Ipsofactoj.com: International Cases [2002] Part 4 Case 7 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Parsons

- vs -

Norris

McGRATH J

FISHER J

WILLIAM YOUNG J

15 OCTOBER 2001


Judgment

Fisher J

(delivered judgment of the court)

INTRODUCTION

  1. Until recently Mr Norris was the sole director and shareholder of a small spray-painting company, AMS Auto & Marine Spray Painters Ltd ("the Company"). He made loans to the Company on the security of a debenture. The Company having gone into liquidation, the Liquidator challenged the validity of the debenture.

  2. In the High Court Master Faire ordered that the debenture be not set aside. The Liquidator appeals.

    FACTUAL BACKGROUND

  3. The Company was incorporated on 17 February 1997 with 1000 shares of $1.00 each owned by Mr Norris and his wife. Mr Norris was the sole director.

  4. To fund the Company Mr Norris borrowed $50,000 from Westpac on the security of his own home, sold certain plant and equipment to the Company, and provided the Company with further advances. The advances were made from time to time from two bank accounts in the personal name of Mr Norris. The Company did not have its own bank account. Instead, Mr Norris’s accounts were used for all the Company’s receipts and payments. The principal account appears to have been permanently in overdraft. On the odd occasion these two accounts were used for Mr Norris’s personal transactions but for the most part they were used for the business of the Company.

  5. Mr Norris says that from the beginning he advanced $90,000 in all to the Company and then supplemented this from time to time with further funds raised by increasing his overdraft with the bank. The Company’s liability to Mr Norris was recorded in a loan agreement of 10 July 1997. It identified a principal sum of $90,000 and stated that that sum and further advances were to be repaid on demand. Provision was made for interest at 15 per cent per annum if demanded. The agreement recorded that the loan was to be secured by a first debenture over the assets of the Company. It was signed on behalf of the Company by Mr Norris as director.

  6. Mr Norris says that a debenture was executed at the same time. Although that is now challenged by the Liquidator, Mr Norris was not cross-examined on it and there is no evidence to the contrary. An obscure letter of 2 November 1999 from the Company’s solicitor does not state otherwise. We agree with the Master that the case is to be approached on the basis that a debenture was signed at the same time as the loan agreement on 10 July 1997. It is common ground that it was not registered as required by s 102 of the Companies Act 1955 and s 6 of the Companies (Registration of Charges) Act 1993.

  7. By 1999 the Company was in financial difficulty. When a special financial adviser was consulted he discovered that the debenture had not been registered. A fresh debenture was signed on 21 April 1999. Although it includes inappropriate wording referring to "a loan agreement of even date herewith" the document as a whole makes it clear that it was intended to secure "past advances made to the company by the lender" together with "all moneys for the time being owed by the company to the lender". This debenture was registered on 26 April 1999.

  8. Six weeks later Mr Norris issued a statutory demand for payment by the Company. He ceased to hold office as director on 15 July 1999 and the Company ceased to trade two weeks later on 13 July 1999. On 8 October 1999 the Company was put into liquidation on Mr Norris’s application. On 20 October 1999 he appointed a receiver.

  9. On 29 October 1999 the Liquidator issued a notice under s 294(1) challenging the validity of the debenture on the following grounds:

    1. The charge is a charge pursuant to s. 293(1) of the Companies Act;

    2. A M S Auto and Marine Spraypainters Ltd (in liquidation) was placed into liquidation by order of the High Court at Hamilton on Friday 8 October 1999.

    3. A M S Auto and Marine Spraypainters Ltd (in liquidation) gave the charge within six months before the making of the application to the Court to place A M S Auto and Marine Spraypainters Ltd (In Liquidation) into liquidation.

