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High Court of New Zealand Decisions |
Last Updated: 30 August 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-2869 [2012] NZHC 2132
UNDER the Companies Act 1993
IN THE MATTER OF the liquidation of JAMES DEVELOPMENTS LIMITED (In Liquidation)
BETWEEN GRANT BRUCE REYNOLDS AS LIQUIDATOR OF JAMES DEVELOPMENTS LIMITED (IN LIQUIDATION)
Applicant
AND CHRIS JAMES Respondent
Hearing: 13 August 2012
Appearances: M J McCartney SC for Applicant
M H Morrison and K D Puddle for Respondent
Judgment: 22 August 2012
JUGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on ...22 August 2012 at ...4:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Whitlock & Co (M D Whitlock) P O Box 100-449 Auckland for Applicant
Email: mwhitlock@internet.co.nz
Anderson Lloyd (F B Barton/A M Cunninghame) Dunedin, for Respondent
Email: frazer.barton@andersonlloyd.co.nz / alexandra.cunninghame@andersonlloyd.co.nz
Copy for:
M J McCartney SC, P O Box 47-114 Ponsonby, Auckland 1144, for Applicant
Email: jan.mccartney@gmail.com
REYNOLDS V JAMES HC AK CIV-2011-404-2869 [22 August 2012]
[1] This is an insolvent transaction case. The liquidator of James Developments Ltd applies for orders setting aside payments totalling $60,904 that the company made in 2009, plus a general security agreement dated 22 May 2009 and seeks judgment for $60,904. He says that the respondent, Mr James, the respondent, has received $60,904 more than he would in the actual liquidation and that he should not be able to rely on a charge taken shortly before the company went into liquidation. In opposition Mr James relies on later payments he made which he says were for the company.
[2] It is undisputed that James Developments Ltd was not able to pay its due debts when it made the payments and the general security agreement. That was within two months of liquidation, well inside the specified periods under ss 292(5) and 293(6) of the Companies Act 1993. Mr James does not raise any defences under s 296.
Issues
[3] These questions arise:
(a) Is the general security agreement voidable under s 293 of the Companies Act
1993 as giving a charge for past debts?
(b) Did Mr James receive payments from the company?
(c) Who funded the liquidators’ fees and the post-liquidation litigation expenses? (d) Did Mr James remedy the preference?
(e) Is the general security agreement voidable under s 292 of the Companies Act
1993 as enabling Mr James to receive more than in the liquidation?
Facts
[4] James Developments Ltd was established as a property developer. Mr James is the director. A trustee holds the only shares in the company for interests associated with him. Mr James is a land agent of Queenstown. There he is the director and sole shareholder of a real estate agency, Otago Real Estate Ltd.
[5] In October 2007 James Developments Ltd entered into an agreement to buy a property near Cromwell from Mana Property Trustee Ltd. Settlement was to take place after new titles had issued. The purchase price was $4.5 million plus GST. James Developments Ltd paid a deposit of $450,000. The lot to be sold to James Developments Ltd was to be not less than 4.715ha. When the title issued, the area was marginally less than that. James Developments Ltd refused to settle and in November 2008 gave notice cancelling the agreement. Mana Property Trustee Ltd sued for specific performance of the agreement, and applied for summary judgment. The application was heard on 6 March 2009. On 8 April 2009 Associate Judge Osborne made orders for specific performance and costs. It is common ground that at least from the date of Associate Judge Osborne’s order, James Developments Ltd was not able to meet its liabilities as they fell due.
[6] James Developments Ltd appealed and also applied for a stay of the order for specific performance until the appeal was decided. On 28 May 2009 the stay application was granted on terms that James Developments Ltd pay into the trust account of the solicitors for Mana Property Trustee Ltd the sum of $821,214.80 and that it pay Mana costs of $13,700 on the summary judgment application.
[7] On 6 July 2009 James Developments Ltd went into voluntary liquidation by shareholders’ special resolution. Paul Jenkins and Iain Nellies of Dunedin were appointed liquidators. They are the original liquidators.
[8] The transactions challenged by the liquidator took place in May and June
2009, that is, between the summary judgment decision and the start of the liquidation, and while the company could not pay its due debts. On 22 May 2009
James Developments Ltd signed a general security agreement in favour of Mr James.
