Commercial Factors Ltd v Wave Transport Ltd [2014] NZHC 3325 (18 December 2014)

Last Updated: 22 December 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1707 [2014] NZHC 3325

UNDER	the Personal Property Securities Act 1999, section 167
IN THE MATTER	of an application to resist a change demand made pursuant to section 162 of the Personal Property Securities Act 1999
BETWEEN	COMMERCIAL FACTORS LTD Plaintiff
AND	WAVE TRANSPORT LTD Defendant

Hearing:	27 November 2014
Counsel:	PJ Dale for Plaintiff TJG Allan for Defendant
Judgment:	18 December 2014

_{JUDGMENT OF BREWER J}

This judgment was delivered by me on 18 December 2014 at 4:00 pm pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

Solicitors: Neilsons Lawyers Ltd (Auckland) for Plaintiff

Grove Darlow & Partners (Auckland) for Defendant

_{Counsel: PJ Dale}

COMMERCIAL FACTORS LTD v WAVE TRANSPORT LTD [2014] NZHC 3325 [18 December 2014]

Introduction

[1] The plaintiff is a debt factor. It buys trade debts from commercial entities pursuant to a written debt factoring facility agreement. The benefit to the commercial entities is the boost to their cashflow.

[2] One of the plaintiff’s customers was Prestige International Ltd (“Prestige”), a company providing mechanical services. Prestige did a lot of work for the defendant, although its invoices were issued to Mr HW Taylor, a director of the defendant and its principal shareholder. Because the plaintiff was buying all the debts Mr Taylor was incurring to Prestige, it obtained security for the debts direct from the defendant and from Mr Taylor. The form of the security was a general security agreement (“GSA”) and a financing statement was registered under the Personal Property Securities Act 1999 (“the Act”) accordingly. Both the defendant and Mr Taylor provided a written guarantee to the plaintiff that the debts would be paid.

[3] On 4 November 2013, the defendant was placed in liquidation. The plaintiff maintains that the amount owed by Mr Taylor to the plaintiff on that date was

$73,681.84. The plaintiff says that the defendant is liable for that sum also, pursuant to its guarantee.

[4] The liquidator of the defendant, Mr Tietjens, formed the view that in fact all debts had been paid and so nothing was secured by the GSA or the defendant’s guarantee. On 13 May 2014, he gave notice to the plaintiff that the defendant was no longer liable to the plaintiff under the GSA and its guarantee. He also demanded that the plaintiff register a financing change statement to discharge the registration of the financing statement.¹

[5] The plaintiff did not comply with the defendant’s notice because it considers

it is still owed money. On 1 July 2014, the defendant lodged a change demand with the Registrar and notice was given by the Registrar to the plaintiff accordingly. The

¹ Personal Property Securities Act 1999, ss 162 and 163.

plaintiff now applies for an order from the Court to maintain registration of the financing statement.²

[6] The argument between the parties is focused on the construction of the debt factoring facility agreement entered into on 24 November 1999 between Prestige and the plaintiff (“the agreement”). On the plaintiff’s construction, Mr Taylor, and hence the defendant, still owes the plaintiff money and so the financing statement must be maintained. If the liquidator’s construction of the agreement is correct, no money is

owed.³

The agreement

[7] The agreement contains the terms by which the plaintiff factored debts owing to Prestige. There are two categories of debts, Category A debts and Category B debts. The former are paid for by the plaintiff to Prestige, within four business days of receiving the invoices. The latter are paid to Prestige only after the plaintiff is paid.

[8] The key provisions of the agreement relevant to the parties’ dispute are as

follows:

2.1 The Vendor hereby assigns absolutely to the Purchaser all Debts incurred or to be incurred by any Customer which shall be in existence as at the date of this agreement or which shall come into existence at any subsequent time before termination of this agreement. The ownership of every such Debt in existence as at the date of this agreement shall vest in the Purchaser as at the date of this Agreement. The ownership of every such Debt coming into existence at any time after the date of this agreement shall vest in the Purchaser immediately upon such Debt coming into existence.

