Ipsofactoj.com: International Cases  Part 9 Case 2 [NZCA]
COURT OF APPEAL, NEW ZEALAND
- vs -
Axiom International Ltd
26 JUNE 2001
This appeal is against a judgment of Master Gambrill delivered in the High Court at Auckland on 10 October 2000. She found in favour of the creditor Axiom International Ltd on an application for an order that payment to it by the company Number One Men Ltd in the six months prior to liquidation not be set aside in accordance with a notice by the liquidator, Mr Meltzer.
The application was made pursuant to s268(2) Companies Act 1955. That Act is applicable because the company had not re-registered under the 1993 Act. There were two grounds.
The first was that the payments were not voidable having been made in the ordinary course of business so as to negate the presumption in s266(3) and to take them outside the reach of s266(2).
The second ground was that recovery by the liquidator should be denied under s270(3) on the ground that:
The person from whom recovery is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside; and
In the opinion of the Court, it is inequitable to order recovery or recovery in full.
The case for the appellant provides another example of the repeated efforts to graft onto the statutory exclusion of transactions made in the ordinary course of business criteria or qualifications that are not there. It is unproductive to extract from passages in previous judgments references to relevant indicia and regard them as mandatory elements to be established as a matter of law.
In Countrywide Banking Corporation Ltd v Dean  1 NZLR 385, 394 the following passages appear in the judgment of the Privy Council:
Plainly the transaction must be examined in the actual setting in which it took place. That defines the circumstances in which it is to be determined whether it was in the ordinary course of business. The determination then is to be made objectively by reference to the standard of what amounts to the ordinary course of business. As was said by Fisher J in the Modern Terrazzo Ltd case  1 NZLR 160, the transaction must be such that it would be viewed by an objective observer as having taken place in the ordinary course of business. While there is to be reference to business practices in the commercial world in general, the focus must still be the ordinary operational activities of business as going concerns, not responses to abnormal financial difficulties. Their Lordships respectfully agree with the Judge’s conclusion by reference to the policy of the section at p175.
Whether a payment should be regarded as commercially routine at a day-to-day trading and operating level will turn at least in part upon a comparison with the practices of the commercial community in general. But equally, the way in which the particular company has acted in the past, and its dealings with the particular creditor, would seem pertinent. That the payment was simply a repetition of past patterns of behaviour would make it more difficult to argue that it represented special assistance to an insider or the result of special enforcement measures or a situation in which the subject creditor ought to have investigated before extending credit. So at a policy level there is something to be said for the view that relevant considerations should extend to the prior practices of the particular company.
The section therefore requires examination of the actual transaction in its factual setting (excluding the intent or purpose of the company save as required by subs (4)). Because the examination is undertaken objectively by reference to the standard of the ordinary course of business, there may be circumstances where a transaction, exceptional to a particular trader, will none the less be in the ordinary course of business – as for example its first transaction of a particular type. It may be that transactions undertaken in the past will, because of changed circumstances, no longer be considered as in the ordinary course of business. The payment of some accrued indebtedness may be within the ordinary course of business as may the payment of moneys owing under a lease to secure a lessor’s consent to an assignment of the lessee’s interest. The particular circumstances will require assessment in each case.
Subsequently, in Re Excel Freight Ltd (In Liquidation), Waikato Freight and Storage (1998) Ltd v Meltzer CA164/00, judgment 5 March 2001 [to be reported] this Court said (para 31):
In our view the judicial approach has become over-complicated and over-refined. The question is whether, at the time it was made, the relevant transaction was made in the ordinary course of business. That is a question of objective fact. General business practices are relevant to that question, as are any particular customs or practices within the field of commerce concerned. So too is the previous commercial relationship between the parties. The observer spoken of in the Privy Council is in reality the Court which must look at the circumstances, as objectively apparent at the time of the transaction. The ultimate question is whether on the evidence before the Court the transaction or payment can be said to have been made in the ordinary course of business. Was it in its objective commercial setting an ordinary or an out of the ordinary transaction for the parties to have entered into?
What is required is a factual assessment in all the circumstances of the case. Those circumstances in the present case involve a quite idiosyncratic course of dealing between the company and the creditor.
The company was incorporated in 1992. Its business was in the retail sale of men’s apparel and accessories. It was operated by Mr Woods, one of the directors, who was described as having undoubted skills as a retailer and salesman. He was not adept at keeping accounts or managing cash flows. He had a reputation for being unreliable with respect to payment. He arranged for a firm of chartered accountants to assist with management of the company’s cash flow. The accountants held a company cheque book and about 90% of all payments by the company over the relevant time came from that.
