SHEN V MANAGH, LIQUIDATOR OF ZEST BISTRO LIMITED (IN LIQUIDATION) HC WN CIV-2004-485-858

SHEN V MANAGH, LIQUIDATOR OF ZEST BISTRO LIMITED (IN LIQUIDATION) HC WN CIV-2004- 485-858 10 May 2006IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2004-485-858UNDER The Companies Act 1993 IN THE MATTER OF the liquidation of ZEST BISTRO LIMITED (In Liquidation) BETWEEN IVY YI WEN SHEN Plaintiff AND JOHN FRANCIS MANAGH, LIQUIDATOR OF ZEST BISTRO LIMITED (IN LIQUIDATION) Defendant Hearing: 22 March and 5 May 2006 Appearances: P.S.J Withnall for Plaintiff B.A. Gibson for Defendant Judgment: 10 May 2006 at 11.00am In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 11.00am on the 10th day of May 2006.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] In these proceedings the plaintiff seeks an order pursuant to s294 Companies Act 1995 that a transaction made prior to the liquidation of Zest Bistro Limited ("Zest Bistro") which the liquidator seeks to set aside is not voidable and should not be set aside. Alternatively the plaintiff seeks relief under s296(3) of the Companies Act 1993 from any order which might be made under s295 of the Act. [2] The application is opposed by the liquidator of Zest Bistro, the defendant.Background Facts[3] Zest Bistro was placed into liquidation on 6 th May 2002. The defendant was appointed as liquidator. [4] For several years prior to its liquidation Zest Bistro operated a restaurant business from leasehold premises at Cuba Street, Wellington. The director and principal shareholder of Zest Bistro was a Mr Robert Lim ("Mr Lim"). [5] It appears that at least by August 2001 the Zest Bistro business had run into significant financial difficulties. It was sold at that time to another company Sati Holdings Limited ("Sati Holdings") under an agreement for sale and purchase dated 13 August 2001. The purchase price was stated as $138,000.00 ascribed as to $1,000.00 to goodwill, $7,000.00 to stock and $130,000.00 to chattels. [6] The principal director and shareholder of Sati Holdings (which company is itself now in liquidation) was the plaintiff. [7] The plaintiff previously had a relationship with and lived with Mr Lim and has deposed that during this time she advanced monies by way of loan to Mr Lim for the use of his business. There seems little argument that these loans when originally made were unsecured. [8] As I have noted, the Zest Bistro business at the time of the sale to Sati Holdings appeared to be in severe financial difficulty. There really seems to be little cogent material before the Court to suggest that the business at that point was anything other than insolvent. It had numerous trade creditors and owed debts to the Inland Revenue Department, to Mr Donald Wu, the company's accountant, and a Mr Hubert Lee. The plaintiff states that this was in addition to the sum of $250,000.00 which she claims the business owed to her. [9] According to Zest Bistro's company records, the company gave a debenture to the Robert Lim Family Trust, a trust effectively operated by Mr Lim as one of the trustees, in about November 1998.[10] On 16 August 2001 this debenture, which purportedly secured indebtedness of $250,000.00 from Zest Bistro to the Robert Lim Family Trust, was assigned to the plaintiff. [11] Some time prior to that, it seems on or about 25 July 2001, Mr Lim on behalf of Zest Bistro signed a handwritten acknowledgement confirming thatZest Bistro Limited (WN853217) has borrowed from Ivy Yi Wen Shen money to the sum of $250,000.00 (two hundred fifty thousand dollars). 1. $170,000 September 1998 – early 2000 (over a period of time) $10,000 May 2001 (accessed from credit card) $8,000 March 2001 (to pay wages) 2. $50,000 December 2000 – Jan 2001 This sum was put into my personal account then into Zest over a period of time 3. $12,000 $4,000 March 1998 $5,000 March 1999 $3,000 February 2001 Deposited into my personal account.[12] Returning to the agreement for sale and purchase of the business between Zest Bistro as vendor and Sati Holdings as purchaser, this document provided for settlement to take place on 13 August 2001, curiously the date of the agreement itself. [13] It seems that settlement did take place around that time. The purchase was settled by the plaintiff making available the sum of $138,000.00 to the purchaser Sati Holdings, and this being given to the solicitor acting for the vendor Zest Bistro. Immediately thereafter the debenture over Zest Holdings was presumably discharged to release its charge from the Zest Bistro assets, and the plaintiff (who had received an assignment of the debenture at that point) received a cheque back for the same figure of $138,000.00, expressed by her to be "for part repayment of debenture".