Liquidator of Quality Tanning (NZ) Limited (In rec. & in liq.) v Moritszon Properties Limited CA43/98 [1998] NZCA 250 (3 December 1998)

Last Updated: 14 December 2021

_{Liquidator of Quality Tanning (NZ) Limited v Moritzson Properties Limited}

Status Court of Appeal Judgments (Archive)

Court of Appeal

CA43/98

3 Dec 1998

Blanchard J - Gallen J - Salmon J

Appellant: The Liquidator of Quality Tanning (NZ) Limited

Respondent: Moritzson Properties Limited

Judgment by: Salmon J Coram No.: 3

Appellant's Counsel: P D McKenzie Respondent's Counsel: L A Anderson Filing date: 13 Mar 1998

Hearing Year: 1998

Keytitles: Companies - Liquidators - Preference - Intent

Notes: Dismissed

Judgments: CA4398

COMPANY LAW - liquidation - no intention to prefer - appeal dismissed.

IN THE COURT OF APPEAL OF NEW ZEALAND CA 43/98

BETWEEN THE LIQUIDATOR OF QUALITY TANNING (NZ) LIMITED (IN RECEIVERSHIP & IN LIQUIDATION) Appellant

AND MORITZSON PROPERTIES LIMITED Respondent

Coram: Blanchard J

Gallen J Salmon J

Hearing: 25 November 1998

Counsel: P D McKenzie for Appellant L A Andersen for Respondent Judgment: 3 December 1998

JUDGMENT OF THE COURT DELIVERED BY SALMON J

This appeal is against a judgment of Hansen J declaring that a debenture given by Quality Tanning (NZ) Ltd (“Quality Tanning”) to the respondent, dated 13 November 1990, was not voidable against the liquidator under s.309 of the Companies Act 1955.

Background

On 24 April 1995 the Official Assignee, as liquidator of Quality Tanning gave notice pursuant to s.309 of the Companies Act 1955 to set aside a debenture in favour of the respondent dated 13 November 1990, and registered in the Companies Office on 16 November. The grounds of the notice were that the debenture was granted within two years preceding the commencement of the winding up, at a time when Quality Tanning was unable to pay its debts with a view to giving the respondent a preference over other

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creditors. As a consequence of the notice the respondent commenced proceedings in the High Court seeking an order under s.311A of the Companies Act 1955 declaring the debenture to be not voidable as against the liquidator. In the High Court the plaintiff (now the respondent) conceded that the debenture was granted within the relevant two year period and that at the time Quality Tanning was unable to pay its debts. It argued, however, that there was no intention to prefer the respondent as a creditor, nor did the debenture have the effect of giving the respondent any preference over the general pool of unsecured creditors.

Quality Tanning was purchased by the respondent at a time when it was indebted to a subsidiary of the

respondent. Prior to purchase, the respondent had obtained separate financial and management assessments of Quality Tanning and both of those reports concluded that Quality Tanning was a viable business. Quality Tanning, therefore, became a subsidiary of the respondent. Quality Tanning was not as successful as the respondent had hoped and financial assistance had to be given. In 1990 the respondent was requested to provide a letter of credit to pay for skins. At this time the company was experiencing further difficulties and indeed, a winding up notice had been issued by a creditor.

Quality Tanning asked a Mr Worth of Coopers and Lybrand to prepare a report. That report, which is dated 6

November 1990, indicated that Quality Tanning would not meet the solvency test unless the respondent's current account of $178,231, plus the letter of credit referred to above of $65,802, were treated as non current liabilities. Mr Worth concluded that a recovery plan would have a prospect of success, provided certain conditions were met, including the respondent treating the advances already made as being of a semi permanent nature.

The respondent's board met on 6 November and made a decision to defer payment of current accounts and future rent and fees and to take a debenture from Quality Tanning to secure the amount of the letter of credit plus those earlier or future advances. The debenture is dated 13 November 1990.

One of the assumptions made by Mr Worth in his report was that all output was sold and factored as it was produced. In December of 1990 the factoring company

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involved withdrew and despite an offer by Mr Hall, the chairman of the respondent, to give a personal guarantee of

$50,000, the factoring company refused to reinstate the previous arrangement.

