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COURT OF APPEAL BACKS NORTHERN CREST LIQUIDATORS – PAYMENTS MADE TO ROBT. JONES HOLDINGS SET ASIDE
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The Court of Appeal has confirmed that Robt. Jones Holdings Limited (RJH) must repay over $750,000 to Northern Crest (in liquidation) (NC). This outcome follows action by NC’s liquidators to clawback payments made by two third parties to discharge a debt owed by NC to RJH.

Background

NC owed rent to RJH. In 2010, RJH received payments from Columbus Property Marketing Pty Ltd (Columbus) and MSH No 2 Pty Ltd (MSH No 2). The following year, liquidators were appointed to NC.

The liquidators argued that:[1]

a. Columbus paid licence fees, due to NC, to RJH in discharge of NC’s obligations; and

b. the MSH No 2 payments to RJH were also a redirection of licence fees, or alternatively were an inter-group loan from MSH No 2, paid to RJH for the benefit of NC.

RJH’s first point of appeal was that the High Court was wrong to conclude that the Columbus payments were a redirection of licence fees because:[2]

a. the agreement between Columbus and NC was a sham; or

b. there was inadequate evidence before the Court that those payments were a redirection of licence fees, and from money belonging to NC. 

Court of Appeal

The Court of Appeal summarised when third party payments can amount to voidable transactions:[3]

Payments by third parties may constitute insolvent transactions…where the payment is made at the direction or with the consent of the insolvent company, and:

(a) the third party makes that payment in discharge of an obligation it owes to the insolvent company; or

(b) the money is not the third party’s, but is paid from funds belonging to the insolvent company or to which the company has rights.

The Court of Appeal did not refer to its earlier recent decision in Ebert Construction Ltd v Sanson.[4] In Ebert, the Court of Appeal observed that, ‘it is of the essence’ for a voidable transaction that the funds (or the asset conveyed) are from the resources available to the company to pay its general creditors.[5]

The Court rejected RJH’s first point of appeal.[6] On the evidence produced, the High Court was right to conclude that the agreement was not a sham.[7] The High Court was also right in finding that the payments by Columbus to RJH represented licence fees owed to NC.[8] The Court also observed that whether they were payments by way of loan or a redirection of licence fees, they would still, in substance, be NC transactions, and subject to s292(3) of the Companies Act 1993 (Act).[9]

RJH unsuccessfully argued that the MSH No 2 payments were not transactions of NC. The Court found there was ample evidence to prove that NC procured these payments to meet its obligations to RJH.[10] Again, it did not matter whether the payments were a redirection of licence fees or a loan – they were still NC transactions.[11] This left the Court to decide the third (and key) question on appeal: were the payments by MSH No 2 insolvent transactions, if they did not diminish the pool of assets available to NC’s creditors?

Must insolvent transactions diminish the net pool of assets available to creditors?

RJH argued that the transactions must have the effect of diminishing the net pool of assets available to creditors of NC in order to be caught by s292 of the Act. It submitted that the effect of the MSH No 2 payments was to swap one creditor for another, while the net pool of assets to other creditors remained the same.[12] RJH invited the Court of Appeal to depart from its previous decision in Levin v Market Square Trust,[13] which held that the liquidators were not required, under s292, to prove that the transactions resulted in a diminution of the pool of assets available to creditors.

The Court declined to depart from Levin. It held that nothing in the language of s292 supported the importation of the additional requirement submitted by RJH.[14] For a transaction to be an insolvent transaction under s292(b) of the Act, what is required is that the transaction:

enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive in the company’s liquidation.

Winkelmann J, in delivering the Court’s judgment, observed that the policy of the voidable transaction regime is to ensure equality of treatment of creditors and fairness between them. She observed that:[15]

The provisions are intended to avoid a scramble for priority between creditors in the period immediately preceding insolvency.  They also avoid sharp practices such as, directors of a company, anticipating insolvency, borrowing money to pay off a creditor they wish to see paid in preference to other creditors at the expense of the lender. In this case, if [counsel for RJH’s] approach were adopted, RJH would have been preferred as a creditor over MSH No 2 and the liquidators would have been unable to challenge the transaction.

Liquidators’ fees

RJH’s final shot was to argue that it should be granted some form of relief under s295 of the Act for the clawback. It argued that the liquidators’ motive for bringing the claim was for the primary purpose of recovering their fees, which was an abuse of process.[16]

For their part, the liquidators did not dispute that recovery would be used to pay for the costs of liquidation, including their fees. Winkelmann J held that there was nothing objectionable in that per se.[17] Priority is afforded to liquidators for payment of their fees under the Act because there is a public interest in the orderly liquidation of insolvent companies.[18]

Comment

We are not surprised that RJH’s appeal was unsuccessful. There is no good reason why payments received by a creditor from a third party at the direction or consent of an insolvent company should not be caught by the voidable transaction regime when:

a. the transaction discharges a debt of the company; or

b. the funds belong to the company,

and the transaction results in a preference. To allow otherwise would enable a creditor who receives a third party payment from an insolvent company to get a jump over other creditors. 

Creditors must be aware that payments made on behalf of others can also be vulnerable to clawback. Liquidators will be comforted that they can pursue voidable transactions to cover liquidation fees and costs when they have a genuine claim.

To read a copy of the judgment, please click here. If you would like to know more about the Court of Appeal’s decision, please contact us.                   

FOOTNOTES

[1] Robt. Jones Holdings Ltd v McCullagh [2018] NZCA 358, at [9].

[2] See: [18] and [107].

[3] At [15].

[4] [2017] NZCA 239.

[5] Ibid at [59].

[6] See: [73] and [106].

[7] At [73].

[8] At [106].

[9] At [108].

[10] At [123] and [124].

[11] At [121].

[12] At [125].

[13] [2007] NZCA 135; [2007] 3 NZLR 591.

[14] At [130].

[15] At [133].

[16] At [146].

[17] At [148].

[18] At [148].

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