The general security agreement uses the Auckland District Law Society form. James Developments Ltd gave Mr James a security interest in all collateral as secured property. The money secured under the agreement was all monies provided by Mr James to James Developments Ltd now and in the future, including all obligations of James Developments Ltd to Mr James. The general security agreement was registered under the Personal Property Securities Act 1999.
[9] During June 2009 the company made three payments:
2 June 2009: $35,764.00
25 June 2009: $13,738.00
28 June 2009: $11,402.00
$60,904.00
[10] At the date of the general security agreement, Mr James was a creditor of James Developments Ltd for $141,986.00. If the general security agreement is upheld, he has security for the company’s indebtedness to him. If the payments made in June are taken into account, the company’s debt to him is $81,082.00.
[11] The original liquidators continued with the appeal by James Developments Ltd against the order for specific performance. The Court of Appeal gave its decision on 19 October 2009 in favour of James Developments Ltd.1 James Developments Ltd was not only discharged from liability for not completing the purchase, but was also entitled to the return of the deposit of $450,000.
[12] Mana Property Trustees Ltd appealed. The Supreme Court gave leave. Mana Property Trustee Ltd succeeded.2 The court held that the purported cancellation of November 2008 was of no effect. James Developments Ltd lost its right to recover the deposit of $450,000. In November 2010 the original liquidators resigned and Mr Reynolds, the present liquidator, was appointed.3
The position of the company following the litigation
1 James Developments Ltd v Mana Property Trustee Ltd [2009] NZCA 483.
2 Mana Property Trustee Ltd v James Developments Ltd [2010] 3 NZLR 805 (SC).
3 Under s 283(2) of the Companies Act 1993.
[13] After the company went into liquidation, Mr James made a claim as secured creditor for $81,082, the balance owing to him after payments of $60,904 were taken into account. The security he relied on was the general security agreement. The other creditors are unsecured. Mana Property Trustee Ltd filed a claim for
$1,720,260.09 as representing the loss arising from the failure of James Developments Ltd to settle. The only other creditors of James Developments Ltd are two companies associated with Mr James.
[14] The first report of the original liquidators did not identify any assets held by the company. The current liquidator, Mr Reynolds, has identified a possible asset, a debt of $740,000 owed by Frongopolous Trust. That trust is associated with Mr James. Proceedings may be taken to recover that sum. That aside, there are no assets available to the liquidator, barring the payments of $60,904 which he claims in this proceeding.
[15] Mr James says that he paid the remuneration of the original liquidators and also the legal fees for the appeals to the Court of Appeal and the Supreme Court. He has given evidence of payments made from May 2009 to March 2011. They total
$130,657.55 and fall into four groups:
1. Costs of litigation incurred before liquidation $13,738.31
2. Costs of litigation after liquidation4 $70,760.31
3. Non-litigation legal expenses5 $6,908.93
4. Remuneration of original liquidators $39,250.00
$130,657.55
[16] Mana Property Trustees Ltd was awarded the following costs in the litigation:
High Court $13,700.00
Court of Appeal $16,590.00
Supreme Court $19,615.72
$49,905.72
[17] Mr Reynolds says that so far his remuneration comes to $11,918.35 and legal fees and disbursements he has incurred come to $32,910.87. Mana Property Trustee
Ltd is funding Mr Reynolds.
[18] Mr Reynolds issued separate notices under s 294 seeking to set aside the payments of $60,904 under s 292 of the Companies Act and setting aside the general security agreement under both ss 292 and 293 of the Companies Act. The notice of objection by Mr James says that the transaction was made with the express purpose of allowing Mr James to meet the company’s obligations to meet its ongoing legal expenses and the expenses of the liquidation.
Is the general security agreement voidable under s 293 of the Companies Act
1993 as giving a charge for past debts?
[19] Under s 293, a charge given within two years before the start of liquidation when the company is unable to pay its due debts is voidable, insofar as it secures past indebtedness and does not replace a similar charge. 6 The general security
agreement is within the definition of “charge” in s 2. 7 The general security
agreement was given within the specified period under s 293(6). It is accepted that the company was not able to pay its debts on 22 May 2009 when it gave the charge to Mr James. Although he had not conceded it earlier, Mr James accepted at the hearing that the general security agreement should be set aside insofar as it purports to give him security for debts already due to him at the date of the general security agreement. He cannot claim that he has security for $81,082 for his pre-liquidation account with the company. There is a separate question whether the general security agreement can be set aside as a charge for any later debts the company incurred.
