Levin and Jordan as liquidators of B & J Iti Contracting Limited (in liq) v Iti & Syddall Enterprises Limited HC Auckland CIV 2011-404-405 [2011] NZHC 1050 (1 September 2011)

Last Updated: 4 October 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2011-404-405}

UNDER the Companies Act 1993

IN THE MATTER OF the liquidation of B & J Iti Contracting

Limited

BETWEEN HENRY DAVID LEVIN AND BARRY PHILLIP JORDAN AS LIQUIDATORS OF B & J ITI CONTRACTING LIMITED (IN LIQUIDATION)

Applicants

AND ITI & SYDDALL ENTERPRISES LIMITED

Respondent

Hearing: 4 July and 29 August 2011

Counsel: CC Mansell for applicants

GE Sharrock, CB Hirschfeld and SC Potter for respondent on 4 July

2011

SC Potter for respondent on 29 August 2011

Judgment: 1 September 2011 at 4:00 PM

JUDGMENT OF ASSOCIATE JUDGE FAIRE

_{[on application that transaction be set aside and for recovery]}

Solicitors: Martelli McKegg, PO Box 5745, Auckland 1141

Enterprise Law, PO Box 41 203, St Lukes Mail Centre, Mt Albert

LEVIN AND JORDAN V ITI & SYDDALL ENTERPRISES LIMITED HC AK CIV 2011-404-405 1

September 2011

The application

[1] The applicants seek orders in reliance on ss 292, 294, 295 and 296 of the

Companies Act 1993:

(a) Setting aside payments totalling $62,406.37 made by B & J Iti Contracting Ltd (in liquidation) to Iti & Syddall Enterprises Ltd and referred to in the liquidators’ notice to set aside a voidable transaction dated 2 February 2009; and

(b) Requiring the respondent to pay $62,406.37 to B & J Iti Contracting

Ltd.

[2] The liquidators’ notice, which is not contained in the bundle of documents

prepared by counsel for this hearing, was produced by counsel’s memorandum dated

7 July 2011 and filed in this proceeding. The notice had apparently been filed on

2 February 2009 and given the number CIV 2006-404-6745.

[3] The operative parts of the liquidators’ notice provide:

Take notice that-

1. Henry David Levin, liquidator of B & J Iti Contracting Limited (In Liquidation) (―the Company‖) hereby seeks to set aside payments made by the Company totalling $62,406.37 in reduction of the debt for goods and services supplied by Iti & Sydall Enterprises Limited.

Details of Voidable Transactions

2. The Company was put into liquidation by the appointment of a liquidator on 12 April 2007 by the High Court at Auckland. The matter number for the original proceeding was CIV-2006-404-6745. The application for appointment of a liquidator was filed on

1 November 2006.

3. The property or value that the Liquidator wishes to recover is

$62,406.37 made up of the transactions set out in Appendix A.

4. In giving this notice, the liquidator relies on the following grounds: (a) The liquidators have reviewed the Company’s MYOB

supplier card transaction listing and have considered the running account balance. Within the specified period the

peak of the Company’s debt to Iti & Sydall Enterprises

Limited was $64,137.87; and Iti & Sydall Enterprises Limited were owed $1,731.50 at the date of liquidation. The Liquidators believe that Iti & Sydall Enterprises Limited have received a voidable preference of $62,406.37.

(b) The Transactions were insolvent transactions in terms of

section 292 of the Companies Act 1993 (―the Act‖).

(c) The Transactions were within the specified period as defined by section 292(5) of the Act as the period of two years before the date on which the application for liquidation was made to the High Court.

(d) The Transactions have enabled Iti & Sydall Enterprises Limited to receive more towards the satisfaction of a debt than it would otherwise have received or have been likely to have received in the company’s liquidation.

History of this application

[4] I shall refer to B & J Iti Contracting Ltd as the company. This matter has had an unfortunate history since the filing by the liquidators of a notice to set aside transactions pursuant to s 294 of the Companies Act 1993 on 2 February 2009. The respondent, by its solicitors, sent a letter, which was accepted by the liquidator as a notice objecting to the liquidators’ notice pursuant to s 294(3) of the Companies Act

1993. It was not until 1 February 2011 that the liquidators filed their application to set aside transactions and for recovery of the moneys covered by those transactions.

