G E FINANCE AND INSURANCE TRADING AS GE COMMERCIAL FINANCE V ARRON LESLIE HEATH AND JEFFREY PHILIP MELTZER AS THE LIQUIDATORS OF PHOENIX FREIGHT LIMITED HC AK CIV 2006-404-4903

G E FINANCE AND INSURANCE TRADING AS GE COMMERCIAL FINANCE V ARRON LESLIE HEATH AND JEFFREY PHILIP MELTZER AS THE LIQUIDATORS OF PHOENIX FREIGHT LIMITED HC AK CIV 2006-404-4903 9 October 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-4903UNDER The Companies Act 1993 IN THE MATTER OF of Phoenix Freight Limited (in liquidation) BETWEEN G E FINANCE AND INSURANCE TRADING AS GE COMMERCIAL FINANCE Plaintiff AND ARRON LESLIE HEATH AND JEFFREY PHILIP MELTZER AS THE LIQUIDATORS OF PHOENIX FREIGHT LIMITED Defendants Hearing: 6 June 2007 Appearances: Mr Toebes for the Plaintiff Mr Hucker and Mr Cumming for the Defendants Judgment: 9 October 2007 at 4 pmJUDGMENT OF MALLON J ContentsIntroduction........................................................................................................................... [1] The facts................................................................................................................................ [4] The legislation..................................................................................................................... [18] Burden of proof................................................................................................................... [23] Transaction.......................................................................................................................... [26] Satisfaction of debt greater than in liquidation ................................................................... [33] Ordinary course of business ................................................................................................ [48] Should recovery be declined ............................................................................................... [57] Result .................................................................................................................................. [69]Introduction[1] Just under six months before Phoenix Freight Limited ("Phoenix") was put into liquidation by shareholders' resolution it paid $282,418.25 ("the payment") to the plaintiff ("GE Finance"). At the time of the payment Phoenix did not owe GE Finance money. However Phoenix did owe money to Cardinal Freight Distribution Limited ("Cardinal") which in turn owed GE Finance money. The payment to GE Finance had the effect of reducing Phoenix's indebtedness to Cardinal. [2] Because the payment was made within two years of the date on which Phoenix was put into liquidation the payment is potentially voidable under s 292 of the Companies Act 1993 ("the Companies Act"). The defendants, who are the liquidators of Phoenix, gave notice to GE Finance that they wished to set aside the payment. The liquidators' notice led to an application from GE Finance that the payment not be set aside. The issue for me to determine is whether the payment should be set aside and, if so, whether GE Finance should be ordered to repay that sum. It is accepted by GE Finance that at the time of the payment Phoenix was unable to pay its due debts. However all the other criteria for setting aside the payment are in issue. [3] For reasons which follow I find that the payment was not made in satisfaction of a debt owed by Phoenix to GE Finance. It does not therefore meet the criteria for setting it aside and accordingly it is not set aside. The liquidators notice also covered a general security agreement ("the GSA") dated 10 June 2004 granted by Phoenix to GE Finance and a guarantee to GE Finance given by Phoenix on 13 October 2004 ("the cross guarantee"). GE Finance no longer pursues its application that the GSA and Phoenix's obligation under the cross guarantee not be set aside and so these are accordingly set aside.The factsThe parties[4] GE Finance is a financier. For many years GE Finance and its predecessor provided finance facilities to Cardinal and a related company, Concord Storage and Distribution Limited ("Concord"). [5] Cardinal's principal activity is warehousing and logistics for the food and grocery industry. Concord operated a nation-wide freight distribution service. Concord's major customer was Cardinal and the two companies have now amalgamated. The majority shareholder of Concord and Cardinal is a family trust ("The Gorton Family Trust No. 2"). Mr Gorton is the sole director of Cardinal and Concord. [6] Phoenix was also in the freight distribution business. It had eight branches around New Zealand and a number of contracts with owner/drivers of freight trucks. In October 2003 a Gorton family trust ("The Phoenix Gorton Trust") purchased all the shares in Phoenix. Mr Gorton is the sole director of Phoenix.Funding and securities[7] GE Finance provided to Concord and Cardinal a facility with a limit initially of $2 million but which was progressively increased over time. It