Simon Dalton and Peter Kemp v Avanti Finance Ltd

JurisdictionNew Zealand
JudgeR M Bell
Judgment Date13 May 2020
Neutral Citation[2020] NZHC 1020
CourtHigh Court
Docket NumberCIV-2019-404-1823
Date13 May 2020

UNDER the Companies Act 1993

IN THE MATTER OF the liquidation of Fabri-Cell International Limited (In Receivership and In Liquidation)

Between
Simon Dalton and Peter Kemp
Plaintiffs
and
Avanti Finance Limited
Defendant

[2020] NZHC 1020

R M Bell

CIV-2019-404-1823

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Companies, Contract — application by liquidators for recovery of payments under s297 Companies Act 1993 — transactions of undervalue — debt-factoring agreement entered into by the respondent and a third company which passed the funds to the liquidated company — agreement by conduct — whether the liquidated company and the respondent received a value

Appearances:

Kalev Crossland and Jesvin Boparoy for the Plaintiffs

Phillip Rice and Nicola Robertson for the Defendant

ORAL JUDGMENT OF ASSOCIATE JUDGE R M Bell
Introduction
1

The liquidators of Fabri-Cell International Ltd sue Avanti Finance Ltd under s 297 of the Companies Act 1993. They say that it has benefited under transactions with Fabri-Cell International Ltd. At closing submissions these were:

The liquidators say that Fabri-Cell International Ltd did not receive any value for any of these transactions and seek an order for payment of $811,257.59.

  • (a) it received payments totalling $208,650.37;

  • (b) Fabri-Cell factored to Avanti Finance Ltd invoices for which it claims a nett sum of $595,107.22; and

  • (c) it received two forklifts worth $7,500.

2

The case is about debt factoring by Avanti Finance Ltd. Avanti says that it advanced funds on invoices being factored to it. It says that its advances were for more than it received in repayment and it made a net loss. On the other hand, the liquidators say that Fabri-Cell International Ltd received no value under the invoice financing and they can recover to the full extent of the undervalue.

3

Section 297 of the Companies Act 1993 says:

297 Transactions at undervalue

  • (1) Under subsection (2) the liquidator may recover from a person ( X) the amount C in the formula A - B = C, where—

    • (a) A is the value that X received from a company under a transaction to which the company was or is a party; and

    • (b) B is the value (if any) that the company received from X under the transaction.

  • (2) The liquidator may recover the difference in value (that is, C in the formula in subsection (1)) from X if—

    • (a) the company entered into the transaction within the specified period; and

    • (b) either—

      • (i) the company was unable to pay its due debts when it entered into the transaction; or

      • (ii) the company became unable to pay its due debts as a result of entering into the transaction.

  • (3) For the purposes of this section,—

    • (a) transaction has the same meaning as in section 292(3):

    • (b) specified period means—

      • (i) the period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

      • (ii) in the case of a company that was put into liquidation by the court, the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the court was made; and

      • (iii) if—

        • (A) an application was made to the court to put a company into liquidation; and

        • (B) after the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—

      the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

4

Fabri-Cell International Ltd was ordered into liquidation on 9 November 2017 on an application filed on 3 October 2017. All the transactions in this case are within the specified period under s 297(3), which began on 4 October 2015.

Background
5

Fabri-Cell International Ltd, a manufacturer, made disposable gloves and safety protection garments for the medical and industrial markets in Australia and New Zealand and it also made laminated packaging for the export of chilled lamb. It had been operating since 1975. In 2015 and early 2016, Fabri-Cell International Ltd's sole shareholder was Adava Holdings Pty Ltd, an Australian company. Mr Avon Cook was the sole director. He was also the director of Adava Holdings Pty Ltd.

6

In June/July 2016, control of Fabri-Cell passed to Mrs Ashika Kant and her husband, Mr Bimlesh Ram. How they came to assume control of the company and the business is not straightforward. I will come to that later. Mrs Kant became the company's director in July 2016 and held office until September 2017, when Mr Ram replaced her. Mr Ram had a chequered past. He had been discharged from bankruptcy in 2015.

7

There was another company, JSR Group Ltd. Mrs Kant was the director and shareholder of JSR Group Ltd. It was incorporated in 2015 and up until June 2016 appears to have carried on a small-scale printing business.

8

Mr Cook lives in New Zealand but has not been called. Inquiries made suggest that Mrs Kant now lives in Queensland. There is no evidence where Mr Ram now lives. None of them has given evidence.