The creditor, Axiom, is a small fashion accessory manufacturer and importer. It supplied its customers ex-warehouse on an "as required" basis, often against small orders. It commenced trading with Mr Woods’ company in August 1995. A credit account was established and Mr Woods signed a guarantee on 15 August. The standard conditions of sale provided for payment on the 20th of the month following delivery. That was never adhered to. From the beginning invoices were sent to the company’s accountants and cheques were issued from there. Mr Woods offered post-dated cheques and they became a feature of the arrangement. The first invoice was dated 18 August 1995. That was followed by four more invoices in August and a further four in September. In total they amounted to $15,423.92. The first payment was made by cheque dated 31 October and was for $1,000. There was a second cheque dated 6 November for $2,500. It became a feature of the arrangement that payments were not made on, or in respect of, particular invoices but cheques were sent from the accountant’s office for round sums with several dated through each month.
These features reflected the arrangement reached between Mr Woods, the accountant’s office and Axiom. On occasions, cheques, when presented were dishonoured. Indeed the second cheque received was paid only after it was re-presented.
Trading between the two companies in this way continued until the end of August 1996, though in July and August there were few orders but cheques continued to be sent. In this period dishonour of cheques increased, reflecting less co-ordination between Mr Woods and his accountants. Mr Woods died suddenly in September 1996. There were no invoices in that month. Nor were there any payments, save that two cheques dated in September were issued to replace a cheque dishonoured in mid August.
In October trading resumed. Goods were invoiced and payments were made by cheques for rounded amounts dated at intervals through the months of October and November.
The company resolved to go into voluntary liquidation on 4 December 1996. The liquidator issued a First Report indicating a "Total Deficiency as Regards Unsecured Creditors and Shareholders" of $308,711 with debtors not fully established. The report said creditors should return claim forms by 6 January 1997 or they might be excluded from any distribution.
On 12 April 2000 the liquidator gave notice to Axiom seeking to set aside all payments to it by the company within the six month "restricted period" amounting to $70,000 (later corrected to $69,000). That attracted the application with which we are now concerned.
The Master, in her judgment, divided the impugned payments as falling into two periods; those made prior to the death of Mr Woods and those made after his death. The amounts were $40,000 and $29,000 respectively. In relation to the former, the Master was satisfied that those payments were made in the course of trading and therefore were within the ordinary course of business as carried on. She said:
I believe there are two periods that should be identified. Prior to Mr Woods’ death I am satisfied there can be no question that these payments were all made in the course of trading that was accepted by all parties and therefore was within the ordinary course of the business as carried on see p. 175 Modern Terrazzo Ltd as referred to in Countrywide Banking Corporation Ltd v Kean  1 NZLR 385 at 394-395 lines 34-35. There is no evidence as to how Mr Yaxley could know that he was a preferred creditor and he is entitled, if the reputation of Mr Woods is as described in the affidavits, to refuse to supply from the initial supply in 1995 unless he was able to make satisfactory arrangements for the payment. In this case the arrangements from day one were for post dated cheques and therefore I am satisfied that they were within the ordinary course of business (the test as defined in the cases). It was not as if the arrangements put in place came into being following a series of failures to pay. They were the arrangements agreed by all parties including the company's accountant at the commencement or shortly after the supply and therefore I do not think they can be considered to be outside the ordinary course of business. Nor were the payments made in response to a normal or identified financial difficulty.
In relation to the second period the Master took a different view. She said:
Mr Woods’ death, however, may have put a different complexion on the matter and this is where the Court has difficulty after 1 October. There is no evidence as to what was intended between the parties as to the continuation of the business. Some discussions obviously took place some payments were made and obviously the business must have been trading using the stock that had been supplied from Axiom and other companies. It is a situation which on the evidence before it, the Court finds it impossible to assess independently. No cross-examination took place. However, the responsibility lies on the applicant to satisfy the Court at that period the payments were still in the ordinary course of business and obviously some re-arrangement of that ordinary course of business had taken place following Mr Woods’ death. There is also unusually a substantial amount of payment after the 14 October. The evidence shows
However, the Master then exercised her discretion to deny the liquidator the right to recovery. The strong theme throughout her judgment is a criticism of the processes adopted by the liquidator and the absence of evidence put before the Court as to his conduct of the liquidation. She referred particularly to the delay in giving notice seeking to avoid the payments and the explanation from the liquidator which she regarded as unsatisfactory. At the outset the liquidator considered that he was entitled to recover from the shareholders (particularly the estate of Mr Woods) substantial balances in shareholders’ accounts. It is common ground, if all loans and advances then assessed by the liquidator had been recovered, it would have enabled all creditors to be paid in full. In fact the liquidator informed the Court that he had been successful in recovering from the trustees of the Woods’ family trust only $75,000 and the loan account claim has been abandoned. He said it was only after recovering sufficient funds he was able to investigate voidable transactions and pay legal costs. The Master was critical of the lack of detail placed before the Court and regarded it as of some significance, bearing in mind it was a voluntary liquidation, that there was no meeting of creditors, no assessment of whether litigation or legal fees should be expended, no overview of the chances of recovery from shareholders / directors, and no request to existing creditors to give them the opportunity to fund the claims which the liquidator said existed.
