Stapley and another v Fletcher Concrete and Infrastructure Limited [2008] NZCA 442 (24 October 2008)

Last Updated: 29 October 2008

IN THE COURT OF APPEAL OF NEW ZEALAND

CA134/2008

[2008] NZCA 442

BETWEEN GLEN ALLAN STAPLEY & ANOR
Appellants

AND FLETCHER CONCRETE AND INFRASTRUCTURE LIMITED
Respondent

Hearing: 21 October 2008

Court: Robertson, Randerson and Heath JJ

Counsel: H J P Wilson for Appellants
K W Fulton for Respondent

Judgment: 24 October 2008 at 2 pm

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT
(Given by Randerson J)

Introduction

[1] The appellants were appointed liquidators of Bedrock Contracting Limited on 28 October 2006. They subsequently gave notice of their intention to set aside three payments made by Bedrock to the respondent Fletcher Concrete and Infastructure Limited within the restricted period of six months prior to liquidation namely:

• 10 August 2006 $10,855.52
• 12 October 2006 $10,000.00
• 18 October 2006 $ 2,445.44

[2] In a reserved judgment delivered on 4 March 2008 (HC CH CIV 2007-409-2036 and CIV 2007-409-2590) Associate Judge Christiansen granted an application by Fletcher for orders that the transactions not be set aside. The liquidators of Bedrock now appeal against that decision. They do so on the grounds that:

(a) There was no evidence to support the finding by the Judge that the payments were made in the ordinary course of business;

(b) The Judge misapplied the onus of proof; and

(c) The Judge erred by finding that Fletcher’s application of its credit policy would not normally risk a finding that the payments were voidable.

[3] A ground of appeal relating to references by the Judge to payments “outside” the ordinary course of business was not pursued. Counsel acknowledged this was a semantic issue rather than one of substance.

The relevant law

[4] It is common ground the case is to be determined on the basis of ss 292 to 296 Companies Act 1993 prior to the amendments introduced on 1 November 2007. Section 292 Companies Act 1993 then relevantly provided:

292 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 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), 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.

...

[5] The only issue before the Judge was whether the payments were made in the ordinary course of business since it was accepted that the payments:

(a) Were made when Bedrock was unable to pay its debts;

(b) Were made within six months of the date of liquidation (so that they were within “the restricted period” in terms of s 292(3)); and

(c) Enabled Fletcher to receive more towards the satisfaction of its debt than it would otherwise have received in the liquidation.

[6] There is no challenge to the legal principles adopted by the Judge. The Privy Council in Countrywide Banking Corp Ltd v Dean [1998] 1 NZLR 385 at 394 described the approach to be taken to the issue of the ordinary course of business:

Plainly the transaction must be examined in the actual setting in which it took place. That defines the circumstances in which it is to be determined whether it was in the ordinary course of business. The determination then is to be made objectively by reference to the standard of what amounts to the ordinary course of business. As was said by Fisher J in the Modern Terrazzo Ltd case [1998] 1 NZLR 160], the transaction must be such that it would be viewed by an objective observer as having taken place in the ordinary course of business. 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. Their Lordships respectfully agree with the Judge's conclusion by reference to the policy of the section at p 175:

“Whether a payment should be regarded as commercially routine at a day-to-day trading and operating level will turn at least in part upon a comparison with the practices of the commercial community in general. But equally, the way in which the particular company has acted in the past, and its dealings with the particular creditor, would seem pertinent. That the payment was simply a repetition of past patterns of behaviour would make it more difficult to argue that it represented special assistance to an insider or the result of special enforcement measures or a situation in which the subject creditor ought to have investigated before extending credit. So at a policy level there is something to be said for the view that relevant considerations should extend to the prior practices of the particular company.”

[7] Since the Countrywide decision, this Court has reaffirmed that the question of whether a transaction takes place in the ordinary course of business is one of objective fact involving a consideration not only of the commercial relationship between the parties but also of general business practices. The ultimate question as noted in Waikato Freight & Storage (1998) Ltd v Meltzer [2001] 2 NZLR 541 is:

Was it [the transaction] in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?

