Carter Holt Harvey Ltd v Fatupaito [2003] NZCA 133; (2003) 9 NZCLC 263,285; [2003] 9 NZCLC 263,285 (2 July 2003)

Last Updated: 17 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA149/02

BETWEEN CARTER HOLT HARVEY LIMITED
Appellant

AND V J FATUPAITO AND J A WALLER
Respondents

Hearing: 19 June 2003

Coram: Blanchard J Tipping J Anderson J

Appearances: M A Peters and N F Flanagan for Appellant
A S Kuran for Respondents

Judgment: 2 July 2003

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

Introduction

[1] The respondents, Ms Fatupaito and Mr Waller, are the liquidators of Project Works Construction Ltd (the debtor company). The liquidation commenced on 28 May 2001. In reliance on s294 of the Companies Act 1993 (the Act), the liquidators filed in the High Court at Auckland and served on the appellant, Carter Holt Harvey Ltd (the creditor or Carters), a notice to set aside two payments which had been made by the debtor company to the creditor shortly before the liquidation commenced. These were a payment of $40,000 by cheque dated 21 May 2001 which was presented on 22 May 2001 and a payment of $100,000 by cheque dated 22 May which was presented on 23 May. Both cheques were duly paid.
[2] In a judgment delivered on 27 June 2002 Master Lang dismissed the creditor’s application that the transactions not be set aside. The creditor appeals.

The Companies Act provisions

[3] The relevant provisions of the Act are:

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.

(3) Unless the contrary is proved, for the purposes of subsection (2) of this section, a transaction that took place within the restricted period is presumed to have been made—

(a) At a time when the company was unable to pay its debts; and

(b) Otherwise than in the ordinary course of business.

(4) For the purposes of this section, in determining whether a transaction took place in the ordinary course of business, no account is to be taken of any intent or purpose on the part of a company—

(a) To enable another person to receive more towards satisfaction of a debt than the person would otherwise receive or be likely to receive in the liquidation; or

(b) To reduce or cancel the liability, whether in whole or in part, of another person in respect of a debt incurred by the company; or

(c) To contribute towards the satisfaction of the liability, whether in whole or in part, of another person in respect of a debt incurred by the company—

unless that other person knew that that was the intent or purpose of the company.

(5) For the purposes of subsection (2)(a)(ii) of this section, specified period means—

(a) The period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

(b) In the case of a company that was put into liquidation by the Court, the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order was made; and

(c) If—

(i) An application was made to the Court to put a company into liquidation; and

(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—

the period of 2 years before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

(6) For the purposes of subsection (3) of this section, restricted period means—

(a) The period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

(b) In the case of a company that was put into liquidation by the Court, the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the Court was made; and

(c) If—

(i) An application was made to the Court to put a company into liquidation; and

(ii) After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—

the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

...

294 Procedure for setting aside voidable transactions and charges

(1) A liquidator who wishes to have a transaction that is voidable under section 292 of this Act or a charge that is voidable under section 293 of this Act set aside must—

(a) File in the Court a notice to that effect specifying the transaction or charge to be set aside and, in the case of a transaction, the property or value which the liquidator wishes to recover, and also the effect of subsections (2), (3), and (4) of this section; and

(b) Serve a copy of the notice on the other party to the transaction or the grantee of the charge and on every other person from whom the liquidator wishes to recover.

(2) A person—

(a) Who would be affected by the setting aside of the transaction or charge specified in the notice; and

(b) Who considers that the transaction or charge is not voidable—

may apply to the Court for an order that the transaction or charge not be set aside.

(3) Unless a person on whom the notice was served has applied to the Court under subsection (2) of this section, the transaction or charge is set aside on the twentieth working day after the date of service of the notice.

(4) If one or more persons have applied to the Court under subsection (2) of this section, the transaction or charge is set aside on the day on which the last application is finally determined, unless the Court orders otherwise.

295 Other orders

If a transaction or charge is set aside under section 294 of this Act, the Court may make one or more of the following orders:

(a) An order requiring a person to pay to the liquidator, in respect of benefits received by that person as a result of the transaction or charge, such sums as fairly represent those benefits:

(b) An order requiring property transferred as part of the transaction to be restored to the company:

(c) An order requiring property to be vested in the company if it represents in a person's hands the application, either of the proceeds of sale of property, or of money, so transferred:

(d) An order releasing, in whole or in part, a charge given by the company:

(e) An order requiring security to be given for the discharge of an order made under this section:

(f) An order specifying the extent to which a person affected by the setting aside of a transaction or by an order made under this section is entitled to claim as a creditor in the liquidation.