That aspect falls outside s 293 and is addressed later.8 The charge for past debts
under the general security agreement is set aside as voidable under s 293.
Did Mr James receive payments from the company?
[20] A payment of money is a transaction within s 292(3)(e). Mr James accept s that the company paid him $47,166.00 ($35,764.00 on 2 June 2009 and $11,402.00
6 Companies Act 1993, s 293(1) and (1A).
7 Companies Act 1993, s 2 :. charge - includes a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to creditors entitled to be paid under section 313 of this Act; but does not include a charge under a charging order issued by a court in favour of a judgment creditor:
8 See s 293(1A). Instead it is addressed under s 292 and will be considered later.
on 28 June 2009), but he contests that he received the $13,738.31. Mr James says that on 25 June 2009, $13,738.31 was withdrawn from the company’s current account and transferred to the trust account of the solicitors who were acting for the company in the Mana litigation. Under this account the solicitors, not he, received the payment from the company.
[21] The liquidator refers to other evidence:
[a] The company’s ledger showing its debt to Mr James. There is an entry for 25 June 2009 showing that the sum of $13,738.31 has been taken into account to reduce the company’s indebtedness to Mr James to $81,082.00.
[b] The draft statement of financial position as at 30 June 2009 prepared by the company’s accountants records the company’s liability to Mr James as $81,082.00.
[c] Mr James made a claim in the liquidation as secured creditor in the sum of $81,082.00 and referred to the draft company accounts at
30 June 2009 in support.
[d] Mr James acknowledged that all three payments were made to him when he was examined on 30 May 2012.
[22] Mr James invited me to bypass these matters. The accounting documents were said to be in error and he had made a mistake in having relied on them. The money may have passed directly from the company to the lawyers; however, because the accounts treat that payment as a partial reduction of Mr James’ indebtedness to the company, it is he, not the company, who paid the lawyers. The contemporaneous record of the transaction establishes that in law the company’s payment went to Mr James, not to the lawyers.
[23] In submissions, Mr Reynolds gave a reason why the transaction could have been structured that way. If the company had paid the lawyers directly, the lawyers
would be at risk of the payment being set aside as voidable under s 292. Routing the flow of funds through Mr James meant that he carried the risk of the payment being set aside, rather than the lawyers. At the time, Mr James clearly intended that the company should continue its appeal. He would have to make sure that the lawyers acting for the company were paid. In those circumstances, it makes business sense that he would accept the risk of the payment being set aside as voidable, rather than the lawyers. He should not now be allowed to say that the liquidator should look to the lawyers, rather than to him, for recovery of a preferential payment. The fact that Mr James took the risk of the payment of $13,738.31 being set aside as voidable is
relevant later in this decision9.
[24] The accounting records are accepted as describing correctly that the company’s payment of $13,738.31 should be credited to Mr James. He has not given a good reason why they should not be. This is not a case of fictitious entries in a loan ledger, as in Rea v Russell.10 There were alternative ways of structuring and describing the payments in this case. The accounting records show which was chosen. Mr James’ claim and his statement in his examination confirm that position.
Who funded the liquidators’ fees and the post-liquidation litigation expenses?
[25] Most of the invoices from the original liquidators and the lawyers are made out to Otago Real Estate Ltd.11 Mr Reynolds relies on these invoices to say that Mr James cannot take the credit for paying these expenses.
[26] Otago Real Estate Ltd runs a real estate agency business. It was not part of its business to fund the litigation of James Developments Ltd. It would not be able to claim the costs of funding that litigation as a deductible expense in carrying on its business. Despite the invoices, the payments could only have been made on behalf of Mr James. Otago Real Estate Ltd was not paying its own debts, but was advancing funds to Mr James. I find that although he obtained funds for payment from Otago Real Estate Ltd, it was Mr James, rather than Otago Real Estate Ltd,
who met the costs of the litigation and the liquidators’ remuneration.
