[1] This appeal against a decision of Associate Judge Christiansen (HC INV CIV 2007 425 000290 13 November 2007), is concerned with the proper application of s 292 of the Companies Act 1993. The Companies Amendment Act 2006 came into force two days after the hearing of this matter in the High Court. It is common ground that the pre-Amendment Act law is applicable to this dispute.
[2] The first respondent undertook painting for, and the second respondent supplied and installed roofing and associated materials to, Southern Lakes Construction Limited (“Southern Lakes”) during the six month period prior to it going into liquidation on 23 November 2005. The appellants are the liquidators of Southern Lakes.
[3] The sum of $38,500 was paid to the first respondent in September 2005 and $35,000 to the second respondent in September and October 2005.
[4] On 17 March 2007, the liquidators served notices to set aside those payments.
[5] Section 292(2) and (3) of the Companies Act at the relevant time provided:

Transactions having preferential effect

...

(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 time 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.

[6] Each respondent filed an application seeking that the payment transactions not be set aside. It was common ground that they were voidable because they were made at a time when Southern Lakes was unable to pay its debt, within two years prior to its liquidation and in circumstances in which each of the respondents received a larger sum on account of their debt than they would have received as a result of liquidation. The sole issue was whether the respondents established that they were “in the ordinary course of business.”
[7] Shortly before the appeal hearing, counsel who had represented the first respondent advised that his client had ceased trading and did not intend to participate in the appeal. Counsel was given leave to withdraw, on normal conditions.

Factual situation

[8] Associate Judge Christiansen set out the factual trading relationship as follows:

P & W Painters Trading Relationship

[20] In March 2005 P & W Painters commenced work on a development project undertaken by Southern lakes. The nature of the work was that of painting and decorating, and the total value of the work contracted for was $115,800 plus GST.

[21] Invoices were rendered, and payments were received according to the schedule below. The works covered by the invoices were described on each invoice.

Invoices Rendered		Payments Received
31/3/05	$22,545.00	27/4/05	$22,545.00
30/4/05	$12,593.25	25/5/05	$12,593.25
31/5/05	$11,587.50	24/6/05	$11,587.50
30/6/07	$28,967.62	02/8/05	$28,967.62
31/7/05	$23,828.00	06/9/06	$7,500.00
		12/9/05	$5,000.00
31/8/05	$26,478.00	29/9/05	$26,000.00

[22] During the months March through August inclusive, invoices were rendered on the last day of each month. Each of the first 4 of these was paid in the invoice amount in or about the last week of the month following render.

[23] A change of pattern is noted in connection with the final 2 invoices rendered. It will be observed that payments were made in rounded sums, which did not correspond with the invoice amounts.

[24] The transactions were limited to a 6 month period. In his affidavit in support of the application Mr Pitches said it was not uncommon in the industry concerned for a contractor to receive less than that claimed in that invoice, nor to receive late payments.

[25] Mr Pitches alluded to the liquidity issues that developers faced on account of funds only being released to them by way of progress payments. In those circumstances, lump sum or rounded payments were often made by a contractor in the knowledge the balance of the contract price would be settled on the final invoice.

Trading relationship with Calder Stewart

[26] By written agreements dated 26 July 2004, 30 November 2004, and 12 April 2005, Calder Stewart contracted with Southern Lakes to supply certain materials and labour to 2 of Southern Lakes projects in Queenstown.

[27] Between January and August 2005 materials and labour were supplied to the project and progress payment claims were rendered.

[28] Set out below is a schedule containing an invoice and payment history:

Date	Invoice	Payment	Balance	Description
28/1/05	$63,881.98		$63,881.98	Claim 1 BT
28/2/05	$17,435.224		$81,317.22	Claim 2 BT
28/2/05	$41,158.74		$122,475.96	Claim 1 HS
4/3/05		$38,134.80	$84,341.16	Part payment on Claim 1 BT
9/3/05		$25,747.18	$58,593.98	Payment balance on Claim 1 BT
30/3/05		$48,715.88	$9,898.10	Payment Claim 2 BT and part payment Claim 1 HS of $21,280.64
31/3/05	$542.27		$10.420.37	Misc Invoice A BT
27/4/05		$542.27	$9,878.10	Payment Misc Invoice A BT
30/5/05	$25,621.36		$35,499.46	Claim 3 BT