[5] The application was then subject to directions made by this Court on

23 March and 6 and 20 May 2011. The direction made on 23 March 2011 allocated a one-day fixture for 4 July 2011. The respondent was in serious breach of those directions. I issued a minute on 29 June 2011, two clear working days before the fixture. After setting out the background in the minute, I ordered as follows:

4. The file discloses no submissions in opposition and copies of all authorities from the respondent. They are now in default in that requirement. This must be attended to forthwith.

5. I have considered the document which is entitled Notice of opposition to originating application for order that transaction be set aside and for recovery dated 31 March 2011. The document, as a notice of opposition, does not comply with r 7.24 in that it:

a. Does not state which of the orders sought in the application are opposed;

2. Does not state the specific grounds of opposition to the orders sought;
   

100. Does not refer to any particular enactment or principle of law or judicial decision on which the respondent relies.
     

[6] The deficiencies in the respondent’s case continued until 5pm on Friday,

1 July 2011. When the matter was called before me on 4 July 2011, I allowed counsel to take further instructions because, obviously, the position was unsatisfactory. The respondent sought a further adjournment and indicated a desire to file further affidavit evidence. On probing further as to the nature of the affidavit evidence, it appeared to be restricted to the application of s 296 to the case. Counsel for the applicants, with some reluctance, obtained instructions to proceed. I can understand the difficult position that the applicants were placed in, particularly when they considered the economics of the matter.

[7] The hearing proceeded on the basis that the application would be examined as to the application of ss 292 and 294 of the Companies Act 1993 and, if that did not determine the matter, further time would be allowed to consider matters pertaining, particularly to s 296 of the Companies Act 1993. Unfortunately, it became evident as the hearing proceeded that the evidence before me was unsatisfactory and that I did not feel confident that a proper determination of the issues restricted to those raised by ss 292 and 294 of the Companies Act 1993 could be achieved. Accordingly, further fixture time was allocated and directions made to ensure that the file was in proper shape for the conclusion of this application. It is important that I add that one of the previous major points raised in opposition was that B & J Iti Contracting Ltd was holding moneys on trust for the respondent that were ultimately paid to the respondent. Counsel advised that that position was no longer pursued. It is not covered in the notice of opposition that was then filed. Although the affidavits that appear on the file deal with this issue, it will not be further dealt with in my analysis.

[8] My minute drew attention to a further matter. Accordingly I set out that portion of the minute:

10. Because of the timing of the transaction, the analysis which the court is required to undertake involves the provisions of s 292 and following of the Companies Act 1993 prior to the amendment which was substituted from

1 November 2007 by s 27(1) of the Companies Amendment Act 2006.

Accordingly, the specific issues that are now required to be determined by the court are:

(a) Whether some 63 payments and covering a sum in total of $62,406.37 and which were made within the restricted period as defined in s 292(6) of the Companies Act 1993 were made in the ordinary course of business of B & J Iti Contracting Ltd;

(b) Whether Iti & Syddall Enterprises Ltd knew that the intent or purpose of the payments were in respect of matters referred to in s 292(4)(a), (b) and (c); and

(c) Whether the respondent received the payments in good faith and has altered its position in the reasonably held belief that the payments were validly made and would not be set aside and that it is inequitable to order recovery, or recovery in full.

[9] My minute then noted that further time had to be allowed for the filing and service of further affidavits in support, opposition and reply and appropriate directions covering that were the made.

[10] On reviewing the file I discovered that the liquidators’ notice, required by s 294 of the Companies Act 1993, was not on the court file. I issued a minute requiring production of the complete notice with its appendix. Counsel, by memorandum, then filed the notice.

[11] When I analysed the notice that had been provided I became concerned as to whether it complied with s 294(2)(c) of the Companies Act 1993. Section 294(2)(c) provides that the liquidators’ notice must ―specify the transaction or charge to be set aside‖.

[12] I issued a minute which relayed my concerns to counsel. The operative parts of this are now set out:

3. I raise for counsel to consider whether there has been a compliance with s 294(2)(c) of the Companies Act 1993.
   

4. Subject to checking and working back from 8 December 2006 to

1 May 2006, the column in Appendix ―A‖ which appears to signify

payments made by B & J Iti Contracting Ltd to the respondent total

$123,709. I have extracted that from the column with ―Debit‖ at its head. If the counting I have taken is correct, that would indicate that a number of the entries in the column that I have made reference to are not the subject of challenge. That, in turn, would indicate that

there has not been an appropriate specification of the transactions that are challenged by the liquidators.