9 See [37] below.
10 Rea v Russell [2012] NZHC 11 at [9] – [12].
11 An invoice of 5 August 2009 and a statement of 10 August 2009 are both addressed to Mr James.
[27] Mr James suggests that the company’s payments of $35,764.00 and
$11,402.00 went towards those payments. However, he has not put in evidence any bank statements or similar documents that would allow the flow of funds to be traced. It may be that the payments on 2 June and 28 June 2009 gave Mr James the means to make some of the payments for the litigation and for the liquidators’ remuneration, but there is no evidence to support a tracing claim.
Did Mr James remedy the preference?
[28] This part of the decision deals with the question of preference under s
292(2)(b), that is, whether the payments enabled Mr James to receive more towards satisfaction of his debts than he would receive in the liquidation. Arguments as to preference are often founded on the pari passu principle, that is, the principle of creditor equality that requires creditors to share pro rata. However, it is also relevant
that the Companies Act provides for a ranking of claims. 12 A creditor may be
preferred not only by receiving more than the pro rata share that he would take in the liquidation, but also by receiving payments ahead of creditors who rank above of him. Because the company has no other assets, in this case the focus is more on whether Mr James has received payments ahead of higher-ranking creditors.
[29] Mr Reynolds’ case is that Mr James received payments of $60,904.00 in June
2009. Mr James is an unsecured creditor, because the general security agreement is set aside as voidable under s 293. As an unsecured creditor, Mr James has received
$60,904.00 more than he would receive in the actual liquidation of the company and he has accordingly been preferred under s 292(2)(b). The argument is sound to that point. Mr James does not dispute that if matters had stopped there, he was preferred.
[30] In broad terms, Mr James’ response is that the transactions were made with the express purpose of allowing him to meet the company’s obligations to pay its ongoing legal expenses and liquidators’ remuneration.
[31] If a creditor who has received a preferential payment pays an equivalent sum back to the company, then he will eliminate the preference. The initial payment may
be voidable under s 292(1), but a liquidator would not obtain any relief under s 295, because the preferred creditor has remedied the effect of the preference. By receiving an equivalent sum, the company has equivalent assets, which o n liquidation are available to be distributed under the Companies Act.13 The normal principles of ranking of creditors and pari passu distribution will apply. If a creditor who has received a preferential payment pays back a sum equivalent to only half of the preferential payment, then that creditor may be preferred to the extent that he has not made a payment back.
[32] Mr James’ claim is not that he put an equivalent sum of money back into the company. His claim is different. His claim is that he spent more than the amounts of the preferential payments for company purposes. The claim that he met company expenses raises these questions:
[a] Were the payments for a company purpose?
[b] Are the payments ones that can give a creditor a claim in the liquidation?
[c] If the creditor has a claim, where does it rank?
[33] As to the first, if a payment is not made for a company purpose, the creditor cannot claim that the company has benefited from the payment. The preference has not been redressed.
[34] The second follows from the first. Unless the creditor’s payment of expenses would entitle him to claim in the liquidation, it is not one which could redress the preference. When a creditor claiming to have met a company’s expenses says that the payment goes to reduce a preference he has received, the liquidator needs to know two things: whether the company has a liability for those expenses, and whether the creditor would otherwise have a claim against the company for having met the expense. On the former, unless the company is under a liability for the expenses, the liquidator can say that the preference has not been redressed because
the payment of expenses has not affected the assets available for distribution to creditors or the creditors to receive a distribution or the amounts of creditors’ claims. The latter goes to entitlement. If a creditor who has met company expenses does not have a claim in law against the company, the liquidator is entitled to say that the company is not bound. The creditor cannot claim that he has redressed a preference, if he does not have a claim against the company for having met its expenses. Under s
303(1) an admissible claim in a liquidation is a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages. The claim must be legally enforceable.14 A creditor who has received a preferential payment, who then relies on subsequent expenditure to make up for the preference, must show that his claim for expenditure is legally enforceable against the company
so as to be claimable as a debt in the liquidation.