also provided funds under specific loan contracts with Concord and Cardinal. In April 2004 Concord sought further funding from GE Finance. This was to purchase trucks to replace the owner/driver trucks contracted to Phoenix. The application was for $1.5 million, although the funding was to be advanced in tranches. [8] Funding was provided on terms that included Phoenix providing a charge over its assets (the GSA) and a guarantee of Concord/Cardinal's obligations. GE Finance's rationale for the guarantee and security from Phoenix was said to be the increased level of intercompany business between Phoenix andConcord/Cardinal. The revenue payable by Phoenix to Concord and Cardinal would service the indebtedness of Concord and Cardinal to GE Finance. Phoenix would receive revenue for work it completed using the trucks for which GE Finance was providing the funding. The security and guarantee was therefore also seen as a method of securing the cashflow to Concord and Cardinal from Phoenix. [9] The GSA was not executed until 10 June 2004. The GSA ranked behind an existing first ranking security held by the National Bank of New Zealand Limited ("National") over Phoenix's assets. For reasons that are not explained in the evidence the guarantee was not executed until 13 October 2004 ("the cross guarantee"). Cardinal, Concord, Phoenix, Mr Gorton, the Trustees of The Gorton Family Trust No 2 and the Trustees of the Phoenix Gorton Trust granted, in favour of GE Finance, the cross guarantee in respect of the liabilities that any of them may have to GE Finance. [10] In July 2004, that is after the GSA was executed but before the guarantee was obtained, Cardinal sought funding from S H Lock (NZ) Limited ("Lock"). The funding was via an invoice discounting facility (essentially, money borrowed against the debts due to Cardinal). A further facility from Lock was negotiated for Phoenix (in respect of debts due to Phoenix). [11] The Phoenix facility appears to have been in response to a letter from National to Phoenix dated 22 July 2004. That letter advised that National "was no longer willing to provide banking facilities" to Phoenix and that National "would like" Phoenix to "arrange alternative banking arrangements by no later than 30 September 2004". The reasons for this included National's "serious concerns over the financial viability" of Phoenix. [12] The security for the Phoenix facility from Lock was a general security from Phoenix. This security was supported by guarantees from Cardinal, Concord, a representative of the Gorton family trusts and a mortgage over a Christchurch property owned by Phoenix. In addition, Lock required that Phoenix obtain from GE Finance, as an existing security holder, a deed of release. The deed of release would release Phoenix's book debts from the charge held by GE Finance under theGSA and would regulate priorities as between GE Finance and Lock. (Initially Lock referred also to a security held by another company, but on investigation it transpired that the security interest was in respect of specific goods and that the deed of release did not need to cover this interest.) [13] GE Finance was advised of the Lock arrangements by letter dated 30 August 2004 from Phoenix's solicitors (Morrison Kent). As a condition of agreeing to the deed of release, GE Finance required the following: a) GE Finance registering a financing statement on the PPSR over vehicles owned by Phoenix as listed in a letter from GE Finance to Morrison Kent dated 7 September 2004; b) Repayment from the funds to be advanced by Lock of a loan taken out by Cardinal in November 2003. The repayment amount was $282,418.25 if paid on or before 1 October 2004; and c) An undertaking from Morrison Kent that the deed of release would be held until receipt of funds from Lock at which point the $282,418.25 was to be transferred to GE Finance and proof of payment was to be provided. [14] These terms were set out in a letter dated 7 September 2004 from GE Finance to Morrison Kent. That same day Morrison Kent advised that Phoenix agreed to these terms and the deed of release was signed ("the deed of release"). On 9 September 2004 Phoenix, via Morrison Kent, received the initial draw down from Lock in the sum of $967,500. Morrison Kent's statement to Phoenix dated 13 September 2004 records that these funds were paid as follows: a) $684,814.06 to National being "repayment of overdraft and term loan"; b) $282,418.25 to GE Finance being "agreed payment in reduction"; c) $267.69 being "balance".