    4. The charge was given within the restricted period.

    THE LEGISLATION

  10. In issuing his notice the Liquidator relied upon ss 293 and 294 of the Companies Act which provide:

    293

    Voidable charges

    (1)

    A charge over any property or undertaking of a company is voidable on the application of the liquidator if the charge was given within the specified period, unless—

    (a)

    The charge secures money actually advanced or paid, or the actual price or value of property sold or supplied to the company, or any other valuable consideration given in good faith by the grantee of the charge at the time of, or at any time after, the giving of the charge; or

    (b)

    Immediately after the charge was given, the company was able to pay its due debts; or

    (c)

    The charge is in substitution for a charge given before the specified period.

    (2)

    Unless the contrary is proved, a company giving a charge within the restricted period is presumed to have been unable to pay its due debts immediately after giving the charge.

    (3)

    Subsection (1)(c) of this section does not apply to the extent that—

    (a)

    The amount secured by the substituted charge exceeds the amount secured by the existing charge; or

    (b)

    The value of the property subject to the substituted charge at the date of the substitution exceeds the value of the property subject to the existing charge at that date.

    (4)

    Nothing in subsection (1) of this section applies to a charge given by a company that secures the unpaid purchase price of property, whether or not the charge is given over that property, if the instrument creating the charge is executed not later than 30 days after the sale of the property or, in the case of the sale of an estate or interest in land, not later than 30 days after the final settlement of the sale.

    (5)

    For the purposes of subsection (1)(a) and subsection (4) of this section, where any charge was given by the company within the period specified in subsection (1) of this section, all payments received by the grantee of the charge after it was given shall be deemed to have been appropriated so far as may be necessary—

    (a)

    Towards repayment of money actually advanced or paid by the grantee to the company on or after the giving of the charge; or

    (b)

    Towards payment of the actual price or value of property sold by the grantee to the company on or after the giving of the charge; or

    (c)

    Towards payment of any other liability of the company to the grantee in respect of any other valuable consideration given in good faith on or after the giving of the charge.

    (6)

    For the purposes of subsection (1) of this section, specified period means—

    (a)

    The period of a year before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and]

    (b)

    In the case of a company that was put into liquidation by the Court, the period of a year before the making of the application to the Court together with the period commencing on the date of the making of the application and ending on the date on which[, and at the time at which,] the order of the Court was made[; and

    (c)

    If—

    (i)

    An application was made to the Court to put a company into liquidation; and

    (ii)  

    After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—

    the period of a year before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date [and at the time] of the commencement of the liquidation.]

    (7)

    For the purposes of subsection (2) of this section, restricted period means—

    (a)

    The period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and

    (b)

    In the case of a company that was put into liquidation by the Court, the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of the application and ending on the date on which[, and at the time at which,] the order of the Court was made[; and

    (c)

    If—

    (i)

    An application was made to the Court to put a company into liquidation; and

    (ii)  

    After the making of the application to the Court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—

    the period of 6 months before the making of the application to the Court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.

    294

    Procedure for setting aside voidable transactions and charges

    (1)

    A liquidator who wishes to have a transaction that is voidable under section 292 of this Act or a charge that is voidable under section 293 of this Act set aside must—

    (a)

    File in the Court a notice to that effect specifying the transaction or charge to be set aside and, in the case of a transaction, the property or value which the liquidator wishes to recover, and also the effect of subsections (2), (3), and (4) of this section; and

    (b)

    Serve a copy of the notice on the other party to the transaction or the grantee of the charge and on every other person from whom the liquidator wishes to recover.

    (2)

    A person—

    (a)

    Who would be affected by the setting aside of the transaction or charge specified in the notice; and

    (b)

    Who considers that the transaction or charge is not voidable—

    may apply to the Court for an order that the transaction or charge not be set aside.

    (3)

    Unless a person on whom the notice was served has applied to the Court under subsection (2) of this section, the transaction or charge is set aside on the twentieth working day after the date of service of the notice.

    (4)

    If one or more persons have applied to the Court under subsection (2) of this section, the transaction or charge is set aside on the day on which the last application is finally determined, unless the Court orders otherwise.

