HF RESIDUAL OBLIGATIONS LIMITED (FORMERLY HANOVER FINANCE LIMITED) V OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ANDREW MARK KRUKZIENER CA739/2012 [2013] NZCA 656

HF RESIDUAL OBLIGATIONS LIMITED (FORMERLY HANOVER FINANCE LIMITED) V OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ANDREW MARK KRUKZIENER CA739/2012 [2013] NZCA 656 [17 December 2013]IN THE COURT OF APPEAL OF NEW ZEALANDCA739/2012[2013] NZCA 656BETWEENHF RESIDUAL OBLIGATIONSLIMITED (FORMERLY HANOVERFINANCE LIMITED)AppellantAND OFFICIAL ASSIGNEE IN THEBANKRUPTCY OF THE PROPERTY OFANDREW MARK KRUKZIENERRespondentHearing: 14 November 2013Court: Stevens, Miller and Dobson JJCounsel: B J Burt and B J Murphy for AppellantB H Dickey and K H Kuang for RespondentJudgment: 17 December 2013 at 11.30 amJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs on a standard appeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Stevens J)Introduction[1] This is an appeal against a judgment of Associate Judge Abbott setting aside a payment of $250,000 to the appellant HF Residual Obligations Ltd (Hanover) as aninsolvent transaction.1 Section 194 of the Insolvency Act 2006 (the Act) provides that the Official Assignee may initiate proceedings to cancel a transaction by a bankrupt if it is an insolvent transaction that was made within two years before thebankrupt's adjudication.[2] The bankrupt was Andrew Krukziener who, the Official Assignee contends, entered into such a transaction. This is said to have occurred when Hanover, Mr Krukziener and several corporate and trust entities associated with him entered into a deed of settlement dated 17 March 2009 (the Deed). The sum of $250,000 was paid to Hanover as part of the consideration payable under the Deed.[3] Following Mr Krukziener's adjudication on his own petition on 15 December2010, the Official Assignee invoked the cancellation procedures under the Act2 inrespect of what it was claimed was an "insolvent transaction".3 To qualify as such, a transaction by a bankrupt must be entered into at a time when the bankrupt is unable to pay his or her due debts and, relevantly in this case, enable a creditor to receive more in satisfaction of a debt by the bankrupt than the person would receive in the bankruptcy.4 Associate Judge Abbott upheld the claim.[4] The parties are agreed that the appeal raises two issues:(a) Was the payment made by Mr Krukziener?(b) Was the payment in discharge of a debt owed by Mr Krukziener to Hanover?Both of these issues will be addressed when we discuss the factual question ofwhether the payment of $250,000 to Hanover under the Deed was an "insolvent transaction".1 Official Assignee v HF Residual Obligations Ltd HC Auckland CIV-2012-404-5887, 16 October 2012.2 Insolvency Act 2006, s 206.3 Insolvency Act, s 195.4 Insolvency Act, s 195(1)(b).Factual background[5] In 2002 two companies associated with Mr Krukziener5 (which we will refer to as the AK companies) entered into loan agreements with Hanover. The AK companies defaulted on those loans in 2005. On 5 April 2007 Associate JudgeSargisson granted Hanover's application for summary judgment and enteredjudgment against Mr Krukziener as guarantor under the loans for the sum of $4,159,386.61.6 An appeal to this Court was unsuccessful.7[6] Hanover then commenced the necessary process to adjudicate Mr Krukziener bankrupt. In August 2007, Mr Krukziener and another of his companies commenceda proceeding against Hanover, claiming losses from Hanover's involvement incertain property transactions. Hanover filed a counterclaim and the proceedings were unresolved when Hanover and Mr Krukziener concluded the Deed in March 2009.Terms of the Deed[7] The Deed provided for the AK companies, together with AK & AMCustomhouse Ltd (described in the Deed collectively as "the Assignee") to purchase the debts, including the judgment debt (referred to as "the Assigned Debt"), owed toHanover by Mr Krukziener and the Assignee. The purchase price was $700,000 tobe paid "by or on behalf of the Assignee".8[8] Although the parties agreed that the Deed was entered into in full and final settlement of all issues between the parties,9 cl 3.6 provided that nothing in the Deed would operate to discharge or affect the obligations of, or otherwise provide a defence to, Mr Krukziener in respect of payment of the Assigned Debt.[9] Hanover agreed to forbear from enforcing its debt in the following terms:5 Andrew Krukziener (No 1) Ltd and Andrew Krukziener (No 2) Ltd. The Deed recites that the AK companies are the trustees of the Krukziener Albert Street Trust (the KAS Trust).6 Hanover Finance Ltd v Krukziener HC Auckland CIV-2006-404-1667, 5 April 2007.7 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.8 Clauses 1.1 (definition of "Purchase Price") and 7.1.9 Clause 3.2.4.4 Subject to satisfaction of the conditions in clause 2 and provided that no Termination Event has occurred:(a) [Hanover] covenants not to take any steps or commence any proceedings to enforce payment of, or to adjudicate [Mr Krukziener] bankrupt for the non-payment of, the Assigned Debt prior to the settlement date.