OORSCHOT V DANFOSS (NZ) LTD CA CA209/03

OORSCHOT V DANFOSS (NZ) LTD CA CA209/03 30 June 2004IN THE COURT OF APPEAL OF NEW ZEALAND CA209/03BETWEEN ANDREW MARCHEL OORSCHOT Appellant AND DANFOSS (NEW ZEALAND) LIMITED Respondent Hearing: 3 June 2004 Coram: Hammond J William Young J O'Regan J Appearances: D M Lester for Appellant T D Holton for Respondent Judgment: 30 June 2004JUDGMENT OF THE COURT DELIVERED BY WILLIAM YOUNG J Introduction[1] This is an appeal against a judgment of Master Christiansen adjudging that transactions entered into between Nairn Industries Ltd, a company now in liquidation, and Danfoss (New Zealand) Ltd should not be set aside as voidable under s292 of the Companies Act 1993. The appeal is brought by the liquidator, Mr Michael Oorschot.Factual background[2] Nairn was a manufacturer of grape harvesting machines. These machines were constructed using parts supplied by Danfoss. The business relationship between Nairn and Danfoss was longstanding, the parties having worked closely together inthe development of the machines. When Nairn was placed into receivership on 17 December 2001, it owed Danfoss $126,993.03. That debt was unsecured. [3] Messrs Guy Pierce and Keith Palmer were appointed as receivers. They looked at the possibility of selling the business and, to this end, investigated the possibility of continuing to trade the company in receivership. They decided to finish three harvesting machines that were in the course of manufacture and which had been ordered by Australian buyers. For each machine which was to be completed, it would be necessary to purchase a standard package (or kit) of parts for each machine. Such kits were traditionally supplied by Danfoss. [4] Before it went into receivership Nairn had been paying $36,276 plus GST for kits of this type. [5] On 20 December 2001 the receivers wrote to Danfoss setting out the basis upon which the receivers would run the company in receivership. This letter appears to have been in standard format and thus likely to have been sent to all known creditors. It indicated that subject to ordering formalities the receivers would meet accounts for goods supplied to the company in receivership but that their liability was limited to the available assets of the company. [6] The receivers approached Danfoss to discuss the supply of the parts needed. Danfoss' representative was Mr Broderick, its business manager. A meeting between Mr Broderick and the receivers took place on 21 December 2001. As Danfoss had eight kits available, the discussions focused on the purchase of up to eight kits. [7] Mr Broderick, in his own words, played "hard ball". He proposed the following GST exclusive prices:• Two kits at $94,000 each; or• Four kits at $62,000 each; or• Six kits at $52,000 each; or• Eight kits at $46,000 each.[8] At 11.45 am that day Mr Pierce telephoned Mr Broderick and offered $64,000 plus GST for the first kit, $45,000 plus GST for the second and $40,000 plus GST for any subsequent kit. In addition he offered to pay $34,000 plus GST for the balance of an order, part of which had been supplied prior to receivership. At the prices agreed prior to receivership, the balance of the order would have been invoiced at $16,784 plus GST. A facsimile was sent confirming this offer, which was accepted by Mr Broderick. In the end Danfoss supplied two complete kits and the balance of the kit, part of which has been supplied pre-receivership. The total price payable was accordingly in excess of the pre-receivership prices by $53,664 plus GST (or $60,372 including GST). [9] The receivers agreed to pay what they plainly regarded as excessive prices for the kits because: 1. They believed, probably rightly, that it would not be practicable to source kits from an alternative supplier in time to complete the three machines in accordance with the existing orders. 2. Despite the prices they agreed to pay, they believed that they could still complete and sell the partly completed machines at a profit. [10] There is no suggestion that the agreement made on 21 December 2001 had the legal effect of reducing the existing debt between Nairn and Danfoss. Indeed in a proof of debt lodged by Danfoss and dated 28 December 2001, the amount claimed was $126,993.03. [11] The money which fell due under the 21 December agreement was paid on 31 January and 5 and 18 February 2002. [12] On 18 February 2002 Nairn was placed into liquidation by order of the High Court at Christchurch. It is unclear on the evidence whether this was before or after the last of the payments to Danfoss (which was made on the same day).