The consequence was that the assumptions underlying Mr Worth's report no longer applied and at an urgent meeting of the respondent's board it was agreed that Westpac, the first debenture holder of Quality Tanning, would be asked immediately to appoint a receiver. Two Dunedin accountants were appointed. They traded the business until 28 June 1991 when trading ceased and the assets of the company were sold. There were insufficient funds available for secured creditors and, of course, none for unsecured creditors. The respondent received nothing pursuant to its debenture. Ultimately, Quality Tanning was liquidated on 16 December 1992 by order of the High Court.

The respondent was unhappy with the manner in which the receivership had been conducted. In 1991 it commenced proceedings against the receivers which have yet to be heard. The claim is that the receivers failed to obtain a proper price for the assets of Quality Tanning when disposing of those assets, and were thereby in breach of their duty to act in good faith.

A matter which assumed some importance at the hearing was the date of the issue of the letter of credit. The

document itself could not be found and there was conflicting evidence as to the date. The question was whether the letter of credit had been issued before or after the respondent took the debenture. Hansen, J. found that the letter of credit was issued on 17 November after execution of the debenture. It will be necessary to return to that issue later in this judgment.

Although s.309 of the Companies Act 1955 was repealed by s.41 of the Companies Amendment Act 1993 that Act and s.3 of the Companies Act Repeal Act 1993 preserved the section in so far as liquidations prior to 1 July 1994 were concerned. The relevant part of s.309 provides:

“Every ... security or charge given over any property, ... by any company unable to pay its debts as they become due from its own money, shall be voidable as against the liquidator, if -

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(a) It is in favour of any creditor ... with a view to giving that creditor ... a preference over other creditors; and

(b) The making ... occurs within 2 years before the commencement of the winding up of the company.”

The Decision in the High Court

The learned High Court Judge after setting out the facts, recorded that the intention to prefer referred to in s.309 must be “the principal or dominant but not necessarily the only intention of the debtor”. He concluded that restructuring a subsidiary company with the intention of making the business viable is far from uncommon and in the circumstances the issue of the debenture was in the ordinary course of business and that the liquidator had not satisfied him on the balance of probabilities that the intention of the respondent in relation to the debenture was to prefer it to other creditors.

He held that there was a further complete answer to the liquidator's position. That was based on the Court of Appeal decision in Hyde & Others v Lewis & Others [1996] 7 NZCLC 261, 192 and the decision of the Privy Council in the same case ([1998] 1 NZLR 12(L)). The High Court Judge held that because the debenture in fact gave the respondent no advantage over other unsecured creditors it did not have the effect of a preference.

The Applicable Legal Principles

We have already set out the relevant provisions of s.309 of the Companies Act 1955. In order to constitute a preference it is necessary that the dominant intention of the debtor must be to prefer the creditor in question over others and that decision must be an act of free will and not the product of pressure or other motives. There is a succinct summary of the relevant principles in Re Radio Times Communications Ltd (In Vol Liq) (1984) 2 NZCLC

99071, 99072:

“The fact that a payment is made to a creditor by an insolvent company within the prescribed period before the

winding up does not of itself prove a preference. The Court must be satisfied on the balance of probabilities that in making the payment the company's dominant intention was to prefer that creditor over the others. There must be a

_{'conscious decision which is an act of free will' (Richardson J in Re Northridge Properties Ltd, Auckland, .M46-}

_{99/75, 77/75, 13 December}

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1975 - see February 1983 New Zealand Law Journal, p 44). And of course the relevant decision is that of the person or persons whose mind or minds can be said to be that of the company (see Tesco Supermarkets Ltd v Nattrass [1970] AC 1533 at pp.170-171 per Lord Reid). ...

It is unusual for there to be any direct evidence as to this, and normally it is a matter of the inference properly to be drawn from the proved facts.”

The onus is on those who claim to void the transaction to establish the debtor's intention and that the real intention was to prefer. That onus is only discharged when the Court, after a review of all the circumstances, is satisfied that the dominant intention to prefer was present (Peat v Gresham Trust [1934] AC 252 ).

It is not sufficient that there be an intention to prefer, there must also be a preference in fact (Hyde v Lewis

(supra)).

The Arguments in this Court

In this Court it was recognised that a key issue was whether the Judge's finding in relation to the date of the giving of the letter of credit should be upheld. Mr McKenzie referred to the well known decision of the House of Lords in Benmax v Austin Motor Company [1955] AC 370 in support of his proposition that where there is no question of the credibility or reliability of any witness involved and where the point in dispute is a proper inference to be drawn from proved facts, an Appeal Court is in as good a position to evaluate the evidence as the trial Judge.

