date: 13 February 2013

Under section 292 of the Companies Act 1993

In the Matter of the liquidation of Hightower Roofing Limited

Between

Iain Bruce Shephard and Andrew Robert Croad

Applicants

and

Steel Building Products (Central) Limited

Respondent

[2013] NZHC 189

CIV 2010-443-000313

IN THE HIGH COURT OF NEW ZEALAND

NEW PLYMOUTH REGISTRY

Application by liquidators for orders seeking recovery of amounts paid over a six month period leading up to liquidation to reduce company's debt to respondent — day prior to liquidation, a direct credit of $12,500 was made to the respondent (“last payment”) — continuing business relationship between company and respondent — payments were treated as one transaction in accordance with s292(4B) Companies Act 1993 (“CA”) (insolvent transaction voidable) — liquidators made a mistake in calculating the point of peak indebtedness — whether liquidators had established an insolvent transaction by showing that the company was insolvent and that the respondent had received a preference from the transaction — whether respondents had established the requirements for a defence under s296(3) CA (additional provisions relating to setting aside transactions and charges) — whether the liquidators were entitled to pick a starting point for determining the commencement of the “single transaction” under s292(4B) CA — whether liquidators were bound by an initial mistaken assessment of the point of peak indebtedness.

Appearances:

D A Bleier for applicants

P R Cogswell for respondent

D A Bleier, Barrister, PO Box 5817, Lambton Quay, Wellington 6145

JUDGMENT OF ASSOCIATE Judge Abbott

1 This case exemplifies the difficulties that face liquidators of small companies that operated with minimal record keeping. The applicants (the liquidators) were appointed liquidators of Hightower Roofing Ltd (in liquidation) (Hightower). The day before it was put into liquidation the bank account was all but emptied by a direct credit of $12,500 to the respondent, Steel Building Products (Central) Ltd (which traded as Metalcraft Roofing, and to which I will refer as Metalcraft) as well as two cash withdrawals totalling $1,380.

2 At the time of liquidation Hightower owed other creditors over $90,000, a substantial part of which is claimed to be preferential debt (GST).

3 A director of Hightower provided the liquidators with no more than some bank statements, invoices, and an invoice book. There were no proper records as required by the Companies Act 1993.

4 The liquidators initially gave notice to Metalcraft that they sought repayment of the $12,500. Metalcraft contended that it was not liable to repay the money as the payment was made as part of a continuing business relationship, and was received without knowledge of the impending liquidation or that Hightower was in financial difficulty. Metalcraft produced a schedule of all transactions between it and Hightower to demonstrate their relationship. After consideration of those transactions the liquidators accepted that there had been a continuing business relationship and issued a second notice seeking recovery of the amount by which Hightower's indebtedness to Metalcraft had been reduced by payments in the six months or so leading up to liquidation (treating them as one transaction in accordance with s 292(4B) of the Companies Act 1993).

5 Metalcraft opposes the orders sought by the liquidators. It contends that the liquidators have not shown that Hightower was insolvent or that there was a net indebtedness as claimed, and further that it has a defence under s 296(3) of the Companies Act 1993 because it received the payments in good faith, without suspicion of Hightower's insolvency, and gave value for or altered its position in reliance on the validity of the payments.

Material background

6 Hightower was incorporated in April 2007 with two directors, Shane Pearce and Rhyss Taylor. It was a small company with only two employees (the evidence does not disclose whether the directors were the employees). It carried out roofing contracts in the New Plymouth region.

7 Metalcraft was incorporated in April 2009. It manufactures and installs long-run roofing, metal tiles and rainwater systems for the New Zealand residential and commercial construction markets. It has a branch in New Plymouth. As well as supplying trade and retail customers with products, Metalcraft provides an installation service, either through its own employees or through local contractors (whom Metalcraft engages for the purpose).

8 Hightower was one of the independent roofing contractors engaged by Metalcraft to provide installation services for Metalcraft's customers. Hightower also undertook roofing work which came to it directly. In the latter case it obtained its roofing products from Metalcraft. It purchased these products on Metalcraft's usual terms of trade, which required payment before the end of the month following invoice.

