Preston Farm Ltd v Managh [2003] NZCA 297; [2004] 1 NZLR 629; (2004) 9 NZCLC 263,455 (15 December 2003)

Last Updated: 16 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA62/03

BETWEEN PRESTON FARM LTD
Appellant

AND JOHN FRANCIS MANAGH
Respondent

Hearing: 16 October 2003

Coram: Gault P Panckhurst J William Young J

Appearances: G P Blanchard and A E Lankovsky for Appellant
M B Lawson for Respondent

Judgment: 15 December 2003

JUDGMENT OF THE COURT DELIVERED BY WILLIAM YOUNG J

Introduction

[1] This is an appeal against a judgment given by Master Gendall in the High Court at Napier in which he dismissed an application made under s294(2), Companies Act 1993, for an order that certain specified transactions not be set aside.

Factual background

[2] The case concerns Hill Corporation Ltd (“Hillcorp”). Hillcorp was controlled by Mr Ted Hill and his wife and other members of their family. It grew horticultural crops in Hawkes Bay. In the Summer of 1997/1998 Hillcorp’s squash crop completely failed. This led to a dispute with the Napier City Council in which the Council claimed rent for land leased by Hillcorp which, in turn, alleged that the crop failure was due to the Council’s unlawful refusal to allow it to irrigate during the critical period that Summer.
[3] By the latter part of 1998 Hillcorp was insolvent. It owed over $500,000 to the ANZ Bank. The ANZ Bank advance was secured over all assets of the company and also by guarantees from Mr Ted Hill and other members of his family. The guarantors were in a position (and willing) to meet their liabilities under the guarantee. But this was plainly going to take some time. In the meantime they took steps to wind up the affairs of Hillcorp. So the company collected money which was owing, realised its other assets and paid outstanding debts.
[4] As part of this general mopping up of assets and liabilities, Hillcorp sold to Preston Farm Ltd (“Preston Farm”), another Hill family controlled company, a beetroot grader and a forklift. These were sold at their book values, $3,196 in the case of the grader and $21,344 in the case of the forklift. This transaction occurred in the first half of 1999. At that time Preston Farm owed Hillcorp $8,955. So the effect of the transactions was to increase the indebtedness of Preston Farm to Hillcorp to $33,495.
[5] Accordingly, as at 30 June 1999, Preston Farm owed Hillcorp $33,495.
[6] In July 1999 Hilhurst Farms Ltd (“Hilhurst Farms”), which is also a Hill family company, paid a total of $379,173 to Hillcorp. Another $189,868 was paid by Hill Nurseries Ltd (“Hill Nurseries”). This company is owned by the son of Mr Ted Hill. The total inflow of funds was $569,041. These funds were primarily used to pay off indebtedness to the ANZ Bank (which as at 30 June 1999 was $564,623).
[7] Prior to these payments being made, Hillcorp was owed a total of $62,273 by companies associated with the Hill family. This included the $33,495 owed by Preston Farm to which reference has already been made.
[8] In the accounts for Hillcorp prepared to 30 June 2000, the $62,273 owed by companies associated with the Hill family was treated as having been repaid from the payments made by Hilhurst Farms and Hill Nurseries. The result of this was that:-

1. The indebtedness to Hillcorp of the Hill family entities (including Preston Farm) was extinguished.
2. The indebtedness of Hillcorp to Hilhurst Farms and Hill Nurseries was some $62,273 less than the injection of funds from those two companies.

[9] There is some dispute as to how this result was achieved. In those circumstances, we should refer to the evidence on the point.
[10] In his first affidavit, Mr Ted Hill said this:-

Of the total funds advanced to Hill Corporation Ltd some of the monies were effectively used in repaying the shareholder current account of Preston Farms Ltd that had temporarily been overdrawn due largely to the acquisition of the fixed assets. ...

Then, after referring to the balance of $33,495 in the current account as at the end of June 1999 Mr Hill went on:-

Subsequently, from the monies injected by Hilhurst Farms Ltd and Hill Nurseries Ltd into Hill Corporation Ltd the current shareholder account of Preston Farm Ltd was able to be repaid. It is my understanding that had the account not been paid in this manner Hilhurst Farm Ltd and Hill Nurseries Ltd would have been able to prove a commensurately greater amount than the amount they are presently seeking to prove as creditors of Hill Corporation Ltd.

