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Court of Appeal of New ZealandLast Updated: 20 December 2011
IN THE COURT OF APPEAL OF NEW ZEALAND
CA98/04BETWEEN TRANS OTWAY
LIMITED
Appellant
AND IAIN BRUCE SHEPHARD AND CHRISTINE MARGARET
DUNPHY
Respondents
Hearing: 12 April 2005
Court: Anderson P, William Young and Chambers JJ
Counsel: D M Law for
Appellant
H L
Thompson for Respondents
Judgment: 13 June 2005
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JUDGMENT OF THE COURT
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REASONS
(Given by Chambers J)
The nature of a set-off
[1] This case involves an interesting question as to the true nature of a set-off. A owes B $X. Subsequently, A agrees to sell B an asset for $X. A and B expressly agree that the two sums will be set off against each other. At settlement, does A pay B $X and B pay A $X or is the correct analysis that neither pays the other?
[2] The problem in this case arises in the context of s 292 of the Companies Act 1993, the section under which certain “transactions” may be set aside by the liquidator of a company. If, in the above example, A went into liquidation shortly after the set-off arrangement was entered into, has A made a “payment of money” to B in the sum of $X which A’s liquidator can claw back under s 292?
[3] Associate Judge Sargisson held that A had made a payment of $X which could potentially be clawed back. This appeal is concerned with whether she was right in that conclusion.
Issues on the appeal
[4] Trans Otway Limited, the appellant, was B in the above example. It raised a number of issues on this appeal.
[5] First, did Newman Carrying Limited (A in the above example) make a “payment of money” to Trans Otway for the purposes of s 292(1)(e)? Trans Otway says that Newman did not pay anything because of the set-off. Newman’s liquidators, the respondents, dispute that.
[6] If Newman did make a payment, then the next issue is whether the liquidators have proved the elements of s 292(2)(b).
[7] The third issue relates to whether the court should give relief under s 296(3).
[8] We shall first set out the relevant statutory provisions for ease of reference. We shall then summarise the facts insofar as they are relevant to the issues we must determine. We shall then set out the High Court reasoning, followed by our analysis of the issues.
Relevant statutory provisions
[9] For ease of understanding of the reasons that follow, we set out the relevant statutory provisions from the Companies Act:
- 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.
...
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.
...
If a transaction or charge is set aside under section 294 of this Act, the Court may make one or more 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 hand 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.
...
(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.
...
The facts
[10] Trans Otway and Newman had dealt with each other in the past. Those dealings commenced prior to 2001; it is not clear on the evidence before us as to when they came to an end. Trans Otway had carried out line haul freighting for Newman. Newman had done freighting for Trans Otway in the lower North Island. Each billed the other for services rendered. There was some dispute between Trans Otway and Newman as to what the balance was when these dealings came to an end. Trans Otway said that the balance owed by Newman as a result of the mutual dealings was $94,996.73.
[11] In early 2003, Trans Otway was pressing for that balance sum to be paid. Finally, on 20 March 2003, Trans Otway served on Newman a statutory demand in respect of the balance debt.
[12] At the time this notice was served, Godfrey Otway, the managing director of Trans Otway, and Leslie Newman, the managing director of Newman, were negotiating for Trans Otway to buy Newman’s business. They reached an agreement, which was recorded in writing. The agreement bears the date of 2 April 2003, but it would appear from affidavit material before the court that the agreement was in fact reached at some stage late in March 2003. Nothing turns on the exact date of agreement, at least for present purposes. We shall call it for convenience “the March agreement”.
[13] The March agreement began with four matters by way of background. One of those matters so agreed was an acknowledgement by Newman that it was indebted to Trans Otway in the sum of $94,996.73. This resolved the issue as to what the balance indebtedness arising from the parties’ earlier mutual dealings was.
[14] The first six clauses of the March agreement read as follows:
- The vendor [Newman] agrees to sell and the purchaser [Trans Otway] agrees to purchase all of the assets set out in the first schedule hereto for the sum of $371,000.00 plus GST.
- The vendor agrees to sell and the purchaser agrees to purchase the client list for the sum of $94,996.73 including GST.
- The vendor warrants and undertakes that at the giving and taking of possession, the assets are the encumbered property of the vendor, or that the assets are subject to such charges and leases as shall be notified to the purchaser prior to settlement in writing, and hereby authorises the purchaser to repay such charges directly to the chargeholder in part payment of the purchase price.
