Shotblast Services (Auck) Limited v Levin [2012] NZHC 2129 (22 August 2012)

Last Updated: 11 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-433 [2012] NZHC 2129

BETWEEN SHOTBLAST SERVICES (AUCK) LIMITED

Applicant

AND HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF MULTI CONSTRUCTION CONCEPTS (MCC) LIMITED (IN LIQUIDATION) Respondents

Hearing: 27 June 2012

Counsel: J D McBride for Applicant

J R Sumner for Respondent

Judgment: 22 August 2012

_{JUDGMENT OF KEANE J}

This judgment was delivered by on 22 August 2012 at pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Knight Coldicutt, Auckland for Applicant

Ford Sumner, Wellington for Respondents

SHOTBLAST SERVICES (AUCK) LIMITED V HENRY DAVID LEVIN AND DAVID STUART VANCE AS LIQUIDATORS OF MULTI CONSTRUCTION CONCEPTS (MCC) LIMITED (IN LIQUIDATION) HC AK CIV 2012-404-433 [22 August 2012]

[1] On 24 February 2012 Henry Levin and David Vance, the liquidators of MCC, obtained judgment by default against Shotblast for $26,517.75. The effect was to require Shotblast to refund to the liquidators seven payments, declared void, that MCC had made to Shotblast between 29 June 2007 - 2 July 2008, almost all within the 12 months before MCC went into liquidation on 11 July 2008.

[2] Shotblast cannot contest the judgment as it relates to the last four of those payments, totalling $11,103. They were received after 1 November 2007, the date on which an amendment to the Companies Act 1993 removed any ability to assert that they were received 'in the ordinary course of business'. It contends that the first three payments, totalling $15,414.75, made before that date, were received ordinarily. As to those, it seeks to have the judgment set aside, contending that otherwise there will be a miscarriage of justice.

[3] Shotblast, in reality its sole shareholders and directors Mr and Mrs Styles, were served with the liquidator's originating application one week before the date on which it was first to be called. They did not appreciate, they contend, that judgment would be entered on that day if they did not appear. They promptly filed their application to have the judgment set aside. They have, they contend, a good defence to the liquidator's claim as to those three payments. They were received in the ordinary course of business.

[4] The liquidators oppose this application. Mr and Mrs Styles, they contend, must have been aware that judgment could be entered on 24 February 2012. They must have chosen to 'wait and see'. The judgment, the liquidators contend, is soundly based in an irregular pattern of payments showing that Shotblast was preferred over other creditors. They themselves have been put, they say, to significant cost and delay. The judgment should stand.

Judgment by default

[5] On 13 August 2008, shortly after MCC went into liquidation on 11 July 2008, Shotblast filed with the liquidators an unsecured creditors claim for $7,500 for two

invoices then outstanding. One, dated 30 May 2007, originally for $6,115.50, had been reduced by $1,376.25 to $4,739.25. The other, dated 20 June 2007, was for

$2,760.75.

[6] On 23 April 2009, in an email in answer to questions from the liquidator, Mrs Styles listed all nine of Shotblast's invoices between 30 April - 20 June 2007 and identified the MCC work sites to which each related. She went on to say this:

Our terms of trade are normally 20th month. Though sometimes we make a request for payment within 7 days if large amounts as we are only a small family business we need payment fairly prompt. When there are large amounts it may be the only job for the month. We still have wages etc to pay for.

[7] On 23 June 2009 Mrs Styles, in a further email, listed all seven of MCC's payments between 29 June 2007 - 2 July 2008 and asked 'Is there any chance of us getting the outstanding balance?' Instead, the liquidators contrasted MCC's seven payments to Shotblast, largely clearing Shotblast's debt, with its failure to meet its much larger debts to the Commissioner of Inland Revenue and ACC. They concluded that Shotblast had been preferred.

[8] On 13 January 2011 the liquidators sent a letter to Shotblast stating that they considered that the seven payments were voidable and asked Shotblast to repay

$26,517.75. Shotblast, they said, had no defence that they could identify. They invited Shotblast to offer any evidence it had as to why the payments were not voidable. On 25 January 2011 Shotblast replied, disputing those conclusions, but the liquidators were not deflected.