2.2 The Purchaser shall pay the Purchase Price (calculated in accordance with the first schedule) to the Vendor for the Debt in the manner following:

(a) The Purchase Price for Category A Debts shall be paid within 4 Business Days of receipt by the Purchaser from the Vendor of original copies of the relevant Invoices but reduced by the amount of any deductions therefore made pursuant to clause 4.2.

² _{Section 167.}

³ I put to one side the plaintiff ’s fallback contention that even if the defendant’s argument is

correct some money is owed nevertheless. I will address the point later if I need to.

(b) Subject to clause 2.3 the Purchase Price for Category B Debts shall be paid:

(i) By the fifteenth day of the month following the month during which payment of such Category B Debts from the Customer in cleared funds is made; or

(ii) If payment is not received from the Customer in cleared funds by the Repurchase Age in respect of any particular Category B Debt, contemporaneously with payment of the repurchase price in cleared funds by the Vendor for that category B Debt in accordance with Section 7 of the Agreement.

7.1 The Vendor will repurchase from the Purchaser any Category A which remains unpaid at the expiration of the relevant Repurchase Age. Such repurchase will be effected immediately after the expiration of the relevant Repurchase Age. For the avoidance of doubt, the Purchaser’s right of set-off pursuant to clause 16.1 applies in respect of any amounts payable by the Vendor pursuant to this clause 7.1.

7.5 Any Category A Debt which is repurchased by the Vendor shall immediately following the moment of repurchase be assigned to the Purchaser pursuant to clause 2.1 as a Category B Debt.

[9] The plaintiff’s argument is that, read together and in the light of the overall scheme of the agreement, repurchased Category A debts remain the property of the plaintiff. The defendant says they do not.

Issue

[10] The issue for me to determine is:

Does the repurchase of a Category A debt pursuant to clause 7.1 and

7.5 of the agreement remove the debt from the security evidenced by the registered financing statement?

Discussion

[11] The defendant submits that the assignment of debts to the plaintiff pursuant to clause 2.1 is conditional upon the plaintiff paying Prestige the purchase price for the assigned debts. That the agreement should be read in this way is, it is submitted, functionally consistent with the purpose of the agreement.

[12] This submission then flows to the interpretation of clause 7.5. In the defendant’s submission, this clause recognises that once Prestige has satisfied its repurchase obligations, two steps occur:

(a) The Category A debt is reassigned by the plaintiff to Prestige (hence

the phrase “assigned to the Purchaser”); and

(b) Prestige, now the owner of the former Category A debt, reassigns the debt to the plaintiff pursuant to the assignment provision of clause 2.1 as a Category B debt.

[13] The immediately apparent flaw in this submission is that “Purchaser” is a defined term in the agreement. It means the plaintiff. But, the argument remains that in order for there to be an assignment to the plaintiff there must have been an antecedent assignment from the plaintiff to Prestige.

[14] The submission which follows is that the assignment back to the plaintiff is subject to payment of the purchase price of the (now) Category B debt by the plaintiff.

[15] The defendant submits that the requirement in clause 2.2(b) for Category B debts to be paid would be redundant if the plaintiff was not obligated to pay for the assignment of Category B debts.