    HIGH COURT PROCEEDINGS

  11. Mr Norris brought an application under s 294(2) seeking an order that the debenture of 21 April 1999 not be set aside. It was not disputed that as the debenture had been given within 12 months of the liquidation of 8 October 1999 it fell within the "specified period" in terms of s 293(1). Unless it could be brought within one of the three exceptions contained in paras (a) to (c) of s 293(1) it would be voidable at the instance of the liquidator. Further, it was accepted that as the debenture had been given within 6 months of the liquidation it fell within the "restricted period" in terms of s 293(7)(a). There being no evidence to rebut the presumption of insolvency under s 293(2), Mr Norris was precluded from relying upon s 293(1)(b).

  12. Mr Norris relied upon the two remaining grounds for validity contained in terms of s 293(1), namely that the debenture secured consideration provided at the time of or after the giving of the debenture (para (a)) or alternatively that it was in substitution for the original debenture given on 10 July 1997 (para (c)). The case turned on those two possibilities.

  13. As to validity under s 293(1)(a), Mr Norris argued that during the period following the giving of the debenture on 21 April 1999 he made payments to the Company’s creditors from his own bank accounts. He argued that this qualified as valuable consideration at or after the giving of the debenture. The Master appears to have rejected that argument on a number of grounds: that it was not shown that Mr Norris paid money to the Company, as distinct to the Company’s creditors; that on the authority of Re Cleadon Trust Ltd [1939] 1 Ch 286, 315 a payment made voluntarily and without any legal liability or compulsion in discharge of the debt of another raised no implied contract for repayment; that equity would intervene only if the payments made on the debtor’s behalf had been made with the knowledge and approval of the debtor; that there was no evidence of a specific resolution by the Company authorising Mr Norris’s method of trading; and that the transaction was not a bona fide arms-length one formally authorised by the Company.

  14. The Master accepted Mr Norris’s other argument that the 1999 debenture qualified for validity under s 293(1)(c). He accepted that it was a charge in substitution for the 1997 debenture which in turn had been given before the specified period. The Master considered that although the 1997 charge had never been registered it still constituted a prior "charge" for the purpose of substitution under that provision. That was sufficient for an order that the 1999 debenture not be set aside.

  15. The Liquidator also submitted to the Master that the debenture ought to be set aside under s 299 of the Companies Act. He argued that having regard to the circumstances in which the debenture was created, the conduct of Mr Norris, and all the surrounding circumstances, it was just and equitable that it should be set aside. The Master declined to consider that application given the lack of prior notice to Mr Norris. The Master noted that it was still open to the Liquidator to make a specific application under s 299 which would need to be dealt with on another occasion.

  16. The Master declined to order costs in favour of Mr Norris. He described his success under s 293(1)(c) as a situation in which he had "been able to take advantage of what may well be a loophole in s 293(1)(c)". He also bore in mind the possibility that the debenture might still be set aside on a further application under s 299.

    SUBSTITUTING NEW CHARGE FOR UNREGISTERED ONE (s 293(1)(c))

  17. The Liquidator’s principal ground of appeal was that the Master’s approach to s 293(1)(c) was wrong in law. The Master held that even where an earlier unregistered charge is void against the Liquidator and other creditors it can provide the foundation for substituting a new charge that is itself beyond challenge by virtue of s 293(1)(c).

  18. Whether the Master was correct turns on the meaning of the word "charge" where it is used for the second time in the s 293(1)(c) sentence "The charge is in substitution for a charge given before the specified period". No real assistance is derived from the definition of "charge" in s 2(1) of the Act which provides:

    "Charge" includes a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to creditors entitled to be paid under section 313 of this Act; but does not include a charge under a charging order issued by a court in favour of a judgment creditor.

    A charge which is void against a Liquidator and creditors for non-registration would not fall within the defining words in s 2(1) but as the Master rightly noted, that could scarcely be an end to a matter given the non-exhaustive nature of that definition.

