Reynolds v Topline Export & Trading Limited [2012] NZHC 3101 (21 November 2012)

Last Updated: 26 November 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-003532 [2012] NZHC 3101

UNDER The Companies Act 1993

IN THE MATTER OF the Liquidation of Richmond Meats

Limited (in Liquidation)

BETWEEN GRANT BRUCE REYNOLDS Applicant

AND TOPLINE EXPORT & TRADING LIMITED

Respondent

Hearing: 21 November 2012

Counsel: B M Pamatatau for applicant

D G Dewar for respondent

Judgment: 21 November 2012

_{(ORAL) JUDGMENT OF ASSOCIATE JUDGE ABBOTT}

Solicitors:

Malcolm Whitlock, Whitlock & Co, PO Box 100449, North Shore, North Shore City 0745

D G Dewar, Thomas Dewar Sziranyi, PO Box 31-240, Lower Hutt

Counsel:

B Pamatatau, P O Box 2422, Shortland Street, Auckland

GRANT BRUCE REYNOLDS V TOPLINE EXPORT & TRADING LIMITED HC AK CIV 2012-404-003532 [21 November 2012]

[1] The applicant is the liquidator of Richmond Meats Limited (in liquidation) (Richmond). Richmond was incorporated to take over the operation of a retail butchery and meat processing plant in Hastings. It purchased meat supplies from the respondent (Topline), a meat wholesaler, but was put into liquidation by its shareholders within approximately a year of incorporation.

[2] The liquidator has applied for orders setting aside two payments made by Richmond to Topline (sums of $19,613.24 and $2,500) within six months of the liquidation. He says that those payments were voidable transactions.

[3] Topline opposes the application. It says that one of the payments, the later one, was not an insolvent transaction because it was part of a cash transaction. As to the first of the payments it says that there is a basis for questioning whether it was an insolvent transaction, but primarily it relies on the statutory defence that it received the payment in good faith, with no suspicion of Richmond’s insolvency, and altered its position in reliance on the validity of the payment.

Background

[4] Richmond was incorporated on 27 July 2010. Its incorporation coincided with the purchase by related parties of land and buildings, and plant and equipment, from and with which Richmond conducted its butchery business. There are some curious features to the acquisition in that Richmond acquired an historical liability owed to employees of the business by the vendor. The liquidator has not yet been able to establish the reason for Richmond assuming that liability.

[5] It is clear from the reports filed by the liquidator that there are serious questions as to whether Richmond traded insolvently from the start. Indeed, I do not understand Topline to challenge that that is in fact the position (its case is that it had no knowledge of this).

[6] Topline was approached by a manager of Richmond’s business, who was

already known to it, and asked to establish a trading account. Prudently, it required

Richmond to complete a credit application and Richmond’s director (a Mr Green) signed that application both on behalf of Richmond and as a guarantor. Of significance to this application, under a paragraph in which Richmond agreed to be bound by Topline’s terms and conditions of trade, there was a handwritten endorsement of “7 days payment terms”. There is no challenge to the fact that that endorsement was part of the terms of trade.

[7] Trading commenced in August 2010, and Topline supplied meat to Richmond from that time until March 2011. In an affidavit in support of his application, the liquidator has set out a summary of invoices that Topline rendered to Richmond over that period. He has shown beside each invoice the time that elapsed between the date of rendering of the invoice and payment. The first four payments were either within the seven day period or just outside. Subsequently there is a clear trend of increasing delay in payment. I will return to that later. As at the end of December

2010, Richmond owed Topline $46,355.84, being the total of seven invoices issued between 24 November 2010 and 20 December 2010.

[8] On 2 February 2011 Richmond paid Topline the sum of $19,613.24 (the February payment). This is the first of the payments which the liquidator seeks to set aside. That payment left a balance of $26,742.60 owing. It is common ground that this sum represented payment of the first three of the seven outstanding invoices rendered between 24 November 2010 and 2 December 2010.

[9] Topline did not supply any further meat to Richmond until 17 March 2011. On that date Richmond made a further payment of $2,500 (the March payment), which the liquidator initially took to be a part payment towards the balance due for the remaining four invoices.

[10] Topline’s director, Mr Stewart, has sworn an affidavit in support of its opposition. He states that the meat supplied on 17 March 2011 was on a cash basis and that the payment received from Richmond on that date was part payment for that cash transaction (the balance having been paid by related entities).

[11] There was no further trading between Richmond and Topline before Richmond’s shareholders placed it into liquidation on 11 July 2011. At that point Callum James McDonald was appointed liquidator. He was replaced by the applicant, Grant Bruce Reynolds, as liquidator on 31 August 2011.

The application

[12] The liquidator formed the view that the two payments ($19,613.24 and

$2,500) were insolvent transactions. The liquidator issued a notice to Topline on 21

March 2012. Topline responded, objecting to the setting aside of those transactions, and the liquidator filed the present application on 22 June 2012. In the application (brought under s 292(4) of the Companies Act 1993 (the Act)) the liquidator seeks an order that the two payments be set aside as insolvent transactions, and an order pursuant to s 295 of the Act that Topline pay the liquidator the total sum, together with interest from the date of filing of the application.