[35] Third, if the preferred creditor pays expenses for the company, the ranking of those expenditure claims against the company is relevant to the redress of the preference. If a preferred creditor pays a sum to meet the claim of another unsecured lowest-ranking creditor, that payment will not get rid of the preference, if there are higher-ranking creditors who cannot be paid. The only effect of paying another unsecured creditor will be to prefer another creditor of equal rank, not to eliminate the preference. The higher-ranking creditors will still miss out. A preferred creditor, wishing to redress a preference by repaying company expenses, can do so only if the effect of his expenditure is not to disturb the ranking of claims under ss 312, 313 and the Seventh Schedule.
[36] These questions are relevant in this case, but are not necessarily exhaustive
for all cases. I consider Mr James’ expenditure claims in the light of those questions.
[37] The payments of $6,908.93 for non-litigation legal expenses were for services provided for Mr James as a director and creditor of James Developments Ltd. They were for his personal benefit and were not for a company purpose. They are not claimable against the company. They did nothing to eliminate the preference.
[38] Mr James’ payment of $13,738.31 for legal fees incurred before liquidation was the payment of another unsecured creditor of the company. The result of that payment is that another unsecured creditor was paid in full and has received more than it would have in the actual liquidation. That other creditor has been preferred because there are other higher ranking creditors who have not been paid. Mr James’ payment of $13,738.31 did not eliminate the preference he received, but passed the benefit on to the other creditor.
[39] Mr James cannot rely on his position as a director of the company to say that he authorised payment of expenses for the company. That is because on liquidation, he lost his power to bind the company. Section 248(1) says:
(1) With effect from the commencement of the liquidation of a company
...
(b) the directors remain in office but cease to have powers, functions, or duties other than those required or permitted to be exercised by this Part...
[40] There is no part of Part 16 of the Companies Act that authorises directors to pay off creditors. Instead, under s 248(1)(a), the liquidator has custody and control of the company’s assets. The liquidator, not the directors, exercises the powers o f the company, including the power to pay expenses and to authorise that expenditure.
[41] If Mr James is to have any claim in the liquidation of the company for having paid expenses, it must be on the basis that he has some admissible claim under s 303 against the company. Mr Reynolds objects that Mr James can have no claim against the company for paying the remuneration of the original liquidators or for paying the legal costs of the appeals. He characterises Mr James as acting in his own interests or as a risk-taking intervener.
[42] The evidence shows that by 25 May 2009, James Developments Ltd did not have sufficient funds to meet the terms of the stay and could not meet its liability under the order for specific performance. As director, Mr James wanted the company to continue with its appeal. He put in place arrangements which he hoped would allow the appeal to be continued. He took funds out of the company but for the purpose of funding the liquidation and the appeal. He arranged for the company
to give him the general security agreement. He had the company go into liquidation, thus avoiding the effect of the stay conditions and also preventing enforcement of the order for specific performance.
[43] While the general security agreement may be voidable as a charge, it still has contractual effect between the company and Mr James. The general security agreement contemplates that Mr James may make advances for the benefit of the company, for which security is said to be given. Given that Mr James was to be the source of the funding for the litigation, the general security agreement has contractual effect binding the company to repay Mr James for expenditure he incurs for the company.
[44] That arrangement was effective up until the time of liquidation. But Mr James’ claims are for payments he made on behalf of the company after liquidation. The people who could authorise the company incurring liabilities after liquidation were the original liquidators. Mr James could not rely on his position as a director to authorise further expenditure on behalf of the company, because on liquidation he lost any authority to do so.
[45] The liquidators authorised Mr James to pay their remuneration. Their invoices for payment as liquidators are made out to Otago Real Estate, showing that they expected Mr James to make those payments, being payments for which they would otherwise look to the assets of the company. They have accordingly authorised Mr James to incur that expenditure on behalf of the company. Having met expenses that would otherwise be payable by the company, Mr James is entitled to claim against the company for payment of the liquidators’ remuneration. Even if it is not effective as a charge, the general security agreement is evidence that if Mr James met expenses of the company, he did not do so gratuitously, but on the basis that he was to be reimbursed.