[9] On 13 April 2011 the liquidators filed in this Court, as they then became obliged to do, a statutory notice addressed to Shotblast signalling that they wished to have the payments set aside as voidable transactions; and on 20 April 2011 that notice was served at Shotblast's registered office in Manukau. The liquidators' final ground was that MCC's 'payment regime during the specified period was irregular and inconsistent'. Shotblast must therefore, they contended, have known of MCC's

'financial and/or cashflow issues'.

[10] On 27 April 2011, within the 20 working day period for reply, Shotblast's solicitors contested the liquidators' notice. Shotblast, the solicitors said, had no reason to suspect that MCC was or might become insolvent. It had given value for the payments or otherwise altered its position. It had received all of MCC's payments

'in the ordinary course of business'. As to the payment irregularity asserted and what that might imply, they said this:

Shotblast started working for the Company in October 2006. During the entire period Shotblast provided services to the Company there was an irregular payment pattern. The payments that you have identified in the notice are simply a repetition of this past pattern of behaviour and do not represent any special assistance provided by the Company to Shotblast. Nor do they give rise to any special circumstances, which would have put Shotblast on notice before extending further credit. In particular payments were made on 24 January 2006, 24 January 2007, 21 February 2007, and 24

March 2007 prior to the specified period. A director of our client has discussed the matter with Rueben, a director of the Company, who has

confirmed that he is willing to sign an affidavit advising that Shotblast had

absolutely no knowledge of the business circumstances of the Company during the period that Shotblast provided services to the Company.

[11] The result was that the liquidators had then to apply to this Court for the judgment that Shotblast now seeks to have set aside and they did that almost a year later on 1 February 2012, relying on an affidavit from Mr Levin. The application was served at Shotblast's registered office on 15 February 2012. It gave notice that on 24

February 2012, at 11.45 am, the liquidators would seek judgment for $26,517.75 and interest.

[12] On 24 February 2011 there was no appearance for Shotblast and judgment was given by default. Mrs Styles has since explained that until then they had thought their solicitors' letter had proved persuasive. When they were served with the liquidators' application on Wednesday, 15 April 2012, they were taken by surprise. It did not occur to them that the liquidators could obtain judgment on the first call on the following Friday week, 24 February 2012. On 13 April 2012 they applied to have the judgment set aside.

Setting judgment aside

[13] HC 15.13 gives this Court the ability to set aside a judgment obtained by default:

Any judgment obtained by default may be set aside or varied by the Court on such terms as it thinks just, if it appears to the Court that there has been, or may have been, a miscarriage of justice.

[14] In Paterson v Wellington Free Kindergarten Association Inc1 the Court of Appeal identified three issues: (i) whether the defendant has a substantial ground of defence; (ii) whether the defendant's failure, earlier, to take any steps is reasonably explained; and (iii) whether the plaintiff will suffer irreparable harm if the judgment is set aside. But in Russell v Cox2 the Court made clear that the overriding question is whether in all the circumstances it is just to set aside the judgment.

[15] The three issues identified in Paterson,3 the Court said in Russell, were generally important 'as a matter of common sense and practice' in deciding where justice lay. They were not 'a necessary prerequisite to the exercise of the discretion' and what weight they were to have would vary with the case. The Court chose to restate the test in this way:

The test against which an application to set aside a judgment should be considered is whether it is just in all the circumstances to set aside the judgment and the several factors mentioned in the judgments discussed should be taken not as rules of law, but as no more than tests by which the justice of the case is to be measured, in the context of procedural rules whose overall purpose is to secure the just disposal of litigation.

Ordinary course of business

[16] Before 1 November 2007, the date so critical to this application, payments made to creditors by a company before it went into liquidation were voidable at the instance of the liquidators under s 292(1) if they were made:4 (i) within the 'specified

_{period', in this instance the two years before the creditor's application to have the}

1 _{Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 (CA).}

2 _{Russell v Cox [1983] NZLR 654 (CA).}

3 At 659.

company placed in liquidation, plus the time that then elapsed until the order was made;5 and (ii) at a time when the company was unable to pay its debts; and (iii) the creditor received more than it would have received, or was likely to have received, on the liquidation.