[13] The response to my minute came principally via one of the liquidators, Mr Levin’s, affidavit of 15 July 2011. Mr Levin’s response is contained in paragraphs 18–22 of that affidavit, which I now set out:

18. I note that the Court questioned the contents of the notice to set aside the transactions.

19. On 2 February 2009, I caused a notice to set aside to be issued against the Respondent. The notice included a ledger showing all transactions between the companies in the running account.

20. The notice sought that a sum of $62,406.37 be set aside, as this was the peak indebtedness sum less payment due to the Respondent at liquidation.

21. I understand the Court requests that the individual transactions to be set aside be identified. That being the case, we seek to set aside all invoices paid by the Respondent identified in the ledger between

14 June 2006 and 10 August 2010 [which clearly was meant to be

2006], less the amount due to the Respondent in liquidation.

22. The same figure of $62,406.37 is reached whether we use the running account test or isolate the transactions in the accounting ledger between 14 June 2006 and 10 August 2006. This is because the peak indebtedness was reduced to zero. The invoices paid can be identified in the schedule attached to the notice.

[14] I do not set out in full the extensive Appendix A to the notice to set aside a transaction. To give some idea of the transactions it covers, I note that it commences on 31 March 2005. It contains five and one third pages of closely typed entries, with approximately 80 entries per page.

[15] The precise payments were identified in counsel’s memorandum as follows:

$5,559.75 on 14 June 2006

$5,000.00 on 22 June 2006

$10,000.00 on 30 June 2006

$5,861.81 on 3 July 2006

$5,000.00 on 10 July 2006

$5,000.00 on 14 July 2006

$4,500.00 on 28 July 2006

$4,000.00 on 3 August 2006

$23,144.42 on 10 August 2006.

[16] Those transactions exceed the amount referred to in the notice and in the application. They total $68,065.98. Mr Potter, however, advised that he did not take issue with the total now claimed, now that the particular transactions were identified.

[17] I have set out this summary because it will explain why a matter that should

easily have been determined within less than a day’s fixture has not been determined.

Relevant statutory provisions

[18] This case relates to a company which was put into liquidation by order of this Court made on 12 April 2007. At that time the Court appointed Henry David Levin and Barry Phillip Jordan as liquidators.

[19] The application to place the company into liquidation and to appoint liquidators was filed by the Commissioner of Inland Revenue on 1 November 2006.

[20] The transactions which are the subject of the liquidators’ notice, and therefore

this application, took place in the period from 14 June 2006 until 10 August 2006.

[21] Section 292 of the Companies Act 1993, which is the primary section to consider in determining whether the transaction in the liquidators’ notice are voidable, was substituted as from 1 November 2007 by s 27(1) of the Companies Amendment Act 2006. Subsection 5 of s 27 of the Companies Amendment Act 2006 provides that nothing in s 292, the substituted section, makes voidable a transaction that was completed before the section came into force, if that transaction would not have been voidable if s 292 had not come into force.

[22] Section 292 of the Companies Act 1993, in its form prior to the substitution by the Companies Amendment Act 2006 provided as follows:

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.

[23] The transactions that are required to be considered in this application all fall within the restricted period referred to in s 292(6) of the Companies Act 1993. The restricted period, for the purposes of this application, commenced on 1 May 2006.

[24] This application raises the following issues:

(a) Were each of the payments referred to in [15] made to the respondent by the company?

(b) Was the company unable to pay its due debts when each of the challenged payments were made?

(c) Did receipt of those payments by the respondent enable the respondent to receive more to the satisfaction of its debt than it would have received in the liquidation?

(d) Are the payments nevertheless justified and able to be retained by the respondent because they are transactions that took place in the ordinary course of business of the company?

[25] As mentioned, all the payments occurred in the restricted period as defined by s 292(6). By s 292 there is a presumption that the company was unable to pay its debts at the time. There is a further presumption that the payments were made otherwise than in the ordinary course of business. It will be necessary, therefore, to determine particularly whether the respondent can displace the presumptions.