[46] There is a similar approach to Mr James’ payments to meet the costs of the
litigation. The liquidators had the power to continue the legal proceedings after liquidation.15 The company could only continue the proceedings with the consent of
15 Companies Act 1993 s 260(2) and Sixth Schedule cl (a).
the liquidators. The costs decision of the Supreme Court is authority that the liquidators were entitled to continue the appeal in the Court of Appeal and to oppose the appeal in the Supreme Court.16 Having continued the legal proceedings, and having left Mr James to meet those costs, the original liquidators must be taken to have approved Mr James meeting the costs of the litigation on behalf of the company.
[47] Accordingly, Mr James has a claim for meeting expenses of the company during the liquidation for $110,010.31, made up of $70,760.31 for the costs of litigation and $39,250.00 for liquidators’ remuneration. His claim is in contract. His claim could also be made in restitution based on free acceptance by the original liquidators,17 but it is not necessary to examine that in depth, as the matter is covered by contract law. The original liquidators’ acceptance of Mr James paying their
remuneration and the costs of the litigation answers the complaint that Mr James was a risk-taking intervener.
[48] The next point is to establish whether these payments redress the preferential effect of the payments made to Mr James in June 2009.
[49] First, the payments Mr James made ($110,010.31) are more than the amounts of the preferential payments he received in June 2009 ($60,904). Second, Mr James has met fees and expenses incurred by the liquidators in carrying out their duties and exercising their powers and has also paid the liquidators’ remunerat ion. These are expenses within the 7th Schedule, clause 1(1)(a):
(1) The liquidator must first pay, in the order of priority in which they are listed –
(a) The fees and expenses properly incurred by the liquidator in carrying out the duties and exercising the powers of the liquidator, and the remuneration of the liquidator ...
[50] Mr Reynolds contests this. He says that any claim by Mr James does not come under clause 1(1)(a) and does not meet the requirements of clause 1(1)(e):
16 Mana Property Trustee Ltd v James Developments Ltd (No 2) [2011] 2 NZLR 25 (SC) at
[12]–[15].
(1) The liquidator must first pay, in the order of priority in which they are listed – ...
(e) to any creditor who protects, preserves the value of, or recovers assets of the company for the benefit of the company's creditors by the payment of money or the giving of an indemnity,—
(i) the amount received by the liquidator by the realisation of those assets, up to the value of that creditor's unsecured debt; and
(ii) the amount of the costs incurred by that creditor in protecting, preserving the value of, or recovering those assets.
[51] Mr Reynolds is correct that Mr James’ claim does not come within clause
1(1)(e). Mr James did not protect, preserve the value of or recover assets for the benefit of creditors. But claims under that clause are for expenditure incurred without the liquidator’s consent. An example cited in argument was a salvor’s claim. However, the argument is beside the point, because expenditure authorised by a liquidator in carrying out the liquidation comes under clause 1(1)(a), even if there is no benefit to creditors as a whole.
[52] A creditor who has paid a liquidator’s remuneration has discharged a company’s liability with the authority of the liquidator and has a claim that ranks under clause 1(1)(a). Similarly a creditor who has met expenses in the liquidation, authorised by the liquidator, has a claim under clause 1(1)(a). By meeting expenses at the very highest level of priority under the Seventh Schedule, Mr James has redressed the preferential effect of the payments made to him in June 2008.
[53] Mr Reynolds objects that the costs of liquidation and the liquidators’
remuneration paid for by Mr James are not the only claims that come within clause
1(1)(a) in the liquidation. Other claims are for his remuneration, the orders for costs made in the litigation in favour of Mana Property Trustee Ltd,18 and his legal costs in the liquidation. While those costs have to date been met by Mana Property Trustee Ltd, Mana Property Trustee Ltd has a legitimate claim against the company because
of the funding arrangements between it and the liquidator.
2 Ch 684 and Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1 (HL) at 21.
[54] There are two answers to Mr Reynolds’ objection.
[55] First, if the original payments of June 2009 had not been made to Mr James, those funds would have remained in the company and on liquidation they would have been applied in accordance with the provisions of the Companies Act. They would have been applied in payment of the remuneration of the original liquidators, and in payment of the costs of litigation. Once they were used up, Mr James would have continued funding those costs himself. But by the time the present liquidator was appointed, any funds that had originally been left in the company would have been all used up.
