Madsen-Ries and Another (as Liquidators of Te Pua Road Development Ltd ((in Liquidation)) v Donovan Drainage and Earthmoving Ltd
| Jurisdiction | New Zealand |
| Judge | Clifford J |
| Judgment Date | 12 April 2016 |
| Neutral Citation | [2016] NZCA 301 |
| Docket Number | CA342/2015 |
| Court | Court of Appeal |
| Date | 12 April 2016 |
[2016] NZCA 301
Kós, Clifford and Brewer JJ
CA342/2015
IN THE COURT OF APPEAL OF NEW ZEALAND
Appeal by liquidators against the High Court's (HC) refusal to set aside, payments made by the insolvent company to the respondent as insolvent transactions in terms of s 292 Companies Act 1993 (CA) — the respondent had undertaken drainage works for the company on a subdivision — the company's directors had advised the respondent that there would be a delay in paying its invoice — the respondent was aware that it had sold one of the sections and possibly a second section — the respondent said it was not unusual in the development industry for payments to be delayed until sections were sold and it had no reason to suspect that the company would become insolvent — the liquidators said that the respondent had not satisfied the test for the bar on recovery provided by s 296(3)(b) CA (… reasonable person … would not have suspected, and … did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and) — whether the test for liquidity was co-extensive with the test of solvency - whether in assessing the absence of a suspicion of insolvency the Judge had placed too much weight on the respondent's director's subjective impressions.
P C Murray and M J Hammer for Appellants
D M Grindle and H King for Respondent
-
A The appeal is dismissed.
-
B The appellants are jointly and severally to pay the respondent's costs for a standard appeal on a band A basis, together with usual disbursements.
(Given by Clifford J)
Ms Madsen-Ries and Mr Levin, the appellants, are liquidators (the Liquidators) of Te Pua Road Development Ltd (in liquidation) (Te Pua). On 3 September 2014 the Liquidators issued a notice under s 294 of the Companies Act 1993 (the Act) to set aside, as insolvent transactions in terms of s 292 of the Act, payments made by Te Pua to Donovan Drainage and Earthmoving Ltd (Donovan Drainage) totalling $184,978.01. Donovan Drainage objected. The Liquidators subsequently applied to the High Court for orders to set aside those transactions. The Liquidators' application was heard by Associate Judge Christiansen on 15 May 2015.
In his judgment of 20 May 2015 the Associate Judge declined the Liquidators' application. 1 The Liquidators now appeal that decision. They say that although the Associate Judge was correct when he found that the challenged payments did constitute insolvent transactions, he was wrong in finding that Donovan Drainage had satisfied the test for the bar on recovery provided by s 296(3) of the Act. In particular, the Judge was wrong to have found that a reasonable person in Donovan Drainage's position would not have suspected, and that Donovan Drainage did not have reasonable grounds for suspecting, Te Pua was or would become insolvent.
Donovan Drainage carries on business in rural Northland as a drainage and earthworks contractor. The company was incorporated in 2003. Its principal, Mr P Donovan, has been involved in earthwork contracting and related industries for more than 30 years. In June 2008 Donovan Drainage contracted to provide earth and drainage works for Te Pua at a property in Te Pua Road, Kaikohe. Donovan Drainage's tender for the work, which it priced at $140,225.50 (excluding GST), was accepted by Te Pua on 4 June 2008. Donovan Drainage began work shortly thereafter. By the end of September Donovan Drainage had completed the bulk of
the work. On 30 September it issued an invoice for work done for $127,441.69 including GSTOn 28 October 2008, before that invoice was paid, Te Pua's office manager Mr Visser called on Mr Donovan on site to advise of some issues with payment. Mr Visser described that meeting in an email later that day to fellow company officers in the following terms:
I made a site visit today and the project is looking fantastic, the power both over head and under ground have been installed and will be connected by the end of this week. Thomson Survey will have a team on site before the end of this week and will complete the easement survey for the power lines, 223 is expected by the end of this week and we could be applying for 224c by next week, it could take up to two weeks for the approval, Nicolene indicated that we should then allow LINZ another 18 days to title, could be sooner if we are lucky.