296 Additional provisions relating to setting aside transactions and charges

(1) The setting aside of a transaction or an order made under section 295 of this Act does not affect the title or interest of a person in property which that person has acquired—

(a) From a person other than the company; and

(b) For valuable consideration; and

(c) Without knowledge of the circumstances under which the property was acquired from the company.

(2) The setting aside of a charge or an order made under section 295 of this Act does not affect the title or interest of a person in property which that person has acquired—

(a) As the result of the exercise of a power of sale by the grantee of the charge; and

(b) For valuable consideration; and

(c) Without knowledge of the circumstances relating to the giving of the charge.

(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.

(4) Nothing in the Land Transfer Act 1952 restricts the operation of this section or sections 292 to 295 of this Act

The evidence

[4] The debtor company was a construction company. Carters was its major supplier of building materials. The credit terms agreed between them established a credit limit from time to time of $100,000 and required payment on the 20th of the month following supply. But in practice the debtor company had been allowed to exceed the limit and from December 1999 onwards it had quite frequently been in arrears with its payments. On four occasions (out of 26) it had made rounded sum payments in reduction of its indebtedness to Carters. For instance, in January 2001 it paid $120,000 and in February $100,000. These payments were not matched to particular invoices from the creditor. They simply reduced the overall debit balance.
[5] It is common ground that the debtor company was insolvent from at least March 2001 but that Carters was quite unaware of its state of insolvency at the time when the contested payments were made. Nor was it aware of an intention, if there was one, on the debtor company’s part to prefer Carters. Consequently s292(4) requires that no account is to be taken of any such intent or purpose of the debtor company. It is also accepted that the conditions in s292(2)(a) and (b) are met. The issue is whether the payments took place in the ordinary course of the debtor company’s business and thus are within the exception which appears in the concluding words of s292(2).
[6] At the end of April 2001 the debtor company owed the creditor $177,863, of which $108,771 was in arrears, i.e. 30 days and over. A payment of $67,860 was made on 7 May 2001. That reduced the amount owing to $110,003, of which $40,911 was in arrears, having been due for payment on 20 April. The liquidators do not assert that the payment on 7 May is voidable. Meanwhile Carters was continuing to extend new credit. By the time the two contested payments were made, further indebtedness had been incurred in May of $63,934, but that was not due for payment until 20 June 2001. Thus the two payments in issue, totalling $140,000, had the effect of clearing all arrears, i.e. indebtedness due on 20 May or before, and paying about half of the amount not due for payment until 20 June. The Master said that it paid $35,642 of that amount and that when the liquidation occurred the debtor company owed Carters $28,292.53. (We are unable to reconcile these figures but the discrepancy was not adverted to by counsel and, in the event, we have no need to resolve it since the parties were content to proceed in this Court on the basis that $29,996.65 was paid in advance of when it was due.)
[7] The only evidence before Master Lang concerning the circumstances in which the two cheques were handed over by the debtor company came from Mr Tan. He is the managing director of CreditWorks Solutions Ltd, a company engaged by Carters to manage its outstanding accounts and debtors ledger. He deposed that the credit management function requires regular contact between the credit manager and the customer. He said he needs to know what projects the customer is involved in or which may come on-stream, for whom, the size of their operation and other relevant matters affecting their business. A significant part of Mr Tan’s role is spending time having regular discussions with Carters’ customers. In that context he had been trying to arrange lunch with the debtor company’s directors. He said that it was a large customer of Carters and the need to maintain a strong relationship was particularly important. He met Mr Birchall of the debtor company on 22 May and was given an envelope which Mr Birchall said contained a payment of the debtor company’s account. There was no discussion about the payment. Mr Tan assumed it was a routine payment of what was owed. There was talk about the debtor company’s business in general, jobs on at the time and future potential jobs for which it was bidding. When he returned to his office he gave the envelope to a staff member. He was not aware of the amount that had been paid until after it had been receipted into Carters’ bank account.
[8] Mr Tan explained that the cut-off for cheques to be processed and credited to Carters’ account is 4pm each day. Because it takes some time to go through the administration required to cash a cheque and credit the customer’s account, one cheque was processed and the moneys credited that day and the other was processed the following day. We find curious this explanation about the separate banking of the cheques but Mr Tan’s evidence was not challenged on the point. In the end, it is of no moment. The fact is that the cheques were dealt with separately by or on behalf of Carters.
[9] The person at CreditWorks actually responsible for managing the debtor company’s account, Ms Sain, deposed that although its account had often exceeded the credit limit, there was nothing unusual about that: often it is necessary to exceed a credit limit if a customer has a lot of work on and Carters will do that if it is confident that the company will be able to pay, as it was in this case. She said there was nothing unusual about the debtor company’s account or in the fact that it paid by way of lump sums unrelated to a specific invoice:

The building industry is not one characterised by prompt payment and precise accounting. Because many of Carters’ customers are small companies, their cashflow is often intermittent. Notwithstanding contractual obligations to pay on a specified day, it is therefore common for companies to pay their invoices on an irregular basis, and to be significantly in arrears. When companies do get into arrears, they tend to operate on a “pay when paid” basis, making payments when they can afford to do so. Because of this, payments sometimes do not relate to specific invoices, but are simply payments made according to cashflow.

While Carters would much prefer not to have to accept payment in this way, and does all that it can to avoid it, it is simply a reality of the industry.

[10] In her affidavit Ms Fatupaito stated that she found no previous instances of payments being made by the debtor company before the 20th of the month following supply. In her experience of companies in the construction industry, she also could not recall seeing such payments.
[11] Mr Tan deposed that receiving payments before the 20th of the month was not uncommon in Carters’ business. He annexed to his affidavit some accounting records appearing to show such payments from unidentified customers. Some were very close to the 20th and seemed to have been merely intended to meet the contractual obligation. No information has been given about the terms or circumstances of the other accounts. And, in contrast to Mr Tan, the national credit manager of Benchmark Building Supplies Ltd said in an affidavit on behalf of the liquidators that in the building and engineering industries goods obtained on credit are seldom paid for before the 20th of the month following “unless pressure is brought to bear”. The import of the qualifying words is not obvious to us as no suggestion has been made that Carters pressured the debtor company.

The Master’s judgment

[12] After reviewing the facts in some detail, Master Lang found that there was “nothing particularly surprising” about the making of rounded lump sum payments in May 2001. It was a fact of commercial life that from time to time customers would allow their credit accounts to fall behind and that they would then make lump sum rounded payments as circumstances allowed. The fact that payments do not relate to a particular invoice does not necessarily mean they are outside the ordinary course of business. Similarly the fact that the payments were not made in compliance with the terms of trade was of no particular relevance in the present case. It was a feature which was commonplace in many industries, including the building supplies sector. It had been allowed to happen earlier in the operation of the credit facility. But he said that there was one feature about the “payment which was made on 22 May 2001” which was of significance when viewed in the light of previous dealings between the parties. That was that the payment had the effect of both extinguishing outstanding arrears and partially paying for goods purchased during May 2001, notwithstanding that payment for them was not due until 20 June. He considered that this was a point of difference “which marks out the payments made in May 2001 as being payments which were outside the usual course of business between these particular parties”.
[13] The Master also compared the position of Carters with the positions of other creditors of the debtor company. Approximately $2.9 million is owed to about 200 creditors. Some are owed quite large amounts. On the evidence of the liquidators, payments to other creditors in the week of 21 May 2001 were small in value and number; there were only five payments to other trade suppliers during the period from 22 to 25 May and none of those payments exceeded $7,000. The liquidators had contended that the payment to a single trade supplier of the sum of $140,000 was a significant event which was at odds with the company’s dealings with its creditors generally. The Master considered that this submission had some merit, although accepting that the Court was handicapped by the fact that it had no ability to analyse the payments which were made by the company outside the period referred to by the liquidators.
[14] Another matter of some significance was that there had been no evidence from Mr Birchall. It must have been obvious to him, the Master said, that the debtor company was in dire financial straights by 22 May 2002. If other creditors were not being paid (including creditors owed large amounts), it might have been expected that the debtor company would pay the minimum amount necessary to satisfy Carters so as to be able to continue to make future purchases on credit. Instead, a payment was made which cleared all arrears and also paid a significant proportion of current purchases. When viewed against the overall financial position of the company and its dealings with its other creditors at that stage, the Master considered that the payment which was made to Carters was remarkable for this reason also. He found that the “payment” made on 22 May had not been shown by Carters to have been made in the ordinary course of business.

One transaction or two?

