ANZANI INVESTMENTS LIMITED V THE OFFICIAL ASSIGNEE CA CA252/07

ANZANI INVESTMENTS LIMITED V THE OFFICIAL ASSIGNEE CA CA252/07 4 June 2008IN THE COURT OF APPEAL OF NEW ZEALAND CA252/07 [2008] NZCA 144BETWEEN ANZANI INVESTMENTS LIMITED Appellant AND THE OFFICIAL ASSIGNEE Respondent Hearing: 22 May 2008 Court: O'Regan, Priestley and Heath JJ Counsel: A H J Commons for Appellant G A D Neil for Respondent Judgment: 4 June 2008 at 11.30 amJUDGMENT OF THE COURT A The appeal is dismissed. B Costs shall be paid by the appellant to the respondent in the sum of $3,000, together with usual disbursements. REASONS OF THE COURT(Given by Heath J)The appeal[1] Anzani Settlement Ltd (ASL) and Settlement Fisherton Ltd (SFL) were joint venture partners. They owned a property situated at Kaiwaka, in Northland. [2] An associated company of ASL, Anzani Investments Ltd (AIL), was owed approximately $170,000, as a joint venture debt, about the time the Kaiwaka property was sold. From the proceeds of settlement of the sale, ASL paid $70,000, on 20 May 2005, to AIL in partial satisfaction of that debt. [3] ASL was put into liquidation on 27 October 2005. The order was made in the High Court at Auckland as a result of an application by Marsden Real Estate Ltd, filed on 20 July 2005. SFL was also put into liquidation, on the application of the same creditor. That order was made on 29 September 2005. [4] The Official Assignee, as liquidator of ASL, gave a notice to set aside the payment of $70,000 as a voidable transaction. In response, AIL made an application to the High Court for an order that the transaction not be set aside. In a judgment, delivered on 9 May 2007, in the High Court at Auckland, Courtney J dismissed the application. AIL appeals from that decision. [5] As the payment was made before 1 November 2007, the controlling law is s 292 of the Companies Act 1993 (the Act), in the form in which it stood prior to enactment of the Companies Amendment Act 2006.The statutory scheme[6] The purpose of s 292 is to provide a mechanism that enables a liquidator to restore valuable consideration (of various types), with which the company parted prior to liquidation, to the pool of assets available for distribution among all creditors. The object is to prevent one creditor from being given preferential treatment through payment (pre-liquidation) of an amount in excess of that which would have been received had it participated with other creditors of equal rank in thedistribution of the proceeds of sale of assets on liquidation. Those general principles are qualified by limited exceptions contained in s 292. [7] A payment of money made by the company in liquidation is a "transaction" on which s 292 bites: see s 292(1)(e). If a payment were made, the liquidator could avoid it and seek recovery, if it: (a) were paid at a time when the company was unable to pay its due debts; and (b) were paid within a period of two years before the making of the application to the Court to put the company into liquidation; and (c) had the effect of enabling another person to receive more towards satisfaction of a debt than it would have received (or be likely to have received) in the liquidation; and (d) were paid otherwise than in the ordinary course of business. See s 292(2) and (5) of the Act. [8] If a payment were made within a period of six months before an application that lead to a liquidation order, it is presumed that the payment was made at a time when the company was unable to pay its debts and was entered into otherwise than in the ordinary course of business. The presumption is rebuttable: s 292(3). The period of six months is known as "the restricted period": s 292(6). [9] Because the application on which ASL was put into liquidation was made on 20 July 2005, the payment of $70,000 fell within "the restricted period". Therefore, the rebuttable presumption applied. [10] The recipient of a payment to which s 292(1) applies can also seek relief from the need to restore money to the liquidation. Section 296(3) of the Act provided that if the money was received in good faith and the recipient had altered its position in the reasonably held belief that the payment was validly made, recoverycould be denied, wholly or in part, if the Court were of opinion that it was inequitable to order recovery or recovery in full. In the alternative, AIL asked the High Court to grant relief on that basis. The Court declined to do so. It is unnecessary to say more on that issue as it is not pursued on appeal.Grounds of appeal[11] Mr Commons, for AIL, submitted that Courtney J erred in three respects. He submitted that: (a) The payment was not made "by the company" for the purposes of s 292(1)(e). (b) The payment was made in the ordinary course of business. (c) Because no other creditors existed at the time of the payment, the transaction could not be said to have had a preferential effect. [12] For the liquidator, Mr Neil submitted that Courtney J was right to hold that all statutory criteria had been met.The factual matrix[13] Courtney J considered the application on the basis of affidavit evidence, supplemented by some oral evidence from Mr Kroon, a director of both AIL and ASL at the relevant time. Mr Kroon was cross-examined on his affidavits. [14] ASL and SFL formed their joint venture for the purpose of subdividing and re-selling land situated at Settlement Road, Kaiwaka. A joint venture agreement was executed on or about 6 November 2003. The two companies operated a joint account with Westpac Banking Corporation. Mr Kroon and Mr Spencer (as directors of ASL and SFL respectively) were required to sign cheques on the account, as evidenced by the companies' mandate to the Bank.