McCloy v ITI & Syddall Enterprises Ltd [2013] NZHC 1001 (7 May 2013)

Last Updated: 11 September 2013

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-007411 [2013] NZHC 2001

IN THE MATTER OF the Liquidation of ITI Contracting 2007

Limited (In Liquidation)

BETWEEN COLIN THOMAS MCCLOY AND CRAIG ALEXANDER SANSON Applicants

AND ITI & SYDDALL ENTERPRISES LIMITED

Respondent

Appearances: C Murphy for the Applicants

S C Potter for the Respondent

Judgment: 7 May 2013

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

07.05.13 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors/Counsel:

C Murphy, Barrister, Auckland – [e-mail] / [e-mail]

S Potter, Potter & Co Ltd, Auckland – [e-mail]

COLIN THOMAS MCCLOY AND CRAIG ALEXANDER SANSON V ITI & SYDDALL ENTERPRISES LIMITED HC AK CIV 2012-404-007411 [7 May 2013]

The application to set aside transactions

[1] The applicants served a Notice to set aside transactions (Notice) upon the respondent by affixing that Notice to the front door of the premises which was the registered office of the respondent and which also was the residential address of its sole director. That Notice was served on 6 August 2012. The respondent’s evidence is that it was found affixed to the front door by the sole director’s wife on 9 August

2012.

[2] On 28 August 2012 the respondent’s solicitor telephoned the applicants seeking confirmation of the date of service of the Notice. This was supplied to him on the same day as an email to the solicitor dated 28 August 2012, confirms.

[3] Section 294(3) of the Companies Act 1993 (the Act) confirms the

respondent’s response to that Notice was required to have been delivered by 3

September 2012. That response was not delivered until 5 September 2012.

[4] The present application seeks an order requiring payment of the amount that is due for repayment by the respondent in the outcome of transactions being set aside.

[5] The respondent opposes the application claiming:

(a) The mode of service prejudiced the respondent and was inadequate;

(b) The Notice contained an error and therefore is defective or wholly void.

Background

[6] The applicants are the liquidators of ITI Contracting 2007 Limited (In liquidation) (the Company). The Company went into liquidation on 19 November

2008.

[7] The applicants claim that between 30 November 2007 and 28 October 2008

16 payments totalling $80,400 were made by the Company to or for the benefit of the respondent (the transactions). Four of the transactions occurred within the two year specified period and the remainder occurred within the restricted six month period.

[8] The applicants claim that all transactions occurred at a time when the

Company was unable to pay its due debts.

[9] On 6 August 2012 the applicants served on the respondent the Notice dated

31 July 2012. The Notice referred to 17 transactions involving an amount of

$90,400. The applicants concede that it should have referred to 16 transactions involving an amount of $80,400.

[10] The respondent failed to serve a Notice of objection within 20 working days and accordingly pursuant to s 294(3) of the Act the transactions were automatically set aside.

[11] The applicants are supported by the affidavit of Mr Sanson. He deposed that all of the transactions occurred at a time when the Company was unable to pay its due debts and in particular because the Company was not meeting its PAYE and GST liabilities to the Commissioner of Inland Revenue from August 2007.

[12] On 5 September 2012 some 23 working days after service of the applicants’ Notice to set aside the transactions was delivered, the respondent’s solicitors served a notice of objection. It claimed, inter alia:

(a) Insufficient particulars of specific transactions were identified in the

Notice.

(b) The respondent did not receive preference “in the payments it received when viewed objectively from the commencement of the restricted period to the date these proceedings were filed”.

(c) The transactions were “integral to the continuing business relationship” between the Company and the respondent.

[13] Mr Sanson states that the respondent’s solicitors have now acknowledged that

the Notice of objection was served out of time.

[14] In an affidavit in opposition Mr J Syddall, the sole director of the respondent, deposed that the registered office of the respondent was his residential address. He said on 9 August 2012 his wife found the letter containing the Notice to set aside certain transactions “affixed to the outside of the door with sticky tape”.