29/6/05		$25,621.36	$9,878.10	Payment Claim 3 BT
30/6/05	$42,733.09		$52,611.19	Claim 2 HAS
13/7/05	$846.81		$53,458.00	Misc Invoice B BT
27/7/05	$87.58		$53,545.58	Misc Invoice B BT
28/7/05	$30,143.18		$83,688.76	Claim 4 BT
28/7/05	$35,769.88		$119.458.64	Claim 3 HS
30/7/05		$9,878.10	$109,580.54	Final Payment Claim 1 HS
01/8/05		$42,733.09	$66,847.45	Payment Claim 2 HS
31/8/05	$6,870.04		$73.717.49	Claim 5 BT
8/9/05		$30,000.00	$43,717.49	Payment Misc B and C BT Part payment Claim 4 BT of $29.065.61 ($1,077.57 outstanding)
5/10/05	$1,531.52		$45,249.01	Interest
7/10/05		$5,000.00	$40,249.01	Payment Claim 4 BT Part payment claim 3 HS $3,922.43 ($31,847.45 outstanding)
20/10/05	$379.21		$40,628.22	Interest
20/11/05	$812.56		$41,440.78	Interest

[29] The challenge to payments concerns those made on 8 September 2005 and 7 October 2005 for $30,000 and $5,000 respectively

The appeal

[9] The crux of the appellant’s argument was:

(a) Until the impugned transactions, the course of business between Southern Lakes and the respondents was characterised by:

(i) invoices being rendered by the respondents to Southern Lakes;

(ii) where Southern Lakes took no issue with work done on an invoice, payment being made in full with reference to specific invoices; and
(iii) where Southern Lakes took issue with work done on an invoice, payment was made of the undisputed amount and an explanation given as to why the disputed amount was not being paid.
(b) The impugned transactions, by contrast:

(i) were for amounts not referable to any invoices:

(ii) were not accompanied by any explanation as to why there was difference between the invoiced amount and the paid amount.

[10] There were some subsidiary issues which were of relevance to the respective respondents.
[11] It was common ground that two decisions of this Court encapsulate the standard approach to “ordinary course of business.” In Waikato Freight & Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 it was held that :

[31] The question is whether, at the time it was made, the relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned. So too is the previous commercial relationship between the parties. The observer spoken of in the Privy Council [see Countrywide Banking Group Ltd v Dean [1998] 1 NZLR 385 (PC) at 394] is in reality the Court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether on the evidence before the Court the transaction or payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?

And subsequently in Carter Holt Harvey Limited v Fatupaito (2003) 19 NZCLC 263, 285:

[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 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: s 292(4) ...

[12] The Judge’s conclusion with regard to the first respondent, that the payments were made in the ordinary course of business, was rooted in:

(a) an inference that further contract work was to be undertaken;

(b) the fact that it was industry practice to tolerate delays in payments; and

(c) there being no evidence of credit concern.
[13] The appellant submits that these are all irrelevant to the question of whether the respondents were, at the material times, “in the ordinary course of business”.
[14] As far as the second respondent was concerned, the Judge found that there was:

(a) a history of late, and sometimes very late, payments;

(b) effectively a running account;

(d) the possibility of a counter-claim.
[15] All of these bases are challenged by the appellants as either irrelevant or unsustainable.

Discussion

[16] As the learned authors of Brown and Telfer, Personal and Corporate Insolvency Legislation, indicate at page 19 of their “Guide and Commentary to the 2006 Amendments”:

Creating a workable voidable preference regime has never proven to be an easy task. The problem is finding appropriate statutory language to differentiate between transactions that should be set aside and those that should be allowed to stand. ...

[17] The latest statutory amendment further reflects an endeavour to capture this essential distinction.
[18] Under the applicable law, bearing in mind the onus which was on the respondents, an objective assessment must begin from the clear evidence as to the conventional nature of the payment relationship.
[19] As the schedules set out in Associate Judge Christiansen’s judgment demonstrate (see above, at [8]), in each case there was a history of specific invoices being rendered and paid, albeit (particularly in the case of Calder Stewart) with some delay. This was however explicable because of the challenge which had arisen to part of an account and which the evidence discloses was the subject of discussion.
[20] The claims under scrutiny are the only times in which there have been rounded figures in respect of payment to either of the respondents.
[21] The Associate Judge summarised his approach:

[35] In brief:

(a) The contract was ongoing. It can be inferred further contract work was to be undertaken.

