New Zealand Credit Law Bulletin - Vol 2, No 4, June 2002
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Liquidators "ignore the economic reality of trading"
- Could the former bankrupt sue his lawyers?
- Directors liabilities under which Companies Act?
- Time limit to apply to set aside statutory demand
Hartner Trustee Limited v Colin MacKenzie Plastering Limited (2001) 9 NZCLC 262,645 (15 Jun 2001)
1. Liquidators "ignore the economic reality of trading"
Meltzer v Reidpaints Limited (2001) 9 NZCLC 262,745 (14 Sept 2001)
In July 1998 Reidpaints ("RP") sold their Auckland branch to Reidpaints (Auckland) Ltd ("Auckland") under a franchise agreement. RP supplied paint and other products to Auckland on credit terms.
Auckland informed RP of its cash flow problems. But Auckland assured RP that it was also owed debts which, when paid, would solve its problems. Between January and May 1999 Auckland was able to make six large payments to RP totalling over $55,000. However, the position didn't improve. In June 1999 Auckland was placed in voluntary liquidation.
Meltzer, Auckland's liquidator, served notice in July 2000 to set aside the six payments to RP as voidable payments (under s 292 of the Companies Act 1993). RP opposed this, claiming that the payments had been made in the ordinary course of business (which would make them untouchable).
The Judge concluded that even though they weren't the agreed terms of trade, arrangements allowing for lump sum payments were perfectly normal in the paint retailing industry. The creditor (which continued to supply and did not start debt collection action) was not aware of the possibility of insolvency at the time. The Judge went so far as to say, "it appears liquidators are treating most, if not all payments, that are not made in accordance with the terms of trade as not being in the ordinary course of business. It is, of course, dangerous to generalise but such an approach seems to ignore the economic reality of trading."
The Court also determined that it would be inequitable to allow the liquidator to recover the payments in a voluntary liquidation that had come as a surprise to the creditor. Furthermore, there had been no
effort to alert RP to any problems with the payments until over a year after the liquidation - that is, 15 to 16 months after the payments had been made. Such a delay was unacceptable. The liquidator was denied recovery of the payments.
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2. Could the former bankrupt sue his lawyers?
Edmonds Judd v Official Assignee [2001] 2 NZLR 135
Edmonds Judd, a firm of solicitors in Te Awamutu, had acted for Mr Hobbs. Hobbs was declared bankrupt in October 1994, with debts of over $180,000. Edmonds Judd were owed over $13,000 in legal fees and were paid out only $90. By October 1997 Hobbs had been discharged from bankruptcy. Almost a year later, he faxed the Official Assignee asking them to sue Edmonds Judd for negligence in the handling of his affairs, which he said had led to his bankruptcy. If the OA did not want to sue, Hobbs could do it himself _ but apparently it had to be done by the next day. The Official Assignee refused to sue because there was no money in Hobbs' bankrupt estate to fund the action. The OA's response said, "any potential action may be deemed as abandoned, and therefore vests in Mr Hobbs." So Hobbs sued Edmonds Judd himself.
Edmonds Judd applied to the Court under s86 of the Insolvency Act 1967. That section allows a creditor "aggrieved by an act or decision of the Assignee" to ask the court to review it.
If there is no money in the estate to pay for litigation, the OA can sell the right to sue. This is known as "assignment" and means that the OA can get at least some return for the bankrupt's estate from outstanding claims. In this case the OA had just abandoned the possibility of suing Edmonds Judd. The Court of Appeal considered that this was not a reasonable decision.
In addition, because Hobbs had been discharged from bankruptcy, Edmonds Judd would not be able to off-set any award that might be made to Hobbs against the amount he still owed to them. This was also considered unreasonable.
For these and other reasons, and the decision of the Official Assignee to abandon the cause of action was quashed. This meant, effectively, that Hobbs was not allowed to sue Edmonds Judd. The solicitors were also awarded costs of $7500 against the OA.
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3. Directors liabilities under which Companies Act?
Re Cellar House Ltd (in liq); Walker v Allen & Ors (2001) 9 NZCLC 262,737
Audits carried out on Cellar House Ltd by Customs in 1992 and 1997 revealed errors in its record-keeping that resulted in a substantial understatement of Cellar House's liability for excise duty. A judgment of $5.8 million was entered against the Company and a further $140,000 of excise duty was found to be owing. Under that crushing weight Cellar House was placed in liquidation.
The liquidator brought proceedings against the directors and former directors of the company for breaching various directors' duties. The liquidator alleged they had failed to keep adequate accounting records, failed to prepare financial statements, traded recklessly, and failed to act in good faith and in the best interests of the company.
Cellar House was re-registered under the Companies Act 1993 two and a half years before it was placed in liquidation. Two of the former directors had resigned before re-registration. The two former directors did not deny that they were in breach of the directors' duties under the previous Companies Act 1955. However, they did dispute their liability for any directors' duties contained in the new 1993 Act.
They argued that the only duties they owed were under the old 1955 Act. At the time Cellar House was placed in liquidation, it had been re-registered under the 1993 Act, and therefore they claimed that only the duties listed in the 1993 Act could be relied on. It followed that as the two directors had resigned prior to re-registration, the "new"
duties were not applicable to them.
Unfortunately for them, the Court did not agree. As the directors' duties under the two Acts were almost identical, the Court considered it irrelevant that at the time Cellar House went into liquidation it had been re-registered under the 1993 Act. To conclude otherwise would be "illogicality". It was also irrelevant that the two directors had resigned prior to re-registration.
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4. Time limit to apply to set aside statutory demand
Hartner Trustee Ltd, ("HT") owned an Auckland property where Mr and Mrs Hartner, directors of HT, lived. Colin MacKenzie Plastering Ltd ("CMP") carried out plastering work on the property following instructions from the Hartners. CMP wasn't paid so it served a statutory demand on HT claiming $102,908.40. HT applied to have it set aside, disputing the amount owing and arguing that CMP had contracted with the Hartner's personally and not HT itself.
Under s290 of the Companies Act 1993, a company has 10 days to apply to set aside a statutory demand. The application by HT was made one day outside the 10-day time limit. The creditor opposed the application to set aside the statutory demand, because it was served out of time. The applicant attempted to withdraw the application but the creditor refused to consent to this and gave notice that it intended to seek orders under s 291(1) of the Companies Act 1993.
These orders would compel HT to pay the debt within a specified time or be placed in liquidation.
So was the Court able to hear the application which was made outside the right time frame? The Court found the original application to set aside the statutory demand by HT was a complete nullity as it was filed and served outside the prescribed time frame. This meant that there was no actual application on which a substantive hearing could be held, and so CMP still had to wait for the statutory demand to operate before he could get paid.