- Settlement of the sale shall take place on 1 April 2003.
- On the settlement date the following should occur:
- (a) The purchaser shall pay to the vendor by way of ordinary cheque the sum of $371,000.00 plus GST upon receipt of a valid GST invoice less sums as are to be paid pursuant to subclause (b) hereof.
- (b) The purchaser shall pay to the holders of any securities over or leases of the assets, such sum as shall be required to repay the full indebtedness secured by the assets.
- (c) Ownership of the assets will pass on payment being made as provide in subclauses (a) and (b).
- (d) The vendor will provide full details of its clients to the purchaser in writing together with contact names, addresses and phone numbers together with details of activity of the account for the previous 12 months.
- (e) The purchaser will pay to the vendor the sum of $94,776.73 including GST for such client details, such payment to be made by the purchaser acknowledging that the vendor has made full payment of all sums due and owing to the purchaser.
- The purchaser acknowledges that following settlement of this agreement in full, it will take no further steps pursuant to the statutory demand served on the vendor on 20 March 2003.
[15] Settlement duly took place, presumably on the agreed date.
[16] On 16 May 2003, the shareholders of Newman resolved to put Newman into liquidation. Iain Shephard and Christine Dunphy, the respondents on this appeal, were appointed liquidators.
[17] On 25 September 2003, Newman’s liquidators filed and served a notice under s 294 of the Companies Act. In that s 294 notice, the liquidators said that they wished to have set aside “the payment of $94,996.73 including GST by Newman Carrying Limited (in liquidation) to Trans Otway Limited, payment made by set-off against a debt in that amount due to Trans Otway Limited by Newman Carrying Limited (in liquidation), and as recorded in an agreement dated 2 April 2003”. The liquidators asserted that the impugned transaction was a “payment of money by the company”, as defined in s 292(1)(e) of the Companies Act. They alleged that the payment was made at a time when Newman was unable to pay its due debts and within “the specified period”, as defined. They said that it enabled Trans Otway to receive more towards satisfaction of the debt owed to it than Trans Otway would otherwise be likely to have received in the liquidation. They also said that the transaction did not take place in the ordinary course of business. They sought recovery of the sum of $94,996.73.
[18] Trans Otway then applied to the High Court for an order that the transaction not be set aside: s 294(2).
The High Court decision
[19] Associate Judge Sargisson held that “a substance focused approach” was required: Re Newman Carrying Limited (in liquidation), Trans Otway Limited v Shephard and Another HC AK CIV2003-404-15409 30 April 2004 at [23]. She concluded that there had been a payment, and the payment was “a transaction the equivalent of cash among businessmen”. (She took the quoted words from a judgment of Lord Hanworth MR in Re Matthew Ellis Limited [1933] 1 Ch 458 (CA) at 469.) The judge said that the possibility that Trans Otway may not have paid $94,996 for the client list if it had not been for its purchase of the rest of the assets did not change the fact that it contracted to pay that sum for the list. Nor did it alter the fact that Newman paid Trans Otway $94,996 to extinguish its debt: at [28].
[20] According to the judge, there was no dispute that “the payment” (if payment it be) was made at a time when Newman was unable to pay its debts and within “the specified period”. It was also agreed that the transaction did not take place in the ordinary course of business.
[21] In light of that, the judge declined to make an order that the transaction not be set aside.
[22] In the event that the transaction was set aside, Trans Otway had also sought orders under s 295 of the Companies Act. Her Honour considered she needed further submissions on that section and the orders sought. She adjourned that aspect for further hearing. Apparently, that further hearing has never taken place, presumably because Trans Otway wished to test the correctness of the “payment” decision in this court. Neither party sought to advance before us any argument concerning s 295.
Was there a payment of money?
[23] We agree with Associate Judge Sargisson that Newman, by entering into the March agreement and subsequently settling it, did pay off the debt it owed to Trans Otway. There was a “payment of money” for the purposes of s 292(1)(e).
[24] There can be no doubt as to the effect of clauses 2 and 5(e) of the March agreement. Trans Otway was agreeing to pay $94,996.73 including GST for the client list. The parties agreed that that payment could be set off against the existing debt Newman owed Trans Otway. This was a classic example of the setting of money cross-claims against each other. The effect of the agreement was that both payments were made.