[14] In effect, the plaintiff had received back the very same amount paid for the purchase monies which she in turn, it seems, had borrowed and advanced to her purchaser company Sati Holdings to settle the purchase. [15] The defendant maintains that the transaction was a "sham". The defendant contends that there were no monies owed under the debenture, as there was never any record or evidence of any advance being made to the company Zest Bistro by the Robert Lim Family Trust. No accounts or resolutions of the trustees of the Trust or any other evidence to support the suggestion that Zest Bistro owed the Trust any monies at all, were presented to this Court. Accordingly, the defendant suggests there was nothing, therefore, for the Trust to assign to the plaintiff, and at best if the plaintiff had made loans to the company, these would have remained unsecured. [16] Counsel for the defendant points to the evidence of a Mr Blundell who prepared the debenture on the instructions of Mr Lim, which he says confirms that no monies were advanced through his Trust Account to Zest Bistro from Mr Lim on behalf of the Family Trust, and that he was unaware of any advances. [17] Similarly, a Mr Dennis Lander, the accountant for Zest Bistro, at the operative time also confirms in his evidence that no advances were made through his Trust Account, and further, that he was unaware of any evidence supporting advances said to be made from the Robert Lim Family Trust to Zest Bistro. Indeed, Mr Lander confirms that he only inserted the figure of $250,000.00 as monies owed to the Robert Lim Family Trust as a liability in the company accounts of Zest Bistro on the instructions of Mr Lim himself. Significantly too, as I see it, Mr Lander was himself a co-trustee of the Robert Lim Family Trust throughout the relevant time, he retiring from that position, according to the documents made available to the Court, effective only from 5.00pm on 15 August 2001. One would have expected that as a trustee he would have participated in any decisions if the Trust had been involved in making any substantial loan advances. [18] Turning to the present application before the Court, it is the cheque for $138,000.00 said to be a repayment of the debenture paid to the plaintiff which is in question here.[19] The defendant provided to the plaintiff a notice dated 9 March 2004 under s294 Companies Act stating that this transaction of $138,000.00 was set aside and that he required the plaintiff to repay this sum to the liquidator. [20] The defendant as liquidator had concluded that the payment of $138,000.00 made by Zest Bistro to the plaintiff was a voidable transaction. He took the view that the payment was made at a time when Zest Bistro was unable to pay its debts, and that the payment enabled the plaintiff to receive more than she would have received as a creditor of the company if she had filed a claim in the liquidation. The liquidator also considered that the $138,000.00 payment was not made in the ordinary course of business. [21] The present application by the plaintiff seeks an order that this payment of $138,000.00 sought to be set aside under the notice not be set aside.Counsel's Arguments and My Decision[22] The present application calls into play s292 Companies Act 1993. The relevant parts of this section are as follows:292. Transactions having preferential effect-(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. (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.[23] Here the transaction in question clearly took place within the "specified period" noted in s292(5) Companies Act 1993, being two years before the date of commencement of the liquidation of Zest Bistro. [24] And, there can be no doubt, in my view, that the $138,000.00 payment to the plaintiff made in August 2001 was a transaction made at a time when Zest Bistro was unable to pay its due debts. [25] At the time of this transaction the plaintiff herself acknowledges that Zest Bistro had numerous trade creditors, and it owed debts to the Inland Revenue Department, and also probably to the company accountant and others. The last annual accounts made available for the company show an excess of current liabilities over assets, and the profit and loss appropriation account shows losses for the year ended 31 March 2000 of $135,239.18. [26] In addition, the plaintiff herself claims that Zest Bistro at the time owed her some $250,000.00. She has also given evidence that subsequently through her company Sati Holdings, the purchaser of the business, some $150,000.00- $200,000.00 of past trade debts of Zest Bistro were settled by Sati Holdings post- August 2001. [27] I am satisfied, therefore, that at the time the transaction took place, Zest Bistro was not in a position to pay its debts. This requirement of s292 is therefore satisfied.[28] The next question to be considered is whether the payment of $138,000.00 was made "in the ordinary course of business". If it was, then in terms of s292(2) Companies Act 1993 it is not a voidable transaction. [29] The test of what is "in the ordinary course of business" is an objective one. This is clear from a range of authorities culminating in the decision of the Court of Appeal in Waikato Freight & Storage (1998) Limited v Meltzer [2001] 2 NZLR 541 (CA). [30] From the authorities it appears that two principal matters must be considered: a) The circumstances of the particular transaction at the time at which payment was made; and b) Past patterns of behaviour between the company and the creditor, including their previous dealings, viewed also in the light of customs, practice and the means of doing business in the particular industry in question. [31] Although the onus is on a liquidator to show that the payment in question was not one made in the ordinary course of business (see Wiri Wholesale Timber Company Ltd v Rea and Sargison (unreported, High Court Auckland, CIV-2003- 404-816, Associate Judge Lang, 17 September 2004 at paragraphs [12]-[18])), I have no hesitation in finding in this case that the $138,000.00 payment to the plaintiff was not