BURGESS and YOUNG v THE RAINDANCE COMPANY NEW ZEALAND LIMITED [2013] NZHC 2738

BURGESS and YOUNG v THE RAINDANCE COMPANY NEW ZEALAND LIMITED [2013] NZHC 2738 [21 October 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2012-404-3954[2013] NZHC 2738UNDER the Companies Act 1993IN THE MATTER OF the liquidation of ADVOCATEADVERTISING LIMITEDBETWEEN RAYMOND GORDON BURGESS andCRAIG ANDREW YOUNGApplicantsAND THE RAINDANCE COMPANY NEWZEALAND LIMITEDRespondentHearing: 22 July 2013Appearances: J McDonald for ApplicantP Johnson for RespondentJudgment: 21 October 2013JUDGMENT OF ASSOCIATE JUDGE BELLThis judgment was delivered by me on 21 October 2013 at 3:00pmpursuant to Rule 11.5 of the High Court Rules....................................Registrar/Deputy RegistrarSolicitors:Short & Partners, Auckland, for ApplicantClearwater & Associates, Auckland, for Respondent[1] This is a voidable transaction claim. The applicants are the current liquidators of Advocate Advertising Ltd. That company was incorporated on 1 May 2008, and went into liquidation on 7 May 2013 by shareholders' resolution. Theoriginal liquidator was replaced on 29 October 2010.[2] Advocate Advertising Ltd was an advertising agency. The respondent, The Raindance Company NZ Ltd, provided services to it as an independent contractor. The transactions which the liquidators wish to set aside are five payments amounting to $33,227.90 for services that The Raindance Company NZ Ltd had provided to Advocate Advertising Ltd in the six months before liquidation. This table shows Raindance's invoices from November 2009 to March 2010 and the payments forthose invoices:Invoice No. Invoice Date Amount of payment Date of payment854 25 November 2009 $7,013.25 26 November 2009857 20 December 2009 $7,013.25 21 December 2009904 20 January 2010 $7,013.25 28 January 2010914 24 February 2010 $7,013.25 25 February 2010917 24 March 2010 $5,102.90 23 March 2010[3] Before the first of these invoices was sent, Advocate Advertising had paid allRaindance's earlier invoices in full and on time. At the end of these invoices, Raindance had been paid in full. Each of the invoices charged for services provided during the month in which the invoice was sent. In every case The Raindance Company NZ Ltd received payment during the same month as it provided the services for which it had invoiced.[4] The liquidators gave an appropriate setting aside notice under s 294 of the Companies Act 1993. It is common ground that the respondent gave a notice of objection under s 294(3) although the notice of objection was not put in evidence.[5] The main issues are:(a) Was Advocate Advertising Ltd insolvent at the time of the payments to The Raindance Company NZ Ltd?(b) Did the payments enable The Raindance Company NZ Ltd to receive more than it would in the actual liquidation?(c) Does The Raindance Company NZ Ltd have a defence under s 296 of the Companies Act?Background[6] The directors of Advocate Advertising Ltd were Helma Mitchell and Tony Richards. They incorporated Advocate Advertising Ltd to purchase and carry on an advertising business. The purchase price was $1,750,000, but that price was subject to adjustment depending on the earnings of the business for the two-and-a-half years following the purchase.[7] The vendor of the business was itself called Advocate Advertising Ltd, but after settlement changed its name to Punter Management Ltd.[8] The new Advocate Advertising Ltd paid Punter a deposit of $60,000 and $540,000 on settlement. It was required to pay the balance of the price by quarterly instalments of $100,000 each up to December 2010, together with a final payment of $150,000. The agreement for sale and purchase provided for Punter to require payment in full upon any default in payment by Advocate Advertising Ltd, but that provision was in turn subject to the provision for adjustment of the price on account of fluctuations in earnings following settlement.[9] Advocate Advertising Ltd paid the $600,000 payable by settlement and the first quarterly instalment of $100,000 on 30 September 2008, but did not pay the second quarterly instalment of $100,000 due on 31 December 2008 and did not make any further payments for the purchase of the business.[10] Punter Management Ltd sued Advocate Advertising Ltd and its directors for the unpaid purchase price of $1,050,000.1 Associate Judge Abbott found for Punter Management on liability, but not on quantum, leaving that to be decided at trial. Punter Management Ltd and the directors of Advocate Advertising Ltd have apparently entered into a settlement, but the terms are said to be confidential and have not been disclosed in this proceeding. Punter Management Ltd has not claimed in the liquidation.[11] The people behind Punter Management Ltd, including Mr Ian Shaw, Mr Ari Hallenburg and Mr David McAra, provided advertising services to Advocate Advertising Ltd after the sale of the advertising business. They worked as independent contractors and billed for their work. The way that Advocate Advertising Ltd dealt with their bills is relevant to how much The Raindance Company NZ Ltd knew about the financial position of Advocate Advertising Ltd.[12] Ms Mitchell and Mr Richards incorporated another company on 6 April 2009, Advocate Advertising & Media Ltd. The explanation given for this company was that it was established as the entity to be credited with earnings for new business, that is, earnings that were not attributable to the old advertising business and that did not have to be brought into account in calculating adjustments to the purchase price under the agreement with Punter Management Ltd. The liquidators do not necessarily accept that explanation. They pointed out that the earning streams could be accounted for separately without the need for a second company. They condemn the second company as a phoenix company. It is not clear that in using that term they intend the provisions of ss 386A–386F of the Companies Act to apply. Advocate Advertising & Media Ltd is apparently still trading.1 Punter Management Ltd v Advocate Advertising Ltd HC Auckland CIV-2009-404-2233, 25 June 2010, Associate Judge Abbott.