9 Metalcraft's branch manager in New Plymouth, Mr Maharey, has given evidence that from time to time Metalcraft and Hightower would do a reconciliation of the amounts each party owed the other. He says that this could lead to Metalcraft setting off payments due to Hightower for roofing work undertaken on Metalcraft's behalf against purchases made by Hightower or to payments being made by Hightower to Metalcraft for purchases. Mr Maharey says that Hightower could make one payment in respect of several invoices, or a payment of a “rounded off” amount (as Hightower would not necessarily know what was outstanding at that particular time as accounts were done monthly).

10 The Accident Compensation Corporation (ACC) filed its application to put Hightower into liquidation on 20 July 2010. It was based on unpaid levies totalling $15,872.94. The application was advertised in the New Zealand Gazette on 18 August 2010 and in the local newspaper, the Daily News (although there is no evidence of the date of that advertisement).

11 On 13 September 2010 (the day before the hearing of ACC's application at which Hightower was put into liquidation) the last of the payments made by Hightower ($12,500) was direct credited to Metalcraft's bank account. At the same time a “special answer fee” was debited to Hightower's bank account in relation to that payment. On the evening of the same day two withdrawals were made from Hightower's account, through an automatic teller machine (ATM), within a minute of one another. These transactions left a balance in the account of $19.78. This amount was not able to be withdrawn as the ATM permits withdrawals in denominations of $20 only.

12 Hightower was put into liquidation on 14 September 2010 and the liquidators were appointed.

13 On 22 September 2010 the Inland Revenue Department submitted a claim to the liquidators in the amount of $70,520.53, of which $50,951.79 was claimed as preferential. The following day Fletcher Steel sent the liquidators a claim in the amount of $5,903.66.

14 Following the liquidation the liquidators met with Mr Pearce, who provided them with Hightower's records (as already mentioned these amounted only to bank statements, invoices and an invoice book). Neither the liquidators nor Metalcraft have been able to contact Mr Pearce since. There is no mention in the evidence of the second director, Mr Taylor, but the liquidators say (presumably from their examination of what records exist and their meeting with Mr Pearce) that Mr Pearce had effective control of Hightower.

15 The liquidators wrote to Metalcraft requesting repayment of the $12,500. Metalcraft declined to do so, saying that the payment was made in the normal course of business. In support of that position Metalcraft provided a statement of all transactions between it and Hightower over the period of their business relationship. The statement lists 38 invoices issued by Metalcraft to Hightower, 6 payments received by Metalcraft (in February, March (3), August and September 2010), 5 “credit adjustments” (in April (2) and July (3) September 2010), and a credit note issued after liquidation that appears to relate to a specific invoice issued in early September 2010.

16 The liquidators issued their first formal notice (pursuant to s 294 of the Companies Act 1993) seeking to set aside the payment of $12,500. Metalcraft served notice of objection to that notice, contending that the payment was part of a continuing business relationship between it and Hightower, and that Metalcraft had no reason to suspect Hightower was in financial difficulty.

17 The liquidators reviewed the transactions disclosed by Metalcraft. Using a running account analysis they formed the view that Metalcraft's position had been bettered in the period from April 2010 to liquidation by $35,188.24. They served a second notice on Metalcraft on 17 October 2011 seeking to set aside payments made between 23 April 2010 and the date of liquidation, to the extent that the payments exceeded the value of work in that period (on the basis that the net position was a single transaction in the period in terms of s 292(4B)). Metalcraft again responded with a notice of objection. The present application followed, based on the second notice.

The opposing contentions, legal proposition and issues

18 The liquidators say that the amount by which Hightower reduced its indebtedness to Metalcraft between April 2010 1 and the date of liquidation is an insolvent transaction (relying on s 292(4B) of the Companies Act). They say that the transaction was entered into at a time when Hightower was unable to pay its due debts, relying both on the presumption in s 292(4A) and on the fact that Hightower had paid no more than minimal amounts in respect of tax or ACC levies over the period of its existence. They say this...