[10] Under cl 6.1 Hanover agreed to assign absolutely the Assigned Debt upon payment of the purchase price. However, until receipt of the final instalment, Hanover retained ownership of the debt on the following basis:6.2 The parties agree that, until the Final Instalment of the Purchase Price is paid by the Assignee on the Settlement Date, [Hanover] shall be the sole legal and beneficial owner of the Assigned Debt. [11] The Deed provided that the purchase price of $700,000 was payable in instalments as follows:10(a) an initial instalment of $250,000 by 18 March 2009;(b) $250,000 in 25 equal, consecutive monthly instalments of $10,000 from 1 April 2009; and(c) a final instalment of $200,000, payable on 1 September 2011.[12] The purchase price was not refundable in whole or in part,11 and in the eventof a "termination event" such as a failure to pay an amount due, Hanover wasentitled to retain any part of the purchase price received.12The alleged insolvent transaction[13] It is the payment of the initial instalment which is the subject of this appeal. On 16 February 2009, Gilbert Walker received cheques from:(a) Nelson Street Hotel Ltd, for $200,000; and10 Clauses 1.1 (definition of "Initial Instalment"), 2.1(b) and 7.1.11 Clause 7.2.12 Clause 10.2(c).(b) Mr Krukziener's parents, for $50,000.Gilbert Walker deposited the funds into its trust account. On 16 March 2009 it transferred the sum of $250,000 to Chapman Tripp, which held the funds in a trust account in Mr Krukziener's name. On 18 March 2009, Chapman Tripp paid the funds to Hanover's solicitors.[14] Following Mr Krukziener's adjudication the Official Assignee took steps tocancel the transaction, giving the required notice to Hanover. Objection was made by Hanover, necessitating an application by the Official Assignee to the High Court under s 206 of the Act. However, owing to an apparent "administrative oversight",Hanover took no steps to oppose the application in the High Court. Therefore on 16 October 2012 Associate Judge Abbott, without opposition, ordered that the transaction be cancelled. The judgment having been sealed the same day, Hanover has appealed to this Court.The legal test[15] The parties are agreed as to the relevant legal test. First, s 194 refers to "a transaction by the bankrupt". Accordingly the Official Assignee must establish thatthe payment was a payment by Mr Krukziener. Second, it is implicit in thedefinition of "insolvent transaction" in s 195 that the payment must be made towards satisfaction of a debt which is owed by the bankrupt to the payee. For that reason it is necessary for the Official Assignee to show that the funds were applied to discharge a debt owed by Mr Krukziener.SubmissionsHanover[16] On the question whether the payment was made by Mr Krukziener, Mr Burt for Hanover submits that it is artificial to reason that the payment was made by Mr Krukziener simply because the funds passed at some points through solicitors'trust accounts held in his name. Rather, the payment was made by or on behalf ofthe debtor companies in order to discharge their contractual obligation under the Deed.[17] Mr Burt submits this case is analogous to National Bank of New Zealand v Coyle.13 There the shareholders of a company had paid a sum directly to the bank inreduction of a company's overdraft. When the company was put into liquidation theliquidator sought to recover the payment. Panckhurst J held that based on the evidence, if the company had not been placed into liquidation, the advance would have been recorded as such in the books of the company. Accordingly, the paymentwas "in substance" a payment on behalf of (and therefore by) the company.[18] Mr Burt also submits that Mr Krukziener was the sole director and shareholder of the debtor companies. Both the agreement Mr Krukziener made with Hanover, and the payment itself, were made in his capacity as an officer of the debtor companies. From this perspective, the payment was an act of the debtor companies rather than Mr Krukziener personally.[19] Mr Burt submits that the payment was not made in satisfaction of a debt owed by Mr Krukziener to Hanover. A payment by a bankrupt cannot be cancelled if it satisfies a debt owed by someone other than the bankrupt.14 Where the nexus of debtor and creditor does not exist between the parties, the transaction cannot fall within the definition of an insolvent transaction.15[20] The argument is that, although Mr Krukziener in fact owed a judgment debt to Hanover, he was not under any obligation to pay that debt. In support of this argument Mr Burt submits that cl 4.4 of the Deed made it clear that Hanover had agreed to forbear from enforcing the judgment debt. Further, cl 3.6 clarified that the payment did not operate to reduce the debt owed by Mr Krukziener to Hanover.16Following any default by the debtor companies, Hanover would have been entitled to enforce the judgment debt for the full amount, unaffected