[17] This, however, was subject to the exception which ceased to apply on 1

November 2007.6 The power to deem voidable payments to creditors did not apply to those that 'took place in the ordinary course of business'. For, as the Court of Appeal said in the Waikato Freight case,7 the statutory regime then in place did not make

'payments having a preferential effect absolutely voidable'. As the Court then said:

Parliament ... intended a commercially unremarkable payment to stand, even if having preferential effect. It must have been Parliament's view that otherwise the ordinary processes of commerce would be unduly undermined.

[18] The significance of this exception, in a practical sense, turned very much, as it does still on this appeal, on when the payment in issue was made. If that was within the 'restricted period', the six months before the date on which the application to place the company in liquidation was made, plus the time until the order, the onus lay on the creditor to defend the payment as 'in the ordinary course of business'.8 If it were made outside that period but within the 'specified period', the onus lay instead on the liquidators to show that it was made outside 'the ordinary course of business'.9

[19] In deciding that issue, the Court was not, and is not now, to take account of any intent or purpose on the part of the company in liquidation to pay to the creditor more than the creditor was to receive, or was likely to receive, on the liquidation, unless the creditor actually knew that to be the company's intent or purpose.10

[20] That apart, the Court of Appeal confirmed in Waikato Freight, whether a payment was in the ordinary course of business is 'a question of objective fact' to which 'general business practice' and 'any particular customs or practices within the

_{field of commerce concerned' and 'the previous commercial relationship between the}

5 _{Section 292(5).}

6 _{Companies Amendment Act 2006 (No 56).}

7 _{Waikato Freight & Storage (1998) v Meltzer [2001] 2 NZLR 541 at [17], [18].}

8 _{Companies Act 2003, s 292(3).}

9 Companies Act 1993, s 292(1), (5).

parties' are relevant.11 The 'ultimate question', the Court concluded, is this, 'Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?'12

[21] In Carter Holt Harvey Ltd v v Fatupaito13 the Court added this:

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 contractual obligation rather than a response to its current situation of insolvency?

The bench mark cases

[22] In Waikato Freight14 the company in liquidation met all seven of the creditors' invoices by four payments, none matching any invoice, the last three within the 'restricted period'. The liquidator deemed to be voidable the last two of those three payments; one three months before liquidation, the other two months before. The creditor carried the onus of establishing that they were received 'in the ordinary course of business'.

[23] At first instance the Master accepted that late payments were not unusual in the industry, and that the company in liquidation had never made a prompt payment. He accepted that the creditor had not departed from usual debt recovery procedures. Also that it was not unreasonable for the creditor to want to be paid, when the company in liquidation had severed their relationship to cut costs. Also that it was not unusual for a cheque to have to be presented twice. Despite that, he concluded that the pattern of payments, and those features cumulatively, stood against the creditor discharging the onus.

[24] The Court of Appeal disagreed. It held that the payment pattern was unremarkable, more especially because in reality there was no pattern. The two payments made before the disputed payments did not constitute a pattern. Nor could

_{anything be taken from 'how long outstanding the moneys comprised in each}

11 _{Waikato Freight & Storage (1998) v Meltzer at [31].}

12 _{At [31].}

13 _{Carter Holt Harvey Ltd v v Fatupaito (2003) 9 NZCLC 263, 285 (CA) at [22].}

14 Waikato Freight and Storage (1988) Ltd v Meltzer [2001] 2 NZLR 541 (CA).

payment had been, either in themselves or by comparison with the composition of earlier payments'. Nor was it 'out of the ordinary' for the outstanding debt to be met by two payments, a month or two months after the relationship ended. The Court regarded the creditors' billings and debt collection as 'entirely conventional'. It counselled against 'the adoption of too narrow a view of the ordinary process for

commerce'.15

[25] Nothing, the Court said also, turned on the fact that the company in liquidation had ceased the relationship because it was intent on cost cutting, or on the dishonour of the cheque. As the Court concluded rhetorically:16

In any case what is the first supplier to do? All the services have been performed. Moneys are outstanding. No question of further credit arises. Is the first supplier to be disqualified from the benefit of payments made to discharge the indebtedness on the basis that they were not made in the ordinary course of business?