(b) Initial payments were made promptly in invoice amounts. There is evidence of an industry practice which tolerates delays of payments, in lesser sums.

[22] Mr Hikaka, for the appellants, undertook a thorough and careful analysis of the operation of the arrangements and was able to demonstrate that frequently payments were received on the basis of actual invoices rendered.
[23] But that is only one small part of the picture. A consideration of the evidence and the payment regime leaves no doubt that there was a pattern, particularly in Southern Lakes’ dealings with Calder Stewart, of payments being made only in response to pressure being exerted.
[24] It is noteworthy that Calder Stewart served three claims under the Construction Contract Act 2002 demanding payment and giving notice of an intention to suspend work if payment was not received in full within five working days. Practices in the construction industry were significantly affected by the reforms instituted by the 2002 Act. We consider that it is important to have in mind the procedures set out in that Act as part of the context in which the ordinary course of business as between contractor and subcontractor is assessed.
[25] These notices were issued the day before receipt of the payments of 4 March, 29 June and 8 September. The notices were for different sums than what was actually paid, but they demonstrate a pattern of ongoing pressure on Southern Lakes to ensure that it continued to meet its financial obligations.
[26] There is no evidence to suggest that there was a credit concern while this was going on. Rather, it was simply the way that the relationship operated and, as the uncontroverted evidence demonstrated, it was not an unusual method of operating in the building industry.
[27] We agree there was an ongoing contractual relationship between Southern Lakes and Calder Stewart, and although Calder Stewart did no further work for Southern Lakes after 31 August, there remained a job outstanding which it was willing and able to do when proper payments were received.
[28] The Associate Judge’s conclusion in respect of Calder Stewart was:

[41] In my assessment, the continued application of pressure to collect monies outstanding was a feature throughout the parties’ trading history. Payments were frequently late, and as I have noted, sometimes very late. I believe it is proper to consider the parties as having a running account. Work and services were continued to be supplied, notwithstanding there was a constant level of debt owed on a monthly basis. Unpaid invoice levels exceeded $50,000 until September, when the rounded payments were made.

[29] The position with P & W Painters was not materially different. The rounding off in the final two payments can hardly be seen as commercially significant in a relationship which had only involved half a dozen invoices. They do not demonstrate any major deviation from the pattern which had emerged, even though there was a short payment in the latter period.
[30] We accept that this was not a “running account” as that phrase is used in a technical sense, particularly in the Australian jurisprudence. But the rounded payments are not out of the ordinary unless one becomes fixated by the final dollars and cents rather than the pattern and character of the payment regime.
[31] We are satisfied that the summation of the position of both respondents is fairly captured by when Associate Judge Christiansen when he said, at [42]:

[42] Overall, the relationship was characterised by providing high cost services to 2 developments where payments were often late, and where threats of recovery action were the norm, rather than the exception. Too much emphasis is placed on the fact that the payments were rounded. When an overview is taken of the history of the trading relationship, there is nothing in the rounded payments to put Calder Stewart on inquiry as to the company’s solvency. There is no evidence that at the time those rounded payments were made there was not an ongoing business relationship between the parties. In that overview, there is nothing commercially remarkable in the 2 payments made. Further, there is evidence those payments were made at a time when Southern Lakes advised it believed it had a counter claim.

[32] We reject the suggestion that this involved a shift in the onus of proof and, like the Associate Judge, we are satisfied the respondents meet their obligation of proof on the balance of probability.
[33] There is an absence of any evidence of developing financial disaster and apart from a threatened counter-claim, these parties, throughout the length of their respective relationships, operated on a basis of payments being made and received no sooner than absolutely necessary to keep the business relationship on foot.
[34] In those circumstances it cannot be said that these transactions were other than “in the ordinary course of business.”

Result

[35] The appeal is dismissed.
[36] The appellants must pay the second respondent’s costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Lee Salmon Long, Auckland, for Appellants
AWS Legal, Invercargill, for Second Respondent

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