[13] Ms Mitchell and Mr Richards also had another company, MediaR Ltd. Through that company they advanced funds to Advocate Advertising Ltd. At 31 March 2009 Advocate Advertising Ltd owed MediaR Ltd $1,400,197.00. MediaR Ltd claimed in the liquidation for $834,336. MediaR Ltd has security for its debt under a general security agreement registered under the Personal Property Securities Act 1999. So far the liquidators have not decided whether to challenge the security.[14] A statement of affairs by the liquidators shows the estimated realisable value of assets as $71,268. There is a shortfall for MediaR Ltd as a secured creditor for $834,336. There is one preferential creditor, the Commissioner of Inland Revenue, for $5,330. Unsecured creditors come to $1,241,933.46. That sum includes provision for Punter Management Ltd of $1,050,000. The statement of affairs records that the company disputed that debt.[15] Alan Houghton and his wife are the directors and shareholders of The Raindance Company NZ Ltd. The company is the vehicle through which Mr Houghton offers services to the advertising industry. Advocate Advertising Ltd was one of the advertising agencies Mr Houghton worked for. The Raindance Company NZ Ltd invoiced Advocate Advertising Ltd from June 2008 to March 2010 for Mr Houghton's services for a total of $147,580.90 including GST. Every invoicewas paid in full and on time. Advocate Advertising Ltd was never in arrears. The Raindance Company NZ Ltd has not claimed as a creditor in the liquidation.[16] Mr Houghton described himself as a marketing and advertising contractor. His evidence was that his role at Advocate Advertising Ltd initially was assimilating the business purchased from Punter Management Ltd and later he was involved primarily as an administrator responsible for sales, production and billing. He called it a sales managerial role. It included seeing that budgets were met.[17] The contractual arrangements between Advocate Advertising Ltd and Raindance were loose. There was no formal written contract. Mr Houghton charged for the time he worked for Advocate Advertising Ltd. It was not full time work. The arrangements were effectively terminable at will by either side.[18] Mr Houghton was styled the Group General Manager. The liquidators claim that by virtue of his role he was a de facto director and had an intimate knowledge ofthe company's affairs, especially its financial position. That claim is relevant to Raindance's defence under s 296(3). It will be considered more fully at that part ofthe judgment.Was Advocate Advertising Ltd insolvent at the time of the payments to The Raindance Company NZ Ltd?[19] The payments in issue are the last five payments to The Raindance Company NZ Ltd. As they were all made within the six months before the shareholders resolved to put the company into liquidation, there is a presumption under s 292(4A) of the Companies Act that the company was unable to pay its due debts at the times of those payments. The Raindance Company NZ Ltd has the onus of showing that the company was not insolvent at those times.[20] The basis for Raindance Company NZ Ltd's argument that AdvocateAdvertising Ltd was solvent is that the company was generally meeting its liabilities to its trade creditors regularly up until liquidation. It referred to a schedule of accounts receivable prepared for the liquidation which showed unpaid trade creditors plus Accident Compensation and the Inland Revenue totalling $213,747.16. Mr Houghton said that there were good reasons for not paying those accounts which had nothing to do with insolvency. Mr Houghton was able to refer to some of the accounts and to suggest that those creditors had not been paid because the account was disputed, there was no purchase order, the transaction had not been authorised before or had not been approved for payment. He considered that the amountsunpaid were trivial in relation to the company's total billings. Few of the accountshad been outstanding earlier than November 2009.[21] Mr Houghton's evidence did not cover all the accounts in the schedule. He did not suggest that the debts to the Inland Revenue ($9,584.29) or Accident Compensation ($2,932.73) were disputable.[22] This focus on the accounts receivable fails to take into account a larger picture. On an inquiry in a voidable transaction case whether a company is able topay its debts, it is normal to follow the test set out by Richardson J in Re Northridge Properties Ltd (in liq):2(a) The ability of the company to pay debts is concerned with the position of the debtor at the time when the charge or payment is made or other specified act took place. The concern is with the present.(b) In considering the present position regard may properly be had to the recent past – relevant to this is whether the debtor has in recent weeks been unable to pay debts as they become due;(c) In determining the ability to meet debts as they become due, account must be taken of outstanding debts;(d) The words "as they become due" mean, as they legally become due;(e) The reference to "payment from his own money" has not beeninterpreted strictly to require a debtor to keep sufficient cash on hand at all times for that purpose. It is a matter of striking a balance. It is not a matter of simply measuring assets against liabilities, and it is not a matter of whether given sufficient time assets could be realised and debts paid;(f) The section is concerned with solvency, so there must be a substantial element of immediacy in the ability to provide cash from non cash assets;(g) If, as is well established, convertibility to cash from non-cash assets on hand may be taken into account in determining solvency, so too must debts becoming due while that conversion takes place.Moreover, the words "as they become due" involve consideration of a debtor's position over a period not an instant of time;2 Re Northridge Properties Ltd (in liq) SC Auckland M46/75, 13 December 1977.