[8] And as stated subsequently by this Court in Carter Holt Harvey Ltd v Fatupaito (2003) 9 NZCRC 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) ...

[9] Where the payment is made within six months of the date of commencement of the winding up, the onus is on the recipient of the payments to prove, on the balance of probabilities, that the payments were made in the ordinary course of business. Both counsel accept that the Judge correctly stated the onus. The appellant’s point is that he misapplied it.

The trading history

[10] The trading relationship between Bedrock and Fletcher (operating as Winstone Aggregates) commenced in January 2003 and continued for nearly three years until Bedrock went into liquidation. Fletcher supplied aggregates and similar products to Bedrock for use in its business as a contractor. Payments of invoices issued by Fletcher were generally made in cash but from November 2005 a contra arrangement was reached whereby Fletcher hired trucks from Bedrock for the purpose of carrying materials supplied by Fletcher. In the six months prior to liquidation, there were five credits to Bedrock’s account with Fletcher in respect of contra transactions. The only cash payments received during this period were the three impugned payments. The liquidators do not suggest that the contra arrangements were unusual or out of the ordinary course of business.

The evidence before the Associate Judge

[11] The Judge had before him affidavits from one of the liquidators (Mr Stapley), a director of Bedrock (Mr Craig Stevenson) and a former administration assistant employed by Bedrock (Ms Carolyn Joyce). There were opposing affidavits from a manager employed by Fletcher (Mr John Moffat). Mr Moffat was cross-examined briefly before the Associate Judge.
[12] It was submitted on behalf of the liquidators and pressed in argument before us that there was insufficient evidence before the Judge to displace the statutory presumption that payments made in the six month period prior to liquidation were not made in the ordinary course of business. Before the Judge, counsel for the liquidators focussed on a practice adopted by Fletcher of stopping Bedrock’s trucks at the exit of the quarry when payments were in arrears or credit limits had been exceeded.
[13] On this point Mr Moffat’s evidence in his first affidavit was:

5. We have traded with Bedrock for several years, since 2003. We supply them product but we also contract their services and make payments to them. Sometimes the cross accounts are just set-off by way of contras. That is pretty common not only with the customer but across the industry.
6. I am familiar with the account and credit practices of FCIL. I am not aware of anything that FCIL may have done or refrained from doing that we would not do with every customer. We have a credit policy, as do all large suppliers and we apply it. We can trade with customers for years and they can go in and out of stop or reduced credit limits and not cause us any concern at all about us being paid. It is the nature of the construction industry that our customers can have issues with cashflow and with bad payers (to them) and we just work through that. Again, none of those developments would cause us concern. It is not at all uncommon for lump sums to be paid to bring accounts up to date or because at that time the customer has only received part of a payment due to them and they want to keep faith with us. The whole operation of the account was unexceptional for us.
7. FCIL was an important supplier to Bedrock. It needed our support and we were happy to provide it if our credit terms were respected and Bedrock agreed to that.

[14] Ms Joyce did not give any specific evidence on this point. She accepted that it was inherent in Bedrock’s business for there to be delays in both receiving payments from debtors and making payments to creditors and that Bedrock had undertaken a policy of making payments to trade creditors who were essential to the company’s trading in priority to other creditors. No issue is taken about this evidence since an intention to prefer is no longer an essential element in voidable transaction cases. Ms Joyce added that Winstones had made it clear that unless their accounts were kept up to date, supplies to Bedrock would cease.
[15] Mr Stevenson’s evidence was:

5. One way that the company managed to come close to maintaining its account with Winstones was to carry out trucking work for Winstones in terms of paragraph 5 of Mr Moffatt’s affidavit. Payments were mostly set off against the company’s account with Winstones.
6. I also confirm that on occasions during the last six months of its operation the company’s vehicles were not permitted to leave Winstones quarry with shingle without arrangements being made in respect of the company’s outstanding account. I specifically recall this because when the company’s driver was not permitted to leave he would make contact with me from the quarry over the radio-telephone and that communication was open to a number of other employees to hear and was a factor in making the company’s financial situation public knowledge.
7. Some of the payments the subject of these proceedings may specifically have been as a result of the matters referred to in paragraph 6. It is certainly my recollection that payments were made to Wistones as a result of those matters.