[13] We do not have the full details of the results of the receivership but it appears that as at September 2002, the secured debt still exceeded $200,000. There is reference in the affidavits to a claim which Nairn has in Australia which may produce some further cash. Subject to that possibility, the transactions between the receivers and Danfoss would appear to have had no practical effect on the unsecured creditors. [14] The receivers sold Nairn's business and Danfoss has continued as a supplier to the new company. [15] Mr Oorschot, as liquidator, filed notice under s294 of the Companies Act of his intention to set aside the payments made to Danfoss pursuant to the purchase agreement of 21 December 2001; this to the extent that they exceeded the pre- receivership prices of the goods supplied. Following this Court's decision inCarter Holt Harvey Ltd v Fatupaito (2003) 9 NZCLC 263,285, the parties agreed that the notice would be treated as applying to the transactions in their entirety, but that Danfoss would be treated as having altered its position to the extent of the pre-receivership prices.The High Court judgment[16] In the High Court, there was a dispute over what had occurred at the meeting of 21 December 2001. [17] On the receivers' evidence Mr Broderick acknowledged during the meeting that he was adjusting the price to recover as much of the pre-receivership debt as possible. Mr Broderick denied this. [18] After hearing evidence, the Master was satisfied that the receivers' account of the meeting was unreliable. There was no record of such a statement in any of the contemporaneous notes made by either side and the Master was impressed by what he regarded as Mr Broderick's forthright and direct evidence.[19] The Master then went directly to the question whether the transactions took place in the normal course of business. For the reasons which he gave, he accepted the arguments advanced by Danfoss and accordingly ruled in favour of Danfoss.The appeal[20] Mr Oorschot has appealed to this Court from the judgment of Master Christiansen. [21] Before we turn to the arguments of counsel, it is appropriate for us to provide a brief overview of the issues.Overview of the case[22] The starting point is s292 of the Companies Act:292 Transactions having preferential effect(1) In this section, transaction, in relation to a company, means— (e) The payment of money by the company, including the payment of money under a judgment or order of a court. (2) A transaction by a company is voidable on the application of the liquidator if the transaction— (a) Was made— (i) At a time when the company was unable to pay its due debts; and (ii) Within the specified period; and (b) Enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation— unless the transaction took place in the ordinary course of business.(3) Unless the contrary is proved, for the purposes of subsection (2) of this section, a transaction that took place within the restricted period is presumed to have been made— (a) At a time when the company was unable to pay its debts; and (b) Otherwise than in the ordinary course of business. (4) For the purposes of this section, in determining whether a transaction took place in the ordinary course of business, no account is to be taken of any intent or purpose on the part of a company— (a) To enable another person to receive more towards satisfaction of a debt than the person would otherwise receive or be likely to receive in the liquidation; unless that other person knew that that was the intent or purpose of the company. (5) For the purposes of subsection (2)(a)(ii) of this section, specified period means— (a) 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 (b) 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 that application and ending on the date at which, and the time at which, the order was made; (6) For the purposes of subsection (3) of this section, restricted period means— (a) The period of 6 months 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; (b) In the case of a company that was put into liquidation by the Court, the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making that application and ending on the date at which, and the time at which, the order was made; [23] The first two payments were within both the specified and restricted period provided for by s292(6). The position as to the third payment is unclear as it was made on the same day as Nairn was put in liquidation but whether before or after the order was made is not known. [24] The threshold question in respect of each transaction (being the payment made to Danfoss) was whether it enabled Danfoss to receive more towards satisfaction of a debt than it would have received in the liquidation of Nairn. [25] Throughout the case, Mr Oorschot has been imprecise as to the debts in respect of which he alleges that Danfoss has been preferred. For instance, the s294 notice alleged simply:The transactions enabled you to receive more towards the satisfaction of its debts that it would have