[15] The amount of $686,814.06 represented the full amount of Phoenix's indebtedness to National. The amount of $282,418.25 was the total amount of Cardinal's indebtedness to GE Finance under one loan contract, although the total indebtedness of Cardinal and Concord to GE Finance was more than this.Intercompany records[16] Mr Gorton says that as at 6 September 2004 Phoenix owed Cardinal in excess of $700,000. This is shown in the intercompany records produced to the Court. Mr Gorton says that this indebtedness largely related to local deliveries undertaken by Cardinal on Phoenix's behalf and charged back to Phoenix on a commercial basis. The intercompany records also show that the payment of $282,418.25 to GE Finance was treated as follows: a) A debit in Phoenix's account on 30 September 2004 of $282,418.25 described as "GE Finance pmt in reduc"; b) A credit in Cardinal's account on 20 October 2004 of $302,377.12 described as "Phoenix Int Co Loan – T". (This amount is said to include the $282,418.25 payment.)Phoenix insolvent[17] It seems that from the time Mr Gorton's trust purchased Phoenix, it had financial difficulties. Despite the support of Mr Gorton, Cardinal and Concord the financial viability of the business did not improve. The expert evidence for the liquidators is that throughout the period of June to October 2004 (ie the period that relates to Phoenix providing securities to GE Finance and making the payment of $282,418.25) Phoenix was insolvent. This is not contested by GE Finance.The legislation[18] Voidable transactions are dealt with in s 292 of the Companies Act. A transaction is voidable on the application of the liquidator if it meets the following criteria: a) It qualifies as a "transaction" which is defined as including "the payment of money by the company" (s 292(1)(e)); b) It was made at a time when the company was unable to pay its due debts (s 292(2)(a)(i)); c) It was made within the "specified period" (s 292(2)(a)(ii)) (the specified period is a two year period prior to the commencement of the liquidation (s 292(5)); d) It 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 (s 292(2)(b)); and e) It did not take place "in the ordinary course of business" (s 292(2)). [19] The criteria at [18] (b) and [18] (e) are presumed "unless the contrary is proved" if the transaction took place "within the restricted period" (s 292(3)). The restricted period is a six month period prior to the commencement of the liquidation (s 292(6)). [20] If a liquidator wants to set aside a transaction the liquidator must give notice to the other party to the transaction (s 294(1)). A person who would be affected by the setting aside of the transaction and who considers it is not voidable may apply to the Court for an order that the transaction not be set aside (s 294(2)). [21] If a transaction is set aside the Court "may" make a number of orders. The relevant one for present purposes is an order "requiring a person to pay to theliquidator, in respect of benefits received by that person as a result of the transaction such sums as fairly represent those benefits" (s 295(a)). However recovery by the liquidator of the sum representing the benefit received "may" be denied "wholly or in part" if the person: a) Received the payment in good faith; b) Has altered their position in the reasonably held belief that the payment was validly made and would not be set aside; and c) In the opinion of the Court it is inequitable to order recovery in full (s 296(3)). [22] In this case it is not disputed that the payment was made within the restricted period and the specified period. Nor is it in dispute that the payment was made when the company was unable to pay its due debts. The issues raised by the parties are: a) Who has the burden of proof; b) Whether the payment was a "transaction"; c) Whether the payment enabled GE Finance to receive more towards satisfaction of a debt than GE Finance would otherwise have received in the liquidation of Phoenix; d) Whether the payment was made in the ordinary course of business; and e) Whether recovery by the liquidator should be declined in whole or in part.Burden of proof[23] Mr Toebes for GE Finance relies on the position under the predecessor legislation (Re Gladding King Real Estate Ltd (In Liq) (1993) 6 NZCLC 68, 261 considering ss 309 and 311A of the Companies Act 1955) and submits that the burden under for establishing the criteria under s 292 remains on the liquidator. Mr Hucker for the liquidators submits that because the payment in this case occurred during the restricted period, the burden is on GE Finance to establish that it was made in the ordinary course of business. [24] I agree with the liquidators. Section 294 of the Companies Act provides how the matter is to come before Court but is silent on burden where the setting aside is contested. The question of burden is to be determined by the words of s 292. Under s 292 it is the liquidators who make the application. I consider that they must establish the criteria that makes a transaction voidable (see [18] above). (This is consistent with the position under the predecessor legislation). [25] However, because the payment took place in the restricted period the liquidators have the benefit of the presumption that it was not made in the ordinary course of business. This presumption applies "unless the contrary is proved". Those words, which are absent