(h) The test of insolvency is an objective one.[23] The legislation in that case said "payment from its own money". "From its own money" does not appear in s 292. Even under the old legislation the companywas not required to keep cash in hand.3 The courts have recognised that a company may maintain solvency by recourse to borrowed funds, provided that the borrowing is on deferred terms or that the lender is not a creditor whose debt cannot be repaid when it becomes due and payable.4[24] Financial statements prepared for Advocate Advertising Ltd describe the financial position of the company in the two years before the payments in this case. The financial statements for the year ending 31 March 2009 were prepared by independent chartered accountants. For that year the company made a loss of $192,930. There was a working capital deficit of $879,416.5 There was negative equity. The financial statements also recorded the liability to Punter Management Ltd as an unsecured loan, with a note that it was unpaid at balance date but was disputed. MediaR Ltd was a creditor for $757,774. Advocate Advertising Ltd was only able to keep trading because the directors were willing to support the company by advancing funds through MediaR Ltd.[25] The liquidators say that the sum of $757,774 understates the amount actually due to MediaR Ltd. They refer to a reconciliation of payables prepared by the accountants which shows that MediaR Ltd was owed a further sum of $642,423, so that the total owed to it was $1,400,197.[26] Financial statements were also prepared for the year ending 31 March 2010, but not by independent chartered accountants. There was no submission that the 2010 statements could not be relied on. They show a loss of $110,908. There was a working capital deficit of $976,644. The negative equity had grown larger. MediaR Ltd was a creditor for $864,319. The liquidators make the point that during that yearthe directors had reduced the company's indebtedness to MediaR Ltd – a matter of3 Bank of Australasia v Hall (1907) 4 CLR 1,514 at 1,543 per Isaacs J.4 Lewis v Doran [2005] NSWCA 243, (2005) 219 ALR 555 per Giles JA at [107]–[109].5 Current assets of $738,720 and current liabilities of $1,618,136.advantage to the directors. It also shows that the directors were withdrawing their support from the company.[27] In December 2008 Advocate Advertising Ltd had defaulted in paying Punter Management Ltd the instalment of $100,000 and did not pay any more instalments. I find that the reason for these defaults was that Advocate Advertising Ltd did not have the funds to make those payments. In part that inability arose because the directors were not prepared to allow funds from MediaR Ltd to be used for those instalments, rather than to meet other current liabilities. That unwillingness is likely to have been because they considered that Punter Management Ltd had misrepresented the business to them. Even so, the ongoing failure to meet these instalments is evidence of inability to pay debts that had fallen due.[28] I find that even before March 2009, Advocate Advertising Ltd was not able to pay its due debts. It was in default under the loan agreement with Punter Management Ltd from December 2008 and never remedied its defaults. It was able to continue in business as long as it did only because it had ongoing funding from MediaR Ltd but that was gradually withdrawn. MediaR Ltd was not to be an ongoing source of funding. In the six months before liquidation started Advocate Advertising Ltd did not have cash in hand to meet all its ongoing liabilities and did not have arrangements in place that would ensure that it would be able to repay MediaR Ltd, its funder. The Raindance Company NZ Ltd has not shown that Advocate Advertising Ltd was able to meet its due debts at the times it was paid in the six months before liquidation.Did the payments enable The Raindance Company NZ Ltd to receive more than it would in the actual liquidation?[29] The Raindance Company NZ Ltd submits that the course of conduct between it and Advocate Advertising Ltd was such that Advocate Advertising Ltd obtained value for the services provided and it received no preference over other creditors. It bases its argument on a continuing business relationship under s 292(4B) of the Companies Act:(4B) Where—(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties); and(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;then—(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and(d) the transaction referred to in paragraph (a) may only be taken to be an insolvent transaction voidable by the liquidator if the effect of applying subsection (1) in accordance with paragraph (c) is that the single transaction referred to in paragraph (c) is taken to be an insolvent transaction voidable by the liquidator.[30] Section 292(4B) of the Companies Act is intended to codify case law that had been developed in Australia as to running account cases. Some of the more significant running account cases are: S Richards & Co Ltd v Lloyd, Richardson v Commercial Banking Company of Sydney Ltd, Rees v Bank of New South Wales,Queensland Bacon Pty Ltd v Rees, Airservices Australia v Ferrier.6[31] In cases of running accounts between a creditor and a debtor the Australian courts held that individual payments could not be considered in isolation to establish whether they were a preference. Instead, they were considered as part of a wider transaction if payments were made, not only to discharge past indebtedness, but also in consideration of future supplies by the creditor. Then the creditor could not be considered to be receiving a preference, to the extent that the creditor provided further value to the debtor by future supplies. In Rees v Bank of New South Walesthe High Court of Australia said:76 S Richards & Co Ltd v Lloyd (1933) 49 CLR 49; Richardson v Commercial Banking Company of Sydney Ltd (1952) 85 CLR 110; Rees v Bank of New South Wales (1964) 111 CLR 210;Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266; and Airservices Australia v Ferrier(1996) 185 CLR 483.7 Richardson v Commercial Banking Company of Sydney Ltd (1952) 85 CLR 110 at 133.A debtor who pays something off his grocer's account in order to induce theshopkeeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries, he would in the end be in exactly the same position yet he could not be attacked as having received a preference.