[15] It is apparent from a reading of the Master’s judgment that he took the view that the two cheques were to be treated together as a single payment of $140,000. He says this in the opening paragraph of his judgment, giving as his reason for that view that they were effectively made at the same time. Nevertheless, he later refers several times to payments (plural) when referring to the cheques.
[16] We take a different view on this important question. There were two cheques drawn on separate dates and, although they were delivered to Mr Tan at the same time, they were treated separately by being paid into Carters’ bank account on different days. Thus payment of the $140,000 was achieved in two instalments, namely $40,000 on 22 May and $100,000 on 23 May.
[17] The view that there were separate payments receives further support from an affidavit which has now been sworn by Mr Birchall. He was uncooperative with Carters when the matter was before the High Court because Carters were suing him on a personal guarantee of the debtor company. He evidently did not appreciate that there might be something to be gained by cooperation, and it was not until he saw the unfavourable High Court judgment that he approached Carters and supplied them with certain information. For their part, they had understandably been reluctant to call him as a witness when they were unaware what he might say. His affidavit therefore qualifies as being fresh in the respects in which we place reliance on it in this judgment, and it also has the necessary cogency to be admitted in this Court.
[18] Mr Birchall has deposed that, in order to pay Carters, the debtor company was dependent upon receiving money from its own debtors. It had expected payment from two of them on 21 May 2001 (20 May was a Sunday). He was anticipating a meeting with Mr Tan that day. However, one of the debtors short paid the amount due from it by about $150,000 without prior warning. Mr Birchall did not have time to calculate the effect of that short payment but he knew that the debtor company (Project Works) was still about $40,000 short in paying the end of March balance, which had been due on 20 April. He therefore arranged for a cheque to be drawn for $40,000. But he and Mr Tan could not make time for a meeting on 21 May and so arranged to meet on 22 May. Mr Birchall then gives an explanation for the fact that the further cheque, drawn the next day, was also handed over, but, as that matter would not have been apparent to an observer of the transaction, and Carters was certainly unaware of it, we disregard that explanation.
[19] It is, however, objectively apparent that the $40,000 was treated separately by the debtor company, as appears from the different dates on the cheques. The cheques were again separated for the purpose of banking into Carters’ account. The payments of $40,000 and $100,000 are properly to be treated as separate transactions for the purpose of s292.

Ordinary course of business

[20] A payment of money by a company to its creditor is voidable on the application of the liquidator of the company if (a) made at a time, during the specified period of two years, when the company was unable to pay its debts, and if (b) the payment enables the creditor to receive more towards satisfaction of the debt than was likely to have been received in the liquidation. But, as an exception to that general rule, a payment, although made when the company is insolvent and enabling the creditor to receive that advantage, is not voidable if the creditor discharges the burden of showing that it took place “in the ordinary course of business”.
[21] What the creditor has to show in order to prevent the payment being set aside is that an objective observer would have seen nothing abnormal about the transaction in the commercial context as it existed for the company at the time when the payment occurred: Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 at paras [19] and [22]. Where the impugned payment was made as part of an ongoing business relationship, rather than being a one-off event, the hypothetical observer – who is in reality the Judge – should primarily have regard to the prior course of conduct of the company towards the recipient creditor and towards its creditors generally. The normality or abnormality of the payment, in the particular circumstances in which it occurred, also falls to be examined against the practices of solvent companies engaged in similar businesses, but it would not necessarily follow that because other such companies sometimes make payments of the same character, that in itself means that the subject payment can be considered ordinary in the course of the subject company’s business at the time at which it was made. It is to be stressed that the comparison is with the behaviour of solvent companies. As the Privy Council said in Countrywide Banking Corporation v Dean [1998] 1 NZLR 385 at 394, while there is to be reference to business practices in the commercial world in general, the focus must still be the ordinary operational activities of businesses as going concerns, not responses to abnormal financial difficulties.
[22] The business context of course includes the particular contractual context. It is therefore necessary to take account of the circumstances in which the company became obliged to make the payment. It is necessary to ask why the payment was made when it was: can it be described simply as a routine payment which, though made late, was in fulfilment of the company’s contractual obligation rather than a response to its current situation of insolvency? This question is to be answered without regard to any subjective intention or purpose of the company to prefer the creditor unless that intention or purpose was known to the creditor: s292(4). We have already recorded that it is common ground that Carters was unaware of the debtor company’s insolvency and of any intention that it be preferred.
[23] When the $40,000 payment is treated as a separate transaction we have little doubt that it was made in the ordinary course of the business of the debtor company. There was nothing abnormal about the account being in arrears, or for it to be brought up to date as payments were received from debtors, and for this to be done by rounded sum payment. Without taking account of Mr Birchall’s evidence about his intention, it can be seen that the payment closely approximated the unpaid balance of what had been due on 20 April. The features which the Master saw as unusual about the receipt of the whole $140,000 do not apply to the first, and separate, payment of $40,000. It met only indebtedness already due for payment; and it did not pay for goods purchased in May 2001. Whilst it may have been more than was paid to other creditors, Carters was the largest supplier. Furthermore, the liquidators’ review of payments to other creditors, to which the Master referred, covered such a limited period that it is difficult to discern any general pattern of payment from which the $40,000, by comparison, seems out of the ordinary. It met, in round terms, all the overdue indebtedness to the debtor company’s main source of supplies of building materials other than the amount which had just fallen due for payment two days earlier. It has the appearance of a payment made in the ordinary course of business.
[24] We do not see the second payment in the same way. Its strikingly unusual feature was that almost one-third of the $100,000 was for amounts not yet owing. That proportion of the moneys represented by the second cheque was too great for it to be said that overall the payment was really directed to meeting the obligation which had fallen due on 20 May. It was also some four weeks in advance. This was not a case of meeting a 20th of the month obligation a few days early, which might not be regarded as abnormal. Nothing in the evidence suggests that such a large advance payment, so long before it was due, was to be expected from the debtor company so that it fell into place as part of the undistinguished common flow of its business, to use the well-known words of Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) [1948] HCA 14; 76 CLR 463 at 477. It had not happened previously. Nor was it common in the experience of Benchmark’s national credit manager, an apparently impartial observer of industry practice. We conclude that the $100,000 payment was not made in the ordinary course of business.