from the predecessor legislation, indicate that the person who seeks to avoid the setting aside of the transaction needs to prove the contrary – that is, that the payment was made in the ordinary course of business. If they do not do so the presumption will apply. (The same would be true of the presumption that the payment was made at a time when the company was unable to pay its debts. But that is not in issue in this case.)Transaction[26] The liquidators say that the $282,418.25 was a payment made by Phoenix to GE Finance. This means it qualifies as a "transaction" under s 292. The liquidators refer to Morrison Kent receiving the funds from Lock as part of a facility obtainedby Phoenix in respect of Phoenix's debtors. That is, it was Phoenix's money and it was paid to GE Finance. [27] GE Finance says that this is what happened to the money physically – that is, it was received by Morrison Kent on behalf of Phoenix and paid to GE Finance. However, this physical flow of money does not reflect the reality of the transaction. The transaction is shown in the contemporaneous company records. Money was paid by Cardinal to GE Finance to reduce Cardinal's indebtedness, having been paid by Phoenix to Cardinal in reduction of Phoenix's indebtedness. [28] The liquidators say that their position is consistent with the Court's approach to consider whether the money formed part of the assets of the company in liquidation. If it did, then the payment to the third person (here GE Finance) is an advance of the company's funds. GE Finance say that its position is consistent with the Court's approach to consider the substance of the transaction and not merely the physical flow of money. Both rely on National Bank of New Zealand v Coyle (1999) 8 NZCLC 262,100 and Levin as liquidator of One Italy Limited (in Liquidation) v Market Square Trust CA 224/05 18 April 2007 but emphasise different aspects of these cases. GE Finance also gives a number of examples where the flow of money does not represent the substance of the transaction. [29] I accept that there are examples where the flow of money does not reflect the substance of a transaction. Where, for example, A is a creditor of B, and puts C as its agent in funds to pay B, the payment is potentially voidable in relation to the insolvency of A and not C. That is because the money was A's and not C's and the preference (if there is one) is being made by A and not C. [30] I consider, however, that the liquidators are correct that the focus should be on whether, at the time the payment was made, it was an asset of the company in liquidation. If it was, then it is a "payment made by the company" regardless of why the company made the payment and how the company treated the payment in its records. The definition of "transaction" is wide. It seems intended to capture all dealings with company property which have the potential effect of providing apreference to one creditor over others. Whether it does have that effect depends on the other requirements of the section. [31] Here the money was a Phoenix asset. It had obtained the money from Lock on the basis of its book debts. It was Phoenix (through its solicitors) that made the payment and GE Finance that received it. On the words of s 292 it is captured as being "the payment of money by the company". It does not matter that at the time Phoenix made the payment it had no liability to GE Finance. Nor does it matter that GE Finance used the money to extinguish a debt owed by Cardinal to GE Finance and Cardinal gave Phoenix the benefit of this through treating it as a reduction in Phoenix's indebtedness to it. Phoenix made the payment from its assets in exchange for GE Finance releasing security over its book debts. How Cardinal and Phoenix chose to account for that internally does not change the position that the money was a Phoenix asset when it was paid to GE Finance and that it was paid to GE Finance. [32] It could also be seen as a payment of money to Cardinal since that is how it was treated in the intercompany records. That raises the possibility that the liquidator may be able to set aside the transaction in relation to two parties. However, where the payment is not made to a creditor the criteria for setting aside the payment will not be made out (see [34] to [39] below). In other cases, depending on who has received the benefit and/or whether a party has altered its position in reliance on the payment relief might be declined against one or the other.Satisfaction of debt greater than in liquidation[33] There are two aspects to this requirement that are relevant here. The first is whether the payment was in satisfaction of a debt. The second is whether, as a result of the payment, GE Finance received more than it otherwise would have in the liquidation.Satisfaction of debt[34] GE Finance says that by the payment it did not receive "more towards satisfaction of a debt" than it would otherwise have received or be likely to