The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 41 of 1997

 

Countrywide Banking Corporation Limited Appellant

v.

Brian Norman Dean as Liquidator of C B Sizzlers

Limited (in liquidation) Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 24th November 1997

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Present at the hearing:-

Lord Browne-Wilkinson

Lord Slynn of Hadley

Lord Hoffmann

Lord Hutton

Mr. Justice Gault

  ·[Delivered by Mr. Justice Gault]

 

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1. This appeal raises the issue of the correct construction of the voidable preference provisions of the New Zealand Companies Acts.

 

2. At the time of the enactment of the new 1993 Act, the earlier 1955 Act, which continued to apply, was amended so that the same new provisions governing company liquidations were introduced in both Acts.  In this case their Lordships are concerned with section 266 of the 1955 Act as amended which is in identical terms to those in section 292 of the 1993 Act.

 

3. The material facts can be stated briefly.  The appellant ("Countrywide") was the lessor under a lease dated 4th May 1993 by which C B Sizzlers Limited ("the company") occupied retail space in the foodcourt complex in the Queen Street  Countrywide  Bank  Centre  at  Auckland.  In addition to the base rent, the lessee was required to pay as additional rent a percentage of the gross receipts of its business, a percentage of the foodcourt operating expenses and a promotion levy also based upon gross receipts.

 

4. The lease provided for payment of interest by the lessee on amounts in arrear and unpaid and for the lessor's costs of recovery.  There was also provision for assignment of the lease by the lessee subject to the consent of the lessor.  Before giving consent the lessor was entitled to require payment of all moneys due and payable under the lease.

 

5. The lessee company fell into arrears and in October 1994, by variation, the rent was reduced with retrospective effect from 1st September 1993.  The rate of additional rent also was reduced.  Still arrears increased and in March 1995 the amount outstanding was $18,766.86.  Countrywide then instructed solicitors to recover that amount.  Shortly after that instruction was issued Countrywide was made aware that the business of the company was subject to a sale and purchase agreement.  The sale included the lease the assignment of which required the consent of Countrywide.  At the request of the company's solicitors Countrywide agreed not to issue proceedings on the basis that all moneys due to it under the lease would be paid out of the proceeds of sale.  On 5th May 1995 Countrywide received from the solicitors acting for the company a payment of $30,914.90 which is the subject of this appeal.  That sum represented the total of the amounts payable under the lease and unpaid to that date.

 

6. In the meantime, unknown to Countrywide, another creditor had served on the company on 28th March 1995 a statutory demand for payment of other indebtedness and had applied on 4th May for an order that the company be wound up.  Such an order was made in the High Court at Auckland on 1st June 1995.  Under the 1993 law the liquidation commenced on the appointment of the liquidator.

 

7. There were filed with the liquidator proof of debts totalling $63,715.43 in addition to which the National Bank was owed $15,375.00 under a debenture.  The balance of the proceeds of the sale of the business (there were no other assets) were such that other creditors were likely to receive nothing whereas Countrywide had been paid in full.

 

8. The relevant sections of the Companies Act 1955 are as follows:-

"266.Transactions having preferential effect

(1)In this section, `transaction', in relation to a company, means -

(a)A conveyance or transfer of property by the company:

(b)The giving of a security or charge over the property of the company:

(c)The incurring of an obligation by the company:

(d)The acceptance by the company of execution under a judicial proceeding:

(e)The payment of money by the company, including the payment of money under a judgment or order of a court.

 

(2)A transaction by a company is voidable on the application of the liquidator if the transaction -

(a)Was made -

(i)At a time when the company was unable to pay its due debts; and

(ii)Within the specified period; and

(b)Enabled another person to receive more towards satisfaction of a debt than the person would otherwise have received or be likely to have received in the liquidation -

unless the transaction took place in the ordinary course of business.

 

(3)Unless the contrary is proved, for the purposes of subsection (2) of this section, a transaction that took place within the restricted period is presumed to have been made -

(a)At a time when the company was unable to pay its debts; and

 

(b)Otherwise than in the ordinary course of business.