[32] In Airservices Australia v Ferrier, the majority (Dawson, Gaudron and McHugh JJ) expressed the matter more fully:8If a payment is part of a wider transaction or a "running account" betweenthe debtor and the creditor, the purpose for which the payment was made and received will usually determine whether the payment has the effect of giving the creditor a preference, priority or advantage over other creditors. If the sole purpose of the payment is to discharge an existing debt, the effect of the payment is to give the creditor a preference over other creditors unless the debtor is able to pay all of his or her debts as they fall due. But if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness, the payment will not be a preference unless the payment exceeds the value of the goods or services acquired. In such a case a court, exercising jurisdiction under section 122 of the Bankruptcy Act, looks to the ultimate effect of the transaction. Whether the payment is or is not a preference has to be"decided not by considering its immediate effect only but by consideringwhat effect it ultimately produced in fact".As a consequence, a payment made during the six month period cannot be viewed in isolation from the general course of dealing between the creditor and the debtor before, during and after that period. Resort must be had to the business purpose in context of the payment to determine whether it gives the creditor a preference over other creditors. To have the effect of giving the creditor a preference, priority or advantage over other creditors, the payment must ultimately result in a decrease in the net value of the assets that are available to meet the competing demands of the other creditors.Thus, where the payment is a step in a wider transaction, "its actual businesscharacter must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot beisolated and construed as a preference". If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off, and where the value of the assets has increased, they are actually better off. Thus, a debtor does not prefer a creditor to the other creditors if he or she pays a debt, or part of it, to induce the creditor to supply goods of equal or greater value than the amount of the payment. In that situation, it is of no relevance that the debt which is discharged happens to be a stale one. If the present value of the goods supplied is equal to or greater than the payment, the other creditors are no worse off. They are in the same position that they would have been if the parties had so structured the transaction that the8 Airservices Australia v Ferrier (1996) 185 CLR 483 at 501–503.debtor paid for the new supply of goods instead of discharging the old debt. ...[33] Under s 292(4B) the statutory codification of this case law requires all transactions forming part of a continuing business relationship to be treated as if theytogether constituted a single transaction. It is to be remembered that "transaction" ins 292(3) includes both payments (subcl (e)) and incurring an obligation (subcl (c)). In a continuing business relationship, liabilities incurred in ordering goods and services and payments on account of those goods or services are both transactions which may be set off against each other to determine the ultimate effect. It is only if the ultimate effect is to confer on the creditor more than it has supplied by way of further goods or services, so that there is a net reduction in the indebtedness to that creditor, that the creditor is to be considered to have received a preference under s 292(2)(b).[34] The liquidators object that this is not a case under s 292(4B) because there was no fluctuating balance under s 292(4B)(b). The objection is sound up to a point. At the beginning of each month Advocate Advertising Ltd owed Raindance nothing and the position was the same at the end of that month. For all practical purposes, Advocate Advertising paid Raindance on being invoiced.9 To claim that Raindance was momentarily a creditor between the time it issued its invoice and the time it was paid ignores the fact that each invoice was for services provided in the month of the invoice. The services and the payments for them overlapped.[35] While there was no fluctuating balance of account to bring the payments within s 292(4B) so as to allow all the transactions to be treated as one, this does not complete the inquiry whether the payments gave rise to a preference. It is necessary to come back to the fact that throughout Advocate Advertising Ltd paid for services as they were being provided. The result was that:9 See Ormiston JA in V R Dye & Co v Peninsula Hotels Pty Ltd [1999] 3 VR 201 (VSCA) at[37]: "In each case the court is obliged to look at the transactions between the parties in amanner which accords with the commercial realities." Cited with approval by the SupremeCourt in Trans Otway Ltd v Shephard [2005] NZSC 76, [2006] 2 NZLR 289 at [9]. See alsoFarrell v Fences & Kerbs Ltd [2013] NZCA 91, [2013] 3 NZLR 82 at [90]: "A realisticcommercial approach is required to make the legislation work."(a) Raindance was not at any time a creditor of Advocate Advertising Ltd in the sense that there was any outstanding debt;(b) It provided value to the amount of each payment at the time that it was paid; and(c) There were simultaneous transactions under s 292(3); Advocate Advertising Ltd incurred an obligation under (c) to pay for services it received at the same time as it paid under (e).