[25] This conclusion is supported by three leading texts in this field. First, Philip Wood, in his classic text, English and International Set-Off (1989), described the position as follows (at [1-51]):
Set-off may be regarded as similar to payment. In setting off his cross-claim, the debtor “pays” the creditor’s primary claim pro tanto and obliges the creditor to “pay” the cross-claim. There is therefore a pro tanto redemption, discharge, satisfaction, extinguishment or reduction of the reciprocal debts. Set-off pays them both. In formal terms, set-off is a form of discharge.
As mentioned, this double payment or discharge – whatever one wishes to call it – is sometimes effected by the debtor as an extrajudicial right, sometimes by the creditor when he commences proceedings, sometimes by a judicial balance judgment and sometimes by the netting-out operation of the insolvency set-off clause.
[26] Dr Charles Proctor, in the latest edition of Mann on the Legal Aspect of Money (6ed 2005), makes a similar point (at [7.04]):
The concept of payment is, of course, a fundamental aspect of the law of money. Payment in the legal sense must connote any act offered and accepted in performance of a monetary obligation without changing the essential nature of the original obligation.
[27] The footnote to that passage reads as follows:
Thus, if the parties agree that the debtor shall hand over his car in discharge of a debt of £10,000, the car does not thereby become “money” nor does the act of delivery amount to “payment”, for the parties have varied the original contract by discharging the monetary obligation without payment. But a monetary obligation retains its original character even though it is subsequently discharged by the tender and acceptance of cash, cheque by means of a bank transfer, by means of set-off, or by any other means which might ordinarily be described as “a payment”.
[28] In the present case “the essential nature of [Newman’s] original obligation” was not changed. On the contrary, it was reinforced. Newman expressly acknowledged that it did owe $94,000 to Trans Otway. Trans Otway did not agree to take the client list in satisfaction of the debt. On the contrary, Trans Otway expressly agreed what it would pay for the client list and the parties further expressly agreed that the two payments would be set off.
[29] Thirdly, we note what Dr Rory Derham said in his book, The Law of Set-Off (3ed 2003) at [16.07]:
In Australia, the preference section in bankruptcy applies where there was a ‘transfer of property by a person who is insolvent (“the debtor”)’ within the preference period in the debtor’s bankruptcy. A transfer of property is defined as including payment of money. The word ‘transfer’ has been described as one of the widest terms that can be used. ‘Payment’ similarly has been said to be a very wide term, such that it may include a mere transfer of figures in an account without any money passing. The exercise of a contractual right of set-off therefore should constitute a transfer of property for the purpose of the preference section.
[30] Ms Law, for Trans Otway, submitted that “no money changed hands”. Indeed it did not, in the sense of a physical passing of a cash or cheque. But the expression “payment of money” in s 292(1)(e) is not dependent on the physical passing of a cash or a cheque: Re Mataura Motors Limited (1981) 1 NZCLC 98,088 (CA) at 98,092. As Lord Mustill said in Charter Reinsurance Co Limited v Fagan [1997] AC 313 (HL) at 384, the word “payment” is a “slippery” term:
Unquestionably, it is no longer confined to the delivery of cash or its equivalent. In ordinary speech it now embraces transactions which involve the crediting and debiting of accounts by electronic means, not only transfers between bank accounts by payment cards and direct debits, but also dealings with credit cards and similar instruments.
[31] So, while no physical cash was exchanged and while there was not a cheque swap, payments were nonetheless made. As Mr Wood put it, it is the doctrine of set-off which sees both debts paid.
[32] Ms Law’s next point was that s 292(1)(e) requires payment of money by the debtor company. She submitted that set-off is not a payment by the debtor; rather, she submitted, the creditor paid itself from a designated asset of the debtor. Ms Law cited Dr Derham’s book at [16.13] as authority for that proposition.
[33] With respect, we consider that Ms Law has cited Dr Derham’s text out of context. Dr Derham in that paragraph is continuing a discussion which commences at [16.07] with this question:
If a creditor is empowered by a prior agreement to act unilaterally to set off mutual money obligations as between it and the debtor, is the creditor’s act in effecting a set-off, in circumstances where the cross-demands otherwise would not have been set off in the bankruptcy, properly categorized as a payment “by” the debtor so as to be voidable as a preference?