  19. Common usage of the word "charge" is not sufficiently precise to determine the outcome for the purposes of s 293. In general terms a charge appears to be a proprietary security for the performance of an obligation but beyond this the precise boundaries of the concept will be coloured by the particular context in which the expression is used – see, for example, Words and Phrases 3rd ed (Butterworths, 1988) 243-245.

  20. The context in the present case is the liquidation code found in Part XVI of the Companies Act 1993. Central to the code is the premise that subject to specific exceptions (in particular prior charges (s 305), set-offs (s 310), preferential claims (s 312), and agreed subordinations of debt (s 313(3))), creditors will share equally and rateably in the realisable assets (s 313(1)). To that end a subset of equalising provisions is designed to ensure that one creditor can not steal a march over the others by obtaining a last minute payment (s 292), security for past advances (s 293) or an interest for inadequate consideration (ss 297 and 298) during the year preceding liquidation and/or at a time when the company is already insolvent.

  21. To that subset of equalising provisions there are then the qualifications contained in ss 292 to 298. The qualifications are designed to preserve normal trading for as long as possible (the ordinary course of business exception in s 292(2)) and to recognise other transactions unlikely to materially prejudice other creditors. In general terms other creditors will not be prejudiced if a fresh security is associated with fresh value to the company (s 293(1)(a)) or is merely a substitute for an existing security (s 293(1)(c)). All of these provisions are to be looked at from a business point of view, placing the emphasis on substance rather than the form – see, for example, Re Matthew Ellis Ltd [1933] 1 Ch 458, 472, 478 (CA); Re Mataura Motors Ltd [1981] 1 NZLR 289, 291, 293 (CA).

  22. In the normal course the substitution of one charge for another will not materially prejudice other creditors if they would not have had access to the charged property to begin with. That is not the case, however, where the prior charge had been void for non-registration. Pursuant to s 3 and 6 of the Companies (Registration of Charges) Act 1993 the mandatory registration requirement in s 102 of the Companies Act 1955 is applied to companies registered under the Companies Act 1993. The effect of non-registration is stipulated in s 103(2) of the Companies Act 1955 which materially provides:

    .... Every charge to which this section applies shall, so far as any security on a company’s property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the charge is registered in the manner and within the time prescribed by s 102 of this Act ....

    In short, upon liquidation an unregistered charge is void against the only people who matter, the liquidator and other creditors.

  23. It is against that background that the second word "charge" in s 293(1)(c) falls to be interpreted. Absent a specific reason to the contrary, realisable assets will be equally distributed. The exceptions do not include an unregistered charge. For all practical purposes an unregistered charge is void upon liquidation. We do not think that there is any reason for treating its progeny, in the sense of another charge whose validity rests upon the original, any differently. The prima facie effect of s 293(1) is to make charges given within the specified period voidable at the instance of the liquidator. Although an exception is created in a situation where the fresh charge is merely a substitute for another, there is no warrant for using the exception to convert void securities into effective ones. It would also be contrary to the public notification purposes of s 102 of the Companies Act 1955.

  24. We conclude that to hold that the second word "charge" in s 293(1)(c) includes an unregistered charge would run directly counter to the scheme of the Act. There may, of course, be other reasons for upholding the validity of a recently registered charge. However if reliance must be placed solely upon s 293(1)(c) the original charge must have been one which, had the liquidation occurred at the time of the substitution, would have been valid as against liquidator and other creditors. It follows that in the present case Mr Norris can not rely upon the substitution of charges exception found in s 293(1)(c).

    MONEY ADVANCED AFTER EXECUTION OF 1999 DEBENTURE (s 293(1)(a))

  25. Although the principal ground of appeal relied upon by the Liquidator is upheld, Mr Norris sought to uphold the Master’s judgment on another ground. In this Court Mr Bryers renewed his argument that after the debenture was given on 21 April 1999 Mr Norris had made a series of payments to the Company’s creditors from his own bank accounts and that these constituted valuable consideration for the purpose of s 293(1)(a). He had made all payments from his accounts to the Company’s creditors and received into those accounts receipts from the Company’s debtors. The argument is that each time he made a payment from his account for the benefit of the Company after the debenture was signed he was providing valuable post-charge consideration in terms of s 293(1)(a).