In the course of her assessment of the facts, the Master made the affirmative finding on the evidence that Axiom received the payments in good faith. She accepted also that Axiom had no notice of the company’s particular financial difficulties in the period prior to the death of Mr Woods. Plainly she considered that in respect of the period after his death, although Axiom was not able to discharge the burden of proving payments in the ordinary course of business, they were received nevertheless in good faith.
The Master found that the lapse of time without notice or explanation of what was happening prejudiced the creditor. She found in particular that Axiom effectively had lost the right to claim in the estate of Mr Woods under a guarantee (in addition to the one given at the commencement of trading) he seemingly gave shortly before his death. She concluded that, in the circumstances, it would be inequitable to order recovery. Accordingly she invoked s270(3).
In support of the appeal it was submitted that the finding that the payments in the first period were in the ordinary course of business should be set aside because the Master erred in focussing exclusively on the course of trading between the companies and ignoring the lack of evidence of commercial practice in the industry. This was based on a dictum of Fisher J in the Modern Terrazo case wherein among a list of "considerations [that] will often be relevant" he referred to "the principal criterion as practice in the commercial world in general". That is too general a statement to provide much guidance in isolation. It also is not entirely consistent (in the reference to the "principal criterion") with the passage from the same judgment approved by the Privy Council and quoted earlier in this judgment. That said, the attempt to use dicta like statutes simply complicates the factual assessment.
In the course of argument Mr Bierre was asked whether, if the idiosyncratic trading arrangement between the two companies had been going on for say five years, it could be said that the payments pursuant to it would not be in the course of trade. He accepted, we think rightly, that they would. That disposes of the need in every case to prove "practice in the commercial world in general" as a mandatory criterion.
In any event, there was evidence (unchallenged) in the affidavit of the General-Manger of Axiom. He stated:
Indent purchasers in the clothing industry proceed by way of supply of a substantial amount of stock at one point in time, resulting in the customer having no need for further supplies for a lengthy period, with payment for indent stock generally not occurring (despite the terms of trade) until 90 days after delivery. It is also not uncommon for purchasers to delay payment until 180 days after delivery.
He also referred to the commercial reality notwithstanding the standard conditions of sale, that 75% of Axiom’s debtors pay 60 days after delivery with 25% paying 30 days after delivery.
Mr Bierre next addressed his argument to the Master’s factual conclusion in respect of the first period. By reference to the evidence, he invited us to accept that the change of trading pattern the Master found to have taken place in October after Mr Woods’ death, on a proper application of the legal test, should have been found to have occurred earlier, in June of 1996. He identified four matters.
The first was the deterioration in the debt after February 1996 evidenced by the increasing age of the indebtedness.
The second matter was the increasing incidence of the dishonouring of cheques.
The third was the cessation of orders in the July-August-September period.
The fourth matter was the fact that special clearance of a cheque had been sought.
We were not convinced that these matters singly or in combination justified interference with the Master’s factual assessment. The ageing of the debt was not particularly significant bearing in mind the evidence of fluctuations in the timing and value of goods invoiced. There is also the evidence across the period June to September 1996 that regular payments resulted in steady reduction of the total indebtedness with no indication of unusually large or exceptional frequency of payment.
The pattern of dishonoured cheques seems reasonably constant through the whole period of trading. The focus is on payments actually made and they followed a steady pattern throughout.
The fall-off in orders without full analysis is equivocal. It could have been seasonal. It could have reflected Mr Woods’ condition. It is to be considered against the resumption of trading on the same basis in October.
The clearance of the cheque was sought in the second period not the first.
Accordingly we reject the first ground of appeal.
We turn to the appeal against the denial of the recovery to the liquidator on the equitable ground.
Section 270(3) specifies as conditions for relief three matters.
The first is receipt by the creditor of the payment in good faith.
The second is alteration of position in the reasonably held belief that the payment was validly made and would not be set aside.