 

(4)For the purposes of this section, in determining whether a transaction took place in the ordinary course of business, no account is to be taken of any intent or purpose on the part of a company -

(a)To enable another person to receive more towards satisfaction of a debt than the person would otherwise receive or be likely to receive in the liquidation; or

(b)To reduce or cancel the liability, whether in whole or in part, of another person in respect of a debt incurred by the company; or

(c)To contribute towards the satisfaction of the liability, whether in whole or in part, of another person in respect of a debt incurred by the company -

unless that person knew that that was the intent or purpose of the company.

 

(5)For the purposes of subsection (2)(a)(ii) of this section, `specified period' means -

(a)The period of 2 years before the commencement of the liquidation; and

(b)In the case of a company that was put into liquidation by the Court, the period of 2 years 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 on which the order was made.

 

(6)For the purposes of subsection (3) of this section, `restricted period' means -

(a)The period of 6 months before the commencement of the liquidation; 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 that application and ending on the date on which the order of the Court was made.

 

268.Procedure for setting aside voidable transactions and charges -

(1)A liquidator who wishes to have a transaction that is voidable under section 266 of this Act or a charge that is voidable under section 267 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 28 days 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.

 

269.Other orders - If a transaction or charge is set aside under section 268 of this Act, the Court may make one or more of the following orders:

(a)An order requiring a person to pay to the liquidator, in respect of benefits received by that person as a result of the transaction or charge, such sums as fairly represent those benefits: ...

 

270....

(3)Recovery by the liquidator of property or its equivalent value, whether under section 269 of this Act or any other section of this Act, or under any other enactment, or in equity or otherwise, may be denied wholly or in part if -

(a)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

(b)In the opinion of the Court, it is inequitable to order recovery or recovery in full. ..."

 

9. The liquidator gave notice under section 268 of his wish to set aside the payment by the company to Countrywide and called for repayment of the amount of $30,914.90.  Countrywide applied on 8th September 1995 to the High Court under section 268(2) for an order that the transaction not be set aside on the ground that it took place in the ordinary course of business.

 

10. It is common ground that at the time the payment was made the company was unable to pay its due debts, that the payment was made within the specified and restricted periods and that it enabled Countrywide to receive more towards the satisfaction of its debt than it would be likely to receive in the liquidation.  The sole question therefore was whether Countrywide had overcome the presumption in section 266(3) and established that the transaction took place in the ordinary course of business so as to fall within the exception provided in section 266(2).

 

11. In support of its application Countrywide filed an affidavit from an experienced conveyancing solicitor.  His unchallenged evidence was that it is virtually invariable practice for a landlord to require all outstanding rent and other payments under a lease to be paid as a condition of the landlord's consent to the assignment of a lease.  He said also that if a tenant of commercial premises has been unable to meet payments under a lease as they fall due and the sale of that tenant's business is about to occur it is entirely usual for a landlord to receive all lease payments due under the lease from the sale of that business.

 

12. The case for Countrywide was that a payment for which the company was liable under the terms of its lease made in circumstances which were entirely usual represented a transaction that took place in the ordinary course of business within the meaning of that expression in section 266(2).

 

13. In the High Court, in her judgment delivered on 5th December 1995, Cartwright J. referred to authorities to which further reference will be made.  She rightly noted the focus of section 266 as on the company which is about to be, or has been, placed in liquidation and its transactions.  She accepted that the transactions are to be viewed against the circumstances of the company at the time.  She found that the payment to Countrywide was made when there was no possibility of the Company's business continuing, that Countrywide was aware of that and of the company's serious financial difficulties when it consented to the assignment of the lease.  In that context she held that the payment which was dependent upon the cessation of business could not be in the ordinary course of business.

 

14. Countrywide appealed to the Court of Appeal.  The judgment of that Court delivered by Keith J. on 12th December 1996, after brief reference to the principal authorities relied upon at first instance, noted that the parties were not understood as disagreeing on the law.  The Court said that the wording of the phrase "in the ordinary course of business" and its standard interpretation make it plain that the test is an objective and general one such that emphasis is not to be placed on the business of the particular parties to the transaction, whether jointly or singly.  The Court went on to consider the particular transaction in question.   It  was  held that while payments of debts as they become due, including payments under a lease, would be part of the ordinary course of business, as might adherence to invariable practice of meeting outstanding indebtedness as a condition of securing a lessor's consent to assignment of a lease, the payment in this case was of a quite different order.  This was a payment of long accrued arrears and, being the largest sum paid by the company to Countrywide at any one time, it could not be accepted as having been made in the ordinary course of business.  The appeal was dismissed.