have received in the liquidation. It says this requirement means that Phoenix must have had a debt with GE Finance at the time the payment was made. It says that the GSA did not create a debt under which it could have claimed in the liquidation. The only debt Phoenix has to GE Finance arises under the cross-guarantee. The cross guarantee was entered into after the payment. GE Finance says that the payment could not therefore have been in satisfaction of a debt because the debt did not exist at the time of the payment. [35] The liquidators do not contest that the debt must be owed by Phoenix and that it must exist at the time the payment is made. They say that the debt arises under the GSA. They say that the GSA contained a guarantee and that because of this GE Finance was a creditor of Phoenix at the time the payment was made. The liquidators refer to a letter sent by GE Finance's solicitors making a claim as a secured creditor under the GSA. [36] I agree that Phoenix must have a debt with GE Finance in order for GE Finance to receive more in satisfaction of a debt than it otherwise would in the liquidation (see eg Chilton Saint James School v Gray (1996) 9 PRNZ 349 at 355 where this requirement is said to mean that there is a creditor/debtor relationship). [37] I agree with GE Finance that there is nothing in the GSA that created a debt at the time the payment was made. The GSA created a security interest and charge over Phoenix's assets. It was to support an obligation Phoenix may have to pay GE Finance, but did not itself create any such obligation. It required Phoenix to pay the "Secured Money" (clause 2.1). The "Secured Money" was "all money, including present and future advances" which Phoenix "may owe to" GE Finance "now or in the future for any reason" and includes any money that Phoenix may contingently owe GE Finance "now or in the future" (clause 31.1). It contains a definition of guarantee (clause 31.1) and an event of default occurs where a guarantor (also defined) fails to comply with an obligation under a relevant document or agreement(clauses 6.1 and 31.1). It does not itself provide a guarantee from Phoenix to GE Finance in respect of money owed by Cardinal and Concord. [38] That guarantee (the cross guarantee) was not entered into until 13 October 2004. Under the terms of the cross guarantee each of the guarantors (which included Phoenix) guaranteed all money "which is now or may hereafter from time to time be owing" to GE Finance by any of the guarantors (which included Cardinal). It is the cross-guarantee which enables GE Finance to claim in the liquidation. (The claim would have been as a secured creditor under the GSA, as per the letter from GE Finance's solicitors – see [35] above, had that not now been set aside – see [43] below.) [39] The parties had agreed back in April 2004 (at the time the additional funding was sought for the trucks) that the guarantee from Phoenix would be provided. It was not argued that s 292 applies where a payment is made in anticipation of the contingent liability that is to be created. I do not therefore consider this point further. The liquidators have not established that the payment was made "towards satisfaction of a debt" and on this basis their application fails. (I agree with GE Finance that the position has some similarity with Melsom v Vanpress Pty Ltd(1990) 2 ACSR 38 where the Court held that payment by the company in liquidation to a third party which had the effect of expunging the company's debt to a creditor was not a payment "in favour of a creditor". The Court considered that the application ought to have been made against the creditor and not the third party.) [40] Although the liquidators application fails on this basis, for completeness I consider the balance of the issues raised.Amount received in liquidation[41] The liquidators evidence is that, excluding claims made by GE Finance, Concord and Mr Gorton, they have received proofs of debt totalling approximately $5 million. These proofs of debt are from trade creditors and employees. The amount they hold on behalf of Phoenix totals $445,300.[42] The evidence as to the amount Cardinal and Concord owe or may potentially owe GE Finance is not precise. However, working from the affidavit filed by the liquidators, the liquidators refer to a $4 million facility and their understanding that "only $500,000 is now due under the facility". The affidavit evidence filed on behalf of GE Finance does not provide any further detail. [43] GE Finance says that as a secured creditor it would have received all the funds in liquidation. The liquidators say that GE Finance's entitlement in the liquidation is to be assessed at the date of the liquidation. They say that at this time GE Finance is an unsecured creditor because the GSA has been set aside. I agree with the liquidators. The test is what GE Finance would have received in the actual liquidation and not what it would have received in a hypothetical