by the payment of the13 National Bank of New Zealand v Coyle (1999) 8 NZCLC 262,100 (HC). Mr Burt also relied onMarket Square Trust v Levin (2005) 9 NZCLC 263,935 (HC) as authority for the proposition that a payment by a third party may be deemed to be a payment by the company where the payment is made at the direction of, or with the consent of, the company.14 Citing Chilton Saint James School v Gray (1996) 9 PRNZ 349 (HC) at 355.15 Citing Florance v Official Assignee HC Wellington B219/92, 22 March 1996.16 See above at [8]–[9].initial instalment. Accordingly, the payment could only have been in satisfaction of the debt owed by the debtor companies.Official Assignee[21] Mr Dickey for the Official Assignee focuses on how Mr Krukziener obtained the relevant funds. In particular, he points to evidence given by Mr Krukziener in various proceedings and to contemporary documentation obtained by the Official Assignee. Mr Dickey submits Mr Krukziener borrowed $200,000 from Nelson Street Hotel Ltd and another $50,000 from his parents. Each was a personal loan to him.[22] As to who owed the debt to Hanover, the Official Assignee submits that at the time of the payment of the $250,000 under the Deed, the Debt had not been assigned to the Assignee. Instead, Hanover remained the sole legal and beneficial owner of the debt and Mr Krukziener's liability of $4,159,386.61 under the summaryjudgment decision remained. Consequently, Hanover was a creditor of Mr Krukziener at the time of the payment. If, hypothetically, Hanover had subsequently issued proceedings against Mr Krukziener to recover the debt, it would have had to give credit for the payment it received under the common law rules of set-off. Accordingly, it follows that Hanover has received more in satisfaction of a debt owed by Mr Krukziener than it would otherwise receive in the bankruptcy.[23] The Official Assignee further submits that Hanover cannot rely on an argument that the payment was made in respect of the Assignee's obligation underthe Deed rather than in respect of the obligation under the original loan agreement.Such an argument "would prefer form over substance" and cannot be sustained incircumstances where it is clear that the payment was made directly from funds obtained by Mr Krukziener. The Official Assignee emphasises the need to focus on the true nature of the transaction, namely, that Mr Krukziener had negotiated a settlement of the judgment debt owed by him to Hanover in order to avoid bankruptcy.Our evaluation[24] There can be no doubt that the payment of the $250,000 was made from funds belonging to Mr Krukziener. The larger portion of $200,000 was sourced from a personal loan to Mr Krukziener from Nelson Street Hotel Ltd. In an affidavit filed by Mr Krukziener in the High Court, he stated that that loan was to "allow me to make the payments under that settlement deed and thus avoid bankruptcy".17 The context in which this statement was made is instructive. Mr Krukziener said:The [money] which I borrowed from Nelson Street on 16 February 2009 was used to settle part of the initial payment of $250,000 due under the Hanover deed of settlement. I certainly never intended to keep the money. My intention was for it to be a short term loan to allow me to make the payments under that settlement deed and thus avoid bankruptcy. My intention was to repay the money shortly thereafter through funds that I expected to receive from one of my business ventures. As it transpired, I was not able to repay the $220,000 within a short time period. However, it has always been myintention to repay the money. [25] Under cross-examination Mr Krukziener confirmed that the money had passed from Nelson Street Hotel Ltd to himself as a loan and was then paid by him to Hanover.18 The remainder of the payment was received by Mr Krukziener from his parents. There is no evidence to suggest these funds were advanced to any other entity. Mr Krukziener was the person best placed to know if he was making a payment on behalf of one of his companies. His sworn evidence in the High Court confirms that this was not the case.[26] Furthermore, it is clear that when the transaction funds were held by both Gilbert Walker and Chapman Tripp they were held in a trust account in Mr Krukziener's name.19 We are satisfied that the evidence of money flows in connection with the transaction establishes that Mr Krukziener used his personal funds to make the payment.17 The affidavit was in support of a proposal put forward by Mr Krukziener under the Insolvency Act 2006 for a composition with his creditors.18 Mr Krukziener's proposal for a composition with his creditors came before Associate Judge Osborne for hearing in November 2010, in the course of which Mr Krukziener was cross- examined.19 This is consistent with the statutory obligations of solicitors under the Lawyers and Conveyancers Act (Trust Account) Regulations 2008 whereby when funds are paid into a trust account certain details must be recorded including the name of the client for whom the trust money is to be held: reg 12(4)(b).