[26] For reasons which I will explain shortly, there is an issue raised in this case as to whether the respondent knew that the company intended, by making the payments, that the respondent would receive more towards satisfaction of its debt than it would have received in the liquidation.

[27] I have mentioned in [24] the matters that must be investigated. The reason for the first matter mentioned is because the respondent calls into question whether the payment of $23,144.42 was made at all. That is a matter which the liquidators must prove and is not covered by the presumption set out in s 292(3) of the Companies Act 1993.

The opposition

[28] I have already referred to the unsatisfactory position advanced in opposition. Mr Potter, who took on the task of opposing the application at the second hearing, presented a structured basis for the opposition to the application which was based on the following:

(a) The payment of $23,144.42 allegedly made on 10 August 2006 was not made to the respondent;

(b) The other payments were made in the ordinary course of business;

(c) The respondent did not know that the company intended, by making the payments, that the respondent would receive more towards the satisfaction of its debt than it would have received in the liquidation;

(d) The respondent did not know that B & J Iti Contracting Ltd was insolvent at the time the payments were made;

(e) The respondent received the payments in good faith; and

(f) The respondent altered its position on the reasonably held belief that the payment to it was validly made and would not be set aside.

[29] Mr Potter advised the court that the respondent had no evidence on the insolvency or otherwise of the company and therefore accepted that the presumption of insolvency applied to it for the period in which the payments were made.

Background

[30] B & J Iti Contracting Ltd was incorporated on 30 August 2000. It operated a plumbing and drainage services company. Its director was Mr Brett Peter Iti.

[31] The respondent company was incorporated on 30 November 2000. Mr Brett Peter Iti and Mr Jarrad Syddall are its only directors. Mr Syddall has filed an affidavit in this proceeding. He advises that he is the managing director of the respondent and says that he has held that role and been its principal throughout at all material times.

[32] The respondent company is an earthmoving company. Mr Syddall said his company sometimes worked with B & J Iti Contracting Ltd. Some of the contract work involved both drain laying and earth moving. Mr Syddall says that the majority of the work which his company undertook was unrelated to B & J Iti Contracting Ltd. He said that Mr Iti was a shareholder and co-director but did not work as a contractor for Iti & Syddall Enterprises Ltd personally.

[33] He referred to the fact that the companies would refer work to each other when the other’s work was involved in the contract that was being undertaken. He said that Mr Iti was not paid wages or dividends in the seven years that the respondent company has been operating.

[34] Mr Syddall then described how some work that was undertaken with the company came about. He said that firms like Fletchers try to limit the number of contractors that they have to deal with administratively. The work that the respondent was involved in and which occurred at the time of the payments, related to the major project undertaken by Fletchers in 2005 and 2006 on the Spaghetti Junction motorway link in Auckland. The company provided services from April

2005 to 2006 in respect of this project. The project is referred to in the papers as the

―complete joint venture‖ (CJV) which appears to be a joint venture partnership between Fletcher Construction, Leightons and Beca. The joint venture was created to manage the Spaghetti Junction motorway project. The company rendered invoices to the CJV for services provided under the contract. Those invoices have been

produced and are substantial. At the same time the respondent rendered invoices to the company, principally for the provision of vehicle hire. A large number of the invoices have been produced. Mr Levin, in my view, correctly concluded that the relationship was effectively that of contractor and subcontractor. Unfortunately the analysis that was undertaken in the affidavits was against a claim initially made by the respondent that the company was simply a trustee for it in respect of payments that should ultimately have been made to the respondent. What was significant in this was that the company was the contracting party with the CJV, not the respondent.

[35] Mr Syddall’s account of how the contracts worked is supported by an affidavit filed by Mr R Te Atatu Message. He advises that he was the contracts manager directly responsible within Fletchers for the Spaghetti Junction project and for contracts with the company. I need not review his affidavit in full other than to say that Mr Syddall’s description of how the contracts operated is supported by Mr Message.

[36] It is appropriate to record what really has driven the liquidators to make this application. Mr Levin’s study of the company’s ledger led him to conclude in his affidavit of 22 December 2010 that:

11. The trading relationship between Iti Contracting and Iti Enterprises is characterised by alternating purchases and payments of, often, apparently unrelated or rounded sums by Iti Contracting.