liquidation on the date of the payment (see eg One Italy at [44] and [45]). In the actual liquidation it is an unsecured creditor because the security is now set aside. [44] The liquidators say that if GE Finance's claim was accepted on the basis of the $500,000 now due, then the liquidators would pay 8 cents in the dollar to unsecured creditors. The liquidators have calculated what GE Finance would receive if the full $4 million facility was repayable to GE Finance. The calculation is that GE Finance would receive $196,800 (ie below the $282,418.25 payment). This amount is said by the liquidators to include the proceeds of the sale of the trucks over which GE Finance had registered a security. GE Finance initially submitted that the proceeds of the truck would be additional to the $196,800 but then accepted the liquidators' position on this (although said that the truck proceeds ought not to be part of the creditors' pool) and did not seek to produce any different evidence. [45] The liquidators further say that as GE Finance have recourse to other funds and guarantees including the principal debtor to whom the advances were made, the ability of the principal debtor to repay the advances would need to be assessed. They say that on this basis the amount due to GE Finance is likely to be negligible if not zero. They refer to GE Finance's position that it has abandoned resisting the GSA and cross-guarantee being set aside because of "various transactions undertaken by Concord and/or Cardinal in the intervening period" which means that GE Finance"no longer has to rely on" the GSA and cross-guarantee in respect of Concord/Cardinal's indebtedness. [46] GE Finance says that a creditor is entitled to claim for the entire contingent obligation. It says that payments made by the principal debtor prior to the liquidation are deducted from its claim but not payments made subsequently (see re Amalgamated Investment Property Co Limited [1984] 3 All ER 272). However in that case the principal debtor (as well as the guarantor) was being wound up. Further, GE Finance does not refer to s 307 of the Companies Act which provides that where a claim is subject to a contingency the liquidator may make an estimate of the amount of the claim. Here the claim is a contingent one which crystallises on the default of Cardinal or Concord (clause 3.1 of the cross-guarantee) and there is no evidence that Cardinal or Concord have or will default. [47] I do not, however, need to determine this issue because even on the most favourable position for GE Finance (that is, accepting its claim at $4 million) the payment of $282,418.25 resulted in GE Finance receiving more than it otherwise would receive in the liquidation (see [44] above).Ordinary course of business[48] GE Finance has the burden of showing that the payment was made in the ordinary course of business. The principles that are to be applied to this requirement are now well established (see eg Modern Terrazzo Limited (In Liquidation) [1998] 1 NZLR 160; Waikato Freight and Storage (1998) Limited v Meltzer [2001] 2 NZLR 541; Carter Holt Harvey Ltd v Fatupaito (2003) 9 NZCLC 263,285 (CA)) although they are not always easy to apply. The requirement is intended to distinguish those payments which are in the ordinary running of the business (examined against the practices of solvent companies engaged in similar businesses), and those payments that are in response to a situation of insolvency and which have the effect of preferring a creditor over others (see, eg, Carter Holt Harvey at [21]). [49] GE Finance says that the transaction was ordinary – it was absolutely as one would expect in the course of business between a financier and a company. Inexchange for the release of assets charged by a security GE Finance sought a reduction in the indebtedness which the released assets partially secured. It says that it was no different from National's transaction which the liquidators do not suggest was voidable. (GE Finance refers to Vague v Fajner (1998) 8 NZCLC 261,790 where a banker knew that the company was refinancing but the payments it received from the company were made in the ordinary course of business.) [50] The liquidators say that this is insufficient to rebut the presumption that the payment was not in the ordinary course of business. They say that the transaction was out of the ordinary. Phoenix derived no benefit from the payment given that it repaid Cardinal's loan (which was not yet due) and Phoenix contracted with Cardinal and Concord on commercial terms. It was a large one-off payment that had been made earlier than required. [51] They also say that GE Finance must have been aware of Phoenix's financial position. They point to GE Finance's knowledge that there were increased intercompany transactions between the companies. They refer to a list of documents filed by GE Finance in a related proceeding which shows that GE Finance had (at least at the time of swearing