[27] The main authority relied upon by Hanover is distinguishable. In Coyle the shareholders did not have any obligation to repay the debt; rather, the obligation lay with the company for whose benefit they had made the payment. Here, however, Mr Krukziener made a payment from funds belonging to him, at no-one else'sdirection. The purpose of the payment is apparent from the context of the Deed which we address below.[28] Hanover relies on clauses in the Deed to suggest that the amounts payable were payable not by Mr Krukziener but instead by or on behalf of the Assignee. Thisis a reference to the definition of "Purchase Price" as "the sum payable by or onbehalf of the Assignee for the assignment of the Assigned Debt, being the aggregate of the Initial Instalment, the Monthly Instalments and the Final Instalment".20 Thedefinition of the term "Initial Instalment" uses the same language of "payable by or on behalf of the Assignee".21[29] This submission requires us to examine the provisions of the Deed to determine what legal effect it has on the facts to be proved by the Official Assignee under the requirements of ss 194 and 195 of the Act. In this context s 412 of the Act, relied on by the Official Assignee, needs to be considered. That section provides:412 Court may look at real nature of transactionIn considering a transaction, the Court may look at its real nature, and it does not matter that the transaction appears to be, or is described by the parties to it as being, something different.[30] There appears to be limited authority on this provision.22 However, s 412 clearly requires the Court to ascertain the real purpose of the transaction. Any attempt by the parties to dress the transaction up as something other than its practical reality will need to be viewed with considerable caution in an insolvency context.20 Clause 1.1 (definition of "Purchase Price"). See also cl 2.1, which includes a condition (b) of"payment of the Initial Instalment by the Assignee to HFL", and cl 6.1 whereby the agreement by Hanover to assign the Assigned Debt to the Assignee is said to be "in consideration of thepayment of the Purchase Price by the Assignee".21 Clause 1.1 (definition of "Initial Instalment").22 See, for example, Executive Printing (1977) Ltd v Official Assignee HC Auckland B839/81, 14 June 1984; Re Cox (1993) 4 NZBLC 102,967; and Official Assignee v Russell Bay Lodge Ltd[2013] NZHC 1940 at [34].[31] We also refer to the approach to the word "transaction" in a liquidationcontext. Voidable transactions are dealt with under the Companies Act 1993. A transaction is voidable on the application of the liquidator if it meets the criteria set out in s 292 of the Companies Act. When referring to a voidable transaction, theterm "transaction" is wide. It was intended to capture all dealings with companyproperty which have the potential effect of providing a preference to one creditor over another.23 A similar policy is evident in the statutory directive contained in s 412 of the Act.[32] Having considered the evidence and the arguments of the parties, we have no doubt that the payment of the $250,000 initial instalment was made by Mr Krukziener in discharge of a debt he owed to Hanover. While the provisions ofthe Deed purported to suggest it was "payable by or on behalf of the Assignee", thereality was otherwise. These funds were specifically raised by Mr Krukziener from sources available to him.24 Apart from the terms of the Deed there was no other evidence to support a coherent reason for using these funds to discharge a liability of the Assignee to Hanover.[33] The relevance of the substance of the transaction invites consideration of the commercial reality confronting Hanover and the Krukziener entities at the time the Deed was drafted. It is safe to assume that the AK companies had no further assets to call on to meet their obligations to Hanover. Accordingly, Hanover's onlyprospect of a substantial recovery on the debt that was to be assigned was from Mr Krukziener as guarantor of the AK companies. His solvency was questionable, so that any amount he was prepared to pay to forestall bankruptcy would only have value to Hanover if it could be structured in a way that protected Hanover from a claim for repayment in the event that Mr Krukziener was subsequently declared bankrupt. Hanover is likely to have discounted the value of procuring a discontinuance of the proceedings Mr Krukziener had commenced against it in which Hanover had pleaded a counterclaim.25 From Mr Krukziener's perspective, it23 G E Finance and Insurance trading as GE Commercial Finance v Heath [2008] NZCCLR 15 (HC) at [30].24 Namely, Nelson Street Hotel Ltd and Mr Krukziener's parents.25 The proceedings had not proceeded to a hearing in the 20 months since they had been commenced.would have been critical to avoid bankruptcy so, to the extent he could call on other resources, it was worth risking their commitment on the basis he would lose them if the settlement could not be concluded, in order to preserve his chances of avoiding bankruptcy.