[34] It is Dr Derham’s view that the answer to that question is “no”. The set-off constitutes a payment, but it is not a payment “by” the debtor. Dr Derham cites as authority for his view the New South Wales Court of Appeal’s decision in Cinema Plus Limited v Australia and New Zealand Banking Group Limited [2000] NSWCA 195; (2000) 49 NSWLR 513. He acknowledges that there is authority to the contrary: see, for example, Driver v Federal Commissioner of Taxation (1999) 42 ATR 510, affirmed [2000] NSWCA 247. That is not a debate we need to enter, however, as the set-off in this case did not arise as a result of “a prior agreement [permitting the creditor] to act unilaterally to set off mutual money obligations as between it and the debtor”. The power of set-off in the present case arose from the parties’ entry into the March agreement. The set-off in this case was not a unilateral act by Trans Otway.
[35] When Dr Derham says in [16.13] that “the creditor, acting on his own behalf and not on behalf of the debtor, pays himself from a designated asset of the debtor” and that that on its own should not be a preference, Dr Derham is referring to the situation of there being a prior agreement permitting the creditor to act unilaterally to set off mutual money obligations between it and the debtor. In the very next sentence, he contrasts that situation with the position we have in the present case:
On the other hand, the circumstances surrounding the incurring of the debts the subject of the set-off, or the entry into the set-off agreement itself, could give rise to a preference.
[36] Ms Law’s next point was that the only “transaction” in this case was Newman’s selling the client list. That transaction, she said, was not impugned in the liquidator’s s 294 notice. We agree that that too was a transaction, being a “transfer of property by the company”, within the definition of “transaction” given in s 292(1)(a). Another “transaction” was Newman’s selling of the first schedule assets: see clause 1 of the March agreement. That too was challengeable. But a liquidator is not bound to challenge all transactions or none: a liquidator can pick and choose. The fact that the liquidators here have not challenged the transfer of the client list is of no relevance when it comes to assessing whether the transaction they have impugned is indeed voidable under s 292(2).
[37] Finally, under this head, Ms Law cited Moller Johnson Motors (Hawera) Limited v R D and S M Taplin Contracting Limited (in liquidation) HC NWP M54/97 13 March 1998. Ms Law submitted that that case had “some similarity to the present case”. In that case, Taplin owed Moller $18,000 for repair work. Moller had been pressing for payment. In the end, Moller agreed to accept “a stock pile of logs” in partial satisfaction of the debt. Taplin subsequently went into liquidation. The liquidator successfully sought to have the transaction involving the logs set aside under s 292. Ms Law submitted that the significance of the case for present purposes was that the transaction which was set aside was the transfer of the logs, not the reduction of the debt by way of set-off. By analogy, she said, what should here be attacked (if anything can be attacked) is the transfer of the customer list, not the discharge of the debt by way of set-off.
[38] The analogy, with respect, is false, because the parties’ agreement in Moller was different from the parties’ agreement here. The parties’ agreement in Moller was akin to the first proposition in Mann’s footnote cited at [27] above. What the parties in Moller agreed was that Taplin would hand over some logs in partial discharge of the debt. As Mann said, the logs (the car) does not thereby become “money” nor does the act of delivery amount to “payment”, for the parties have varied the original contract by discharging (at least partially) the monetary obligation without payment. It was, no doubt, for that reason that the liquidator’s challenge in Moller was not under s 292(1)(e), but rather was under s 292(1)(a): ibid at 3. Accordingly, Moller does not assist Trans Otway.
Section 292(2)(b)
[39] Having found that there was a “transaction” as specified in the s 294 notice, the next issue is whether the transaction was voidable in terms of s 292(2). Associate Judge Sargisson recorded the parties’ position at the hearing before her in these terms:
[13] There is no dispute between the parties that the payment was made within the specified period defined in s 292(5) of the Act and within the ‘restricted period’ in 292(6) of the Act, or that the payment (in the event that it is a transaction) is therefore presumed to have been made at a time when Newman was unable to pay its debts, and that it was made ... otherwise than in the ordinary course of business. Nor is there any dispute that the payment would enable Trans Otway to receive more than it would have received in the liquidation, if the payment is indeed a transaction.
[40] Ms Law submitted that Associate Judge Sargisson failed to consider at all s 292(2)(b) in her decision. Ms Law complained that the judge, having determined that there was a “payment of money” failed to “go on to consider whether the identified transaction enabled Trans Otway to receive more towards satisfaction of a debt than it would otherwise have received, or be likely to have received, in the liquidation”.