[11] In his affidavit in reply, the respondent (Mr John Managh) did not grapple directly with these allegations. Instead, he said:-

... I accept the company was indebted to the ANZ bank. How much related to monies borrowed and applied to Hill Corporation Ltd is unknown.

... That Hill Corporation’s secured creditor was required to be repaid by other associated company’s [sic] is not disputed. Substantial intermingling off [sic] the various companies [sic] affairs was apparent. ...

Then, after referring to the evidence of Mr Hill to which we have been referred, Mr Managh went on:-

... A credit to a related party’s current account is not fair consideration, but rather allows the party concerned to obtain partial repayment of an otherwise unsecured debt.

[12] In his reply affidavit Mr Ted Hill responded in these terms:-

Mr Managh in paragraph 9 of his affidavit has stated that “a credit to a related party’s current account is not fair consideration, but rather allows the party concerned to obtain partial repayment of an otherwise unsecured debt”. This would be true if there were no corresponding debit entry. However he has in this case apparently ignored the other side of the accounting entry, which was a debit to the bank account of Hill Corporation Ltd resulting from the July 1999 payments....

It was not credit but real money that was introduced by both me and my son Graeme through our respective companies Hilhurst Farm Ltd and Hill Nurseries Ltd. In injecting these funds we, as the two creditor companies, required Hill Corporation Ltd to apply the monies first to extinguish the current account balances of the shareholder companies and then to settle the ANZ indebtedness.

[13] Mr Hill was not cross-examined on his affidavit evidence.
[14] In 2000, Hillcorp lost the litigation with the Napier City Council (in that the Council’s claim for rent was upheld and its counterclaim for damages was dismissed). By this stage Hillcorp had no assets and its liabilities were confined to the amount of the judgment (including costs) in favour of the Napier City Council and indebtedness associated with the injection of funds from Hill family related entities which had been utilised to pay other creditors.
[15] As a result of the inability of Hillcorp to meet its liabilities to the Napier City Council, it was placed in liquidation and the respondent, Mr John Managh, was appointed as liquidator. This was on 8 February 2001.

The voidable preference claim as advanced by the liquidator

[16] Mr John Managh, as liquidator of Hillcorp gave notice to Preston Farm setting aside as voidable the transactions which he described as:-

Beetroot grader @ cost $6,016 transferred to you

Current account transactions July 1999 $33,494.99 to your benefit

This description of the relevant transactions is elliptical, to say the least. It does not refer to the forklift. Nor does it indicate the way in which the current account transactions of July 1999 were structured. As well, there is no recognition of the fact that the current account transactions as in July 1999 were related to the earlier transactions including the sale and purchase of the beetroot grader and forklift.

[17] The grounds relied on by Mr Managh were expressed in these terms:-

• (a) The transactions were made at a time when the company was unable to pay its due debts; and
• (b) The transactions were made within 24 months before the date of the filing of the application for the appointment of a Liquidator; and
• (c) The transactions enabled the defendants to receive more towards satisfaction of debts than the defendants would otherwise have received or been likely to have received in the liquidation; and
• (d) The transaction did not take place in the ordinary course of business.
  

(Emphasis added)

[18] Because this is a point which is of significance given the arguments which have been developed, we note that the notice of the liquidator focussed on the contention that the “defendants” (which in context must be a reference to Preston Farm) was able, by virtue of the impugned transactions, to “receive more towards satisfaction of debts than [it] would otherwise have received or been likely to have received in the liquidation”.
[19] Preston Farm applied for an order that the transactions not be set aside and it was this application which resulted in the judgment of Master Gendall which is now under appeal.

The relevant sections of the Companies Act

[20] Section 292, Companies Act 1993 provides:-

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.

[21] Section 294, Companies Act 1993 provides:-

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.

[22] We should also refer to s295 which provides:-

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.