[15] Mr Syddall referred to an error in the Notice. He said “at least one of the transactions did not exist”. He complained that a copy of the Notice should have been sent to his lawyers also. He said:

I believe that the Notice to set aside certain transactions should be set aside because of the defect it contains and because of the nature in which it was served...

[16] In a response affidavit Mr Sanson explained the confusion surrounding the inclusion in the Notice of a transaction which the applicants accept is not owed by the respondent. He explained there was confusion in linking the transactions associated with Mr Iti whom he said was a former director and shareholder of the respondent. He argues that the applicants do not consider it is sustainable for the respondent to contend that the inclusion of the ITI transaction in the Notice caused a level of confusion which materially hampered the respondent’s ability to mount any genuine objections available to it. He said Mr Syddall has failed to specify those transactions contained in the Notice which he contends do not exist. Prior to their issue of the Notice the applicants had provided copies of the Company’s bank account statements to the respondent. Therefore the respondent had the ability to verify the existence of the payments referenced in the Notice and in their correspondence.

[17] Although the applicants were aware of the respondent’s solicitors and had some communication with them, it was their practice to effect service of Notices to set aside at the registered office in order to avoid delay or uncertainty over whether

the solicitors would obtain prompt and clear authorisation to accept service of formal notices.

[18] On 28 August 2012 the respondent’s solicitor, Mr Potter contacted the solicitors to seek confirmation of the date of service of the Notice. This was supplied to him that same day.

Grounds for opposition

[19] They challenge the effectiveness of service and compliance with Notice requirements.

In the circumstances was service effective?

[20] Mr Potter submits the Notice was not served in accordance with the law; and further that it was defective.

[21] Mr Potter refers to s 387 of the Act which provides that service of the documents on companies in legal proceedings may be effected:

(c) By leaving it at the company’s registered office or address for

service;

...

[22] Mr Potter refers to a number of cases involving issues regarding the adequacy of service of Notices/proceedings, upon a company. In the Argyle Estates Limited v Bowen Group Limited and Anor case 1 Laurenson J had stated that notwithstanding that service may comply with s 387, there remains an issue as to whether that service is effective i.e. in achieving the underlying aim of the section to ensure that the company being served is, in fact, aware of the particular matter which requires service on it.

_{[23] In Croxley Stationery Limited v Tourism Marine Limited} 2 _{the Court stated:}

1 _{(CIV 2005/02, Auckland High Court, 5 August 2003).}

2 (CIV 2003-404-4384, Auckland High Court, 5 November 2003, Master Lang.

[70] It is obviously preferable that, if possible, documents such as statutory demands and liquidation proceedings be served personally on a director of the company, or at least on the occupant of its registered office. Then there can be no doubt that the company has received the document. Section 387 does not, however, require this to be done. It simply requires that the document be left at the company’s registered office or address for service.

[71] The Courts have held that a document will be validly served if it is affixed to the door of the registered office or the gate of the property...

[24] In ASB Bank Limited v Info-Touch Technologies Ltd 3 Master Gambrill stated:

[10] ...

Without a Court direction to affix the document to a certain place, or to post, or to advertise it, [the Court] believes there is a real risk factor which the plaintiff takes if their process server affixes a piece of paper to a floor in a building and then deposes “that is service”. In this case there is no means of knowing whether this is an office door, (or) whether the door would be opened by someone in the business for the defendant company the next day...

[25] Relying upon these authorities Mr Potter submits the effectiveness of service involves a two limb test. The first requires compliance with s 387 and Mr Potter acknowledges that affixing the Notice to the door of the registered office of the respondent complies in this instance.

[26] He submits the second limb requires that the underlying aim of s 387 is (adopting the words of Laurenson J) “to ensure the company being served is, in fact, aware of the particular matter which requires service on it”.