  26. Although there is a lack of clarity in the precise accounting between Mr Norris and the Company, the evidence places it beyond contention that for the three months following the signing of the 1999 debenture the two bank accounts in the name of Mr Norris were used as the clearing house for all receipts and payments associated with the Company. It was not argued that any trustee-beneficiary relationship was involved. Mr Norris was effectively acting as the Company’s banker.

  27. Nor was it disputed that Mr Norris had the necessary capacity to enter into a contract between himself as an individual and the Company of which he was the representative. As the sole director he had the authority to contractually commit the Company to the banking arrangement described. Even within the company itself he and his wife held all the shares. Any doubt over the contractual relationship must have been removed by the course of dealing between himself and the Company over a period of about two years. That distinguishes the case from the otherwise similar situation in Re Cleadon Trust Ltd, supra, in which the company had not given the requisite authority to make the payments on its behalf.

  28. Strictly speaking we think that the liability of the Company to indemnify Mr Norris for the payments he had made on its behalf lay in contract. Even if there had been no contract, however, these were plainly payments made with the knowledge and authority of the Company and thus ones which would have been recoverable on conventional equitable and restitutionary principles – see, for example, Re Ligget (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48.

  29. Fundamentally, the evidence in this case suggests the common situation in a small company where accounts between the company and its shareholders fluctuate from time to time according to the financial needs of the company. What was less usual was the lack of any bank account in the name of the Company. In principle, however, that did not affect the Company’s underlying liability to repay to the shareholder those funds which the shareholder has advanced either directly to the Company or, with its knowledge and authority, to third parties on its behalf. Clause 1 of the 1999 debenture required the Company to repay Mr Norris on demand "all moneys for the time being owing by the company to the lender". Prima facie, therefore, the debenture was security for the sums which Mr Norris paid from his account either to the Company or to its creditors.

  30. For the Liquidator, it was argued that Mr Norris could gain the benefit of s 293(1)(a) only if he could show that over the three months following execution of the charge the use of his bank accounts resulted in a net credit to the Company. There was a conflict of evidence in that regard. In support of Mr Norris, the receiver Mr Currie initially deposed that over the period in question there was a net gain to the Company. That was refuted by the Liquidator, Mr Parsons. More recently Mr Currie agreed that "a precise calculation of the quantum of the debt actually owing by the Company to Mr Norris (if any) can not yet be made". It was not disputed, however, that over the period a series of payments were made from Mr Norris’s accounts to or for the benefit of the Company.

  31. We accept Mr Bryer’s submission that for the purposes of s 293(1)(a) it is sufficient if Mr Norris made payments to or for the benefit of the Company following the execution of the debenture. That must include payments made by drawing upon his personal bank account to that end. The validity of the charge turns solely upon the provision of valuable consideration in terms of s 293(1)(a). We consider that each cheque drawn upon the account of Mr Norris and paid to one of the Company’s creditors constituted valuable consideration for this purpose. The receipts he received over the same period must be appropriated to debts incurred by the Company after the debenture (s 293(5)) but that goes to the state of account between him and the Company, not the validity of the debenture as a security.

  32. The principle just referred to is illustrated by Re Yeovil Glove Co Ltd [1964] 2 All ER 849. In that case a liquidator challenged the validity of a debenture given to a bank within 12 months of the commencement of the winding up. At all material times the company’s bank accounts were overdrawn. Following execution of the debenture a series of receipts and payments were made through the relevant bank accounts. Pursuant to s 322 of the Companies Act 1948 the debenture was invalid for present purposes "except to the amount of any cash paid to the company at the time of, or subsequently to the creation of, and in consideration for, the charge ...." Over the period the company’s accounts showed receipts of £111,000 and payments of £110,000 – a slight reduction in indebtedness to the bank overall. The Liquidator argued that since the accounts as a whole recorded no net benefit to the company over the period it could not be said that any cash was paid to the company at or subsequent to the creation of the charge. The argument was rejected, Harman LJ noting (p 854):

