TIMBERWORLD Ltd v HENRY DAVID LEVIN and VIVIENNE JUDITH MADSEN-RIES as liquidators of Northside Construction Ltd ((in Liquidation)) CA842/2013 and HENRY DAVID LEVIN and VIVIENNE JUDITH MADSEN-RIES v Z ENERGY Ltd

• Jurisdiction: New Zealand
• Judge: Stevens J
• Judgment Date: 24 April 2015
• Neutral Citation: [2015] NZCA 111
• Docket Number: CA842/2013
• Court: Court of Appeal
• Date: 24 April 2015

BETWEEN

Timberworld Limited

Appellant

and

Henry David Levin and Vivienne Judith Madsen-Ries as Liquidators of Northside Construction Limited (In Liquidation)

Respondents

AND BETWEEN

Henry David Levin and Vivienne Judith Madsen-Ries as Liquidators of Northside Construction Limited (In Liquidation)

Appellant

and

Z Energy Limited

Respondents

[2015] NZCA 111

Court:

O'Regan P, Stevens and Miller JJ,

CA842/2013

CA226/2014

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against an order that a creditor repay payments that had been made to it by the debtor company within the specified period in s292(1) Companies Act 1993 (CA) (voidable transaction — insolvent transaction entered into within the specified period of two years prior to the commencement of the liquidation) — Cross appeal by liquidators against the Associate Judge's holding, that they could not use the peak indebtedness rule, did not apply when calculating the start point for determining whether the creditor had obtained a preference — liquidators sought to apply this rule to running accounts — liquidators argued that s292(4B) CA supported the application of the peak indebtedness rule as it was based on s588FA Corporations Act 1992 (Cth) (Unfair preferences), which permitted the application of the peak indebtedness rule — whether the peak indebtedness rule applied to s292(4B) CA — insolvency arose out of debts which the Commissioner of Inland Revenue allowed to accumulate from 2004 and in respect of which the Commissioner took no steps to recover until 2011 — creditor had no knowledge of this worsening tax position — whether the running account defence only applied to the specified period or to all transactions in the running account itself — whether it would be unfair to require the creditor to repay money when the sole beneficiary had allowed the debt leading to insolvency to build.

Counsel:

D W Grove for Appellant in CA842/2013

C A Murphy and J G Cole for Respondents in CA842/2013 and for Appellants in CA226/2014

R J Gordon for Respondent in CA226/2014

CA842/2013:

• A The appeal is dismissed..

• B The cross-appeal is dismissed.

• C There is no order as to costs.

CA226/2014:

• A The appeal is dismissed..

• B The appellant must pay the respondent costs on a standard appeal on a band A basis plus usual disbursements.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Stevens J)

Table of Contents

	Para No
Introduction	[1]
Factual background	[7]
Z Energy	[7]
Timberworld	[11]
The High Court judgments	[14]
Statutory framework	[27]
Treatment of continuing business relationships	[29
The peak indebtedness rule	[35]
Use of peak indebtedness rule in Australia	[37]
Statutory form of running account principle in Australia	[42]
Developments in New Zealand	[47]
The liquidator's appeal and cross-appeal	[53]
The case for peak indebtedness	[53]
Our analysis	[61]
The purpose of preference law in insolvency	[62]
Legislative context	[68]
Importing s 588FA into New Zealand law	[72]
Airservices Australia v Ferrier	[75]
Practical effect of peak indebtedness	[85]
Policy justification	[93]
Allied Concrete	[97]
Conclusion on peak indebtedness	[99]
Timberworld's appeall	[100]
Did the liquidators prove Northside was insolvent?	[101]
Interpretation of s 292(4B) — all transactions or specified period?	[104]
Application of s 295 of the Act	[109]
Result	[115]

Introduction

1 These two appeals were heard together because each raises an important issue concerning the operation of s 292 of the Companies Act 1993 (the Act). The liquidators (Henry Levin and Vivienne Madsen-Ries) (together, the liquidators) contend that the High Court erred in each case by holding they were not entitled to adopt the “peak indebtedness” rule when calculating the start point for determining whether the creditors (respectively Timberworld Ltd and Z Energy Ltd) had obtained a preference. This rule would enable the liquidators to choose the point during the two-year specified period when the relevant indebtedness was at its highest, as opposed to an earlier date taking into account transactions predating peak indebtedness.