[27] Mr Potter submits in this present case that no positive steps were taken by the applicants to ensure that the respondent had, in fact, been made aware that a Notice had been served upon it. Mr Potter postulates that there are a number of options at a liquidator’s disposal to satisfy the obligation to ensure the respondent was aware of the matter for which Notice has been served upon it. Mr Potter suggests this could have been done by email or facsimile or a phone call or a letter or even a personal attendance on the sole director of the company or upon the respondent’s solicitor.

[28] Mr Potter submits therefore the elements of effective service were not present as at 6 August 2012 and that did not occur until 9 August 2012 when the Notice was discovered by, it is deposed, the director’s wife.

[29] Mr Potter submits that service upon the registered office is unlike service upon a real person; that in the circumstances of service upon a registered office a human agent needs to be aware of the delivery, and in this case that did not occur until 9 August when delivery was effected when the Notice was discovered affixed to the door.

Was the Notice to set aside defective?

[30] Sections 294(2) and 294(3) of the Act require the Notice to specify the transaction or charge to be set aside, to describe the amount the liquidator wishes to recover, and to advise the person/company on whom the Notice is served of a right to object to the transaction being set aside by sending a written Notice within 20 working days. The Notice must also state that a written Notice of objection needs contain full particulars of reasons for objecting and must identify any documents that evidences or substantiates the reasons for objecting. The Notice will also confirm that the transactional charges will automatically be set aside if the person/company on whom the Notice has been served does not respond within 20 working days.

[31] Mr Potter submits:

(a) That a Notice must provide sufficient detail for the recipient and the Court to fully appreciate the particulars of the transaction and the quantum sought to be recovered. He said it was not the role of the recipient to research or investigate the nature of an impugned transaction – that such should be obvious on the face of the Notice.

(b) The Notice inadequately specified the transaction to be set aside contrary to the requirements of s 294(2)(c) of the Act. He submits something more is needed than just reference to a date and time. Also he submits s 294(2) was not complied with because it included

respondent.

[32] Mr Potter submits that the requirement in s 294(2)(c) of the Act to specify the transactional charge to be set aside has a requirement to provide detail and not merely to identify the transaction in question.

[33] Mr Potter relies upon the judgment of the Court of Appeal in Levin and Jordan v Rastkar 4. In that case the Court noted that an appendix to the Notice to set aside provided a schedule prepared by the liquidators from a review of the company’s general ledger and bank statements. It was noted that the essence of the liquidator’s claim was that the respondent had, by a number of transactions recorded in the general ledger, advanced money to the company. The Court said it considered that the liquidators’ formulation of the claim was unsatisfactory; that s 292 was concerned with transactions, not with accounting entries. The Court held that the liquidators’ Notice did not clearly identify what were the payments of money by the

company which are said to constitute a ‘transaction’, and consequently did not also clearly identify when the payments were made. The Court noted deficiencies in the schedules from an evidential point of view and that the schedule relied upon by the liquidators was not supported by adequate evidence as to the basis on which it had been prepared. It noted that a copy of a general ledger that had been provided was a poorly prepared photocopy and that parts of pages were omitted or eligible. The Court stated:

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

[34] Referring to the Notice served by the applicants in this instance Mr Potter submits that the reference in the applicants Notice to:

Seventeen payments totalling $90,400 be made by the company between 30

November 2007 to 28 October 2008 to or for the benefit of [the respondent]

(schedule attached) (“the Transactions”),

is insufficient. Neither, he says, is any help provided by the schedule of payments attached to the Notice. In that schedule is noted the dates and the amounts of the payments the liquidators say comprised the Transactions.

[35] Noting that the Court of Appeal in Levin 5 stated that it should not be necessary for the Court to have to undertake a check of the material relied upon at this level for detail, for the purpose of verifying its accuracy, Mr Potter submits that in this case the respondent ought to have received a greater level of detail including references to invoices delivered in respect of the payments it is said were made.