    The fallacy in the liquidator’s argument lies, in my opinion, in the theory that, because the company’s payments into the bank after the date of the charge were more or less equal to the payments out by the bank during the same period, no "new money" was provided by the bank. This is not the fact. Every such payment was in fact new money having regard to the state of the company’s accounts, and it was in fact used by the company’s creditors. That the indebtedness remained approximately at the same level was due to the fact that this was the limit set by the bank to the company’s overdraft. I can find no reason to compel the bank to treat all payments in after the charge as devoted to post-charge indebtedness. The law is in fact the other way.

  33. Mr Grant sought to distinguish Re Yeovil Glove on the ground that in the present case the parties were not dealing with each other at arms’ length and that it had not been demonstrated that any consideration provided by Mr Norris was provided in good faith. We do not think that Yeovil Glove can be distinguished for present purposes. Where the debenture-holder is also the director and principal shareholder there is certainly good reason for scrutinising the records and facts with particular care. The transactions relied upon must have been genuine ones. However, we can not find in the evidence – whether for the Liquidator or for Mr Norris – any real challenge to the genuineness of the banking relationship which existed between the company and Mr Norris in principle.

  34. The ultimate state of accounting between the two parties undoubtedly merits further investigation but it has never been questioned that Mr Norris did make numerous payments from his account to or for the benefit of the Company after the execution of the 1999 debenture and that these must have benefited the Company. We conclude that the 1999 debenture did secure "money actually advanced or paid", and "other valuable consideration given in good faith" by Mr Norris at the time of, and after the giving of, that debenture in terms of s 293(1)(a). It is therefore an answer to avoidance under s 293(1).

  35. The protection offered by s 293(1)(a) is confined to those payments made to or for the benefit of the Company from the date of the debenture, namely from 21 April 1999. Validation of the charge does not extend to past advances. We agree with the decision in Re C & D Webster Ltd (In Liquidation) [1995] 3 NZLR 590, 595 in that respect.

    CONSEQUENCE OF UPHOLDING THE DEBENTURE

  36. The sole effect of upholding the validity of the debenture is to recognise it as a valid security for such sums as are found to be within the scope of the security and protected under s 293(1)(a). Any issues surrounding the sums which may fall within this category are not before us. It is to be hoped that they will be a matter of non-contentious book-keeping. If not, further directions could be sought pursuant to s 284. Whether that is combined with an application to resolve the outstanding challenge to the debenture under s 299 of the Act must remain a matter for the Liquidator.

    RESULT

  37. The Master has already made an order that the debenture be not set aside. We have arrived at the same result, albeit by a different route. The appeal is dismissed.

  38. It would not be appropriate to address costs in this Court until after outstanding issues between Mr Norris and the Liquidator have been resolved. Costs are reserved.


Cases

Re Cleadon Trust Ltd [1939] 1 Ch 286

Re Matthew Ellis Ltd [1933] 1 Ch 458 (CA)

Re Mataura Motors Ltd [1981] 1 NZLR 289

Re Ligget (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48

Re Yeovil Glove Co Ltd [1964] 2 All ER 849

Re C & D Webster Ltd (In Liquidation) [1995] 3 NZLR 590

Legislations

Companies Act 1955: s.2, s.102, s.293, s.294

Companies (Registration of Charges) Act 1993: s.2, s.3, s.6, s.292, s.293, s.297, s.298, s.305, s.310, s.312, s.313.

Companies Act 1955: s.102, s.103

Authors and other references

Words and Phrases 3rd ed (Butterworths, 1988)

Representations

M D Grant for Appellant (instructed by Stace Hammond Grace & Partners, Hamilton)
S P Bryers for Respondent (instructed by Martelli McKegg Wells & Cormack, Auckland)


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