2 The liquidators sought to apply this peak indebtedness rule to running accounts with the debtor companies in each case (respectively Northside Construction Ltd (Northside) in the Timberworld appeal and Tarsealing 2000 Ltd (Tarsealing) in the Z Energy Ltd appeal – both in liquidation). The specific issue in each case concerns the permissible starting point when assessing the existence and effect of a “single transaction” under s 292(4B)(c) of the Act.

3 In Levin v Z Energy Ltd (CA226/2014) the liquidators appeal against the judgment of Associate Judge Doogue dismissing a claim for $293,555.86 plus costs and interest, said to comprise a voidable transaction under s 292 of the Act. 1 The parties agree that if the appeal is dismissed, the claim is at an end.

4 In Levin v Timberworld Ltd (CA842/2013) the liquidators' claim arises by way of a cross-appeal seeking to reverse a finding by Associate Judge Abbott in which he dismissed a claim for $47,963.95, on the basis that there was a voidable transaction, by applying the peak indebtedness rule. 2 Instead the Associate Judge found Timberworld received the sum of only $29,490.46 as a preference over other creditors, calculated by a straightforward application of the continuing business relationship provision, established in s 292(4B). In addition the sum of $44,250 was obtained after the end of the running account, independently constituting a voidable

preference. For its part Timberworld appeals separately, contending the Associate Judge erred in three respects in awarding these sums to the liquidators

5 These appeals are significant for both liquidators and creditors generally. Where there is a continuing business relationship between the parties (such as with a running account) the provisions of s 292(4B) may protect a creditor at the suit of a liquidator seeking to prove the existence of an insolvent transaction. Section 292(4B)(c) allows for consideration of all the transactions forming part of the relationship “as if they together constituted a single transaction”. Thus it is necessary to identify a start point from which all transactions (both supplies of goods and services, and corresponding payments) are to be combined and considered as a single transaction. Naturally liquidators will wish to use the point where the indebtedness of the company is at its highest. On that basis, any later transactions under which the creditor provides further value to the company will be exceeded in value by other transactions reducing the company's indebtedness. Liquidators could then point to the net reduction in indebtedness as amounting to a preference. Suppliers, however, will seek to use an earlier date so that any increase in indebtedness is offset by earlier transactions through which the creditor supplier gave value to the debtor company.

6 It is convenient to address first the liquidators' appeal as to peak indebtedness in Z Energy Ltd and their cross-appeal in Timberworld Ltd. We will then deal with the three separate issues raised by the Timberworld case. We summarise first the factual background in each case.

Factual background

Z Energy

7 The debtor company Tarsealing was incorporated in 1999. It carried on business undertaking contract asphalting work, primarily for Transit New Zealand (now NZTA) and local authorities. It was placed in liquidation on 4 May 2012. The specified period under s 292(5) of the Act ran from 21 November 2009 to 4 May 2012 when Tarsealing was liquidated by the Commissioner of Inland Revenue as substituted creditor.

8 In October 2009 Tarsealing applied for a trade credit account with Z Energy for the purchase of bitumen for use in carrying out its asphalting works. The credit account opened in December 2009 and Tarsealing began operating it in February 2010. The entire course of trading with Z Energy occurred over the 17 month period from 28 February 2010 to 21 July 2011. There is no dispute between the parties that a running account applied during this time.

9 According to a schedule of transactions prepared by the liquidators, the balance of the running account at the start of the specified period was $0, given that trading only began on 28 February 2010. The balance of indebtedness peaked on 30 April 2010 at $293,555.86. The running account returned to $0 in October 2010 when Tarsealing ceased trading with Z Energy for reasons unknown to the latter. No further credit was advanced after that time.

10 The liquidators sought to challenge the $293,555.86 received by Z Energy on the basis that, using the peak indebtedness rule to select the commencement date at which to calculate the “single transaction”, it is a voidable transaction.

Timberworld

11 The debtor company is Northside. It carried on business as a construction company. Timberworld had provided it with building supplies through a credit account commencing in January 2006. The specified period under s 292(5) ran from 24 May 2009 until 15 July 2011 when Northside was put into liquidation.

12 There is no dispute the commercial relationship operated as a running account from the time when the credit account was opened in January 2006 through to 15 April 2010 when trading effectively ceased. The running account within the specified period applied between 24 May 2009 and 15 April 2010. Within this period the running account peaked at $95,569.55 on 2 October 2009. When supply under the running account ended on 15 April 2010 the balance was $47,605.60, constituting an improved position for the creditor of $47,963.95. This was the amount the liquidators...