12. Between March 2005 and liquidation, the peak indebtedness of Iti

Contracting to Iti Enterprises was $64,137.87, which occurred on

13 June 2006 i.e. within the 6 month ―restricted period‖ as defined in

the Companies Act.

13. At the time of Iti Contracting’s liquidation, the debt was $1,731.50.

Therefore within the ―restricted period‖, Iti Contracting paid Iti

Enterprises $62,406.37 (the ―Transactions‖) in reduction of the peak

indebtedness.

[37] Mr Levin says that the company allowed its bank account to go into unarranged overdraft during this period. He does not define the period. The bank statements have been produced. During the period when the payments recorded in [15] were made, the bank statements disclose no overdraft. I suspect therefore that

Mr Levin’s comment relates to a later period when there are entries disclosing an overdrawn position in the bank account. What is clear, however, from the bank statements is that the company did not remain in overdraft for any significant period. The bank statements show that the entry into overdraft appears to have occurred for short occasions from 29 August 2006 onwards. It is appropriate to note that the entry on 29 August 2006 showed an overdraft of $1,021.01, which occurred for a period of one day. The account was back into credit the next day, 30 August 2006, in the sum of $4,618.62.

[38] The application to wind up the company was made by the Commissioner of

Inland Revenue. Mr Levin records the debt owed to the Commissioner at

$385,446.87. He records debts due to other creditors as at the liquidation date of

$71,633.13. He further records that the company failed to make GST payments to

Inland Revenue Department from 31 March 2004.

The liquidators’ case

[39] I referred to the shortcomings so far as the respondent’s position is concerned in relation to this case. The delay by the liquidators in taking steps has created its own set of problems and has led, I am sure, to the confusing positions adopted by the parties. I noted earlier that the liquidators were appointed on 12 April 2007. The payments that the liquidators seek to set aside were made in 2006. These facts require the application of s 292 of the Companies Act 1993 prior to its amendment, which applied to this case from 1 November 2007. Although the old substantive law position applies in relation to voidable transactions, the procedural steps covered by s 294 and the other matters covered by ss 295 and 296 require the application of the

amended provisions of ss 294, 295 and 296.[1]

[40] Both counsel referred, in their submissions, to the running account provisions that are contained in the amended s 292(4)(b) of the Companies Act 1993. That subsection does not apply to this case.

[41] I have mentioned the liquidators’ delay. The notice that the liquidators filed for the purposes of s 294 was filed on 2 February 2009. It was not until 1 February

2011 that the application to set aside the transactions was actually filed. That is in excess of four-and-a-half years after the transactions that the court is asked to consider. The Court of Appeal was critical of the formulation of the claim placed before the Court in Levin v Rastkar. Although the problems in that case are different from the ones now confronting the court, the proposition that a liquidator’s notice must clearly identify the transactions that are the subject of review and the evidence which supports the contention of the liquidator equally applies here. The Court of

Appeal noted:[2]

[9] ... It is not satisfactory for evidence which is crucial to the liquidators’ claim to be put before the Court in the incomplete, undigested and unexplained form ...

[10] It would not be appropriate to impose upon a liquidator an unduly onerous standard of proof. Liquidators will frequently be faced with situations where insolvent companies have not maintained proper accounting records to enable a clear trace of relevant transactions. However, there are means available to a liquidator to undertake further investigations, including the ability to interview those responsible for the running of the company under oath and to require production of documents, under s 261 of the Act. ...

[42] In this case, the liquidators have not undertaken investigations of the type referred to by the Court of Appeal.

[43] I now consider the specific issues that require determination in this case and which are recorded in [24] of this judgment.

Was the payment of $23,144.42 paid?

[44] The liquidators rely on the company’s ledger. The company’s ledger records

11 transactions with the date of 10 August 2006, recorded with a number 102209cd

(the company’s cheque number). Added together, the 11 transactions total

$23,144.42.

[45] The company’s bank statement, however, shows a debit of $7,465.33 and with the reference 102209. The entry is recorded on the bank statement as at

7 August 2006, but this particular statement is dated 11 August 2006. There are no corresponding deposits either of $7,465.33 or $23,144.42 in the respondent’s bank accounts in this period.

