Meltzer v Hiway Stabilizers New Zealand Ltd [2012] NZHC 3281; [2013] 2 NZLR 725; (2012) 11 NZCLC 98-013 (5 December 2012)

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-3172 [2012] NZHC 3281

UNDER the Companies Act 1993

IN THE MATTER OF the Liquidation of WINDOW HOLDINGS LIMITED (IN LIQUIDATION)

BETWEEN JEFFREY PHILIP MELTZER AND LLOYD JAMES HAYWARD AS LIQUIDATORS OF WINDOW HOLDINGS LIMITED (IN LIQUIDATION)

Applicants

AND HIWAY STABILIZERS NEW ZEALAND LIMITED

Respondent

Hearing: 5 November 2012

Counsel: R Hucker and D Man Siu for Applicants

G Harrison for Respondent

Judgment: 5 December 2012

_{JUDGMENT OF TOOGOOD J}

This judgment was delivered by me on 5 December 2012 at 4:45 pm

Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

Solicitors:

R Hucker, Hucker & Associates, Auckland: [e-mail]

C Hunt, North Harbour Law, Auckland: [e-mail]

Copy:

GM Harrison, Barrister, Auckland: [e-mail]

MELTZER AND ANOR V HIWAY STABILIZERS NEW ZEALAND LIMITED HC AK CIV-2012-404-3172 [5

December 2012]

[1] Window Holdings Limited was put into liquidation on 1 July 2011. The applicant liquidators seek to set aside payments the company made to Hiway Stabilizers NZ Limited less than two years before the date of liquidation.¹

[2] It is not disputed that, at the time of the respective payments, Window Holdings was unable to pay its debts, and that Hiway received more towards the satisfaction of the debts than it would have received in the company’s liquidation if still a creditor. It follows that the payments were insolvent transactions pursuant to s 292(2) of the Companies Act 1993 and the liquidators seek to recover them.

[3] Hiway relies on s 296(3) of the Act to oppose the application. That subsection reads as follows:

296 Additional provisions relating to setting aside transactions and charges

...

(3) 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.

[4] A payment made in satisfaction of a debt is within the definition of

“property” in s 2 of the Act.²

[5] The liquidators concede that, at the time Hiway received the payments in question, it acted in good faith and that a reasonable person would not have

¹ _{Companies Act 1993, s 292.}

2. “Property” means property of every kind whether tangible or intangible, real or personal, corporeal or incorporeal, and includes rights, interests, and claims of every kind in relation to property however they arise.

suspected, and that Hiway did not have reasonable grounds to suspect, that Window

Holdings was, or would become, insolvent.

[6] Hiway does not argue that it altered its position at the time of, or after, the payments. Thus, the sole issue in this case is whether Hiway has proved “that when [it] received the property ... [it] gave value for the property”.

[7] Mr Hucker for the liquidators argues that Hiway cannot prove that it “gave value for the property” when it received it and that, on a plain meaning approach to the interpretation of the statute, value given earlier than the date of payment does not qualify. Consistently with the accepted view that the alternative defence under s 296(3)(c) is available only if the creditor’s position is altered after the transaction, Mr Hucker submits that the section requires proof that Hiway provided fresh or new value after the payment was made.

[8] Mr Harrison argues on behalf of Hiway that the focus of the defence is on the bona fides of the creditor and that once the first two limbs of the defence are satisfied, the payment must not be set aside if the creditor had given value for it.

The liquidator’s argument

[9] The liquidators’ fundamental submission is that to adopt Hiway’s interpretation of s 296(3) would render the third limb of the test redundant as virtually all creditors would be able to avail themselves of this limb of the test automatically. They argue that the nature of the voidable transactions regime means that anyone in Hiway’s position will have naturally given some consideration; a creditor will always have provided some prior “value”, otherwise they would not be a creditor.

[10] It is submitted that the purpose of the amendments in 2006 was to abolish the “ordinary course of business” test in order to make the assessment involved one of determining the actual preferential payment the creditor had received. In the applicants’ submission, the amendments did nothing more than remove the subjectivity inherent in the “ordinary course of business” test.