one made in the ordinary course of business. From the plaintiff's perspective, the payment of $138,000.00 at best was a part repayment of the company's debenture which it was suggested had been assigned at almost the same time to the plaintiff. It was a part repayment made presumably in full settlement of what was claimed to be owing under the debenture to enable the debenture to be released, so that the security held over the assets of Zest Bistro could be discharged on settlement of the sale. [32] In my view there is some considerable doubt over the efficacy of this transaction. Certainly there is no evidence of any past patterns of behaviour betweenthe company Zest Bistro and the plaintiff or previous dealings to show that this was a normal means of their doing business. [33] The $138,000.00 payment to the plaintiff represented the identical amount the plaintiff had made available to her company Sati Holdings to purchase the business from Zest Bistro. No other creditors of the company received anything at the time. There was no usual adjustment on settlement for lease rental or other outgoings. No stock-take or customary adjustment for a final actual stock figure was undertaken. Unusually, settlement was said to be required on the same day that the sale agreement was signed – 13 August 2001. [34] In addition, the extensive documentation prepared it seems by solicitors acting for the parties at the time was confusing and, in my view, in many respects it lacked a sound commercial rationale. [35] The agreement for sale and purchase dated 13 August 2001 provided in usual fashion in clause 4.1.3 that Zest Bistro as vendor would promptly pay all creditors of its business incurred up to possession date (13 August 2001), and then clause 3.2.1 of that agreement inconsistently and rather curiously provided that the purchaser Sati Holdings would itself guarantee payment of those debts. [36] The Assignment of Debenture document (also dated around what seemed to be the actual sale settlement date of 16 August 2001) whereby the Robert Lim Family Trust transferred its interest in the Zest Bistro debenture to the purchaser again contained rather curious provisions. In the recitals clause B the document states:B. The Grantor (Zest Bistro) is indebted to the Assignor (the R. Lim Family Trust) for the amount as stated in the Debenture, through advances made by the Assignee (the plaintiff) to the Assignor (the R. Lim Family Trust) for the benefit of the Grantor (Zest Bistro).[37] In the operative assignment clause, however, the document states:In consideration of the assignee (the plaintiff) agreeing to enter into further arrangements with the assignor (the R. Lim Family Trust) and the grantor (Zest Bistro) for repayment of the debt, the assignor (R. Lim Family Trust) assigns to the assignee (the plaintiff) absolutely all of the assignor's (R. LimFamily Trust) right, title and interest in the debenture granted previously by the grantor (Zest Bistro) to the assignor (the R. Lim Family Trust).[38] No evidence has been placed before the Court of what those "further arrangements with the R. Lim Family Trust" might have been. Presumably the plaintiff might contend that this relates to her claim that over time $250,000.00 had been leant by her through Mr Lim to the R. Lim Family Trust. As I have noted, there is no evidence of this before the Court, however. Indeed, to the contrary, Mr Lim's acknowledgement of 25 July 2001 states that this $250,000.00 was advanced from the plaintiff to Zest Bistro, presumably on an unsecured basis, and was not leant to the R. Lim Family Trust. [39] The further document described as an "Equitable Mortgage of Shares" also signed on 16 August 2001 between Zest Bistro as borrower, the R. Lim Family Trust as covenantor and the plaintiff as lender adds further confusion to this matter. This document purports to evidence a loan arrangement under which Zest Bistro, said to be the holder of 1125 ordinary shares in its own capital creates a charge by way of equitable mortgage over those shares. This is confusing in the extreme. As I see it, none of these matters assist the plaintiff in her claim first, that these are all straightforward transactions and secondly, that the original $250,000.00 unsecured loan was somehow made to the R. Lim Family Trust, and then converted to a secured debenture loan when the Trust assigned the debenture to her in August 2001. [40] Counsel for the defendant went further and contended that these transactions amounted to a "sham". Whether or not this may be the case is not entirely clear here. Suffice to say that there is no doubt in my mind that in terms of s292(2) the $138,000.00 repayment transaction in question was not one made in the ordinary course of business. [41] The third question to be answered is whether the payment of $138,000.00 did result in a preference to the plaintiff. The plaintiff submits that it did not. [42] Whether a transaction has a preferential effect is a matter to be viewed objectively – Ferrier v Civil Aviation Authority (1994) 127 ALR 471. It is clear that under s292 the general body of creditors of the company must be disadvantaged as aresult of the transaction affording preferential treatment to one of their number. In the absence of such detriment, the payment is not voidable – National Bank of New Zealand v Coyle (1999) 8 NZCLC 262, 100. [43] If the $138,000.00 payment had not