[41] It is not correct to say that the judge failed to consider s 292(2)(b). Paragraph [13] of the judgment is concerned with that very topic. It is clear that the judge did not need to consider the point in any detail because the parties at that time accepted that, if Newman had paid money, the transaction was within s 292(2). What now seems to be happening is that Ms Law is wanting to resile from a concession made to Associate Judge Sargisson.
[42] Regardless of that, however, there is nothing in the argument Ms Law presented to us under this head. It is clear that subs (2)(b) was made out. Newman’s “payment” of its $94,000 debt to Trans Otway clearly enabled Trans Otway to receive more towards satisfaction of that debt than Trans Otway would otherwise have received or be likely to have received in the liquidation. That is self-evident. The debt was paid in full. Clearly, if the debt had not been paid, Trans Otway would now be proving in the liquidation and would receive in respect of that debt a very much lower figure. Whether or not, therefore, Associate Judge Sargisson correctly recorded Trans Otway’s position before her, the result she set out at [13] of her judgment was absolutely correct.
[43] Ms Law submitted that s 292(2) required that “the whole transaction...be looked at to determine whether there has been a preference”. That meant, she submitted, looking at all the provisions of the March agreement. It meant looking at what the true value was of the customer list and what the value was of the first schedule assets. With respect, that is not correct. A s 292(2) analysis is very focused. One looks simply at the transaction which has been impugned and one analyses whether that transaction – here, the payment of Trans Otway’s outstanding debt - :
- (a) was made at a time when Newman was unable to pay its due debts; and
- (b) was made within the specified period; and
- (c) enabled Trans Otway to receive more towards satisfaction of its debt than it would have received in the liquidation; and
- (d) did not take place in the ordinary course of business.
[44] All those elements are self-evident propositions in this case.
[45] It follows that Associate Judge Sargisson was correct in not acceding to Trans Otway’s application under s 294(2).
[46] There is one very minor point on which we would tweak what the judge did. Her formal result was to “decline to make an order that the transaction is not voidable or that the transaction not be set aside”: judgment at [33]. Section 294 is not as elegantly drafted as it might be. Where an application under s 294(2) fails, the High Court should make a formal order setting aside the transaction. Unless the court makes such a formal order, the liquidator could not move on to the “recovery” phase under s 295, which requires that the transaction has been set aside. The automatic setting aside by effluxion of time under s 294(3) occurs only in circumstances where the person on whom the notice was served does not apply within the specified time to have the transaction set aside.
Section 296(3)
[47] Ms Law’s final submission, in the event the transaction was set aside, was that this is an appropriate case for the court to grant relief under s 296(3).
[48] There is no reference to this subsection in Associate Judge Sargisson’s judgment. That was for very good reason: it is not yet relevant. All the liquidators have done so far is impugn a particular transaction. Their action in impugning that transaction was challenged by Trans Otway, but unsuccessfully. The result of this appeal means that the impugned transaction has been set aside, a finding which (barring a successful further appeal to the Supreme Court) is now binding on the parties. The next stage in the proceeding is the hearing of the liquidators’ application to recover the sum of $94,996.73. When that application is heard, Trans Otway can at that stage raise its s 296(3) defence.
[49] Mr Thompson, for the liquidators, submitted that s 296(3) of the Act “is not properly a subject of this appeal”. He was quite right so to submit. We express no view as to whether this would be a proper case in which to deny “recovery by the liquidator...wholly or in part”. That is a matter for another day in another forum.
The next step in this proceeding
[50] Associate Judge Sargisson ended her judgment as follows:
[34] I turn next to the orders sought under s 295 of the Act. They are as follows:
[35] Neither counsel raised these matters in any detail and, on reflection, I think I need to hear from both counsel further.
[51] The Trans Otway application we have seen does not contain application for the orders to which the judge referred in [34] of her judgment. Perhaps those orders were sought in another application which we have not been shown, or possibly such application was made informally by way of submission. In any event, the case must be remitted to the High Court for that court’s consideration of Trans Otway’s outstanding application. Presumably the court will consider Trans Otway’s application at the same time as it considers the liquidators’ application for recovery.
Costs
[52] There are no exceptional circumstances concerning this appeal. Costs should follow the event, in the normal sum for a one day appeal.
Solicitors:
Wood Ruck Manukau, Manukau, for
Appellant
McMahon Butterworth, Auckland, for Respondents
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