[13] Topline has opposed the application. The grounds for doing so, as stated in its notice of opposition, are:

(a) Topline was a trade supplier, which delivered goods in return for the payments made and acted in good faith.

(b) Topline did not suspect, or have reasonable grounds to suspect, that Richmond was or would become insolvent at the time of the February payment.

(c) Topline was not a creditor in respect of the March payment because the payment was made in relation to goods supplied on a cash basis.

The March payment

[14] The liquidator is not pursuing its application for an order in respect of the March payment. It accepts the evidence given by Topline that this was a cash transaction. No further consideration needs to be given to that payment.

[15] In its notice of opposition, Topline did not challenge the liquidator’s contention that Richmond was insolvent at the time of the payment. However, in his submissions for today’s hearing, counsel for Topline did not concede the point. He contended that this was still a matter on which the liquidator had to persuade the Court. Counsel accepted that the payment was made within the restricted period (six months) prior to liquidation, and hence a presumption of insolvency arises. He submitted, however, that the evidence showed that entities associated with Richmond’s director had advanced capital to Richmond over the period of trading in the sum of approximately $882,000. He invited the Court to consider whether the presumption was rebutted on the facts before the Court, particularly given this evidence of injection of capital.

[16] I accept that the Court must still be satisfied that Richmond was insolvent at the time of payment. I find that the presumption of insolvency applies, and has not been rebutted in this case. The evidence of the liquidator is clear that there were significant creditors at the date of liquidation. Although the initial liquidator’s report included as debts the sums referred to by counsel for Topline as possible capital advances, it is clear from the evidence that even disregarding the effect of those payments in terms of solvency, Richmond was still insolvent to a substantial amount ($1 million) at time of liquidation, and it is still indebted to unsecured creditors for a sum in the order of $410,000.

[17] In the course of the hearing, counsel for Topline accepted that Topline did not have a tenable argument on this point in light of the evidence before the Court. This takes me to the primary ground of opposition, the statutory defence under s 296(3).

The statutory defence under s 296(3)

[18] It is common ground that Topline has the onus of establishing a defence under s 296(3). That section reads:

A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other

enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

(a) A acted in good faith; and

(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

[19] The section requires Topline to establish all three of the elements of receiving the payment in good faith, without suspicion of insolvency, and altering its position as a consequence. I will address each of those in turn.

Good faith

[20] The liquidator challenges Topline’s good faith on the ground that it cannot be disputed that the payments were well outside the agreed seven day terms of credit (the payment was for two invoices rendered on 24 November 2010 and one rendered on 2 December 2010). Accordingly, the payment was either 63 days or 55 days after invoicing.

[21] Topline’s director, Mr Stewart, answers that by saying that the delay was not surprising. He says that no one in the industry paid in a timely manner, and the early February payment of invoices rendered in late November or December was not surprising given the Christmas vacation and the generally slow month of January.

[22] There is no challenge by the liquidator to this evidence, although I accept that it is a difficult matter for the liquidator to answer. The test is whether Topline received the money honestly and in the belief that it would not involve any element of undue preference. I accept Mr Stewart’s evidence on this point. Whether he should have been alert to a problem is not the issue (I will come to that). The test is whether he had any awareness of the fact that he was getting a preference by it. His evidence of industry practice, and understandable delay over the Christmas and New Year period, cannot support any inference of any belief in a preference. I accept that Topline has met this part of the s 296(3) defence.

[23] There are two aspects to the second limb of the s 296 defence. The first is whether a reasonable person in Topline’s position would not have suspected insolvency. This requires an objective analysis. I will come back to that. The second is whether Topline in fact had grounds to suspect insolvency (a subjective consideration).

[24] The subjective aspect can be answered relatively simply. Mr Stewart says that he was not aware that Richmond had financial difficulties until receiving advice from Topline’s buyer in the Hawkes Bay region in early March 2011 (some four weeks after the payment was made). There has been no challenge to this evidence (and again the liquidator is unlikely to be in a position to produce that kind of evidence). I can also have regard to what happened after Topline learnt of the possibility of insolvency. Mr Stewart gives evidence that on 17 March 2011 he was contacted by a manager at Richmond and asked whether Richmond could place an order. His response that he would no longer extend any credit to Richmond, but would provide stock if Richmond paid cash. This led to the payment of $2,500 by Richmond, with the balance being paid by related parties. This subjective aspect has to be considered in light of the nature of Topline’s business. It is a small company, run by Mr Stewart and his daughter, with two other employees. This action (declining to provide any further credit and requiring all payments in cash) is consistent with the conduct that I would expect of a small business as soon as it learnt that one of its trading partners was in financial difficulty. On the strength of this evidence I find that Topline has established the subjective element of the second limb. I turn now to consider the objective element.