 

15. Before their Lordships' Board Mr. Smith for Countrywide emphasised the importance of the case to lessors and the need, if the appeal should be dismissed, for lessors to change what on the evidence is an invariable practice of recovering arrears upon assignment by the lessee.  He said lessors will have to move on defaulting tenants before any substantial arrears accrue with consequent disruption to the lease market.

 

16. Mr. Smith submitted that certain factual findings of Cartwright J. were unsupported by evidence.  Their Lordships consider however that of those material to her decision the findings that Countrywide knew of the cessation of the business of the company and of its financial difficulties were reasonable inferences from the evidence of the request to withhold proceedings pending completion of the sale of the business.

 

17. Mr. Smith did not take issue with the Court of Appeal's description of the test of what is in the ordinary course of business as an objective and general one.  He submitted however that in its reasoning the Court did not apply that test but focused on the particular dealings between the lessor and the lessee in concluding that the transaction was not in the ordinary course of business between them.

 

18. He contended for a test of whether the transaction was one which a man might undertake without having any bankruptcy in view.  On that test, he argued, the payment of moneys due under a lease, in accordance with invariable practice where the lease is assigned, must be accepted as in the ordinary course of business.  This, he said, would reflect commercial reality.

 

19. Mr. Williams for the liquidator supported the judgment.  He submitted that whether the payment was made in the ordinary  course of business is basically a question of fact and that there were concurrent findings in favour of the liquidator in the lower courts.

 

20. On the law Mr. Williams was able to rely upon a judgment of Fisher J. delivered only a few days before the hearing before their Lordships in In re Modern Terrazzo Ltd. (In Liquidation), Bowden v. Macdonald (unreported) 10th October 1997; High Court of New Zealand (Auckland Registry) No. M654 of 1995.  In that judgment Fisher J. considered in some detail the interpretation of the phrase "in the ordinary course of business" in section 266 (and section 292 of the 1993 Act).  In a careful analysis, drawing upon a perceptive article by Matthew D.J. Conaglen; Voidable Preferences under the Companies Act 1993, A Change in Focus [1996] N.Z. Law Review 197, Fisher J. reviewed the authorities and brought them into clearer perspective.  Their Lordships have been considerably assisted by his judgment, as indeed was Mr. Williams.

 

21. The repeal of section 309 and the substitution of section 266 in 1993 effected a substantial change in the approach to voidable preferences in New Zealand.  Section 309, which was based upon the English law, provided that payments made within two years before winding up commenced, if made by a company unable to pay its debts as they fell due, was voidable as against the liquidator if made "with a view to" giving one creditor a preference over other creditors.  The enquiry was as to whether it was the dominant intention to prefer on the part of the debtor when the payment was made.  A creditor so preferred was able to retain the payment by showing that it was received in good faith, that in reliance on the validity of the payment the creditor had altered his or her position and that retention would not be inequitable (section 311A(7)).

 

22. The change effected in 1993 by the new section 266 was to abandon as the sole ground for avoidability the intention of the debtor to prefer.  The enquiry under section 266(2) is as to whether in the prescribed circumstances the effect of the transaction was to prefer - to enable a creditor to receive more than would be likely in the liquidation.  That intention did not cease to be relevant in all circumstances is apparent from subsection (4) which reintroduces it as a factor for consideration of the ordinary course of business exception where the person preferred knew of any intent or purpose of the debtor to prefer.  The alteration of position relief for creditors has been maintained in section 270. What then is a transaction in the ordinary course of business which has the effect of preferring a creditor, the identification of which may be influenced by knowledge of the other person that there was an intention or purpose on the part of the company to prefer?  Good faith on the part of the creditor of itself cannot bring a transaction within the exception because that is an element of the change of position relief the creditor might seek where the exception does not apply.