The third is the opinion of the Court that recovery, or recovery in full, would be inequitable.
In considering the first two requirements it is necessary to keep in mind that the jurisdiction to deny recovery only arises after it has been determined that the payment was not in the ordinary course of business. It is, therefore, not permissible to reason that merely because the payment was not in the ordinary course of business the creditor should have been on notice and could neither have received the payment in good faith nor believed it was valid and would not be set aside. It is to be kept in mind also that the material point in time may be different in respect of the first and second requirements.
"Good Faith" in this context was referred to in Re Orbit Electronics Auckland Ltd; W H Jones & Co (London) Ltd v Rea (1989) 4 NZCLC 65, 170.
To satisfy the first condition under para (a), the company must show that it received the money in good faith. This expression has not previously been the subject of decision in this Court. Mr Gould, again rightly in our opinion, accepted the Judge’s view of its meaning in the passage from his judgment at p 14 (p 193 of the case) Re Orbit Electronics (Auckland) Ltd (in liq); Rea v WH Jones & Co (London) Ltd (1988) 4 NZCLC 64,237 at p 64,244]:
The Master, in accepting the evidence of Axiom’s witnesses that the payments were received in good faith, did not distinguish between those received in the first period and those received in the second period. In the context of the judgment, that the finding was directed to the second period is not entirely clear. However, in this area, the Master clearly accepted the evidence of Axiom’s deponents. That of the General Manager was emphatic, that had there been any suspicion of preference or insolvency Axiom would have ceased to supply and have exercised its rights pursuant to the retention of title clause in the conditions of sale. On that evidence, a finding of good faith, even in the second period, would have been justified having regard to the resumption of supply in October (seemingly not fully recognised by the Master).
The second requirement has two limbs – there is alteration of position and the creditor’s belief at the time. On the first we found it surprising indeed that the Liquidator should seek to argue that there had been no change of position by Axiom over the 3½ years since the date of liquidation during which Axiom had taken no steps under the guarantee and had not sought to prove in the liquidation. There were, of course, other matters referred to by the Master but we find it unnecessary to say more on this point.
Mr Wedekind, who argued this part of the appeal cited a passage from the judgment of Tipping J in the High Court in Re Bee Jay Builders Ltd  3 NZLR 560, 566:
The essence of an alteration of position for present purposes seems to me 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. If following receipt of the impugned payment the recipient does or omits something, reasonably believing that the transaction is valid then the Court may relieve in whole or in part against the rigours of s309(1A).
It was submitted that in the present case there was no evidence of a conscious decision by Axiom not to pursue its rights on receipt of each bundle of cheques.
That focussed on the wrong point of time. The belief must be held at the time of alteration of position. But that point aside, it is to read more into the dictum of Tipping J than likely was intended to require some deliberate decision to alter the creditors’ position while focussing on, and motivated by, the validity of the transaction.
We consider that, with no suspicion of preference (the good faith requirement) and in the absence of any notice or other suggestion of any questioning of the validity of the payments over more than three years, the assumption of validity inherent in refraining from taking steps otherwise to recover the moneys amply satisfies this requirement.
That leaves the assessment of the Master that recovery by the liquidator would be inequitable. The effect of her decision is that, because of the lax and unsatisfactory conduct of the liquidator, Axiom will have enjoyed a preference at the expense of other creditors who have not been at fault. But, as the Master said, the same may be said of the Woods’ family who may have benefited at the expense of trade creditors. But without more evidence it is not possible to fully assess those matters. That is no fault of Axiom and the necessary prerequisites for the exercise of the discretion were present. In the circumstances we are not disposed to interfere with the Master’s conclusion which was open to her.
For those reasons the appeal is dismissed.
The respondent is entitled to costs in this Court which we fix at $5,000 together with disbursements including the reasonable travel and accommodation expenses of counsel, approved, if necessary, by the Registrar.
Countrywide Banking Corporation Ltd v Dean  1 NZLR 385; Re Excel Freight Ltd (In Liq); Waikato Freight & Storage (1998) Ltd v Meltzer CA164/00, 5/3/2001; Modern Terrazzo Ltd case  1 NZLR 160; Re Orbit Electronics Auckland Ltd; W H Jones & Co (London) Ltd v Rea (1989) 4 NZCLC 65; Re Bee Jay Builders Ltd  3 NZLR 560
Companies Act 1955; s.266, s.268(2), s.270
N Bierre and A J Wedekind for Appellant (instructed by Morgan Coakle, Auckland)
K F Gould for Respondent (instructed by Kevin F Gould, Auckland)
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