[36] In Australia it is well established that a cash on delivery transaction does not give rise to a preference. In Airservices Australia v Ferrier Toohey J said:10Because the section speaks of payment to a "creditor", the payment must be in respect of a debt. A contemporaneous payment for goods or services is not a payment to a creditor. In Robertson v Grigg Dixon J commented: "[N]othing can amount to a preference unless the person preferred is a creditor." And, as is made clear by Dixon J, the fact that there is past indebtedness will not affect a payment made in return for contemporaneous goods or services...If, however, the payment is in truth a prepayment for goods or services to be provided later, the payment does not constitute a preference, any more than a COD payment for goods to be delivered amounts to a preference.[37] In V R Dye & Co v Peninsula Hotels Pty Ltd, Ormiston JA referred to earlier legislation and said:11The words of the earlier section, though not importing intent, connoted unfairness in that they required an inquiry as to whether there was shown tohave been the "giving" of a "preference", "priority" or "advantage" effected by the disposition in question. That is why, in my opinion, C.O.D. transactions and payments in the course of a running account were accepted as not being voidable under that section. Doubtless if such payments had been or are now to be set aside the recipients would be relegated to proof in the winding up and would thereby receive less than they had earlier received. The recipients would have to be treated as unsecured creditors because the avoidance of the payments or other dispositions would not consequently result in the return of the consideration, the goods (possible) or the services (impossible), for it is not the whole contractual transaction which has been set aside.10 At 516–517. Toohey J dissented but there is no suggestion that other members of the court took issue with this part of his judgment.11 At [30]–[31].Yet it has been accepted for many years that a disposition in favour of such a recipient will not be avoided ... Largely that would seem to have flowed from the fact that an equivalent benefit was received by the insolvent company or individual. (In the C.O.D. cases the recipient was also held not to be a creditor at the relevant time.) In truth it was the element of"unfairness" which was seen not to be present, because the benefits alsoreceived by the insolvent denied the payments etc, the character of being a"preference, priority or disadvantage" of the kind which the legislature was seeking to strike down...[38] He also set out this policy justification:12... there has been recognised the necessity of ensuring that a company facing winding up must have some capacity to live out and possibly survive its feared fate. It is in the interests of the body of unsecured creditors that there should remain a business which can be sold as a going concern, so long as its liabilities are not increased in the mean time. So it has been accepted for many years that, as long as the company does not pay out existing creditors without obtaining an effective corresponding advantage, then it should be allowed to acquire goods and services by pre-payment or on cash on deliveryterms. The rationale behind the "exception" (more precisely, the non- inclusion within the general rule) is that the company gains goods and services to an equivalent value (in broad terms) to that which it pays out to obtain them, so that the existing creditors cannot in theory be prejudiced by the payment.[39] That case considered the voidable transaction provisions of the Corporations Law, which enacted the statutory codification of the running account cases,13 which has been adopted in New Zealand as s 292(4B). Ormiston JA inferred that as Parliament intended to keep the qualification applying to running account payments, the other exceptions (pre-payments and C.O.D.) were also intended to apply. They had in common this factor identified by the majority in Airservices Australia:14If the purpose of a payment is to secure an asset or assets of equal or greater value, the payee receives no advantage over other creditors. The other creditors are no worse off and, where the value of the assets has increased, they are actually better off.[40] Those considerations that weighed with the Australian courts also apply to the voidable transaction provisions of our Companies Act. In NZ Associated Refrigerated Food Distributors Ltd v Pierce, Panckhurst J said that a debt in s 292 means an existing or antecedent debt.15 A transaction that does not improve the12 At [35].13 Corporations Law, s 588FA(3).14 At 502.15 NZ Associated Refrigerated Food Distributors Ltd v Pierce (2000) 8 NZCLC 262,186 (HC) at 262,191.liquidation position of an existing creditor is not within s 292. A cash on delivery transaction does not make the supplier a creditor because there is no existing or antecedent debt. In such a transaction value is given at the same time as the payment and there is therefore no loss to other creditors. Just as the enactment of s 292(4B) shows that the provision of future value by a creditor is to be taken into account, it is consistent with that provision that the provision of value at the same time as apayment should also be taken into account. Ormiston JA's explanation in V R Dye & Co v Peninsula Hotels Pty Ltd is equally applicable in New Zealand. It would be anomalous to treat a cash on delivery transaction differently from a pre-payment or a running account case. Heath and Whale on Insolvency suggests that they should be treated alike:16Where a prepayment is made in accordance with an underlying agreement a debtor/creditor relationship does not exist between the parties. It is, therefore, unlikely that a preference will be found to be given when the company makes allowance for, or gives effect to, a prepayment. Similarly, payments made against the delivery of goods on a cash on delivery basis will not give rise to a debtor/creditor relationship, nor will a person taking security from the company for a loan, where the security is given at time of entering the loan agreement or shortly thereafter. In both instances, the transactions do not fall in the existing debtor/creditor nexus, nor does the effect of the transaction result in a preference by diminishing the pool of available assets to creditors.