[36] In Levin the Court of Appeal noted that:

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

[37] Mr Potter submits that it was available in this case for the applicants to use those powers under s 261 to enquire of or to examine the director of the Company to obtain further detail regarding the payments made to the respondent. Mr Potter believes that the bank statements alone, which the respondent’s director acknowledges having received in June 2012, were insufficient for their purpose.

Considerations

[38] The evidence is that from about April 2012 the applicants commenced dialogue with the respondent and its solicitors about certain transactions which had occurred during the specified or restricted periods before liquidation. The evidence that the Company was unable to pay its debts as they fell due is not challenged. The applicants invited the respondents to provide a substantive explanation as to why the identified transactions were not voidable in the circumstances. In reply by its then solicitor the respondent requested evidence including copies of bank statements as proof of payments made to it. This information was provided by the applicants who

were made.

[39] The requirements of s 294 of the Act are prescriptive and these have been noted in para [30] of this judgment. The transactions are automatically set aside against a company on whom Notice has been served if that person has not objected by sending a written Notice of objection within 20 working days. It follows that the setting aside takes place automatically if objections are not made within the prescribed time.

[40] In this case and before taking any formal steps the applicants had engaged in correspondence with the respondent and invited an explanation for the transactions under challenge. That correspondence contained an express warning that formal steps could be taken to set aside the transactions. The applicants said those steps were taken when the respondent failed to provide an explanation.

[41] It is the applicants’ position that the transactions had been set aside and that it is appropriate to examine what form an order for recovery should take.

Service of the Notice

[42] The respondent contends that the method of service was “inconsistent” with s

388 of the Act which notes that in connection with leaving a document at a Company’s registered office or address for service such document, other than a document in any legal proceedings, may instead be served by posting it to the Company’s registered office or address for service or delivering it to a box at a document exchange which the Company is using at the time. Alternatively the document can be sent by facsimile to the Company’s registered office.

[43] The respondent complains that the Notice should have been placed in the mailbox at the address due to the method of entry (unknown to the applicants or their process server) commonly used by representatives of the respondent when entering and exiting the registered office i.e. through an adjacent garage door.

[44] Regardless and whether in this case the Notice is characterised as one being in a legal proceeding or as an “other demand” the Court accepts that a document was affixed to the door of the registered office and left there, thereby complying with ss

387 and 388. Notwithstanding there had been prior communications with legal representatives, there had been no substantive engagement in relation to issues that have been raised in opposition to the applicants’ claims.

[45] Service of any document in a legal proceeding is prudently and correctly achieved by service at the registered office of the company for whom it was intended. In certain situations a challenge can be made to the effectiveness of service. The case authorities of Argyle Estates, Croxley Stationery, and ASB Bank, earlier referred to provide examples of the Court’s willingness to review the effectiveness of service. In general that review focuses upon claims that a registered office was abandoned or the situation of a registered office could not with certainty be identified. The present case does not provide any parallel to those just referred to. The document was served on a Monday. Apparently it was not discovered until the next Thursday even though it was affixed to the front door of the registered office in which the respondent’s sole director resided with his family.

[46] In the Court’s view service was effected on 6 August 2012 and was effective

from that date.

Whether the Notice was defective

[47] The respondent contends that because the Notice to set aside had referred to a seventeenth transaction (the value of which was $10,000) which did not relate to it, and because it did not provide sufficient details of the transactions, the Notice should be treated as invalid in its entirety.

[48] The Court accepts that the Notice contained an error. The applicants have provided an explanation as to why that arose. Indeed before the Notice issues the applicants advised the seventh transaction was not to be included in their demand for repayment. The applicants accept it was due to their error, that the seventh transaction was included in their Notice.

[49] In the Court’s view the error identified does not and should not operate to invalidate the Notice. The Notice was not defective even though it contained an error because notices routinely refer to multiple transactions which must each be considered on their own merits in any formal application to set aside.