[16] In my view, the agreement needs to be read as a whole. The context of the plaintiff’s debt factoring business is useful for background understanding of the nature of the risks of the business, but naturally the agreement must be construed objectively.⁴

[17] First, clause 2.1 is clear that debts are assigned absolutely to the plaintiff immediately upon coming into existence. There is no reservation of ownership pending payment. An absolute assignment is one without condition. Clause 2.2

_{provides for the payment of the purchase price of debts. This is a free standing}

⁴ Vector Gas v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].

obligation. Assignment of the debt under clause 2.1 is not contingent upon this payment. I think it significant that when Category A debts remain outstanding, clause 2.3 entitles the plaintiff, in its sole discretion, to deduct from the purchase price payable in respect of any Category B debt:

(a) Any amounts not exceeding in total the sum payable to the Purchaser by Customers under outstanding Category A Debts, whether or not they have been outstanding for longer than the Factoring Period; and/or

(b) such amount as may be required to increase the then balance of the Retention Account to an amount equal to the Retention Account Percentage of the Total Amount Outstanding of Category A Debts then outstanding.

Any amount deducted pursuant to this clause will be paid to the Retention Account and applied by the Vendor in accordance with Section 4 of this Agreement.

[18] The agreement effectively creates a pool of funds which is available to the plaintiff to recover monies paid to Prestige under the agreement. In my view, the repurchase of a Category A debt by Prestige pursuant to clause 7.5 does not release the debt from the agreement. It remains assigned to the plaintiff. I accept that the wording of clause 7.5 is clumsy and gives rise to the defendant’s argument. But the clear intent of the clause seems to me to allow for a reversal of a payment and a reclassification of a debt from Category A to Category B.

[19] The reclassification, even if it is a reassignment, is expressed by clause 7.5 to be “pursuant to clause 2.1”. So, it is also an absolute assignment of the debt to the plaintiff and the end position is the same.

[20] Whether a debt is a Category A debt or a Category B debt is irrelevant to the absolute assignment of the debt to the plaintiff. The categories are relevant only to the obligations between the parties as to funding the debts.

[21] I note the argument of the defendant that the agreement does not grant the plaintiff an all obligations security interest in the debts. But, given that the agreement assigns all of Prestige’s interest in the debts and vests them absolutely in the plaintiff, this is irrelevant.

[22] The defendant also argues that the agreement does not create a valid legal assignment of the debts because no valid notice has been given by Prestige or the plaintiff to the debtors. I disagree. Section 50 of the Property Law Act 2007 has adopted into New Zealand law the position taken by the Court of Appeal of Queensland in Thomas v National Australia Bank Ltd,⁵ with the consequence that

notice does not determine the validity of a statutory assignment.⁶

[23] The assignment created by the agreement is an assignment to which s 50(1) of the Property Law Act 2007 applies.⁷ It is in writing and it is absolute. I do not accept the defendant’s argument that the assignment is conditional upon payment. Clause 2.1 reads that the debts are assigned absolutely. Absolute means absolute.⁸

[24] There is no requirement for valuable consideration to be given for each debt before the assignment becomes absolute. Not only is that inconsistent with the wording of the agreement but s 50(2) of the Property Law Act 2007 does not require valuable consideration for a valid assignment. If it did, I would hold that the obligations the agreement imposes on the plaintiff are valuable consideration for the assignment of debts on their creation.

Decision

[25] The repurchase of a Category A debt pursuant to clause 7.1 and clause 7.5 of the agreement does not remove the debt from the security evidenced by the registered financing statement.

[26] I grant the application and make an order to maintain registration of the financing statement.

⁵ _{Thomas v National Australia Bank Ltd [1999] QCA 525, [2000] 2 Qd R 448.}

⁶ John Burrows, Jeremy Finn & Stephen Todd Law of Contract in New Zealand (4th ed, Lexis

_{Nexis, Wellington, 2012) at 679.}

⁷ The Property Law Act 2007 applies pursuant to s 49(1), as the assignment of Mr Taylor’s debts

_{to the plaintiff occurred after 1 January 2008.}

⁸ This was also Hansen J’s interpretation of an identical clause in Tony Tay and Associates Ltd v

Commercial Factors Ltd HC Auckland M951-IM01, 19 October 2001 at [18].

[27] The plaintiff is entitled to costs. I award them on a 2B basis. They may be

_{calculated by the Registrar if the parties cannot agree.}

Brewer J