The appropriate order

[25] Ms Peters, for the creditor, urged us, if we were of that opinion, to make an apportionment and to order under s295 that the transaction should be set aside only to the extent that indebtedness had been paid when it was not yet due. But counsel admitted that the statute might not allow this to be done. Indeed that is our view. In this respect the statute is something of a blunt instrument.
[26] A transaction is voidable at the behest of the liquidator if the conditions in s292(2) are met and it did not take place in the ordinary course of business. The transaction is either wholly voidable or wholly not voidable. There is no provision enabling an apportionment of one transaction into ordinary and extraordinary parts. (Compare s296(3), upon which Carters is not relying, which gives the Court a discretion to deny recovery wholly or in part.) It follows that when the debtor company’s application in respect of a transaction is unsuccessful the whole transaction, in this case the payment in question, is set aside, i.e. avoided by the liquidator’s notice. It is clear from the opening words of s296 that the setting aside under s294 has a consequential effect on the title or interest of the recipient.
[27] Although s295 is not very happily worded in relation to a transaction in the form of a payment, it is most unlikely that when the drafter of this set of provisions came to address consequential orders it was not intended to cover the most common form of voidable transaction, namely a payment of money by the debtor company. It would not have been intended, we think, to leave successful liquidators to pursue recovery under the general law, as by an action for money had and received. The drafter was alert to the fact that, absent a provision like s295, recovery would be able to be achieved by such means: see the reference in s296(3) to recovery “in equity or otherwise”. The drafter must have intended that payments which have been avoided be recaptured by an order under s295(a) “requiring a person to pay to the liquidator, in respect of benefits received by that person as a result of the transaction..., such sums as fairly represent those benefits”. The benefit is the whole amount of the payment in question, for that is the sum received by the creditor ahead of other creditors. The Court is given no power to order that part only of that benefit be disgorged. It is given no power to order that the creditor does not have to pay the balance of the payment which has been set aside and to which the creditor consequently has no title; there is no power to order that the liquidator may not pursue recovery in equity or otherwise in respect of the balance. The contrast with s296(3) is again apparent.
[28] We are very conscious that s292 already generates a substantial volume of contested litigation, much of it related to whether a transaction was or was not in the ordinary course of business. If the Court had found an implied power of apportionment, that volume might simply increase. It is preferable that this be a matter for attention by Parliament when there is a full review of the workings of the voidable transaction provisions.
[29] We should add that in responding to the apportionment argument we have put to one side the prior question of whether, if the second payment had been for $70,000 only, it could properly have been regarded as made in the ordinary course of business. It has not been necessary for us to reach any conclusion on that question.

Result

[30] The appeal is allowed in part. There will be an order that the $40,000 payment not be set aside. As the appellant has succeeded in the lesser part only, we make no order for costs on the appeal.

Solicitors:
Russell McVeagh, Auckland for Appellant
Lowndes Associates, Auckland for Respondents