that list of documents) financial accounts for Phoenix for 2003 and 2004. They also point to the absence of a solvency declaration in the deed of release (referred to at [14] above). They say that given the burden was on GE Finance it ought to have adduced evidence to show an honest belief that it was not receiving an undue preference. [52] In my view it is not correct to say that Phoenix derived no benefit from the payment. The payment enabled Phoenix to free the book debts from the GSA so that they were available to secure the funding from Lock. That funding enabled it to pay off its indebtedness to National and to reduce its indebtedness to Cardinal. That, however, does not answer whether it was a payment in the ordinary course of business. [53] Looking at the position objectively (putting to one side that Phoenix was in fact insolvent at the time) GE Finance held a security over Phoenix's assets. Had GE Finance been able to exercise that security in respect of Cardinal's indebtedness atthe time of the payment then I consider that the payment would have been in the ordinary course of business. GE Finance's security was to be reduced so it was not unreasonable to require in exchange a reduction in the indebtedness that the security supported. The payment would have been a fair and unremarkable transaction regardless of whether Phoenix was insolvent. [54] However, at the time of the payment the security did not secure any Phoenix, Cardinal or Concord indebtedness to GE Finance. The GSA was in anticipation of the cross-guarantee that had not yet been entered into. That seems to me to make the payment less ordinary than the National repayment. [55] Mr Gorton says that the payment to GE Finance was made in the usual course of trading between these companies. He says that it was normal practice for Cardinal, Concord and Phoenix to pay accounts on behalf of each other and to put through entries in the inter-company accounts. The accounts were reconciled monthly. There is, however, no evidence as to the terms (timing and amount) on which Phoenix was required to repay Cardinal so it is not known whether that reduction was in the ordinary course of business either. [56] Cardinal must have known the financial position of Phoenix (Mr Gorton being the sole director of both companies). The affidavit evidence from GE Finance is silent as to its knowledge of Phoenix's financial position. A subjective intent to prefer on the part of a debtor company is not relevant unless known to the creditor (s 292(4) and Waikato Freight at [32]). However, given the somewhat unusual nature of the payment and the lack of evidence from GE Finance about such matters as to why the cross-guarantee was not entered into until later, why the particular loan contract was to be repaid, what the terms of that loan and other Cardinal/Concord loans were and as to the absence of knowledge of Phoenix's financial position, I consider GE Finance has not discharged the burden of proving that the payment was made in the ordinary course of business.Should recovery be declined[57] Because the liquidators have not established that the payment was in "satisfaction of a debt" the transaction is not to be set aside. The question of recovery of the payment does not arise. Nevertheless, for completeness, I consider it.Did GE Finance receive a benefit?[58] GE Finance says that it received no benefit from the payment because it exchanged a debt obligation (if that is what it was) in return for the payment. It is Cardinal that received the benefit of the payment because its loan to GE Finance was repaid. GE Finance says that the liquidators ought to have proceeded against Cardinal (eg as the Court indicated was the appropriate course in Melsom). It says that even in the absence of the liquidators proceeding against Cardinal, the Court has the power to order that the person who received the benefit be required to pay that benefit. GE Finance sought to join Cardinal for that purpose but was unsuccessful. [59] I agree that Cardinal received a benefit from the payment. I also agree that potentially the liquidators could have proceeded against Cardinal and that had Cardinal been joined this Court might have (depending on the evidence and submissions received in relation to Cardinal) ordered payment from Cardinal. However, I consider that none of this excludes the Court from making an order against GE Finance to repay the money if the criteria under s 292 was made out and if GE Finance (as well as Cardinal) received a benefit. [60] Whether GE Finance received a benefit is not necessarily to be determined by whether it gave consideration for the benefit and if so whether that consideration was of comparable value to the benefit. That analysis might be more relevant to the "ordinary course of business" requirement. I consider that if the criteria under s 292 had been established by the liquidators GE Finance would have received a benefit, namely a payment that was greater