[25] In addressing the objective elements I again start by having regard to the nature of Topline – a small company. Although I have found that Topline did not in fact have knowledge of the financial difficulties, I cannot entirely reject the thought that a small company, thinking clearly about its position, would have had some concerns. Although it is difficult to take much from the short trading history, there is a very clear trend of an increasing delay in payment. It could be said that a small company would be more vigilant, because any bad debt was likely to have a greater

impact on its financial position. However, in that respect I need also to consider whether mere delay in payment, on its own, is enough to excite the requisite suspicion. In Queensland Bacon Pty Ltd v Rees, the High Court of Australia said that something more than a mere idle wondering was required – it needed a positive feeling of actual apprehension or mistrust amounting to a “slight opinion but without sufficient evidence” – and that a reason to suspect is more than a reason to consider

or look at the possibility of the existence of the fact.[1] I also take into account the

finding in Jollands v Mitchell Communications Ltd[2] that a creditor did not have grounds to suspect insolvency even where it was having difficulty dealing with the debtor and the debtor was slow in making payment.

[26] Weighing all of the above, I come to the view that the explanation put forward by Mr Stewart was one that a reasonable person would have reached and further, that a two-month delay, on its own, was not enough to create a reasonable suspicion. This takes me to the last point, whether it can be said that Topline has altered its position.

Alteration of position

[27] The general requirements for alteration of position were considered by this Court in Re Bee Jay Builders Ltd (in liq).[3] I adopt, with respect, the following statement of the Court in that case (which has also been followed in many cases since then):[4]

The essence of an alteration of position for present purposes seems to be a deliberate course of conduct, be it act or omission, following receipt of the impugned payment which course of conduct the recipient would not have undertaken but for receipt of the payment and belief in its validity.

[28] The argument for Topline is that it pursued a claim for the unpaid balance of the debt ($26,742.60) against, and received payment of that amount from, the guarantor, on the basis that the February payment was valid. It says that this

_{constitutes an alteration of position. It also relies on evidence in the form of email}

correspondence from the guarantor (after Topline informed the guarantor of the present application and informed him that it would be seeking indemnity) that the guarantor would dispute liability for any further amount. The guarantor contended that Topline had accepted the payment of $26,742.60 in full and final settlement of any amount due by him.

[29] Counsel for Topline submitted that this was sufficient, on its own, to constitute an alteration of position, but also argued that it was still open to the liquidator to have recourse to the guarantor (who also held office as a director of Richmond), and it was unreasonable to expect Topline to have to pursue the guarantor (believed to be overseas) in order to enforce a disputed claim to indemnity.

[30] Much as I have sympathy for the position of a small trading company such as Topline in circumstances such as this (trading with an entity which has all the appearances of financial support and solvency) I must determine this application on the basis of the principles that apply under s 296(3), and particularly those that apply to the requirement of an alteration of position. I am not persuaded that Topline has established a valid alteration of position. I accept the submission of counsel for the liquidator that Topline has not foregone any claim under the guarantee. Had it done so (and a release was requested by the guarantor at the time of making payment of the balance of the debt in May 2011) the position may well have been different. However, I see that claim as still alive and available to Topline. Topline did not sign the requested release. I do not accept that the liquidator should be required to pursue the director, rather than leaving it to Topline to enforce its guarantee. There is no obvious legal basis on which the liquidator could do so. I also note that Mr Stewart has not stated in his affidavit why he declined to sign. I consider that I can draw an inference from that fact that he appreciated that he could still have rights under the guarantee which he was unwilling to forego. That is a perfectly understandable position on his part. However, it works against any argument now for alteration of position.

[31] I find that the liquidator has made out its case for an order setting aside the payment made by Richmond to Topline on 2 February 2011 of $19,613.24, and for an order for payment of that sum back to the liquidator. I also find that Topline has

not met the requirements for a defence under s 296(3) in that it has failed to establish an alteration of position.

Decision

[32] I make orders as sought by the liquidator:

(a) an order pursuant to s 292 of the Companies Act 1993 that the payment made by Richmond to Topline of $19,613.24 on or before 2

February 2011 be set aside as an insolvent transaction; and

(b) an order pursuant to s 295 of the Companies Act 1993 that Topline pay the liquidator that sum, together with interest at the prevailing rate under the Judicature Act 1908 from 22 June 2012 (the time of filing of the application) until date of payment.

[33] There is a further order that Topline has a period of 30 calendar days within which to make this payment.

Costs

[34] The parties have had mixed success on this application. The liquidator has been successful in respect of one of the transactions, but Topline can be considered to have been successful on the other. I must also take into account that last week the liquidator made an offer to Topline to accept the sum of $19,613.24 in full settlement of the application. That offer was made without prejudice as to costs.

[35] Having regard to the factors just set out, I consider that the appropriate decision to make in respect of costs is that Topline pay the liquidator costs in respect of today’s appearance on a scale 2B basis (half a day) together with disbursements

_{incurred in the filing and service of the application. I order accordingly.}

Associate Judge Abbott

---

[1] _{Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 at 303.}

[2] _{Jollands v Mitchell Communications Ltd [2011] NZHC 16; [2011] NZCCLR 20 (HC).}

[3] _{Re Bee Jay Builders Ltd (in liq) [1991] 3 NZLR 560 (HC).}

[4] At 566.