[11] The liquidators argue that the relevant time for assessing the equality or otherwise of distributions between creditors is the date of the liquidation. Viewed in this way, they say, the respondent’s position creates an obvious inequality because a creditor successfully invoking the s 296(3) defence receives 100 percent of the debtor company’s obligation to them before any other creditor has received anything. Naturally, therefore, the remaining creditors will receive a reduced portion of the obligation owed to them. The applicants submit that Parliament could not have intended to override the pari passu rule, which they say is fundamental to the liquidation regime, in this way.

[12] Furthermore, the applicants point to the potential for creditors in the respondent’s position to “double-dip” if such an interpretation is adopted. It is said they would be able to claim the benefit of a running account as well as invoking the s 296(3) defence.

[13] The liquidators also draw on the support of the learned authors of leading

New Zealand insolvency text, Heath & Whale on Insolvency, who say:³

The concept of value is to be evaluated in the context of the section; accordingly, it is likely that only any new value given by the other party to the transaction will be considered under the section.

[14] In reference to the alternative ground for invoking the third limb of the s 296(3) test, that text observes that the section requires the alteration in the creditors’ position to have occurred after the payments were received. I infer that they adopt a similar view of the “gave value” alternative, although they do not develop the argument.

The former creditor’s argument

[15] Hiway contends that the expression “when A received the property”, when

read in the light of the legislative history and purpose of the section, should not be read to require a temporal relationship between the debtor company’s payment and

³ Paul Heath and Michael Whale (eds) Heath and Whale on Insolvency (looseleaf ed, Lexis Nexis)

at [24.136].

the creditors’ provision of value, but only that there should be a direct relationship or connection between the payment received and the value given.

[16] Mr Harrison disavowed the proposition that Parliament had intended to confine the defence based on the giving of value to cases where payment was received from the debtor company before the creditor provided value in exchange for the payment. This would be the case where, for example, A did not transfer title to goods supplied until after payment from the debtor company had been received. In Mr Harrison’s submission, such an intention is improbable because it would distinguish, for no good reason, between suppliers of goods to whom payment is conventionally made in advance of transfer of title to the goods and the providers of services who conventionally invoice their customers after the invoices are supplied.

[17] Hiway submits that, with respect to a provider of services such as the respondent, the defence could hardly ever apply because payment for the provision of services in advance is only likely to be sought where the supplier suspects that the debtor company might not be in a position to pay for the service later. In such cases, it would be unlikely that the respondent supplier could satisfy the first or second limbs of the test.

Discussion

[18] The question in this case is whether the s 296(3) defence is available to a former creditor whose debt for the provision of goods or services prior to payment has been satisfied by a payment made within two years of the liquidation of the debtor, and who satisfies the first two limbs of the defence, only if the creditor provided some additional value to the debtor company at the time of the payment.

[19] The answer to that question turns on the meaning of s 296(3). It is trite that the meaning of the words in the enactment must be ascertained from the text and in

_{the light of the statutory purpose.}⁴ _{As the Supreme Court has observed:}⁵

⁴ _{Interpretation Act 1999, s 5(1).}

⁵ Commerce Commission v Fonterra Co-Operative Group Limited [2007] NZSC 36; [2007] 3 NZLR 767 at [22].

Even if the meaning of the text may appear plain in isolation of purpose, that meaning should always be cross-checked against purpose in order to observe the dual requirements of s 5. In determining purpose the Court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objective of the enactment.

[20] The legislative history of the provision is of some significance to understanding the statutory intent. The defence provided by s 296(3) of the Act was amended by the Companies Amendment Act 2006. That Act was the product, together with the Insolvency Act 2006 and the Insolvency (Cross-Border) Act 2006, of the Insolvency Law Reform Bill 2005.