[34] We are satisfied that the underlying purpose of the payment of $250,000 was to ensure that Mr Krukziener would, in his own words on oath, "avoid bankruptcy". For Hanover's part it was plainly anxious to avoid any risk that such initialinstalment would be able to be challenged as an insolvent transaction if payment of the total consideration under the Deed did not eventuate.[35] We consider that the provisions of the Deed do not achieve that purpose. The reality was that Hanover was seeking to achieve a payment of the initial instalment and any further monthly instalments as occurred before Mr Krukziener's bankruptcy,in circumstances that would provide a preference to Hanover over other creditors. This is apparent from the following features of the Deed. First, cl 7.1 provided that the Assignee undertook the completion obligations for the purchase price there listed.26 On payment of the full purchase price of $700,000 the Assignee would have had the Assigned Debt assigned to it by Hanover.27[36] Second, Hanover was prepared to write off more than $4.1 million of debt, plus accrued interest and costs, owed to it by companies that could not meet those commitments, and by Mr Krukziener as guarantor, for some 16 per cent of the original debt. That heavily discounted amount was payable pursuant to a deed that was designed to minimise the risk of the payment being characterised as a preference should Mr Krukziener pass into bankruptcy. It had been designed about as well as clever drafting could achieve and, had the Official Assignee been bound to respect the form of the transaction, it was a structure that would have worked. However, it cannot withstand an analysis of the substance of the transaction.[37] Third, the Assigned Debt included the debt due by Mr Krukziener to Hanover arising under the summary judgment proceeding and the loan by Hanover to the26 Referred to at [11] above.27 Clause 6.1. Such assignment was subject to fulfilment of certain other conditions of no relevance to the present discussion.KAS Trust.28 However, we infer that the Assigned Debt is likely to have had little value for the Assignee. This is apparent from the fact that in 2005 the AK companies had defaulted on their loan agreements with Hanover.29 On the other hand, Hanover obtained the sum of $250,000 in the face of a looming bankruptcy of Mr Krukziener from funds all sourced by him and in his personal name.[38] Fourth, pending payment of the full amount of the purchase price, Hanover would remain the sole owner of the Assigned Debt. Moreover, under cl 7.2 of the Deed the purchase price was, notwithstanding the occurrence of any termination event or the giving of a termination notice, not refundable either in whole or part.30[39] Although it is not strictly relevant to our assessment of the Deed we note that following payment of the sum of $250,000 there were further instalment payments made in fulfilment of the obligations in cl 7.1(a). After some further payments Mr Krukziener was declared bankrupt. In the meantime Hanover's interests in theDeed had been transferred to Allied Farmers Investments Limited (Allied). That company proved in the bankruptcy of Mr Krukziener for an amount in excess of $5.1 million. The evidence is unclear as to whether Allied has given any credit for the sum of $250,000 or other amounts paid to it.[40] We are satisfied that the Deed, rather than documenting a genuine commercial transaction, was a device entered into by Hanover in an attempt to circumvent the limitation on one creditor obtaining a preference over others in the bankruptcy of Mr Krukziener. The provisions of the Deed providing for payment of the purchase price by the Assignee were merely window dressing. The money did not come from any one of the Assignees. Rather it came, as we have described above, from Mr Krukziener.28 Clause 1.1 (definition of "Assigned Debt"). The Assigned Debt also included all security heldby Hanover for the loan to the KAS Trust and was subject to certain exclusions are not relevant.29 As discussed at [5] above.30 By virtue of cl 10.2 upon the giving of a termination notice to the Assignee and Mr Krukziener the Assigned Debt was immediately due and payable from the Assignee and Mr Krukziener to Hanover. Thereupon Hanover was entitled without further notice to exercise all rights including proceedings to enforce and recover the Assigned Debt from the Assignee or Mr Krukziener.[41] We are satisfied that the provisions of ss 194 and 195 of the Act are met on the facts. The payment of the sum of $250,000 to Hanover amounted to an insolvent transaction. Associate Judge Abbott was correct to set aside payment of that amount.Result[42] The appeal is dismissed.[43] The appellant is to pay the respondent costs on a standard appeal on a band A basis and usual disbursements.Solicitors:Chapman Tripp, Auckland for AppellantMeredith Connell, Auckland for Respondent