[50] In the case of Levin 6 the Court of Appeal was concerned about the liquidator’s notice having been formed and framed from information contained in general ledgers and schedules that had been created for that purpose. In short and as Ms Murphy described it the notice contained a bundle of information gobbled together by liquidators; that the ledgers in question reflect an accounting treatment, rather than provided a description of what had happened. The Court said that the journal entries made could not properly form the basis of a liquidator’s claim because they were purely internal entries in the books of the company which re- categorised the way in which payments made earlier by the company were treated in the company’s accounts. None of those involved a payment, on the date of the journal entry, by the company.

[51] In this case the matter is quite different. There is a record of actual payments to the account of the respondent. There can be no debate about whether those sums were instead ledger balances contrived for accounting purposes.

[52] The respondent questions whether adequate enquiry has been made by the applicants into the transactions for which repayment is sought. However, and notwithstanding the availability of legal advice, no query was raised regarding the quality of information provided to the respondent at its request. It is clear in particular that the bank statements of the company clearly identify dates and amounts of payment and the account number to which payment was posted. The Court would expect the respondent to have its own record of invoices rendered and payments received to its bank account. In the circumstances it appears the applicants could have done little else to sufficiently identify the transactions in the manner that

_{it did.}

6 Supra.

[53] Neither in correspondence before the notice issues, nor within 20 working days after its service was any objection raised and served as the Act requires. Had it been then the applicants would have been obliged to demonstrate that each individual payment meets the test for avoidable transactions. Ms Murphy is correct when she says there are numerous instances of decisions where Courts have accepted some but not all of the transactions challenged by a liquidator against a particular creditor. It cannot be acceptable that although a Court may be minded to reject one transaction under a Notice, no other transaction listed in the same Notice could be pursued until a new Notice was served and fresh proceedings commenced.

[54] The s 294 process provides for a significant period of time for a respondent to address any concerns raised by the Notice. In that way it is to be contrasted with the short notice obligations arising in connection with the issue of a statutory demand where a Court may entertain claims of defects or irregularity but only if a substantial injustice would be caused. No such substantial injustice has occurred in this case.

[55] Because the focus of the Court’s enquiry in this instance has been upon claims of defects in connection with service of and the adequacy of the content the Notice the applicants have not addressed matters related to the quantum of the transactions in question. The applicants wish to be certain about the quantum level for which it should seek recovery. The respondent briefly referred in its notice of opposition to there having been an ongoing business relationship. If that was so then it may reduce the amount for which the applicants can obtain recovery. Further evidence is required from the respondent in this respect.

Conclusions

[56] The Court is satisfied that the ss 387 and 388 service provisions of the Act have been complied with.

[57] The Court is satisfied that service was effected on 6 August when the Notice was affixed to the front door of the premises which was the Company’s registered office.

[58] There was no obligation in the circumstances to effect service by any other process as well.

[59] The Court infers the premises in question were occupied throughout by the sole director of the company.

[60] Claims of a defect in the Notice which invalidated the Notice are rejected, as are claims the Notice provided insufficient particulars of the transactions.

[61] The clear evidence is that the various transactions identified by the Notice were the subject of extensive correspondence and disclosure by the applicants before their Notice was served.

Judgment

[62] The grounds for opposition raised by the respondent are unsustainable.

[63] The Court confirms that the transactions in question have automatically been set aside pursuant to the provisions of s 294(3).

[64] The Court directs that by 27 May 2013 the respondent will list and then produce to the applicants all or any financial information in its possession or power of control which was relevant to the correct quantum of recovery under s 295.

[65] Leave is granted to the applicants to file an updated affidavit as to the correct quantum to enable the making of a s 295 order following receipt of the respondent’s quantum information.

[66] The respondents shall pay the applicants’ costs on a 2B basis together with

_{disbursements as approved.}

Associate Judge Christiansen