[16] Mr Wilson accepted before us that there was no evidence that Fletcher was aware of the deteriorating financial position of Bedrock.
[17] In response to the affidavits filed on behalf of the liquidator Mr Moffatt stated:

4. It is suggested that FCIL did not release Bedrock arranged trucks carrying our product unless specific payment arrangements were in place. Carolyn Edwin who Mrs Joyce refers to, is not presently with the company so I am unable to check with her. I was and am pretty familiar with the companies dealing with debtors in Christchurch. If Bedrock was in excess of its credit arrangements then like any other FCIL customer it would have been required to satisfy us that payment would be made in due course before it would be supplied product. Indeed, FCIL applies this policy even within its own group of companies. It is possible therefore that a truck was held at the exit gate to obtain payment confirmation. As I said in my first affidavit, we simply applied normal policy. Neither FCIL or I had any knowledge of any preference payments being made to us. We were simply being paid as we expected. We were in a dual relationship and contras are common.

[18] When Mr Moffat was cross-examined before the Judge, he agreed that the three payments in issue were made as a result of the stopping of the Bedrock trucks at the quarry gate. But Mr Wilson accepted before us that the weight to be attached to this concession was diminished by Mr Moffat’s acknowledgement that he had no direct knowledge of the relationship of the three payments to the stopping of Bedrock trucks. In answer to questions from the Judge, Mr Moffat stated that the practice was “not overly common but it does occur”. Mr Moffat also said in answer to further questions from the Judge that payment in rounded sums was a usual part of the trading arrangement.

The Judge’s findings

[19] The Judge found:

[16] Bedrock and Fletcher had a 4 year trading history. During the first eighteen months Bedrock settled their account by payment of invoices on a more or less monthly basis. From about November 2005 payments were made by direct credit, or a “contra” arrangement. The evidence is that from this time Fletcher were exerting control regarding the extent of credit permitted to Bedrock. I infer the trading pattern changed by which credit was extended in exchange for payments made on account of arrears.

[17] The “contra” arrangement was an agreement by which Fletcher employed the services of Bedrock to cart its products to others. The costs of those services were then deducted from Bedrock’s account.

[18] The evidence shows the first contra credit was processed in November 2005. There were others in April, May and July of 2006 which resulted in credits to Bedrock in an amount exceeding $18,000.

[20] The Judge then summarised the evidence of the deponent and in response to the submission by counsel for the liquidators regarding the importance of the decision by Fletcher to stop Bedrock trucks leaving the Winstone quarry he stated:

[32] I am concerned about the quality of the evidence to support this latter submission in particular. It relies upon the evidence given by Ms Joyce and Mr Stevenson. Ms Joyce refers to two or three occasions when she was telephoned and required to provide specific assurances before trucks were permitted to leave. Mr Stevenson deposed that on occasions vehicles were not permitted to leave with arrangements being made.

[33] The reference to “occasions”, and on “two or three occasions” may refer to a very small number of the total of occasions that Bedrock uplifted supplies from Fletcher. There is no evidence of the relationship of the number of invoices to the number of visits in which material was collected. However it is apparent from the evidence of Mr Moffat that assurances of payment were routinely requested before credit was extended.

[21] The Judge then reached his final conclusions:

[34] The liquidator’s evidence provides almost nothing about the ordinary course of business of either Bedrock or the industry. Yet the details of trading history provided by Mr Moffat support the observations I recorded in para [25] of this judgment. I accept the evidence of the liquidator that in the last six months Bedrock was preferring key suppliers more than others. That may be symptomatic of companies experiencing cashflow problems. But the trading account between Bedrock and Fletcher was quite modest in terms of value. There seems nothing in that which should give Fletcher an indication of the extent of Bedrock’s creditors or the volume of their debt. Indeed there is no evidence at all to show that Fletcher knew they were being preferred. To the contrary Mr Moffat was firm that as far as he was concerned there was nothing out of the ordinary.