[41] This case falls within the cash on delivery cases. It makes no difference in principle that services, not goods, were supplied and that each month the supply of services straddled payments. Raindance gave value to Advocate Advertising Ltd as it was paid. At no time were there relevant antecedent debts. Raindance did not become a creditor under s 292. It therefore did not receive more towards satisfaction of a debt than it would receive in the liquidation. It would be wrong to take into account only the payments to it while ignoring the services it provided at the same time. Accordingly, none of the payments in this case are insolvent transactions under s 292(2).[42] The liquidators accept that a cash on delivery transaction takes a payment outside s 292. But they say that this case is not within the exception because:16 Heath and Whale on Insolvency (2013, online ed) at [24.47].(a) There was no contemporaneous exchange of money for services;(b) The final payment does not come within the exception; and(c) The exception does not apply when the person providing the services knows the company is insolvent.[43] On the first, the liquidators' argument is that payments were in arrears, that is,they were not made until Raindance had issued an invoice. Raindance supplied its services ahead of its invoices. Once the invoice was issued there was a state of indebtedness between the parties for those services and the subsequent payment went towards satisfying that indebtedness. Accordingly Raindance was a creditor under s 292. The argument also ran that there could be no inducement for further services, but that aspect tends to blur payments under s 292(4B) – payments under a running account – with payments for contemporaneous services.[44] As a matter of detail, in one case, the last payment, the invoice is dated the day after the payment. That may be a pre-payment. As to all the payments it is necessary to come back to the point that it is necessary to consider the matter in the light of commercial realities. Even if each invoice charged only for work that had been carried out and not for any work still to be done, that does not change the nature of the transaction under s 292. In cash on delivery transactions the person providing the goods or services may require time to deliver or delivery could be extended over a period. While payment is made on completion of delivery, that does not change the fact that supply and payment are contemporaneous. In this case as Raindance invoiced Advocate Advertising Ltd each month for Mr Houghton'sservices in that month, the payments were close enough to the invoices to be considered contemporaneous.[45] On the second, the liquidators are relying on decisions under s 292(4B) where a final payment was held not to be for the future supply of goods or services.17Those findings were specific to those cases. Of course it will often happen in17 Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189 and Re Employ (No 96) Pty Ltd (2013) 93 ACSR 48 (NSWSC) at [54]–[56].running account cases that by the time of later payments the creditor may have given up any idea of continuing to deal with the company, but there is no universal rule that in running account cases, the last payment must be excluded. This is not a running account case, but a cash on delivery case. Payment was made for the contemporaneous supply of services, not for the future supply of services. Besides, on the facts in this case Mr Houghton did more work for Advocate Advertising Ltd after the final payment without being paid for it.18[46] On the third, the test for preference under s 292(2)(b) is effects-based. Intention is irrelevant. Accordingly it has not been necessary to inquire as toAdvocate's intentions in paying Raindance or as to Raindance's understanding of Advocate's financial position at the time of the payments. The liquidators'submission was based on running accounts: a continuing business relationship mustend once a creditor knows of the company's insolvency. In Blanchett v McEntee Hire Holdings Ltd, Associate Judge Christiansen noted a divergence of views in the Australian case law.19 The matter is discussed in "Continuing Business Relationships — Eight Questions in Search of an Answer".20 It says:Even if the creditor provided goods or services to the company knowing it was insolvent and suspecting that the relationship would soon end, the company and its creditors have still benefited from this provision, and the creditor should not be punished by having to return a greater amount than that by which it has in fact diminished the assets of the insolvent.[47] Similarly in Rothmans Exports Pty Ltd v Mistmorn Pty Ltd Santow J said:21I should add that a payment may be received under such a running account with knowledge of the insolvency of the payer, without that fact of itself necessarily leading to the termination of the running account or the continuing business relationship thereby exemplified.[48] I gratefully agree with that approach. It applies equally in the case of contemporaneous supplies. Although I find later that Mr Houghton knew that Advocate Advertising Ltd was insolvent, that does not prevent him showing that the company received value for the services provided at the same time it paid for them.18 Notes of evidence, page 51.19 Blanchett v McEntee Hire Holdings Ltd (2010) 10 NZCLC 264,763 (HC).20 Hal Bolitho "Continuing Business Relationships — Eight Questions in Search of an Answer"(1998) 16 CSLJ 584 at 593–594.21 Rothmans Exports Pty Ltd v Mistmorn Pty Ltd (1994) 12 ACLC 936 (NSWSC) at 946.Does Raindance have a defence under s 296(3)?