[46] By contrast, the other payments that are the subject to challenge appear in the company’s bank statements. In his affidavit Mr Syddall says that he has studied the bank accounts of both the company and the respondent. He claims that the

$23,144.42 was not paid out by the company and was not paid to the respondent..

[47] The only evidence of payment is the company’s ledger. It is surprising that this payment is not matched by an equal entry in the company’s bank account. Be that as it may, I accept the evidence of Mr Syddall that it was not paid to the respondent. Accordingly, I find that no payment of $23,144.42 was made by the company to the respondent and that there is no transaction in respect of $23,144.42 which can be the subject of a voidable transaction.

[48] This finding is significant for the case not only because there was no transaction, but because it removes one of the liquidators’ principal concerns, namely the complete removal of the indebtedness of the company to the respondent as at

10 August 2006. The ledger is plainly not correct as it records that position.

[49] I move to the second issue referred to in [24]. I have already recorded that the respondent is not in a position to advance evidence to reverse the presumption that the company was unable to pay its due debts at the time payments were made.

[50] As to the third issue raised in [24], the liquidators’ analysis is correct. The payments received by the respondent enabled it to receive more to the satisfaction of its debt than it would have received if the payments had not been made and it was forced to prove in the liquidation.

[51] The fourth issue, however, is the most important issue in this case. That asks the question whether the payments were made in the ordinary course of the business of the company.

Were the payments made in the ordinary course of the business of the company?

[52] If the payments were made in the ordinary course of business then they would not be voidable on the application of the liquidators by the operation of s 292(2) unless the unless provision contained in s 292(4) applies. Accordingly, I consider the ordinary course of business position generally first.

[53] Whether a payment or transaction took place in the ordinary course of business was examined by the Privy Council in Countrywide Banking Corporation Ltd v Dean where it said:[3]

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.‖

The section therefore requires examination of the actual transaction in its factual setting (excluding the intent or purpose of the company save as required by subs (4)). Because the examination is undertaken objectively by reference to the standard of the ordinary course of business, there may be circumstances where a transaction, exceptional to a particular trader, will none the less be in the ordinary course of business – as for example its first transaction of a particular type. It may be that transactions undertaken in the past will, because of changed circumstances, no longer be considered as in the ordinary course of business. The payment of some accrued indebtedness may be within the ordinary course of business as may the payment of moneys owing under a lease to secure a lessor’s consent to an assignment of the lessee’s interest. The particular circumstances will require assessment in each case.

[54] Following the Privy Council advice the Court of Appeal in Waikato Freight and Storage (1998) Ltd v Meltzer said:[4]

In our view the judicial approach has become over-complicated and over- refined. 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 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?

[55] The liquidators’ case is based substantially in reliance on the transactions as recorded in the ledger.

[56] The ledger, in summary, discloses:

(a) From the first entry on 31 March 2005, the company owed the respondent $27,763.40;

(b) What follows is a series of payments and debts. I have summarised the extensive nature of those entries in [14] of this judgment;

(c) The number of payments are less than the number of debts recorded, indicating that when payment has been made, the payment covers several matters;

(d) Save for the opening debt entry of $27,763.40, the highest recorded debt on the five pages of ledgers was that of $14,105 on 23 May 2006;

(e) The payment of $5,559.75 on 14 June 2006 was a composite payment for work that had actually been done. It relates to invoices submitted by the respondent to the company after the work had been done. There does not appear to be anything out of the ordinary in the way this payment was made;

(f) The same applies to the payment of $5,861.81 made on 3 July 2006.

That was for an invoice submitted for work actually done. The entire invoice amount was paid. There does not appear to be anything out of the ordinary in the way that invoice was handled and the payment made.

[57] The balance of the payments referred to in [15] of this judgment, save for the one about which I have found no payment was made on 10 August 2006, are for rounded sums. When the ledger is reviewed, however, there is a history of similar payments being made, both from the ledger and into the bank account. None of the payments cleared the existing debt owed to the respondent at the time. When the

$23,144.42 figure is taken out, the account remains in a position where the respondent is owed not less than that sum over the period 14 June 2006 to 10 August

2006.