[35] Courts have long accepted:

(a) A lump sum, or ‘rounded’ payment, of itself does not show a payment as being outside the ordinary course of business.
(b) A company consistently applying its credit policy will not usually run risk of the voidable preference provisions.
(c) It usually requires instances of exception to highlight indications that transactions are out of the ordinary course of business.
(d) The relevance of pressure being applied by a creditor has to be assessed against the party’s trading history, and by reference to industry trade practices.

Summary

[36] It will be apparent from this assessment that I do not consider the three payments made to Fletcher in the six months prior to liquidation to have been made outside the ordinary course of business.

Discussion

[22] Mr Wilson submitted on behalf of the liquidators that there was insufficient evidence to support the conclusion of the Judge that the payments were made in the ordinary course of business. He also submitted that the criticism by the Judge of the failure by the liquidators to provide evidence of the ordinary course of business of Bedrock or the industry showed that the Judge had not correctly applied the onus of proof which lay upon Fletcher to prove that the payments were made in the ordinary course of business. Rather, Mr Wilson submitted that it was incumbent upon Fletcher to provide details of its credit policy and to provide evidence of industry practice demonstrating that the payments were in the ordinary course of business.
[23] We do not accept these submissions. The material produced by Mr Moffat as to Fletcher’s credit policy and its arrangements with Bedrock was unchallenged by the liquidators notwithstanding the availability of a Bedrock director and the company’s administration assistant. We are satisfied that it was open for the Judge to reach the conclusions he did about the quality of the evidence supporting the liquidators’ contention that the payments in question were a direct consequence of the stopping of the Bedrock trucks at the quarry gate. As the Judge said, there was no direct link shown between the stopping of trucks and the payment of the impugned amounts.
[24] We accept the submission made by Mr Fulton on behalf of Fletcher that, in the light of the evidence given by Mr Moffat about the practice of stopping vehicles there was an evidential onus on the liquidators to respond to that evidence in order to avoid a finding by the Judge that Mr Moffat’s evidence was sufficient to discharge the legal onus upon Fletcher. For a recent discussion of the distinction between legal and evidential onus in the context of a causation question, see the decision of this Court in Accident Compensation Corporation v Ambros [2008] 1 NZLR 340 at [55] and [107].
[25] It was submitted finally on behalf of the liquidators that a payment made as a result of the application of the normal credit policy of a creditor would not necessarily mean that the payment was made in the ordinary course of business. We accept Mr Wilson’s general proposition that a payment extracted in consequence of the application of a creditor’s normal credit policy will not necessarily result in a finding that the payment was made in the ordinary course of business. But in the present case, there is undisputed evidence not only that the Bedrock account was operated in accordance with Fletcher’s normal credit policy, but there was also evidence that the same credit policy was applied to all Fletcher’s customers and was not out of the ordinary in the construction industry. A customer who is in excess of its credit arrangements would have been required to satisfy Fletcher that payment would be made in due course before it was supplied with further product. Mr Moffat’s unchallenged evidence was that Fletcher applied that policy even within its own group of companies. In the light of that evidence, there is nothing to suggest that the stopping of Bedrock trucks was an abnormal practice which could support a conclusion that the payments were made outside the ordinary course of business.
[26] Undoubtedly Fletcher applied pressure to Bedrock to make payments, just as it did with all other creditors who were outside their credit arrangements. But the mere existence of pressure by, for example, the withholding of supplies until payment is made, does not compel the conclusion that the payment is made outside the ordinary course of business. Indeed where conventional or usual debt collection measures are taken to recover a trade debt, it will ordinarily be difficult to establish that the making of a payment in response is outside the ordinary course of business. Some other circumstances will usually be required to establish that state of affairs.
[27] While the existence of pressure may be a relevant factor, all the circumstances must be considered from an objective standpoint in any given case to establish whether they demonstrate the transaction is outside the normal flow of business: see the discussion in Chatfield v Mercury Energy Ltd (1998) 8 NZCLC 261,645, at 261,654.

Conclusion

[28] We conclude that the findings of the Associate Judge were open to him on the evidence and that he did not misapply the onus of proof or make any error of law or principle.

Result

[29] The appeal is dismissed. The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Rhodes & Co, Christchurch, for Appellants
Anthony Harper, Christchurch, for Respondent