9

The main events concerning Avanti Finance Ltd and Fabri-Cell International Ltd begin in June 2016 but first I move to a later period. In early 2017, Pacific Finance New Zealand Ltd entered into a debt-factoring agreement with Fabri-Cell and took security over its accounts receivable. It also took a general security over all present and after-acquired property of Fabri-Cell. On 9 October 2017, Pacific Finance New Zealand Ltd appointed receivers. The receivers realised assets including debts payable to Fabri-Cell. At one stage, Avanti Finance Ltd contested the priority claimed by Pacific Finance New Zealand Ltd, but it later accepted that Pacific Finance New Zealand Ltd had first claim on the proceeds realised by the receivers.

10

Fabri-Cell's liquidators say that creditors in the liquidation come to $1,544,544.49. That includes a sum of about $30,000 as a shortfall for Pacific Finance New Zealand Ltd. The Commissioner of Inland Revenue is a preferential creditor although part of the claim may be subject to a GST refund off-set. There are preferential claims by employees of $98,670. The non-preferential unsecured creditors are over $1.1m. Avanti Finance Ltd has not claimed in the liquidation.

11

As a finance company, Avanti Finance Ltd lends to consumers and small businesses, including on mortgage. As a small part of its business, it used to offer a debt-factoring facility. It no longer does so. Mr Mountcastle, Avanti's chief executive officer, says that he knew Mr Ram through Mr Ram's employment with another Avanti customer, Asnet Technologies Ltd, where Mr Ram was the financial controller. Asnet had a factoring facility with Avanti. According to Mr Mountcastle, he understood Mr Ram to be a trusted employee of Asnet. Through that relationship, Mr Ram approached Mr Mountcastle for funding to purchase the business of Fabri-Cell International Ltd. He proposed using JSR Group Ltd to buy the business. Mr Mountcastle knew that Mr Ram was not a director or a shareholder of JSR Group Ltd. Mr Mountcastle was aware of Mr Ram's prior bankruptcy, but he says that Mr Ram explained to him that he (Mr Ram) had been the victim of circumstances and he had not been bankrupted because of his own business failures. Mr Mountcastle accepted that explanation.

12

Avanti decided to lend to JSR Group Ltd. The finance was not only to refinance mortgages over properties owned by Ms Kant but also to provide funds to purchase the business of Fabri-Cell International Ltd. While Mr Mountcastle accepted at the time that it was worth offering finance, it emerged in his cross-examination that Mr Ram was a real credit risk. He had a very spotty past and Mr Mountcastle accepted that a proper credit inquiry would have shown a number of red flags.

13

As the proposal was presented to Mr Mountcastle, JSR Group Ltd was to buy the business of Fabri-Cell International Ltd. It was presented as a profitable company with significant working capital. A summary of financial performance statement for the 12 months ending 31 March 2016 showed a profit after tax of $712,000. A summary of financial position for the same date showed a working capital of $2.2m, although part of the working capital calculation involved a sum for inter-company advances of some $2m - not a point that Mr Mountcastle noted at the time. Mr Mountcastle was also presented with a business plan and a projected cashflow spreadsheet.

14

On 14 June Avanti Finance Ltd made a written loan offer to JSR Group Ltd for some $3.4m, $2.16 being ‘mortgage funding’ and $1.2m for ‘business funding’. Avanti Finance would take a first mortgage security over the three properties owned by Mrs Kant. There would be a general security over Fabri-Cell International Ltd and another company, Realestatemove.co.nz Ltd. There would also be a specific security agreement over items of plant (including two forklifts) and over the accounts receivable of Fabri-Cell International Ltd. For the security over the accounts receivable, Fabri-Cell was to provide funding of up to 80 per cent of the qualifying invoice value, with a facility limit of $350,000. Mrs Kant was to guarantee the borrowing. She signed the loan offer on 20 June 2016.

15

About the same time, Mr Mountcastle received from Mr Ram a signed copy of the sale and purchase agreement for the Fabri-Cell International Ltd business. The cover page of the agreement has the heading “Business Sale Agreement of Fabri-Cell International Ltd (Seller) & JSR Group Ltd (Buyer)”. The agreement was dated 31 May 2016. It provides for the...

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1 cases
  • Dalton and Kemp v Avanti Finance Limited
    • New Zealand
    • High Court
    • 10 June 2020
    ...Calderbank letter to the liquidators’ lawyers. The letter explained the facts behind the invoice factoring 1 Dalton v Avanti Finance Ltd [2020] NZHC 1020. arrangements and that Avanti had advanced $298,695 at the request of Fabri-Cell. letter also set out other matters of defence. Avanti ma......

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