[58] The ledger position needs to be considered against the general background that I have referred to earlier. A subcontractor was being paid as the contractor was receiving payment. That, in fact, is self-evident when the bank accounts themselves are studied.

[59] Without more ado, nothing puts the court on inquiry: there is nothing that would suggest that the way the invoices were handled and paid was anything other than in the ordinary course of business. The matter, however, cannot rest at that stage because Mr Iti’s position as a director needs to be considered.

Mr Iti’s knowledge

[60] Mr Iti has sworn an affidavit in which he says:

7. At no time during or before 1 November 2006 did Iti & Syddall Enterprises Limited require me, as a director of Iti & Syddall Enterprises Limited, to disclose information about B & J Iti Contracting Limited.

8. I would not have disclosed information that I had acquired or held through my position as a director of a company. That is true for Iti

& Syddall Enterprises Limited as it was for B & J Iti Contracting

Limited.

9. The knowledge that Mr Levin is trying to tag Iti & Syddall Enterprises Limited with is knowledge that I would have obtained solely through my role as a director of B & J Iti Contracting Limited. In any event, as I have already stated, I was never asked to disclose any information about of B & J Iti Contracting Limited to Iti & Syddall Enterprises Limited.

[61] He was not cross-examined.

[62] In El Ajou v Dollar Land plc the Court of Appeal held that the directing mind and will of a company was not necessarily that of the persons who had general management and control of the company since the directing mind and will could be found in different persons in respect of different activities.[5] What is required is the identification of the person who had actual management and control in relation to the act or omission under consideration.

[63] In this case, the person who had actual control of the management of the respondent and the work that it was to undertake was Mr Syddall, not Mr Iti.

[64] Mr Potter drew attention to s 145 of the Companies Act 1993. That position prohibits a director of a company who has information in his or her capacity as a director or employee of the company from disclosing information except in certain defined situations. The exceptions do not apply in this case.

[65] I conclude that the principal part of s 292(4) applies. There is no evidential basis for applying the ―unless provision‖ of s 292(4) to the facts of this case. There is no foundation in the material before me to suggest that Mr Syddall knew that the payments were being made to the respondent with the intent or purpose of providing the respondent with a preference.

Conclusion

[66] I conclude therefore that the payments recorded at [15] of this judgment and which were made were, in fact, made in the ordinary course of business. The fact that there was a rise in the indebtedness as at 13 June 2006 is consistent with the fact that there were substantial purchases undertaken between 31 May and 13 June 2006. Further, I note that there was an indebtedness recorded in the ledger as at

14 February 2006 of $59,316 and an indebtedness as at 16 August 2005 of

$62,976.25. Standing back, as I must, I am led to the position that there was no departure from the past pattern of behaviour that had been undertaken between the company and the respondent. The contracting position that applied has been independently verified. I conclude, therefore, that there was nothing out of the ordinary when these payments were made.

[67] Accordingly, I find that they were made in the ordinary course of business.

[68] The conclusion I have reached disposes of the case and makes it unnecessary to consider the application of s 296 to the facts of this case.

Orders

[69] The liquidators’ application for orders setting aside payments is refused.

Costs

[70] At the conclusion of the hearing I invited counsel to advise whether they were happy for me to make a ruling on costs or whether they required an opportunity to confer and to make submissions on same. Counsel requested that I reserve costs so that they could discuss the position and that if they could not agree that memoranda were then to be filed. This case has involved the best part of two hearing days. I have already mentioned that I regard the first hearing day as having been essentially a waste of time because of the fact that the respondent’s position had not been clearly articulated and clearly the liquidators’ position was prejudiced. That factor has to be taken into account in any analysis of entitlement to costs in this case. I make this comment in the hope that it assists the parties in their discussion on the question of costs.

[71] I reserve costs. In the event that the parties cannot agree memoranda in support, opposition and reply shall be filed and served at seven-day intervals.

JA Faire
Associate Judge

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[1] Levin v Rastkar [2011] NZCA 210.

[2] Ibid, at [9]–[10].

[3] Countrywide Banking Corporation Ltd v Dean [1998] 1 NZLR 385 at 394.

[4] Waikato Freight and Storage (1998) Ltd v Meltzer [2001] 2 NZLR 541 at 550.

[5] El Ajou v Dollar Land plc [1994] 2 All ER 696.