been made to the plaintiff on 16 August 2001, then that sum would have been theoretically available to meet all creditors. If there were no secured creditors as the defendant contends, then this sum would have been available to meet claims of unsecured creditors on a pro rata basis (subject of course to the claims of any preferential creditors). [44] Here, however, the plaintiff notes that the agreement for sale and purchase of the Zest Bistro business envisaged that her new company Sati Holdings would pay on a progressive basis most of the trade creditors of Zest Bistro. Also, her evidence at paragraph 40 of her Statement of Evidence dated 22 March 2006 stated:Sati paid these suppliers (previous creditors of Zest Bistro)And at paragraph 41:I estimate Sati would have paid between $150,000-$200,000 of the past trade debts of Zest.[45] There appears to be no other evidence before the Court corroborating this claim by the plaintiff. The plaintiff has provided a list of creditors' names said to be settled by Sati Holdings, but she says in her evidence that it was not possible to calculate the amounts paid to each creditor as Zest Bistro debt. What is clear, however, is that any payments of Zest Bistro's past trade creditors following the sale of the business were made by Sati Holdings and not the plaintiff. Nevertheless, the plaintiff contends that her contentions that Sati settled these debts should be accepted given that the defendant liquidator has acknowledged he received no proofs of debt from any of the normal trade creditors of Zest Bistro. [46] It is clear here that the only proofs of debt which apparently were lodged with the defendant as liquidator were from the company accountant Mr Donald Wu, a Mr H. Lee, and the Inland Revenue Department. If general trade creditors had not been settled subsequent to Zest Bistro selling its business, then it seems likely that at least some would have filed appropriate proofs of debt. The financial position of ZestBistro at the time of the sale to Sati Holdings was precarious. It seems likely that Zest Bistro would have had substantial trade debts at that point. [47] The issue arises, therefore, as to whether the general body of creditors of Zest Bistro would have been in a better position had the $138,000.00 payment to the plaintiff not been made. [48] If that had been the case, then, the $138,000.00 from the sale of the business to Sati Holdings would have been available for all Zest Bistro's creditors. And, given that there appears to be no other evidence to establish that secured monies were owed under the debenture, then this $138,000.00 would have been available to be shared amongst all unsecured creditors. [49] Counsel for the plaintiff argued that the creditors who filed proofs of debt were in fact better off because Sati Holdings paid the other trade debts of Zest Bistro subsequent to its purchase of the business. With respect, I believe this argument is flawed. Those payments by Sati Holdings, assuming they were made, were themselves a form of preference. From the defendant's evidence before the Court, it seems the creditors of Zest Bistro who have proved in the liquidation are likely to receive nothing. Had the $138,000.00 found its way into the company's general funds, then those creditors could at least have shared on a pro rata basis with all creditors, and they would presumably have received payment of a portion of their debt. The plaintiff's argument also ignores the position of any preferential creditor with prior claims such as the Inland Revenue Department which appears still to remain unpaid. [50] I find, therefore, that the payment of $138,000.00 did result in a preference to the plaintiff. At the time it was made, she clearly received more towards satisfaction of her unsecured debt than she would otherwise have received or been likely to receive in the liquidation. [51] In summary, therefore, I find that in terms of s292 Companies Act 1993 the $138,000.00 transaction did take place within the specified period, and at a time when the company was unable to pay its debts. I find that the transaction was madeotherwise than in the ordinary course of business, and as I have noted, there can be no question that the transaction enabled another person (the plaintiff) to receive more towards satisfaction of her debt than she would otherwise have been likely to have received in the liquidation pursuant to s292(2)(b). [52] The transaction is therefore voidable on the application of the liquidator pursuant to s292(2) Companies Act 1993. [53] One last matter requires consideration, however. This is section 296(3) Companies Act 1993, which states:296. Additional provisions relating to setting aside transactions and charges – (3) Recovery by the liquidator of property or its equivalent value, whether under section 295 of this Act or any other section of this Act, or under any other enactment, or in equity or otherwise, may be denied wholly or in part if – (a) The person from whom recovery is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside; and (b) In the opinion of the Court, it is inequitable to order recovery or recovery in full. [54] Counsel for the plaintiff accepts that the onus under s296 falls on the plaintiff. [55] There are three requirements to be established under s296(3): (1) Good faith. (2) Alteration of position. (3) Inequity that the Court should in the circumstances order