[26] Carter Holt Harvey Ltd v Fatupaito & Waller17 is another such case. There the two payments in issue were made within the last days of the 'restricted period':

$40,000 within seven days of the date of liquidation, and $100,000 the day after the first; and not to the creditor directly, but to a credit management company acting on its behalf. There too the creditor carried the onus.

[27] At first instance the Master accepted that there was nothing surprising about rounded lump sum payments, which were 'a fact of commercial life'; nor that a payment might not match an invoice; nor that payment was made outside the usual terms of trade. But, because the two payments were only a day apart he treated them as one payment. He held that, because one third of the second payment was to meet a debt not yet due, both payments were outside 'the ordinary course of business'. The

creditor had been preferred.18

[28] Here too the Court of Appeal disagreed. It held that the two payments, though only a day apart, had to be treated separately.19 The first payment, it held, was not

15 _{At [34].}

16 _{At [38].}

17 _{Carter Holt Harvey Ltd v Fatupaito & Waller [2003] 9 NZCLC 263, 285.}

18 _{At [12].}

19 Carter Holt at [15] - [19].

abnormal, despite the fact that the account was then in arrears, and it was in a rounded sum.20 The second payment, it agreed, was out of the ordinary as to the one third payment in advance.21 The entire payment had to be declared void.22

[29] Graham v Pharmacy Wholesalers (Wellington) Ltd,23 a third decision of the Court of Appeal, on which the liquidators rely, is most unusual. There the Court held that PWL, the wholesale supplier of the company in liquidation, a pharmacy, had been preferred at the expense of the other principal creditor, the original owner of the business. Throughout the brief life of the company in liquidation PWL had access to its bank accounts. PWL was well aware of its state of insolvency. PWL competed for payment with the other principal creditor. PWL was paid out, leaving the other principal creditor, as the Court held it must have known, out in the cold.

[30] In this case, I consider, the Waikato Freight and Carter Holt Harvey cases, which are conventional trade credit cases, supply the bench mark against which the MCC payments in dispute are to be assessed.

Liquidator's evidence

[31] In his affidavit, dated 31 January 2012, in support of the originating application on which judgment was given by default, Mr Levin explained that at the date of liquidation, 11 July 2008, MCC owed $263,227.07 and mostly to the Commissioner of Inland Revenue, who had placed MCC in liquidation.

[32] MCC, the liquidators soon concluded, had not merely been unable to pay its debts as they became due during the specified period, 17 March 2006 - 17 March

2008. It must have been insolvent since at least 2001. MCC had paid no income tax since 2001 or GST since 2004. On liquidation MCC owed $175,846.23 for unpaid GST, PAYE and income tax, increased by penalties and interest. It had not paid ACC

_{levies since 2006 and then owed $15,685.58.}

20 _{At [23].}

21 _{At [24].}

22 _{At [25] - [29].}

23 Graham v Pharmacy Wholesalers (Wellington) Ltd (CA37/04, 17 December 2004).

[33] By contrast, Mr Levin said, on liquidation Shotblast was owed and claimed

$7,500, though the sum it had been owed at 20 June 2007 had stood as high as

$34,017.25. Between 29 June 2007 - 2 July 2008, MCC had paid Shotblast

$26,517.75. The fact of those payments and their pattern, Mr Levin said, showed that

Shotblast had been preferred.

[34] Mr Levin set out in his affidavit Shotblast's invoices, and then contrasted them with MCC's payments. The invoices were all within one year of the date of liquidation, well within the 'specified period', whereas all but one of the payments MCC had made lay within the six months just before liquidation, the 'restricted period'.

[35] Shotblast's invoice pattern, Mr Levin said, was itself indicative. Of the 10 invoices Shotblast issued between 30 April - 20 June 2007, eight were issued in clusters: three totalling $6,867 on 30 April 2007, three more for $11,220.75 on 30

May 2007, and two more for $10,719 on 20 June 2007.

[36] MCC's payment pattern, Mr Levin said, was also indicative. While Shotblast required payment on the 20th day of the month, or for a large invoice within seven days, MCC's payments were well overdue. The first was not made until a week after the last invoice. Two payments related to multiple invoices. There were rounded payments that did not match any invoice. MCC had, he said, first parked the debt and then set out to clear it.