than it would have received in the liquidation. Had I found that the payment was to be set aside, the alleged absence of a benefitwould not in my view have provided a basis for refusing to order repayment by GE Finance of the $282,418.25 payment.Acting in reliance[61] That leaves GE Finance's defence that it altered its position in reliance on the payment. Again, this issue does not need to be decided because of my view that the payment was not in satisfaction of a debt. For completeness, however, I consider it. [62] GE Finance says that it acted in good faith. It was a commercial lender approached by a guarantor with a request for a partial release of security. It responded in prompt fashion by requiring a reduction in the indebtedness of a principal debtor. Mr Toebes submits that GE Finance did not have knowledge of the financial position of Phoenix and it was not pressing for payment. The liquidators say that GE Finance has not established good faith. They say GE Finance ought to have given sworn affidavit evidence that it was unaware of Phoenix's insolvency. They point to the absence of a solvency declaration in the deed of release. They also point to Phoenix not having been a borrower from GE Finance. [63] I agree with the liquidators. The recipient of the money is required to show "that he or she honestly believed that the transaction would not involve any element of undue preference either to himself or herself or to any guarantor" (see One Italy at [54]). GE Finance may well have acted in good faith but it was for GE Finance to establish this. In the absence of positive evidence about its honest belief I consider it has failed to establish this aspect of the defence. [64] The liquidators also say that GE Finance has not established that it altered its position in the reasonably held belief that the payment was validly made and would not be set aside. The liquidators say that GE Finance needs to establish detriment. (See Baker Timber Supplies v Appollo Building Associates (Tauranga) Society Limited (In Liquidation) (1990) 5 NZCLC 66,791). They say that there is no detriment to GE Finance unless it is unable to recover from Concord and Cardinal or Mr Gorton or his trusts.[65] I consider that this takes too narrow an approach to what constitutes detriment. In Re Bee Jay Builders Ltd (in liq) [1991] 3 NZLR 560 at 566 Tipping J set out the following test:"The essence of an alteration of position for present purposes seems to me to be a deliberate course of conduct, be it act or omission, following receipt of the impugned payment which course of conduct the recipient would not have undertaken but for receipt of the payment and belief in its validity. If following receipt of the impugned payment the recipient does or omits something, reasonably believing that the transaction is valid then the Court may relieve in whole or in part against the rigours of s 309(1A) [s 292]".[66] I consider that the same approach can be taken where the party has altered its position in anticipation of or return for the payment. (The alteration need not follow the payment, providing what was done was in reliance on the payment.) Here the detriment was the giving up of the book debts as security. GE Finance may not need to have recourse to that security, but it was additional protection for GE Finance in respect of Cardinal's indebtedness and was intended to support the cross-guarantee to be entered into. [67] The final question is whether it would be inequitable for the liquidators to recover in full. GE Finance say that it relied on the validity of the payment in releasing the security. The liquidators say that Phoenix received no benefit from the payment. GE Finance was attempting to improve its own security when it insisted on the payment. GE Finance could have requested (if they did not) details of the financial position of Phoenix. Equity requires consideration of other creditors. [68] Had I found that the transaction should be set aside under s 292 I would have found it equitable to require GE Finance to repay the payment. GE Finance would have obtained a preference over other creditors. GE Finance would not be in a worse position than had they received no payment at all. The GSA and the cross guarantee have been set aside in any event. GE Finance remains able to seek recovery from Cardinal and Concord as principal debtors and there is no evidence that Cardinal/Concord are unable to pay.Result[69] I make the following orders: a) The payment to GE Finance of $282,418.25 is not set aside. b) The GSA and cross-guarantee are set aside and the charge given by Phoenix under the GSA is released. c) Costs are payable to GE Finance on a 2B basis, GE Finance being successful on its application that the payment not be set aside. Mallon JSolicitors:Mr Toebes, Buddle Findlay, PO Box 2694, Wellington (justin.toebes@buddlefindlay.com) Mr Hucker, Hucker & Associates, PO Box 3843, Shortland Street, Auckland (hucker@huckerlaw.com)