Outstanding Account for Donovan Drainage:
I went to Donovans Drainage today to break the news that we do not have the funds available at present to pay our outstanding accounts due to the finance mess. Not a pleasant job.
Well as it was to be expected Peter Donovan was not a happy man as he has to date spent about $150,000.00 on our project and upon completion including the fencer will have spent about $190,000, he did however appreciate the fact that I presented our case in person and therefore feels that he could trust us.
We agreed to the following:
Peter will continue and complete the job; he will inform the fencer as they have a business arrangement.
I offered:
1. 15% interest per annum.
2. I have submitted a GST claim (based on DD first invoice submitted) which will result in a $14000.00 refund which I will be paying over to Donovan Drainage.
3. We will provide DD with security; he prefers lot 8 on Baldrock as the only mortgagee registered is Alan Collins not a bank as he does not want any lots on Te Pua. I have spoken with Alan and he has indicated that he will approve it.
4. Peter Donovan would only want the security if the bank did not allow a roll over and or they came up with ridiculous terms, he would also like it to be indicated that he is a preferred creditor and upon settlement of lot 5, will want to be paid in full including interest.
Shortly after that meeting, and reflecting Mr Visser's assessment of the extent of the works that had by then been completed, Donovan Drainage issued Te Pua a further invoice, dated 31 October 2008, for $48,756.38.
On 20 November 2008 Te Pua paid Donovan Drainage $120,000 on account of the 30 September 2008 invoice.
Donovan Drainage issued further invoices for work at the Te Pua Road site dated 30 November 2008 and 28 February 2009 for $8,780.63 and $39,966.75 respectively. The February 2009 invoice reflected work carried out by a fencing contractor Donovan Drainage had introduced to Te Pua. Donovan Drainage did not itself carry out that work and the invoice was passed through Donovan Drainage as a matter of convenience.
Further payments were received on 2 December 2008 and 19 January 2009. The total record of invoices rendered by Donovan Drainage, and of payments made by Te Pua, is as follows:
| Date | Invoice Amount ($) | Payment amount ($) |
| 30/09/2008 | 127,441.69 | |
| 31/10/2008 | 48,756.38 | |
| 20/11/2008 | (120,000.00) | |
| 30/11/2008 | 8,780.63 | |
| 02/12/2008 | (7,441.00) | |
| 19/01/2009 | (8,780.63) | |
| 19/01/2009 | (48,756.38) | |
| 28/02/2009 | 39,966.75 | |
| Totals | $224,945.45 | ($184,978.01) |
So, by 19 January 2009 all Donovan Drainage's outstanding invoices had been paid for the work it had done. Subsequently, and although Te Pua sold a further two of the five lots comprising the development, the project failed. On 30 June 2010 Te Pua was placed in liquidation, and the appellants appointed liquidators, on the petition of the Commissioner of Inland Revenue. Donovan Drainage's final February 2009 invoice remains unpaid.
The Liquidators gave notice on 3 September 2013, after they had discovered Mr Visser's email, seeking to set aside all of those payments as insolvent transactions.
Liquidators can by notice set aside what is known as a voidable transaction between a company and a creditor, if the creditor does not object. 2 If the creditor does object, the liquidator can then apply to the Court to set the transaction aside. 3 There are two categories of voidable transaction: insolvent transactions and voidable charges. Section 292 of the Act deals with the voidability of insolvent transactions. As relevant it provides:
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:
…
(e) paying money (including paying money in accordance with a judgment or an order of a court):
…
Where a transaction is set aside as an insolvent transaction, the Court may make a variety of orders including, where the transaction is the payment of a debt to a creditor, that the creditor repay the amount it received. Section 296(3) provides, however, that:
(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...
To continue reading
Request your trial