[21] The Bill was designed to create a predictable and simple regime for insolvency in New Zealand. In particular, it sought to distribute any capital according to pre-insolvency entitlements unless there was a greater public interest in providing greater protection to particular creditors. Further, the reforms were intended to maximise returns to creditors by providing flexible methods of

conducting insolvencies.⁶

[22] Most relevantly for present purposes, the 2006 legislation sought to redesign the voidable transaction provisions of the Act and, at the same time, to harmonise them with the corresponding provisions relating to personal insolvency.⁷

[23] Prior to that amendment, the s 296(3) defence had required an alteration of position by the respondent creditor. Fisher J previously described the defence as designed:⁸

... to assist a creditor if he has deliberately gone down one path in the reasonable expectation that he has received a valid payment, only to find that he is not only required to repay that money but that in the meantime he has also lost a valuable alternative opportunity. In other words, he must have acted to his detriment on the strength of the insolvent company's payment.

⁶ _{Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 17.}

⁷ _{Ibid at 3.}

⁸ Baker Timber Supplies v Apollo Building Associates (Tauranga) Society Limited (In liquidation)

(1990) 5 NZCLC 66, 791 at 66, 793.

[24] Significantly, the case law demonstrated that receipt of payment did not in itself constitute an alteration of position. It was what was done subsequently to receipt that had to be considered.⁹

[25] The redesigning of the voidable transactions provisions was intended to reflect ss 588FA and following of Australia’s Corporations Act 2001. The Explanatory Note to the New Zealand Bill indicates that the intention of s 296(3) was to adopt a defence for creditors (to resist having a transaction set aside) that focuses more objectively on the knowledge of the creditor who or which transacted with the debtor.¹⁰

[26] In assessing the advantages and disadvantages of such a change, the

Explanatory Note observed:¹¹

There will be an initial period of uncertainty regarding the meaning of the new tests. But this will reduce over time and will be mitigated by basing the new test on an Australian test, allowing the Courts to have the benefit of the Australian Courts’ experienced in interpreting those provisions. Overall there will be net gains for creditors, debtors and liquidators involved in voidable transaction proceedings.

[27] It is reasonable to infer that in adopting this policy position, including assuming the New Zealand courts would have recourse to Australian case law, Parliament intended to adopt the Australian defence which is contained in s 588FG(2) of the Corporations Act 2001 and reads:

(2) A court is not to make under section 588FF¹² an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

(a) the person became a party to the transaction in good faith;

and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would

⁹ Westpac Banking Corporation v Nangeela Properties Ltd (in liq) (1986) 3 NZCLC 99,588 at

_99,592.

¹⁰ _{Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 19.}

¹¹ _{Ibid at 25.}

¹² The equivalent of s 295 of the New Zealand enactment.

become insolvent as mentioned in paragraph

588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

[28] In both the Australian and New Zealand legislation, the definition of “transaction” includes the making of a payment,¹³ but there is a material difference between the wording and layout of subs (2) of the Australian provision and our equivalent in subs (3) of s 296.

[29] In the New Zealand provision, subs (3) requires the person seeking to rely on the defence (“A”) to prove that all three limbs of the defence existed or occurred “when A received the property”¹⁴ (i.e., when the payment was made).

[30] Under subs (2) of the Australian section, A must prove that they “became a party to the transaction” in good faith, and “at the time when A became such a party” they met the limb requiring an absence of suspicion of insolvency. That may suggest that A’s bona fides and state of mind should or could be considered at a time earlier than the receipt of the payment. Significantly, however, the third limb of the defence in para (c) of subs (2) in the Australian section contains no temporal element. To establish the third limb of the defence in Australia, A must prove only that A “has provided valuable consideration under the transaction”. Giving “transaction” its ordinary meaning, it appears that Hiway would succeed in its defence under the Australian provisions on which the New Zealand legislation was based.

[31] There is nothing in the Explanatory Note to the Insolvency Law Reform Bill 2005 to indicate any deliberate intention to depart from the Australian position. In fact, the contrary is the case.

¹³ The Australian definition, in s 9, does not limit the ordinary meaning of the word “transaction”.

Section 292(3) of the New Zealand enactment contains an arguably exclusive list of the acts or omissions coming within the definition including “paying money”, but it also includes in paragraph (f) “anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.”