received or are likely to receive in the liquidation. [sic]The "debts" were not particularised. This is consistent with the general drift of the argument advanced in this Court, the thrust of which was to the effect that by the transactions in question Danfoss improved its net position in respect of Nairn and, in this way, it obtained a preference; and that a literal approach to the language of s292 was inappropriate. [26] In the High Court, Mr Oorschot primarily argued that the 21 December 2001 transactions in substance represented satisfaction of the pre-receivership debt owed by Nairn to Danfoss. But in this Court and in response to some pressure from the bench, Mr Lester advanced a rather different argument. On this argument, the debt in respect of which Danfoss was preferred was the post-receivership debt incurred pursuant to the agreement of 21 December 2001. This argument does not appear to have been put in the High Court with any great precision but we are prepared to accept that it was at least implicit in what was said on behalf of Mr Oorschot. [27] We will address the merits of the appeal primarily by reference to the two issues which we have identified, namely: 1. Was Danfoss preferred in relation to its pre-receivership debt?2. Was Danfoss preferred in relation to the debt which arose on 21 December 2001?Was Danfoss preferred in relation to its pre-receivership debt?[28] As indicated, the case for Mr Oorschot in the High Court appears to have been advanced primarily on the ground that the 21 December 2001 transaction resulted in Danfoss receiving more in satisfaction of its pre-receivership debt than would have been likely in the liquidation. [29] We see this argument as unsustainable. [30] There is no suggestion in the evidence that the transactions entered into on 21 December 2001 were intended to, or did, effect any reduction in the amount of the pre-receivership debt or affected the right of Danfoss to lodge a proof of debt for the full amount of that debt (which in fact it did on 28 December 2001). The simple position is that Danfoss has received nothing in satisfaction of those debts and thus no preference in relation to them.Was Danfoss preferred in relation to the debt which arose on 21 December 2001?[31] Mr Lester's alternative argument is along these lines. When the receivers, as agents of Nairn, paid Danfoss in relation to the 21 December 2001 agreement, the result was that Danfoss received payment in satisfaction of its debt (ie the debt owed in relation to the 21 December 2001 transaction) which exceeded what it would otherwise (ie, if no such payment had been made) have received in the liquidation. The payments are thus voidable unless made in the ordinary course of business. Mr Lester maintains that these payments were not made in the ordinary course of business. [32] The corollary of this argument is that almost any payment made by a receiver will be subject to s292 and thus voidable unless it is able to be justified as being made in the ordinary course of business.[33] We are well satisfied that this argument is unsound. [34] It is important to recognise that this line of argument focuses on the payments made rather than the 21 December 2001 agreement. [35] Section 32(1)(a) of the Receiverships Act 1993 provides that a receiver is personally liable on any contract entered into in the exercise of his or her powers as a receiver; this subject to contractual exclusion, see s32(2). In this case there appears to have been the usual contractual modification of the s32(1)(a) liability of the receivers so as to confine it to the assets of the company. We are satisfied that it would be inconsistent with the scheme of the Companies Act and the Receiverships Act to treat payments made by receivers in relation to liabilities covered by s32(1)(a) as subject to the voidable preference regime. To apply the voidable preference regime to such payments would be inconsistent (at least in substance) with the expectation of the commercial community that commitments entered into by receivers will be honoured. [36] There are other factors which support this view: 1. If Mr Lester's argument is right, the payments in question fall under the voidable preference regime because they were made before liquidation. If they had been made after liquidation they would not have been within the time periods specified in s292 (which terminate on liquidation). Interestingly one of the payments in issue in this case was made on 18 February 2002, the same day as Nairn was placed in liquidation. If this payment was made after the liquidation, it is not within the times specified in s292. It is unlikely that the legislature intended the operation of the voidable preference regime to depend on such accidents of timing. We note in passing that the evidential lacuna on the timing issue in relation to the last payment may be a result of this whole line of argument not being developed in the High Court. 