The judgment of the Master

[23] In his judgment the Master recorded that it was common ground that the transactions in issue fell within the specified period defined by s292(5), Companies Act, and that the transactions were thus, potentially, subject to s292.
[24] The relevant passages of the Master’s judgment appears to be as follows:-

[46] As to the transfer of the beetroot grader, it seems to be accepted first, that this was made to a related party, and secondly, that the transfer was apparently accounted for by current account entries in the books of [Hillcorp] with no actual money payment received by the company from Preston Farm Limited.

[47] Further, counsel for the respondent liquidator contends also that the transfer of the beetroot grader at book value does not represent payment of fair value for the item.

[48] As to the current account transactions totalling $33,494.99, as best as I can tell, the approach taken in the accounts of the company would appear to be as follows. As at 30 June 2000 the Preston Farm current account debit with the company was apparently extinguished, curiously in reduction of debts which the company owed to the related companies Hilhurst Farm Limited and Hill Nurseries Limited for monies they had advanced to the company.

[49] The effect of this appears to be that the asset in the company represented by the current account debt owed by Preston Farm Limited was no longer available to meet the outstanding accounts of the company. Instead, this current account debt asset had been “paid” in a 100 cents in the dollar reduction of the debt (if any) which the company owed to Hilhurst Farm Limited or Hill Nurseries Limited.

[50] Here the issue before me is whether these two transactions “took place in the ordinary course of business” and were therefore saved in terms of 292(2) Companies Act 1993. Otherwise, given the company’s acknowledged insolvent position at the time, these transactions are to be set aside.

[25] The Master then went on to decide that the transactions in question did not take place in the ordinary course of business. He therefore was of the view that they should be set aside.

The appellant’s arguments on appeal

[26] The appellants argued in this Court that the Master had misunderstood what had happened. Preston Farm was never a creditor of Hillcorp and the transactions between Preston Farm and Hillcorp which were set aside are not, in fact, subject to s292.
[27] As well, counsel for the appellant argued that there was, in any event, no disadvantage to the body of creditors.

The respondent’s arguments on appeal

[28] Counsel for the respondent suggested that the current account restructuring should be viewed in this way:-

... What appears to have happened from an accounting perspective is that when the accounts for the year ended June 2000 were prepared, the current account debt owed by the appellant has simply been applied in reduction of the debt owed to Hilhurst Farms Ltd and/or Hill Nurseries Ltd which are related companies.

So he contended that the current account restructuring enabled Hilhurst Farms and Hill Nurseries to receive more by way of payment of the money owed to them than they would have received in the liquidation.

[29] As is apparent, counsel for the respondent therefore seeks to argue that the creditors who were preferred were Hilhurst Farms and Hill Nurseries rather than Preston Farm.

Discussion

Overview

[30] There are novel features to the way in which the liquidator’s position was articulated in this Court. As we have noted, the notice under s292 was served on Preston Farm. It was plainly the target of the voidable preference claim advanced by Mr Managh who, by his notice, must be taken to have contended that Preston Farm had been a creditor and had been paid more by reason of the impugned transactions than would otherwise have been the case. Yet on the case as presented to us, the creditors who are said to have been preferred were Hilhurst Farms and Hill Nurseries; entities who were not served with the notice.
[31] In this Court the argument for the liquidator proceeded on the basis that once the relevant transactions are “set aside”, there should be a reversion to the position which obtained prior to those transactions being entered into. On this basis, according to the liquidator, Preston Farm should be treated as still owing Hillcorp $33,495.
[32] We agree that such an approach is consistent with a literal reading of ss 292 and 294. But conventional practice is to treat a voidable preference claim as aimed at the parties who have been preferred, in this case, on the liquidator’s argument, Hilhurst Farms and Hill Nurseries. We see the specific orders which can be made pursuant to s295 as consistent with the view that a voidable preference claim must be aimed at the parties who are alleged to have been preferred.
[33] Accordingly, we have major reservations whether the argument which is advanced on behalf of Mr Managh is available on the true construction of the relevant sections of the Companies Act.
[34] As well, there has undoubtedly been considerable refinement and indeed a major shift in the focus of his argument. As indicated, the initial focus of the claim was on the contention that Preston Farm, as a creditor, somehow or other, had received an illegitimate preference. The claim now is that Hilhurst Farms and Hill Nurseries, as creditors, received an illegitimate benefit.
[35] As will become apparent, there are, in fact, other and fatal difficulties with the argument advanced on behalf of Mr Managh. So it is not necessary for us to resolve the jurisdictional question we have discussed nor to determine the appeal on the basis that Mr Managh’s present argument is not available to him in this Court given the course which was taken in the High Court.