repayment. [56] I will consider each of these requirements in turn.Good Faith[57] This requires that the plaintiff had an honest belief that the $138,000.00 payment received under the debenture did not involve any element of undue preference. [58] At this point I note that the sale of Zest Bistro's business to Sati Holdings was at the same figure of $138,000.00, but I say nothing as to the sufficiency of this as an appropriate price for the business at the time. The transaction here under attack is solely the $138,000.00 purported part repayment of the debenture to the plaintiff. [59] As to this, counsel for the defendant repeated his claim that the complex web of transactions involving the sale of the business to Sati Holdings and the debenture assignment were clearly a sham. [60] This is a serious claim. Although there is no direct evidence before the Court to establish unequivocally that the transactions in question were a sham, many aspects of the complex web of documents prepared and entered into to set up these arrangements appears to me to be of a dubious commercial nature. Counsel for the defendant argued that the entire arrangement smacks of a desire to ensure that the plaintiff in effect paid nothing for the Zest Bistro business, but obtained its assets, was able to carry on the business as a going concern and then ultimately was able to arrange its sale, from the plaintiff's evidence it seems at an agreed sale price of $225,000.00. That Sati Holdings may itself have selectively settled a number of Zest Bistro debts (probably to the detriment of Sati's own creditors given its later descent into liquidation) adds some complication to the mix. But on the plaintiff's own evidence, these were debts cleared by Sati Holdings and not by her. [61] Under all the circumstances prevailing here, it is hard to see how the plaintiff had an honest belief that the transaction in question did not involve any element of undue preference. [62] As I have noted, the fact that Sati Holdings at a later time may have chosen to clear a range of Zest Bistro's unsecured creditors was a matter for it. Whether it mayhave done so on the basis of legal advice provided to it or not is unclear. There can be no doubt that it chose to clear some creditors and not others. Claims by the Inland Revenue Department, Mr Wu and Mr Lee it seems were ignored. [63] I find, therefore, that the plaintiff has been unable to establish good faith on her part in terms of s296.Alteration of Position[64] Although given my finding above, strictly speaking I do not need to deal with this aspect, I think it is arguable that Sati Holdings may well have altered its position as part of the overall transaction by paying past trade debts of Zest Bistro. As I see it, this does not, however, amount to an alteration of position by the plaintiff herself. In my view, there is no evidence before the Court sufficient to meet the onus on the plaintiff to show that she had altered her position in any way when receiving the $138,000.00 payment. Where those monies may have gone has not been disclosed.Inequity that the Court should in the circumstances order repayment[65] In my view, this is not a case where it would be "inequitable to order recovery or recovery in full" of the $138,000.00 paid to the plaintiff here. A major aspect of the plaintiff's complaint, as I understand it, is that in reliance on this transaction, her company Sati Holdings funded repayment of a substantial number of Zest Bistro's trade creditors. [66] As I have noted above, assuming that this is the case, then it seems to me that Sati Holdings would have been able to prove in the subsequent liquidation of Zest Bistro as an unsecured creditor for those trade debts. In my view, this is what should have happened here. It did not. [67] Further, the plaintiff, who at best was an unsecured creditor probably of Zest Bistro (assuming of course that her advances were made to the company rather thanto Mr Lim personally) could also herself have filed a proof of debt in the liquidation of that company. [68] In this event, then all those parties as unsecured creditors of Zest Bistro would have shared in the $138,000.00 settlement payment for the business along with the Inland Revenue Department, Mr Wu and Mr Lee upon a proper basis. [69] That this did not occur was solely as a result of the complex web of arrangements put in place, it seems, by the legal advisers acting for the parties. [70] I find, therefore, that s296(3) does not assist the plaintiff in the circumstances prevailing here.Conclusion[71] It follows that an order setting aside the $138,000.00 payment transaction to the plaintiff is to be made pursuant to s294 Companies Act 1993. [72] An order is now made that the plaintiff is within 5 working days of the date of this judgment to pay to the defendant as liquidator of Zest Bistro Limited the sum of $138,000.00, together with interest in accordance with the Judicature Act 1908 from the date upon which the Notice was served upon the plaintiff. [73] As to costs, these should follow the event. The defendant liquidator, therefore, is entitled to costs against the plaintiff, which I order on a category 2B basis, together with disbursements, if any, as fixed by the Registrar. _______________________________Associate Judge D.I. GendallSolicitors:Paul Cheng & Co, Wellington for Plaintiff B.A. Gibson, Solicitor, Wellington for Defendant