2. Unless sufficient funds are generated in the liquidation to meet the unpaid balance of the secured debt, the payments made are entirely irrelevant to the position of the unsecured creditors.3. The alleged mischief of the conduct of Danfoss lies right outside the scope of what was intended to be addressed by the voidable preference provisions. In terms of economic substance, Danfoss was dealing with the secured creditor. The more Danfoss could obtain on the sale of the kits, the less the margin for the secured creditor on the sale of the three grape harvesting machines to the Australian buyers. For the purposes of this part of the argument, the complaint is not that those in control of Nairn (ie the receivers) gave Danfoss a preference in relation to its existing debt but rather that Danfoss took unfair advantage of the exigencies of the situation to extract a premium on the sale of its kits. Sound or not (and we think it is unsound) this line of argument does not, in any way, engage the underlying purposes of the voidable preference regime. [37] Even if the argument were right, we do not see how it would assist Mr Oorschot on the facts of this case. As we have noticed, the focus of this line of argument is on the payments which were made. Given the provisions of s32(1)(a) of the Receiverships Act and general commercial practice, it is entirely within the ordinary course of business of companies which are in receivership for their receivers to meet post-receivership debts.Other comments[38] The case for Mr Oorschot was conducted on the basis that significant issues of principle were involved in this appeal and that, unless this Court was prepared to take a broad, non-literal but purposive approach to the legislation, the scheme and purpose of the voidable preference regime would be subverted. [39] It is clear from what we have already said that we think that this whole line of argument is wrong in terms of both the proper role of the Courts in cases of this sort and its implicit categorisation of the conduct of Danfoss as in some way infringing the principles that underlie the voidable preference regime. We think it right, however, to elaborate briefly on both points.[40] Rightly or wrongly, the legislature has chosen to address inappropriate pre-liquidation corporate conduct involving preferential transactions by providing discrete and prescriptively drafted remedies rather than a generally expressed catch-all jurisdiction. A liquidator who seeks to rely on s292 must be in a position to point to a transaction which is within the scope of s292(2)(b), see for instancePreston Farm Ltd v Managh (CA62/03, 15 December 2003). It is not the role of the Court to force the language of s292 to encompass other transactions. [41] No doubt Danfoss took a strong line with the receivers. But we see nothing surprising in that. The completion of the three machines had the potential to produce a profit for the receivers and thus benefit the secured creditor. The size of that profit was necessarily going to be affected by the amount paid to Danfoss for the three kits. The less Danfoss charged, the better the position for the secured creditor. How much the receivers were prepared to pay Danfoss naturally depended on their analysis of the economics of completing the machines. If Danfoss demanded too much (leaving insufficient margin for the receivers and the secured creditor to warrant proceeding), it was open to the receivers to renege on the contracts with the Australian purchasers. What the receivers were prepared to pay depended on how much they wanted to complete those transactions. The secured creditor's moral claim to participate in the surplus to be generated on the sale of the machines to Australia was no greater than that of Danfoss. [42] In any event, this case falls to be determined by legal and not moral principles. The profit maximisation approach adopted by Danfoss was logical. This was a one-off transaction where maximising the price to be charged to the receivers would have no long-term adverse commercial consequences for Danfoss and thus there was no reason for not charging what the market would bear. That underlying logic would have been just as compelling if there had been no pre-existing debt. In that context we have difficulty seeing the relevance of the voidable preference regime.Disposition[43] The appeal is dismissed. Mr Oorschot is to pay Danfoss costs of $6,000 together with disbursements (including travelling and accommodation expenses of counsel) to be agreed or, in default of agreement, fixed by the Registrar.Solicitors: Saunders & Co, Christchurch for Appellant Williams & Co, Christchurch for Respondent