Jeffrey Philip Meltzer and Lloyd James Hayward as Liquidators of Window Holdings Ltd ((in Liquidation)) v Allied Concrete Ltd

• Jurisdiction: New Zealand
• Judge: ABBOTT
• Judgment Date: 06 May 2013
• Neutral Citation: [2013] NZHC 977
• Docket Number: CIV 2012-404-003170
• Court: High Court
• Date: 06 May 2013

Under the Companies Act 1993

In The Matter Of the liquidation of Window Holdings Limited (In Liquidation)

BETWEEN

Jeffrey Philip Meltzer And Lloyd James Hayward As Liquidators Of Window Holdings Limited (In Liquidation)

Applicants

and

Allied Concrete Limited

Respondent

[2013] NZHC 977

judges:

Associate Judge Abbott

CIV 2012-404-003170

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application by liquidators to have a payment made to the respondent declared a voidable transaction under s292 Companies Act 1993 (“CA”) (insolvent transaction voidable) — company purchased concrete products from respondent — parties had a relationship in terms of s292(4B) CA (insolvent transaction voidable — transaction was an integral part of a continuing business relationship), conducted through a running account — whether under s296(3) CA (acted in good faith; did not have reasonable grounds for suspecting company insolvent; and gave value for the property or altered position), respondent could show it had given value by provision of credit or continuing to supply company — consideration of the elements to be proved under s296(3) CA

counsel:

R B Hucker/D Lang Siu for applicants

J V Ormsby/C L Webber for respondent

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 6 May 2013 at 4pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

1 Window Holdings Limited was put into liquidation on 26 May 2011. As it was named Harker Underground Construction Limited at time of the transaction in issue in this proceeding, I will refer to it as Harker.

2 Until it was put into liquidation, Harker purchased concrete products from Allied Concrete Limited (Allied) over several years. It purchased these products on credit: initially on a standard (one month basis), but over the course of the relationship Allied agreed orally to an extended period.

3 The applicant liquidators served notice on Allied that they regarded $63,649.50 of a payment of $88,722.41 made by Harker to Allied on 21 October 2010 to be a voidable transaction. Allied gave a notice of objection. The liquidators brought the present application for a determination that the contested amount was a voidable transaction and for an order that Allied pay that sum to them to distribute in the liquidation.

The application

4 There is no dispute that the payment was made on 21 October 2010, or that the transaction is within the two year period prior to liquidation within which an insolvent transaction can be voidable. 1

5 The liquidators accept that Harker and Allied had a continuing business relationship in terms of s 292(4B) of the Companies Act 1993 (the Act), conducted through a running account. They also accept that Allied is entitled to credit for goods and services that it provided to Harker from the time of the voidable transaction until date of liquidation. They have used a start date for the running account calculation2 of 30 September 2010. The amount of the transaction that the1 Companies Act 1993, ss 292(1) and s292(5).2 They base this calculation on a start date of the point of Harker's peak indebtedness to Allied within the two year period, relying on Paul Heath and Michael Whale (eds), Heath and Whale on Insolvency (loose leaf ed, LexisNexis) at [24.64] and Olifent v Australian Wine Industries Pty Ltd(1996) 130 FLR (SASC). This peak indebtedness rule was accepted by this Court in Blanchett v McEntee Hire Holdings Ltd(2010) 10 NZCLC 264,763. Allied did not contest the liquidators' entitlement to choose this start date. Since this case was heard, I have rejected the application of the peak indebtedness rule in Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189, relying on the observations of the High Court of Australia in Airservices Australia v Ferrier (1996) 185 CLR 483, 623 that were cited in Heath and Whale on Insolvency [24.64] as militating against the arbitrariness of the liquidators selecting the starting point for the running account. The start of the period of the running account seems likely to be a matter of fact for each case. Allied has not sought leave to revisit the point in this case. As I will mention in the judgment, not only was there no contest on the point, but it became academic as Allied eventually limited its case to a defence under s 296(3) of the Act.liquidators say is voidable ($63,649.50) is the difference between the sum of $131,285 due to Allied as at 30 September 2010 and the sum due as at the date of liquidation of $67,635.50.

6 One of the liquidators, Mr L J Haywood, has given two affidavits in support of the application (an initial affidavit in support, and one in reply to an affidavit for Allied), setting out the basis on which the liquidators say that Harker was insolvent at the time of the payment being challenged, and why they say that Allied received more than it would have received in the liquidation of Harker.

The opposition

7 Initially, in its notice of objection, and later its notice of opposition, Allied maintained that the liquidators' had not discharged their onus of proving that this was an insolvent transaction under which Allied received a preference, as well as maintaining that it had a defence under s 296(3) of the Act. Allied's notice of opposition was supported by an affidavit from its credit controller, Ms W E Thomson, who gave evidence of the trading relationship and the circumstances surrounding the payment on 21 October 2010 (it comprised payment of 10 invoices issued to Harker in July 2010). She also gave evidence of matters on which Allied relies to support its case that it received the payment in good faith and had no reason to suspect solvency, and that it gave value for the payment and altered its position in reliance on it. Ms Thomson was cross—examined on that affidavit.

8 However, at the start of his submissions, counsel for Allied said that it was confining its opposition to the grounds of defence under s 296(3). This means that I do not have to determine whether submissions made by counsel for the liquidators in relation to whether this was an insolvent transaction. Counsel also advised in the course of the hearing that Allied was not pursuing its assignment that it had altered its position.

The sole issue

9 As a consequence of the withdrawal of various grounds of opposition (all of which appear to me to be appropriate having regard to the evidence and submissions of counsel for the liquidators), the sole issue is whether Allied has made out the grounds for a defence under s 296(3) of the Act.

Principles in relation to s 296(3)

10 Even if the liquidators establish that this was an insolvent transaction in terms of s 292, the Act provides Allied with a defence if it acted in good faith, there was no reasonable basis to suspect that Harker was or would become insolvent, and if it either gave value for the payments or altered its position in the reasonably held belief that the payments were validly made and would not be set aside: 3

• (3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought ( A) proves that when A received the property—

  • (a) A acted in good faith; and

  • (b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

  • (c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

11 A person relying on this defence must establish all three limbs of the defence. 4 In respect of the first limb (good faith), it must show an honest belief that the payments did not involve any element of undue preference. 5 If a creditor receives payment with knowledge that it has been treated differently or preferentially to other creditors, it cannot claim that it received the payment in good faith. 6

Further, if a creditor has actual or implied knowledge of the company's financial difficulties, it will not be able to argue that it received the payment in good faith. 7

12 To satisfy the second limb of the defence, the creditor receiving payment must show that a reasonable person with its knowledge would not have suspected insolvency (an objective test determined by reference to a prudent business person in the creditor's shoes), and that the creditor did not know of matters providing reasonable grounds for suspecting insolvency (which has both a subjective and an objective element to it). The essential element of both is what will amount to “suspicion”: 8

A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence”, as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses … is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub—section describes – a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.

13 The Courts do not look for any single factor, but rather judge the matter on the basis of the contemporary knowledge of the recipient, including potentially countervailing factors, which tended to dispel suspicion at that time. 9 While cash— flow problems can raise a...