[15] The Kaiwaka property was sold in or about May 2005. Neither an agreement for sale and purchase nor a settlement statement was produced in evidence. On 19 May 2005, as a result of the sale, a sum of $124,263.79 was deposited into the joint account. Previously, the account had been in overdraft. The deposit left the joint venturers with a credit balance of $72,531.31. [16] On 20 May 2005, the sum of $70,000 was transferred out of the joint account, at the direction of Mr Kroon. He contended that the money was paid to him in partial settlement of a loan he had made to ASL. However, Courtney J found that the money was withdrawn from the bank account by Mr Kroon, without authority from SFL, and that, although the money was paid into Mr Kroon's personal bank account, he was used only as a conduit to repay part of the AIL advance. We are satisfied that there was a proper evidential foundation for those findings and that they ought not to be disturbed. [17] The Judge considered whether the payment had preferential effect. She described the evidence on the topic of other debts at the relevant time as "quite thin". The only debt that the Judge was prepared to accept existed was one owing to Marsden Real Estate Ltd (in the sum of $59,962.50), based on a handwritten invoice of 23 May 2005. The invoice was addressed to Mr Kroon personally but was sent to a postal address that was not his. Mr Kroon denied receipt of the invoice. [18] While the Judge had some concerns about the invoice, she knew that it had formed the basis of the application to have the company placed in liquidation. The debt had not been disputed, either on receipt of a statutory demand or in the liquidation proceeding itself. On the balance of probabilities, Courtney J was satisfied that the Marsden Real Estate Ltd debt existed at the time the payment to AIL was made. [19] Putting to one side knowledge and intention of both debtor and creditor as irrelevant to the question of preferential effect, Courtney J found that ASL's payment provided AIL with more money than it would have received had it and Marsden Real Estate Ltd both participated as unsecured creditors in the liquidation.[20] The Judge was satisfied that ASL, as at the time of the payment, was unable to pay its debts as they fell due. She said that a finding of insolvency in May 2005 was "clear", "as the most basic analysis of the financial statements shows". [21] Courtney J did not accept that the payment was made in the ordinary course of business. She expressed the question as whether, viewed in its objective commercial setting, the payment was an ordinary, or out of the ordinary, transaction for the parties to have entered into.Analysis of competing submissions(a) First ground of appeal: Was this a payment by the company?[22] Section 292(1) of the Act provides:(1) In this section, transaction, in relation to a company, means- (a) A conveyance or transfer of property by the company: (b) The giving of a security or charge over the property of the company: (c) The incurring of an obligation by the company: (d) The acceptance by the company of execution under a judicial proceeding: (e) The payment of money by the company, including the payment of money under a judgment or order of a court.[23] Mr Commons submitted that a gloss should be placed on the words of s 292(1)(e) to the effect that not only must a liquidator prove a payment was made by the company but also that it had been paid out of the company's own property. He submitted that s 292 could not apply to a transaction involving the use of joint venture funds to pay a joint venture debt. We do not accept that submission. [24] Section 292(1)(a), (c), (d) and (e) are all premised on transactions entered into or made "by the company" in liquidation. In contrast, s 292(1)(b) refers explicitly to "the property of the company", in the context of a transaction involvingthe giving of a security or charge. In our view, a policy choice has been made to defer any issues involving ownership of property transferred or money paid. That could be done on an application for relief under s 296(3) or resolved as part of the liquidator's functions during the distribution phase of a liquidation. [25] In any event, the issue raised by Mr Commons does not strictly arise on this appeal. Both ASL and SFL were jointly and severally liable to AIL to repay the joint venture debt. They were both principal debtors. If AIL had been an arm's length third party, it might have sued either or both companies to recover its debt. [26] ASL drew funds out of the joint account and applied them to reduce a debt owed by it as a principal debtor. The only relevance of Mr Kroon's authority to transfer joint venture money is the possibility of any issues arising as between the joint venturers themselves. Resolution of issues between joint venturers is not relevant to the voidable transaction issue. [27] Courtney J found that ASL paid $70,000 to AIL. That was sufficient to establish that it was made "by" ASL, for the purposes of s 292(1)(e). The Judge's findings of fact on that point are unassailable.