[49] As I have held that the payments were not insolvent transactions, the power to set aside under s 294 has not arisen. It is therefore strictly not necessary toconsider Raindance's defence under s 296(3), but I do so, in case I am held to bewrong in not setting aside the payments.[50] Section 296(3) says:(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—(a) A acted in good faith; and(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.[51] Raindance is required to make out all three grounds under subsection (3). If it does make out all three grounds, the court must not order to make any payment –the court has no discretion.Good faith[52] In Levin v Market Square Trust the Court of Appeal said:22The first matter the trust must establish, therefore, is that it received theproperty in good faith. The test of "good faith" has been clearly establishedby this court. The recipient of the property or money must 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 (Re Orbit Electronics Auckland Ltd (In Liq) approved in Re Number One Men Ltd (In Liq).23 The cases show that a creditor is likely to fail this test where he or shehas actual or implied knowledge of the company's financial difficulties, due to the company's cheques being dishonoured, its failure to pay its debts on time, or of the circumstances indicating serious cash flow problems.22 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [54].23 Re Orbit Electronics Auckland Ltd (In Liq) (1989) 4 NZCLC 65,170; Re Number One Men Ltd (In Liq) (2001) 9 NZCLC 262,671.[53] That case was decided under a version of s 296(3) in force between 1 July 1994 and 31 October 2007. That version of s 296(3) gave the court a discretion to decline relief in full or in part, if the court considered it inequitable to order recoveryin full if "the person from whom property is sought received the property in goodfaith 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".[54] The good faith requirement in (a) goes to the recipient's honesty in his orbelief that the transaction did not involve any element of preference. In Royal Brunei Airlines Sdn Bhd v Tan,24 Lord Nicholls famously explained dishonesty in the context of accessory liability for breach of trust. He noted that acting dishonestly is not acting as an honest person would in the circumstances, and that that was an objective standard. He said:25Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Careless is not dishonesty. Thus for the most part dishonesty is to be equated with a conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. ...[55] That offers helpful guidance when considering "good faith" under s 296(3).Because carelessness is not a component of dishonesty, it is important to avoid imputing absence of good faith to a recipient on the basis of what they ought to have known, rather than what they actually knew.[56] In this case I am satisfied that Mr Houghton honestly believed that the payments to Raindance would not be set aside. I have held that the payments cannot be set aside, because Raindance gave commensurate value at the times of the payments. It was not dishonest for Raindance to do business with Advocate Advertising Ltd on that basis.24 Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC).25 At 389.No reasonable suspicion of insolvency[57] In this context, it is standard to refer to the dicta of Kitto J in Queensland Bacon Pty Ltd v Rees:26A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of apprehension or mistrust,amounting to "a slight opinion, but without sufficient evidence" asChambers' Dictionary expresses it. Consequently a reason to suspect a fact exists is more than a reason to consider or look into the possibility of itsexistence. The notion which "reason to suspect" expresses ... is, I think, ofsomething which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes – a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. ...[58] It is also important to note that Kitto J warned against too ready an assumption of insolvency:27In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of ringing the last ounce of credit out of everyone who can be fobbed off with promises.[59] Kitto J found on the facts of that case that the dishonour of a number of cheques did not create the requisite feeling of apprehension or mistrust.[60] In Hamilton v Commonwealth Bank of Australia Hodgson J said:28I accept that Queensland Bacon shows that it is insufficient that the circumstances give a reason to suspect the debtor might be insolvent: they must be such that the creditor should have suspected that the debtor wasinsolvent . . .[61] In the general run of cases, the court is required to consider whether an outsider, typically a trade creditor, did not have the requisite forms of suspicion. The liquidators said that Mr Houghton was an insider. They called him a de facto director. They referred to his position as Group General Manager. He had regular26 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 303.27 At 302.28 Hamilton v Commonwealth Bank of Australia (1992) 9 ACSR 90 at 113.and frequent meetings with the directors. In his position he had to see that budgets were met. He was aware that often budgets were not met. He was aware of difficulties between Advocate Advertising Ltd and the people behind Punter Management Ltd.[62] For most of this Mr Houghton had an effective answer. His title, Group General Manager, meant nothing. It was part of industry practice to give people inflated titles. His role involved sales and production and meeting budget, but he did not concern himself with profitability. His evidence was consistent with what a salesmanager might give. Such a role did not require him know about the company'sfinancial position and he was not privy to it. His evidence was supported by thecompany's apparent ability to carry on trading.