New Zealand Credit Law Bulletin - Vol 2, No 7, September 2002
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
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:
- Attempt to set aside voidable transaction backfires on liquidator and funder
The judge wasn't impressed. - Creditors defending voidable preference claims get liquidator removed
They got lucky with this one. - Liquidator plays hardball
What happens when you lose a preference claim but don't pay. - Secret commissions for mortgage brokers - deceptive conduct
Secret commissions breached the Fair Trading Act - Was the debenture holder allowed to appoint a receiver?
The debtor company had just arranged to remedy the default. Could it stop the secured creditor from going ahead?
1. Attempt to set aside voidable transaction backfires on liquidator and funder
Woodcut 2000 Ltd v Rodewald (Unreported, Akld; M174/00) 3 December 2001
There was an ongoing dispute between the Mr Memelink and Mr Port. Memelink claimed that Port and his company, Mark & Kim Ltd, were in breach of the use of a patent owned by Memelink. Memelink sought an interim injunction which was granted. Costs of $9437.08 were awarded jointly and severally against Mark & Kim Ltd and Port.
Mr Port, the principal shareholder of Mark & Kim, sold all the company's assets and liabilities to a newly formed company, Woodcut 2000 Ltd in November 1999. The transfer of the property to Woodcut was authorised by Mark & Kim's two major creditors.
However, Memelink was not happy with the transfer. He pursued both Mark & Kim Ltd, winding the company up in March 2000, and Port himself by way of bankruptcy proceedings. Port paid the costs in October 2000 and avoided bankruptcy. The liquidator applied to set aside the transfer of assets to Woodcut on the basis that it was a voidable transaction under Section 292 of the Companies Act 1993. This section enables the Court to set aside transactions having a preferential effect to certain creditors. Memelink, who provided the liquidator with funds ($9000), appeared to be the driving force behind the liquidator's application. There was a suggestion that his patent claim now appeared weaker than it did initially, and that he was using the voidable transaction claim as a way of putting a competitor out of business.
Woodcut asked the Court for an order that the transaction should not be set aside. It had been authorised by its two major creditors and was beneficial to them. Memelink had failed to show that he would have received more if Mark & Kim had not made the transfer.
The Court found in favour of Woodcut and denied the application to set the transaction aside. For Section 292 to apply there must first be a debtor/creditor relationship which was not the case between Mark & Kim and Woodcut. The Court also considered it relevant that at the time Mark & Kim was placed in liquidation, its only outstanding debts were the costs payable to the liquidator, and a small amount which might be owed to the IRD relating to a tax assessment.
The Court also found that Mark & Kim's agreement with its main creditors to transfer the company's assets to Woodcut was commercially sensible practice. Furthermore, it was recognised that a creditor funding a liquidator's action had no right to control the proceedings. The Judge was critical of this and of the liquidator's decision to take action. Tellingly, he awarded 50% of the costs to be paid by Mark & Kim from the money supplied by Memelink, and 50% to be paid by Memelink and Rodewald, the liquidator.
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2. Creditors defending voidable preference claims get liquidator removed
Re Nikau Enterprises Ltd (In Liquidation) (Unreported, Tauranga; M43/01) 2 October 2001
Re Nikau Enterprises Ltd (In Liquidation) (Unreported, Tauranga; M43/01) 2 October 2001
Nikau Enterprises Ltd was put into liquidation by special resolution of the shareholders on 18 February 1999. Although the date was specified in the resolution, the shareholders failed to record the actual time at which the resolution was passed.
Section 241 of the Companies Act 1993 states that liquidation commences on the date and at the time at which the liquidator is appointed. Section 241A requires that if a liquidator is appointed under a special resolution of the shareholders, the shareholders must record the date and the time at which, the resolution was passed. The shareholders in this case did not record the time.
Two years later, the liquidator sought an order from the Court declaring himself to have been validly appointed. Four of Nikau's creditors opposed the liquidator's application. These same creditors were also disputing claims by the liquidator to have certain voidable transactions set aside. Unhappy with the liquidator, they argued the shareholders failure to record the time on the resolution invalidated the appointment.
The Court thought the issue of recording the time of the passage of the resolution appointing a liquidator was important. T his was because the timing of liquidation effects many areas of insolvency law and has many practical effects. For example, once a liquidator is appointed, they have custody and control of the company's assets directors cease to have their full powers, functions and duties. No shares may be transferred nor may a company alter its constitution. It was also recognised it was probably commonplace for resolutions appointing liquidators to omit a record of the time at which it was passed. The Court decided the issue should be clarified.
The Master found that the appointment of this liquidator was invalid due to the failure to state the time of the appointment in the special resolution. Certainty in the timing of liquidation was considered paramount and so a record of the actual time of appointment of the liquidator was mandatory. Even though the liquidation had gone on for more than two years and would have serious effects on the winding up of Nikau, the intention of Sections 241 and 241A was clear.
"Hard cases should not be allowed to make bad law," said the Master.