(b) Second ground of appeal: Ordinary course of business[28] Courtney J was satisfied that only one of the three debts for which proofs of claim have been lodged in the liquidation of ASL had been established to her satisfaction. That was the Marsden Real Estate Ltd debt. However, Mr Commons submitted that this debt had not come into existence by 20 May 2005, the date on which the payment of $70,000 to AIL was made. Therefore, he submitted, the payment to AIL was to wind up ASL's affairs in an orderly way: in the ordinary course of business. [29] The evidence discloses that the Marsden Real Estate Ltd debt was based on an invoice it raised on 23 May 2005, in relation to the sale of the Kaiwaka property. The invoice, while addressed to Mr Kroon personally, relates to real estate agencyfees and commission payable on the sale of that property. The vendors were ASL and SFL. [30] We are satisfied that it was open to the Judge to infer that the debt to Marsden Real Estate Ltd existed as at 20 May 2005. The inference can be drawn from the cumulative effect of the following primary facts: (a) Judicial notice can be taken that real estate fees and commission are (almost invariably) paid by a vendor. (b) The sum of $124,263.79 deposited in the joint venture bank account on 19 May 2005 was sourced from the net proceeds of sale of the Kaiwaka property. (c) The payment of $70,000 to AIL came out of funds deposited into the joint venture bank account from the proceeds of sale of the Kaiwaka property. (d) The Marsden Real Estate Ltd debt was not challenged when a statutory demand was served on 9 June 2005, shortly after the invoice was raised. Further, the debt was not disputed in the liquidation proceeding. [31] Against that background, Courtney J was required to determine whether AIL had rebutted the presumption that the payment was made otherwise than in the ordinary course of business. In determining that question, the Judge referred to two leading authorities, one in the Privy Council and the other in this Court. [32] Countrywide Banking Corporation Ltd v Dean [1998] 1 NZLR 385 (PC), considered the way in which a Court should consider whether a transaction was entered into "in the ordinary course of business". Gault J (delivering the advice of the Privy Council) said (at 394):There are difficulties in drawing upon formulations in different words of statutory tests and treating them as applicable in all circumstances. Such difficulties are increased where those formulations originate in differentlegal or factual contexts. This is particularly so where the test is essentially one of fact in any event. For these reasons, as presently informed by the argument in this case, Their Lordships do not adopt any particular formulation. Nor is it necessary for this case to make any comprehensive statement, suitable for all cases, of the criteria for determining when a transaction is to be held to have taken place in the ordinary course of business for the purpose of s 266 and the corresponding section in the 1993 Act. Their Lordships do not accept, as submitted for the appellant, that the test is general in the sense that it would be satisfied so long as it can be said that the transaction is one which might reasonably take place in some business setting. To abstract the particular business setting and inquire (in effect) merely whether it is possible to envisage a setting in which the transaction would be an ordinary one is not what the statute requires. In that situation the intent and purpose of the company would never have relevance yet s 266(4) specifies circumstances in which they are to be taken into account.Plainly the transaction must be examined in the actual setting in which it took place. That defines the circumstances in which it is to be determined whether it was in the ordinary course of business. The determination then is to be made objectively by reference to the standard of what amounts to the ordinary course of business. As was said by Fisher J in the Modern Terrazzo Ltd [[1988] 1 NZLR 160 (HC)] case, the transaction must be such that it would be viewed by an objective observer as having taken place in the ordinary course of business. While there is to be reference to business practices in the commercial world in general, the focus must still be the ordinary operational activities of businesses as going concerns, not responses to abnormal financial difficulties. Their Lordships respectfully agree with the Judge's conclusion by reference to the policy of the section at p 175: Whether a payment should be regarded as commercially routine at a day-to-day trading and