¹⁴ Emphasis added.

[32] The position in Australia is consistent with the intention expressed in the Explanatory Note to the New Zealand Bill to focus the court’s inquiry more objectively on the state of knowledge of the creditor. While retaining the availability of the defence to a creditor who has altered their position in reliance on the payment, nothing in the Parliamentary history of the Amendment Act indicates why there should be any departure from the Australian position of requiring only proof of value in the transaction, rather than the provision of new value at the time of or following payment.

[33] Mr Hucker submitted that if the respondent’s position in respect of the third limb was adopted, with the result that any value provided in exchange for the payment would suffice, whenever provided, there would be no need to include the alternative defence based on alteration of position. But that proposition overlooks the type of case in which the creditor may not have given value or valuable consideration for the payment at or before the time of payment (for example, where payment is made in advance of the supply of goods or services, but the provider has altered its position in reliance on the payment by providing further goods or services for which payment had not been received at the liquidation date).

[34] It may be that the arguably different position between the New Zealand defence and the Australian defence was unintentional, in that the drafters of the New Zealand legislation did not fully appreciate the arguable significance of applying the temporal element of the defence to all three limbs. But, in any event, an equivalent result to that under the Australian legislation is reached if the expression “gave value” is read as including value given by accepting the payment in satisfaction and

release of the antecedent debt.¹⁵

[35] Further, interpreting the section in that way would remove the absurdity, inherent in the liquidators’ position, of the defence being available to the supplier of goods prior to payment on terms which included a Romalpa clause but not to a supplier of goods or services prior to payment where no question of the passing of

_{title post-payment arises. There is no reason in either logic or policy why a supplier}

¹⁵ P T Garuda Indonesia v Grellman [1992] FCAFC 188; (1992) 35 FCR 515; 107 ALR 199 at [58]- [62]; Buzzle

Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2011] NSWCA 109.

of goods or services who meets the first two limbs of the defence should be deprived of the defence merely because the supply has been made prior to the impugned payment.

[36] It will be evident from the preceding analysis that I respectfully agree with the approach of Christiansen AJ in Farrell v Fences & Kerbs Limited.¹⁶ As the Associate Judge notes,¹⁷ prior to the 2006 Amendment the alteration of position defence made it necessary to evaluate the circumstances existing at the time of payment and the Court was required to consider the purpose to which payments were

applied following receipt.

[37] The Associate Judge concluded, albeit for slightly different reasons than those which appeal to me, that the assessment of the value given for a payment received ought to be made at the time when payment was received (as directed by the strict wording of s 296(3)) but is not confined to circumstances occurring only beyond payment.

[38] As Christiansen AJ observed, the purpose of the Australian and New Zealand provisions is to protect creditors who have received payment from a debtor company in good faith, without suspicion of insolvency, and who have given something in return for their payment. It would be inequitable to permit the debtor company to keep what it has received and to recover what it paid for it, in order to increase the distribution to creditors who have provided value but received no payment. To the criticism that such an approach unfairly disadvantages unpaid creditors who have similarly provided value, the response must be that the legislative scheme necessarily involves arbitrary limits on recovery of payments to creditors, such as the two-year specified period in s 295(5), or the six-month restricted period in s 292(6).

[39] Finding and applying such a purpose in the New Zealand legislation simply requires the transaction to be looked at as a whole. The definition of transactions

_{caught by the defence directs such an approach by the inclusion in s 292(3)(e),}

¹⁶ _{Farrell v Fences & Kerbs Limited [2012] NZHC 2865.}

¹⁷ At [52].

already noted, of “anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.”

[40] For these reasons I am satisfied that the respondent is entitled to take advantage of the s 296(3) defence. Accordingly, I dismiss the application by the liquidators to set aside the two payments received by the respondent.

[41] The respondent is entitled to costs and may apply by filing and serving a memorandum within 20 working days of this judgment. The applicants shall have

20 working days following service of the respondent’s memorandum to file and serve a memorandum in reply. The issue of costs will then be resolved on the papers.

............................................

Toogood J