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3. Liquidator plays hardball
Merlo v Chilcott (as liquidator) (Unreported, Akld; B868-im01) 25 October 2001
Merlo had been trading with a company that was now in liquidation. Chilcott, the liquidator, had wanted to claw back some of the payments made by that company to Merlo. Merlo applied to the Court to have the payments declared "not voidable", but was unsuccessful. This meant that Merlo now owed the liquidator both the amount of the voided transactions and the costs for the unsuccessful court case. When he didn't pay either, Chilcott applied for an order under s295 of the Companies Act, 1993 to force Merlo to pay the voided transactions and also issued a bankruptcy notice against Merlo relating to the Court costs.
Merlo's lawyer wanted the High Court to adjourn the bankruptcy notice proceedings until the same day as the s295 application would be been dealt with. If Merlo successfully defended the s295 application he could offset that against the amount they owed Chilcott. He said that the liquidator had no pressing need for the money. Finally he said it was more efficient for the Court to hear the two matters together.
Chilcott contended that Merlo's application to set aside the bankruptcy notice should be dealt with immediately. The debt would still be owed whatever way the Court ruled on the s295 application.
The Judge decided that it was irrelevant that Chilcott did not urgently need the money, nor was it an inefficient use of the Court's time. Rather, it was more important that justice be served. He refused to adjourn the bankruptcy notice proceedings and held that that there were no grounds for setting aside the notice. Merlo had to pay the costs from his original court action or face bankruptcy. (Note that the bankruptcy notice is only a step along the way towards making him bankrupt, not the final step.)
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4. Secret commissions for mortgage brokers - deceptive conduct
Guthrie v Taylor Parris Group Cossey Limited [2002] BCL 316 (22 February 2002)
Guthrie was a mortgage broker and acted as 'master agent' for Sovereign Homes Mortgages Limited. Guthrie entered an informal mortgage rearrangement scheme with other mortgage brokers, including Taylor Parris. The clients of the members of this "co-operative" were to obtain mortgage finance from Sovereign through Guthrie. He received an establishment fee from Sovereign, equal to one per cent of the loan, which was to be divided between the brokers. Guthrie kept ten percent of the fee and passed ninety percent on to the other brokers as commission. What Guthrie did not disclose to the other brokers is that he also received additional commission, directly from Sovereign, for organising the loans.
The District Court looked at whether this was 'misleading or deceptive' conduct which would be a breach of s. 9 of the Fair Trading Act 1986. The lower Court awarded $6,000 damages to Taylor Parris. Guthrie's appeal was dismissed by the High Court. The Appeal Court Judge said Guthrie's conduct brought him an additional secret benefit of which the other brokers were not aware. This was a breach of the Fair Trading Act. The High Court also looked at the Secret Commissions Act, 1910 but decided it did not apply to the facts. If it had Guthrie may have successfully defended his actions by arguing that he had acted as an agent of Sovereign.
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5. Was the debenture holder allowed to appoint a receiver?
Curragh Developments Limited (in rec) v Rodewald (2001) 9 NZCLC 262,639
Curragh Developments Ltd were property developers in a residential subdivision in Cambridge. In July, 2000 they borrowed $1,200,000 from First Mortgage Trust and gave a mortgage and debentures as security. In September, 1999 Curragh had entered a contract with Welch Construction to erect ten houses on the subdivision. Over $500,000 was unpaid under this contract when the debenture was executed. The debenture holder was not aware of this debt when the loan was made.
When they became aware of the default to Welch the debenture holders appointed Rodewald as the receiver, under the terms of the debenture for failure to pay third parties. However, at the time the receivers were appointed there were compromise agreements in place under which Curragh was to transfer land extinguish the company's debt to Welch. First Mortgage had never given Curragh a prior demand notice. Was it allowed to appoint a receiver? Curragh applied for a declaration under s34(2)(c) of the Receiverships Act 1993 that Rodewald had not been validly appointed.
The Court stated that if a default occurs which entitles a charge holder (in this case, First Mortgage, the debenture holder) to appoint a receiver, the charge holder may appoint the receiver even if the default has been remedied in the meantime. For a considerable time there was a substantial outstanding debt due by Curragh to Welch Construction. First Mortgage had the power to appoint a receiver at any time after an event of default had occurred. Delaying the appointment of a receiver does not amount to waiver of the right to appoint a receiver. A debenture holder cannot be prevented from exercising a power on the basis of a default which existed prior to lending the money, if he did not know the default existed.
Accordingly, First Mortgage was entitled to appoint the receivers. The Court also looked at whether a notice of demand of money was required prior to that appointment. Notice of demand is not required where a charge holder elects to appoint a receiver rather than demand payments of money. If a debenture holder wants to call up the principal sum, relying on the event of default, it would have to make a demand. First Mortgage did not choose to take that course and instead, elected to appoint receivers. Therefore, Curragh Developments was not entitled to the declaration sought and remained in receivership.