We accept that statement of the law but, of course, as also held in Benmax, it is appropriate that this Court should give weight to the Judge's view. Mr McKenzie pointed out that Hansen J's judgment relied on documentary evidence to establish the date upon which the letter of credit was given. Counsel referred to the evidence on the point which was predominantly that of Mr Hall, the chairman of the respondent, and the report prepared by Mr Worth. He submitted that Mr Hall's evidence was equivocal on the question of the date and that it was clear from Mr Worth's report that the letter of credit had been given prior to the signing of the debenture.

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We do not accept those submissions. In our view Mr Hall was quite clear that the company's commitment to the

letter of credit occurred after the debenture was signed. That is consistent with the bank's record relating to the

letter of credit which was relied upon by Hansen J. That document was an ANZ Bank Advice of Debit for drawing down under the letter of credit. It noted that the letter of credit matured on 1 January and that the tenor of drawing was 45 days which established a date of issue on 17 November, after the date of the board meeting. Reading the whole of Mr Worth's report we are satisfied that it does not lead to any contrary conclusion. It is correct that in some of the paragraphs of his report he uses phraseology which would suggest that the letter of credit had already been given. However, reading the report as a whole the appropriate inference to be drawn is that he was making the assumption for the purpose of his report that the letter of credit would be given. This was an appropriate assumption because the purpose of the report was to consider whether the company could meet the solvency test. He concluded that it could, provided the respondent's current account of $178,231, plus the letter of credit of

$65,802 was considered to be a non current liability. The debenture itself supports the conclusion that the letter of credit was given subsequent to the debenture. Recital D records that:

“The company has further requested the lender to provide through its bankers a letter of credit in the sum of

$50,000 Australian which the lender has agreed to do upon the basis inter alia that this debenture is available as security therefor.”

Certainly, Hansen J was justified in coming to the conclusion that he did.

The importance of this finding of fact is that the debenture was not given entirely in respect of past debt. It leaves open the conclusion that Quality Tanning had no option but to provide the debenture if it was to continue in business because the letter of credit was necessary in order to ensure the continuation of supplies of hides and the respondent was only prepared to provide that letter of credit if the debenture was given.

Mr McKenzie argued that even if we were to conclude that the letter of credit was given after the debenture, nevertheless the respondent had committed itself by

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undertaking to the vendor of the skins, that it would give the letter of credit in return for continued supply. The facts do not support that conclusion. The only evidence on the point is Mr Worth's report. It is a reasonable inference from the content of that report that the container which was to be paid for by the letter of credit, and indeed, a subsequent container, had already been delivered to Quality Tanning. The sanction which the vendor was imposing was that the two containers were to be paid for prior to picking up the next one. That was likely to happen in December.

We are satisfied that Hansen J was right to conclude that the liquidator had not discharged the onus of proving there was an intention to prefer on the part of Quality Tanning when it gave the debenture to Moritzson Properties Ltd. We accept that there is some artificiality in deducing such a conclusion in a situation such as this where there is common ownership of the two companies involved. Nevertheless it is the intention of Quality Tanning that is

important. From the point of view of that company it could only continue in business if the respondent was prepared

to provide the letter of credit, defer payment of the current account and also defer payment of rent. Before it was prepared to undertake those commitments the respondent required a debenture. From the repondent's point of view that was an appropriate business decision. From Quality Tanning's point of view it had no option but to accept that condition if it was to stay in business.

It is worth noting that there is other evidence which points to the conclusion that the principal intention of both the respondent and Quality Tanning was to continue the business. Mr Worth's report is evidence of that as is the fact that the respondent accepted his proposals. The event that ultimately led to the receivership was the withdrawal of the factoring arrangement. Even then the chairman of the respondent was sufficiently concerned that Quality Tanning should continue in business, to offer a personal guarantee of $50,000 to the factoring company.

The above finding makes it unnecessary to consider whether the debenture arrangement could be said to be in the ordinary course of business. It is, of course, not necessary in order to find that there was no intention to prefer, to first conclude that the transaction was in the ordinary course of business. Such a finding is just one indication pointing to such a conclusion.

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Conclusion

For the above reasons the appeal is dismissed.

The respondent is entitled to costs of $3,500 together with reasonable disbursements, including travel and accommodation costs of counsel, as fixed by the Registrar.

Solicitors:

Downie Stewart, Dunedin, for Appellant

_{Hall Cotton Lawrence, Dunedin, for Respondent}

Appellant's Counsel: P D McKenzie

Respondent's Counsel: L A Anderson

End of Document