operating level will turn at least in part upon a comparison with the practices of the commercial community in general. But equally, the way in which the particular company has acted in the past, and its dealings with the particular creditor, would seem pertinent. That the payment was simply a repetition of past patterns of behaviour would make it more difficult to argue that it represented special assistance to an insider or the result of special enforcement measures or a situation in which the subject creditor ought to have investigated before extending credit. So at a policy level there is something to be said for the view that relevant considerations should extend to the prior practices of the particular company. (our emphasis)[33] The Privy Council's approach was explained further in Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 (CA). Tipping J, delivering the judgment of this Court, said, after referring to the passage we have highlighted from the Privy Council advice:[21] A little later, also at p 394, Their Lordships spoke again of the exercise being undertaken objectively by reference to the standard of the ordinary course of business. At p 395 they observed: It may be that transactions undertaken in the past will, because of changed circumstances, no longer be considered as in the ordinary course of business. [22] In saying this, Their Lordships did not mean that a payment once made can change its character by reason of changed circumstances in the future. A payment which was made in the ordinary course of business at the time of its making cannot cease to have that character because of a change of circumstances in the future. The point is that a similar payment made in changed circumstances may not bear the same character. We note in passing that, again at p 395, the Privy Council said that payment of accrued indebtedness, as here, may be in the ordinary course of business. [23] The fundamental issue to be considered is how much the "objective observer" is to be taken as knowing about the circumstances in which the payment was made. Differences have arisen in the High Court as to whether that observer is to be taken as looking at the matter on the basis of the creditor's perception of the transaction, the debtor company's perception or some amalgam of the two. As will be seen, none of these approaches exactly captures the correct position[34] After considering subsequent authorities, the Court said:[31] In our view the judicial approach has become over-complicated and over-refined. The question is whether, at the time it was made, the relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned. So too is the previous commercial relationship between the parties. The observer spoken of in the Privy Council is in reality the Court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether on the evidence before the Court the transaction or payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?[35] Applying that test, we are satisfied that the payment made by ASL to AIL occurred during a period in which it was winding down its business after sale of the joint venture's sole asset. The funds used to pay AIL, for all practical purposes, exhausted assets available to ASL, even though it had an outstanding obligation to Marsden Real Estate Ltd. In those circumstances the payment to one creditor (a related party) in preference to another (an unrelated party) cannot be characterised as having been made "in the ordinary course of business".[36] For those more expanded reasons, we agree with Courtney J's conclusion that the presumption that the payment was made otherwise than in the ordinary course of business has not been rebutted.(c) Third ground of appeal: Preferential effect[37] The focus, for preferential effect, is on the amount received by AIL Investments compared to the amount it would have received in the event of liquidation. [38] AIL received $70,000. That amount came out of ASL's only identifiable asset. Had the AIL debt not been paid, both AIL and Marsden Real Estate Ltd would have been left to prove in the liquidation and participate proportionately in a distribution of the amount in the joint venture account immediately before the AIL payment was made. [39] AIL was owed a debt of approximately $170,000. Excluding costs awarded in the liquidation proceeding, Marsden Real Estate Ltd was owed $59,962.50. Both were joint venture debts for which both ASL and SFL were severally liable. The amount available for distribution would have been about $70,000. It is clear from those approximate figures, that AIL has received significantly more, through the payment of $70,000, than it would have received had it proved in a liquidation in competition with Marsden Real Estate Ltd. [40] In our view, the Judge was correct to reach the conclusion that the payment had the requisite preferential effect.Result[41] All grounds of appeal fail. The appeal is dismissed.[42] Costs are awarded in favour of the liquidator in the sum of $3,000, together with usual disbursements.Solicitors: Hornabrook Macdonald Lawyers, Auckland for Appellant Meredith Connell, Auckland for Respondent