 

23. In the course of argument references were made to a number of other contexts in which consideration has been given to the ordinary course of business.  Under the former fraudulent preference provisions of bankruptcy (or insolvency) and company winding up laws the courts evolved a test for negating an intention to prefer where the preference was made in the ordinary course of business.  It could be satisfied where the payment was one a person might make without having any bankruptcy in view.  That was the approach contended for by the appellant relying on English authorities tracing back to Rust v. Cooper (1777) 2 Cowp 629 and Tomkins v. Saffery (1877) 3 App.Cas. 213.  Those are the authorities that also recognised that the necessary intention to prefer could be negated by showing that the debtor paid under pressure from the creditor or in a desperate attempt to remain in business.  They represent the approach jettisoned in New Zealand by the repeal of section 309.  This is clear from the report of the Law Commission which recommended the comprehensive revision of the company law enacted in 1993 (New Zealand Law Commission, Company Law Reform and Restatement (1989) N.Z.L.C. Report 9) para. 649:-

"The focus at present, when a creditor receives payment in preference to others, is on the intention of the debtor company.  This means that in circumstances were a creditor is preferred through no voluntary action by the debtor, for example, where a creditor is able to coerce the debtor, the transaction cannot be attacked.  This leads to the unsatisfactory situation where creditors may be treated differently according to the quirks of their circumstances.  The purpose of a voidable transaction regime is to avoid this, yet the present law permits it.  Our proposals, which are drawn from both the Australian Law Reform Commission's Report and the submission of the New Zealand Society of Accountants, set out a test which is more straightforward to apply."

 

24. The view expressed at the end of this paragraph has not attracted unanimous agreement as appears from the poignant addendum to Fisher J.'s judgment in the Modern Terrazzo Ltd. case:-

"It was in 1993 that the Australians abandoned the phrase `in the ordinary course of business' as the key exception to their company voidable preference regime (formerly s565 of The Corporations Law (Cth) and its predecessors; see now ss588FA-588FG of The Corporations Law).  As one commentator put it (1994) 19 M.U.L.R. 545:-

 

`This abolition has occurred, principally, because of the judicial uncertainty in interpreting what was meant by the phrase.  It is undeniable that there has not only been uncertainty, but also confusion.'

 

25. New Zealand chose that moment to introduce into its own companies legislation the very phrase which Australia had just discarded.  One of us must have got it wrong.  Although in these situations right-thinking New Zealanders would normally assume it to be Australia, Barker J. conceded in In re NZ Spraybooth Ltd. [1996] 7 N.Z.C.L.C. 261,075 that in this instance `It is perhaps unfortunate that this phrase was included in the new companies legislation'.  He may be right."

 

26. The Australian experience revolved around a statutory provision having some similarity to section 266 but which cannot be said to have been adopted by the New Zealand Legislature.  The leading decision of the High Court of Australia in Taylor v. White (1964) 110 C.L.R. 129 dealt with the statutory exception in favour of a "payee in good faith and for valuable consideration and in the ordinary course of business".  The relevant section expressly negated the good faith component of the exception under circumstances leading to an inference of actual or constructive knowledge by the creditor of the debtor's inability to pay its debts and the preferential effect of the payment.  In their Lordships' view that represents a considerably different approach to that required by the New Zealand section.  The Australian cases therefore do not have direct application to the New Zealand provision though they may provide some guidance as to the meaning to be given to the phrase "in the ordinary course of business".

 

27. Another context in which the expression is to be found is in identifying the circumstances in which a company may dispose of assets the subject of a floating charge.  Reynolds Bros. (Motors) Pty. Ltd. v. Esanda Ltd. (1983) 8 A.C.L.R. 422 and Julius Harper Ltd. v. F.W. Hagedorn & Sons Ltd. [1991] 1 N.Z.L.R. 530 are cases in that field.  As was recognised by the Court of Appeal in the second of those cases (page 543) the focus of consideration in these situations is the course of business of the particular company.  Dicta in this context are to be considered in that light.