[37] It is no coincidence, Mr Levin then said, that Shotblast received more than it would ever have received on liquidation. The payments were not in the ordinary course of business. Shotblast could not have understood them to be, or to have received them in good faith. It had to have been on notice that MCC was then in trouble. The payment pattern suggested that Shotblast knew that to be so.

Shotblast's defence

[38] Shotblast, Mrs Styles explains in her affidavit on this present application, is a family company. It cleans concrete floors to remove contaminants so that they can be

coated. It carries out this work throughout New Zealand in carparks, industrial buildings, warehouses, airport terminals, cow sheds, and the like.

[39] Shotblast's terms of trade, Mrs Styles explains, are standard in the construction industry. Shotblast expects to be paid on the 20th of the month following the invoice, but often is not. Shotblast's customers are, just as it is, often small and cannot pay until they are paid themselves. Shotblast faces the usual dilemma. Does it turn work away because customers take too long to pay? Or does it accept the work? Usually, she says, it opts for the latter and receives what the liquidators describe as 'lumpy payments' made late. That is perfectly normal.

[40] In 2007 - 2008, Mrs Styles says, times were difficult in the construction industry. Over that year their own sales revenue dropped significantly. Everybody's cashflows became tighter. Shotblast customers did not pay as promptly. Any work was welcome.

[41] From 2003 onwards, Mrs Styles explains, Shotblast prepared carpark floors, and sometimes factory floors, for MCC, which coated them with 'Flo Crete'. Jobs varied in size over the years and the relationship was never personal, always commercial.

[42] Invoices sent to MCC, she says, began to mount between April - June 2007. Payments began in June 2007 and continued into 2008. That was not at all unusual. There was nothing to suggest that MCC was in difficulty. She did not send MCC letters demanding payment or threatening legal action, let alone instruct solicitors. She did ring MCC. MCC's payments in response seemed quite normal.

[43] In short, Mrs Styles says, Shotblast accepted payments from MCC in good faith, and relied on those payments to provide working capital. To repay them to the liquidators now would cause very considerable hardship.

Conclusions

[44] Despite the fact that Shotblast carries the onus of establishing that the three payments remaining in issue were 'in the ordinary course of business', it does have a substantial ground of defence. As the bench mark cases show, the payments MCC made were by themselves unexceptional and Mrs Styles' evidence on this application also suggests that to be so.

[45] Shotblast's failure to appear on the first call of the case is, I consider, less plausible. The application was explicit. It plainly told Mr and Mrs Styles that the liquidators were intent on judgment, even on the first call of the case. That said, the liquidators' suggestion that Mr and Mrs Styles held back from appearing on the first call on a 'wait and see' principle is also implausible. Mr and Mrs Styles had nothing to gain by that. They might well have been naive, or in denial.

[46] Finally, I cannot see that the liquidators would be irreparably harmed if the judgment were set aside. When they brought their claim against Shotblast they had every reason to expect that Shotblast would defend it. They knew, explicitly, Shotblast's grounds of defence. They obtained judgment by default on the first call by a windfall.

[47] On balance, I conclude, the justice of the case favours the setting aside of the judgment. I grant Shotblast's application. Given, however, Shotblast's failure to

_{appear on the first call, there will be no order as to costs.}

P.J. Keane J

_SCHEDULE

INVOICES

_{Date Amount Total}

_{30 April 2007 675.00 675.00}

_{30 April 2007 1,494.00 2,169.00}

_{30 April 2007 4,698.00 6,867.00}

_{14 May 2007 5,211.00 12,078.00}

_{30 May 2007 589.50 12,667.50}

_{30 May 2007 4,515.75 17,183.25}

_{30 May 2007 6,115.50 23,298.75}

_{20 June 2007 2,760.75 26,059.50}

_{20 June 2007 7,958.25 34,017.75}

PAYMENTS

_{Date Amount Total}

_{29 June 2007 5,373.00 28,644.75}

_{21 September 2007 2,083.50 26,561.25}

_{8 October 2007 7,958.25 18,603.00}

_{31 January 2008 3,603.00 15,000.00}

_{25 March 2008 5,000.00 10,000,00}

_{23 May 2008 1,000.00 9,000.00}

2 July 2008 1,500.00 7,500.00