[56] Second, it has been established that Mr James has removed the preferential effect of the payments made in June 2009. He has applied funds for the benefit of higher ranking claimants. The preferential effect of the original payments to him has been eliminated. The enquiry does not have to go further. For this decision it is not necessary to establish whether there has been or needs to be a pari passu distribution of assets amongst the class of claimants under clause 1(1)(a) of the Seventh Schedule and whether there should be adjustments among those claimants for payments already received.
[57] I summarise on the question of preference. The payment of legal fees of
$13,738.31 before liquidation did not reduce the preference, but the payment of higher-ranking claims after liquidation cleared the preference entirely. If Mr James’ payments of higher-ranking liquidation costs had matched the amount of the preference - $60,904, Mr James would still have a claim for that amount, but it would rank as an ordinary unsecured creditor’s claim. That puts Mr James back in the position he would have been in if he had not received the preferential payments. Mr James’ payments of liquidation expenses were more than $60,904. To the extent that he paid more than was required to clear the preference, he still has a claim as a higher-ranking creditor. Because Mr James has already eliminated the preference, he should not be ordered to make any payments to the liquidator.
Is the general security agreement voidable under s 292 of the Companies Act
1993 as enabling Mr James to receive more than in the liquidation?
[58] Under s 292(3)(b) a transaction includes a charge given by the company over its property. Charges, like payments, are voidable if they enable a person to receive more than they would in the liquidation. While Mr James has claimed for $81,082 as the balance of advances made before liquidation, he also has claims against the company for $13,738.31 for pre-liquidation litigation expenses he met, and for
$110,010.31 for liquidators’ remuneration and for litigation expenses after liquidation. The general security agreement gives him a charge over the assets of the company. If assets do come into the company, for example as a result of proceedings against the Frongopolous Trust, the general security agreement would give him priority if it is valid. It would put him ahead of other claimants with the same level of priority, such as the present liquidator or his funder. He would receive more than other creditors with the same ranking. To that extent, the general security agreement is a voidable transaction under s 292 and should be set aside.
[59] I record that Mr Reynolds submitted that when there are not enough funds to meet all claims under clause 1(1)(a) of the 7th Schedule, there is a ranking according to equitable principles developed by the English courts in the nineteenth century, rather than a pari passu distribution.19 I have not had to decide that question for this case, but it may arise later in the liquidation.
Outcome
[60] I make these orders:
[a] The general security agreement is set aside as voidable under s 293 insofar as it gives a charge for past debts.
[b] The general security agreement is set aside as voidable under s 292 insofar as it gives a charge for any claims Mr James might make
19 See Re Roslea Path Ltd (In liq) Tauranga HC CIV 2005-470-611, 17 December 2009, at [245] for an example of the equitable principles being applied in a recent case. English authorities are Re Home Investment Society (1880) 14 Ch D 167, Re Dominion of Canada Plumbago Co (1884)
27 Ch D 33, Re Staffordshire Gas and Coke Company [1893] 3 Ch 523, Re London Metallurgical Co [1895] 1 Ch 758, Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26, and Re London Drapery Stores Ltd [1898] 2 Ch 684.
against the company for expenses he has met on behalf of the company or for other indebtedness accruing after 22 May 2009.
[c] The company’s payments of $60,904 to Mr James in June 2009 are set aside as voidable under s 292 but the liquidator’s application for orders for payment of that amount plus interest is dismissed.
[d] There is an order under s 295(g) of the Companies Act that if Mr James makes any claim in the liquidation for reimbursement for remuneration of the original liquidators and the costs of litigation that he has met, the first $60,904 of that claim is not preferential under s 312 and the 7th Schedule of the Companies Act, but is to rank as an unsecured claim under s 313(1).
[61] I invite the parties to confer as to costs. If they are not able to agree, memoranda may be filed and I will decide costs on the papers. The parties have had mixed success. I also note that the liquidator brought this proceeding in the Auckland registry, thereby causing further costs to Mr James, when the proceeding ought to have been brought in Invercargill20 (the court closest to where Mr James
lives), or in Dunedin.21
.............................................
R M Bell
Associate Judge
31 saying where voidable transaction proceedings should be filed, but it would seem natural that the proceeding should be filed in the same court as the s 294 notice.
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URL: http://www.nzlii.org/nz/cases/NZHC/2012/2132.html