[63] There was however one matter that he had difficulty explaining. The liquidators put in evidence some emails between Mr Houghton and Mr Shaw about paying invoices. In an email of 20 May 2009 he said to Mr Shaw:Tony sent me a note that you were chasing payment on your invoices. As of right now there is zero in the bank a/c, we have just had a very big amount for PAYE. We are however expecting some collects overnight – it being the 20th. You will be first cab off the rank...[64] In an email of 17 June 2009 Mr Shaw raised with Mr Houghton and Ms Mitchell that another supplier's invoice was overdue. In an email of 27 August2009 to Mr Shaw, Mr Houghton said:The simple fact is that there is zero funds in the Advocate account –yesterday we paid Brian Galloway's & Ari's invoice. On Tuesday (1st Sept) we are hoping to have funds in from the clients that only pay on the 30/31st. Judge will be assessing monies in/out on Tuesday & we hope to be able to pay some or all of the invoices then...[65] And on 15 September 2009 his email to Mr Shaw included:Just a quick note to advise that we will be paying your invoice 165 for $2,812.50 on the 22nd of this month. As I have pointed out previously, cash flow is extremely tight at Advocate the moment...[66] These emails show Mr Houghton as someone with an insider's knowledge ofthe financial position of Advocate Advertising Ltd. It need not be the awareness thatan accountant would apply, but it was enough to suggest to any reasonable person that Advocate Advertising Ltd was not able to pay its debts on time. Mr Houghton had a say in who would and would not be paid.[67] Mr Houghton's explanation for these emails was that he and the directors of Advocate Advertising Ltd had adopted a deliberate strategy of delaying payment to Ian Shaw and the other people associated with Punter Management Ltd, because those people were not co-operating with management. They would not work within the systems established by Advocate Advertising Ltd. They would not supply budgets, sales forecasts or the information needed to bill clients. A policy of slow payment was adopted to encourage greater co-operation. He lied in his emails as one way of getting the Punter people to toe the line.[68] Earlier I have held that Advocate Advertising Ltd was not able to pay its due debts. That includes during the period of these emails. In effect Mr Houghton was saying that even though the company may have been insolvent and even though he was telling other creditors that the company did not have funds in hand to pay them on time, he did not have reasonable grounds to suspect that the company wasinsolvent. Mr Houghton's explanation does not wash. It would be strange that Mr Houghton should lie to present the company as insolvent, while it was in fact insolvent, and at the same time he did not suspect that it was insolvent. Further his explanation that he used the lie to encourage greater co-operation from the Punter people does not make good sense, even as an underhand way of making them perform.[69] I reject his claim that he was lying to Mr Shaw in the emails. It is more likely that he was telling the truth. Having told Mr Shaw that the company was in financial difficulty, he cannot deny that he had reasonable grounds to suspect under s 296(3)(b).Alteration of position[70] In Farrell v Fences & Kerbs Ltd the Court of Appeal said:2929 Farrell v Fences & Kerbs Ltd [2013] NZCA 91, [2013] 3 NZLR 82.[86] We conclude that, with one exception, proof of all three elements of s 296(3) of the Companies Act 1993 is to be established at the time the payment or other company property is received. Specifically, in relation to s 296(3)(c), the giving of value must be proved to have occurred at that time and does not include value given to the company at the time the antecedent debt was created....[90] For practical purposes, the expression "when A received the property" must be interpreted with some degree of flexibility. Theassessment need not be made at the precise moment in time when property is received, such as the time funds were credited to thepayee's bank account. For example, value might be given by a creditor's agreement to provide further goods or services to thecompany in return for full or partial payment of the antecedent debt. The agreement to do so or the actual supply of further goods or services might precede the actual date of payment by a short period. Or, the provision of the goods or services might occur soon after the payment was received pursuant to a prior agreement to do so. Neither of these circumstances would preclude a court fromconcluding that value was given "when" the payment was received.A realistic commercial approach is required to make the legislation work.[71] Under this approach Raindance gave value for the payments by Advocate Advertising Ltd under s 296(3)(c) as payments and the supplies of services overlapped. It is not necessary to consider whether Raindance altered its position in a reasonably held belief that the payments would not be set aside.Summary on s 296[72] Raindance has brought itself within subclauses (a) and (c), but has not shown that it did not have the suspicions under (b). Accordingly if Raindance had had to rely on the defence under s 296, it would not succeed.Result[73] The payments in issue are not voidable transactions under s 292 of the Companies Act. Even though Advocate Advertising Ltd was not able to pay its due debts under s 292(2)(a), the payments were for the contemporaneous supply of services. Raindance was not a creditor of Advocate Advertising Ltd. As such the payments did not enable Raindance to receive more towards satisfaction of a debtthan it would in the liquidation and s 292(2)(b) is not satisfied. No order can be made under s 294 setting the payments aside.[74] I make these orders:i) The liquidators' applications under s 294 and 295 of the CompaniesAct are dismissed;ii) The liquidators shall pay The Raindance Company NZ Ltd costs on a category 2 basis. If the parties cannot agree costs, memoranda may be filed................................................Associate Judge R M Bell