 

28. In each of the judgments of the High Court and Court of Appeal in the present case reliance was placed on passages from two judgments in Australian cases.  The first is to be found in the judgment of Rich J. in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) (1948) 76 C.L.R. 463,477.  That was a decision of the High Court of Australia on the question of whether a transaction which had the effect of converting an unpaid supplier into a secured creditor within the statutory period prior to liquidation was void or whether the creditor was protected by the exception in favour of a payee in good faith and for valuable consideration and in the ordinary course of business.  Citing the earlier decision of Burns v. McFarlane (1940) 64 C.L.R. 108,125, Rich J. said:-

"This last expression it was said `does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor'.  It is an additional requirement and is cumulative upon good faith and valuable consideration.  It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction.  The provision does not require that the transaction shall be in the course of any particular trade, vocation or business.  It speaks of the course of business in general.  But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course.  It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation."

 

 

29. Williams J. in the same case (page 480) said:-

"It seems to me, therefore, that the expression refers to a transaction into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent."

 

30. The New Zealand Court of Appeal in Julius Harper Ltd. v. F.W. Hagedorn & Sons Ltd. said (page 543) that the last part of the passage from the judgment of Rich J. expresses the usual meaning of the words "ordinary course of business" though it was there applied in a different context.

 

31. In his judgment in Reynolds Bros. (Motors) Pty. Ltd. v. Esanda Ltd., Mahoney J.A., in considering whether a floating charge continued to attach to certain tractors disposed of by a company, addressed the question of whether it was done by the company in the ordinary course of business.  He said (page 428):-

"That transaction was, as Mr Grieve submitted, an extraordinary one.  But, within this principle, `ordinary' is not to be confined to what is in fact ordinarily done in the course of the particular business of the company.  Transactions will be within this principle even though they be, in relation to the company, exceptional or unprecedented."

 

Fisher J. in the Modern Terrazzo Ltd. case expressed the view that this dictum is inconsistent with that of Rich J. in the Downs Distributing Co. case and, because of its quite different context, is unhelpful.  He preferred the view of Rich J. expressed in the analogous context as more appropriate to reflect the purpose of the voidable preference provisions.

 

32. There are difficulties in drawing upon formulations in different words of statutory tests and treating them as applicable in all circumstances.  Such difficulties are increased where those formulations originate in different legal or factual contexts.  This is particularly so where the test is essentially one of fact in any event.  For these reasons, as presently informed by the argument in this case, their Lordships do not adopt any particular formulation.  Nor  is  it necessary for this case to make any comprehensive statement, suitable for all cases, of the criteria for determining when a transaction is to be held to have taken place in the ordinary course of business for the purpose of section 266 and the corresponding section in the 1993 Act.

 

33. Their Lordships do not accept, as submitted for the appellant, that the test is general in the sense that it would be satisfied so long as it can be said that the transaction is one which might reasonably take place in some business setting.  To abstract the particular business setting and enquire (in effect) merely whether it is possible to envisage a setting in which the transaction would be an ordinary one is not what the statute requires.  In that situation the intent and purpose of the company would never have relevance yet section 266(4) specifies circumstances in which they are to be taken into account.

 

34. 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, 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 businesses 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 (page 17):-

"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."

 

35. 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 subsection 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 nonetheless 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.

 

36. In the present case, on the finding of Cartwright J. at first instance, the payment was made when, to the knowledge of the lessor, it was part of the transaction by which the company was disposing of its business.  Their Lordships consider it was entirely open to the judge to find that in the circumstances the payment was not in the ordinary course of business.  Equally, the view was open to the Court of Appeal that the payment, made up as it was including long-standing arrears, when made was not in the ordinary course of business. 

 

37. Mr. Smith's argument that to apply the section so narrowly as to exclude from the ordinary course of business payments of the kind here in issue will disrupt the ordinary conduct of the affairs of lessors is not accepted.  Lessors, although contractually entitled to payments provided for in the lease, are not secured creditors.  There is no warrant for more favourable treatment for them than other creditors.  On the contrary, the policy of the voidable preference law is to secure the equal participation of creditors in such of the company's property as is available in the liquidation.

 

38. For the reasons given their Lordships will humbly advise Her Majesty that the appeal should be dismissed.  The appellant must pay the respondent's costs before their Lordships' Board.

 

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