The sale of the equipment

[36] It will be recalled (see para [16] above) that the original notice given by Mr Managh focussed on the sale of equipment to Preston Farm and the subsequent current account restructuring. We are of the view that, on the evidence, neither can be categorised as a voidable preference.
[37] The sale of the items of equipment involved a transfer of property (see s292(1)(a)). The sale occurred at a time when Hillcorp was unable to pay its due debts. It was also within the specified period (see s292(a)). But it cannot seriously be contended that this sale enabled any person to receive more towards the satisfaction of a debt than would otherwise have been received in the liquidation. Preston Farm was not a creditor of Hillcorp at this time. Rather, it was a debtor. The effect of the transaction was to increase the indebtedness of Preston Farm to Hillcorp. We also note in passing that there is no evidence that this sale occurred at an undervalue, ie that the book value of the items of equipment was less than their market value.
[38] So the focus of Mr Managh’s case must be on the current account restructuring.

The current account restructuring

[39] The argument advanced by counsel for Mr Managh before us was that, at the time of the current account restructuring, the advances by Hilhurst Farms and Hill Nurseries to Hillcorp had already been made and that the reduction of those liabilities to allow for the in-substance setting-off of debts owed to Hillcorp by other entities associated with the Hill family (including Preston Farm) involved an
in-substance assignment to Hilhurst Farms and Hill Nurseries of the relevant debts.
[40] If this is what happened then the restructuring would be within s292(1)(a) as involving a transfer by Hillcorp to Hilhurst Farms and Hill Nurseries of property, namely the choses in action represented by the debts owed to Hillcorp by the Hill family entities (including Preston Farm).
[41] The problem for Mr Managh with this argument is that its key factual premise was not established. Indeed, the unequivocal evidence of Mr Ted Hill was that the relevant restructuring did not occur in the way now alleged by Mr Managh. On Mr Hill’s evidence, when Hilhurst Farms and Hill Nurseries injected funds into Hillcorp, they stipulated that some of the money so paid was to be treated as paid on behalf of the Hill family entities which owed money to Hillcorp. To put it simply, the effect of what Mr Hill asserted was that Hilhurst Farms and Hill Nurseries lent to the Hill family entities (including Preston Farm) the money which they needed to repay Hillcorp and such entities utilised the money for that purpose.
[42] If this is the way in which the restructuring was effected, then it clearly lay outside the scope of s292 which can have no application to a transaction in which a debtor (Preston Farm) of an insolvent company (Hillcorp) pays off its indebtedness.
[43] Given that Mr Ted Hill was not cross-examined on this evidence, it is not open to Mr Managh’s counsel to invite us to disbelieve what he said.

Some concluding comments

[44] The members of the Hill family have been prepared to meet personally the claims of all unsecured creditors of Hillcorp other than the Napier City Council. The reasons they have been prepared to pay the unsecured creditors other than the Napier City Council presumably related to their desire to preserve their commercial reputations. Every dollar paid to unsecured creditors has increased the deficiency which Hilhurst Farms and Hill Nurseries have faced as a result of their willingness to fund repayment of the debt owed to the bank. It is self-evident that the willingness of members of the Hill family to pay creditors other than the Napier City Council does not give the Napier City Council a claim against them.

Disposition

[45] Accordingly, the appeal is allowed. In place of the decision of the Master, there is an order that the transactions involving Preston Farm not be set aside. The appellant is entitled to costs in this Court which we fix in the sum of $5,000 together with costs and disbursements, including travelling expenses, to be fixed by the Registrar. Preston Farm is entitled to costs against the respondent in the High Court to be fixed in that Court.

Solicitors:
Bate Hallett, Hastings, for Appellant
Willis Toomey Robinson, Napier, for Respondent