IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2020-404-855
[2021] NZHC 139	

UNDER	the Companies Act 1993	
IN THE MATTER OF	the liquidation of GLENVAR VAULT CAPITAL LIMITED (IN LIQUIDATION)	
BETWEEN	GLENVAR VAULT CAPITAL LIMITED (IN LIQUIDATION)
First Plaintiff

KEVIN JOHN DAVIES
Second Plaintiff	
AND	FOSTER CRESCENT LIMITED
Defendant	

	CIV-2020-404-1900	

BETWEEN	
FOSTER CRESCENT LIMITED
Applicant	
AND	GLENVAR VAULT CAPITAL LIMITED
First Respondent

KEVIN JOHN DAVIES
Second Respondent	

Hearing:	2 February2021	
Appearances:	Kim Francis and B J Hamilton for the Plaintiffs Suzanne L Robertson QC for the Defendant	
Judgment:	22 February 2021	

JUDGMENT OF ASSOCIATE JUDGE R M BELL

GLENVAR VAULT CAPITAL LIMITED (IN LIQUIDATION) v FOSTER CRESCENT LIMITED [2021]
NZHC 139 [22 February 2021]

This judgment was delivered by me on 11 February 2021 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules

………………………….
Registrar/Deputy Registrar

[1]	On 18 September 2020, Powell J gave judgment by default for the plaintiffs against Foster Crescent Ltd, the defendant, for $91,000 plus interest and costs, a total of $116,735.00.1 Foster Crescent Ltd now applies under r 15.10 of the High Court Rules 2016 to have the judgment set aside.

[2]	I find that there would be a miscarriage of justice if the judgment were allowed to stand. Foster Crescent Ltd has shown that the amount of the judgment is excessive and it is varied accordingly.

[3]	The plaintiffs claimed under s 297 of the Companies Act 1993 that the nomination of Foster Crescent Ltd to take title to a property at Silverdale, Auckland, in May 2018 was at an undervalue when the purchaser making the nomination, Glenvar Vault Capital Ltd, was insolvent, and the nomination was less than two years before Glenvar went into liquidation.

[4]	Glenvar was incorporated on 16 August 2017 to carry on business as a single venture property developer. It went into liquidation by shareholders’ resolution on 13 November 2019. Its director, Mr Clark Valmont, was a front for Mr Peter Chevin, who has been adjudicated bankrupt a number of times and has been prohibited from being a director or being involved in the management of a company. Mr Davies, the second plaintiff, is Glenvar’s liquidator.

[5]	Foster Crescent Ltd was incorporated on 13 April 2017. Mr Martin Cooper is the sole director of Foster Crescent Ltd. The shareholder is a trustee company of a

1	Glenvar Vault Capital Ltd (in liq) v Foster Crescent Ltd [2020] NZHC 2432, (2020) 21 NZCPR 402.

trust associated with Mr Cooper. He is in the real estate agency business in a significant way. His real estate company holds 15 real estate agency franchises based on the North Shore and at Westgate. He is not a property developer.

The main facts

[6]	In November 2017, Glenvar entered into an agreement to buy a 4,000 square metre property at 9B Whangaparāoa Road, Silverdale, Auckland for $711,000. The site was not developed. Under the agreement the deposit was $71,100. There was a due diligence condition to be satisfied 25 working days after the date of the agreement. Settlement was 30 working days after the agreement became unconditional. The unconditional date was 19 December 2017. Glenvar did not have any funds. It borrowed the money for the deposit from a Mr Arthur Ramani under a written loan agreement. The loan was to be repaid by 31 March 2018 but was not. By agreement, the settlement date for the purchase was extended to 2 April 2018. At some stage, Glenvar nominated Clear White Investments Ltd to take title to the property. That was another company associated with Mr Chevin.2

[7]	The purchase of the property did not settle on the new date, 2 April 2018. The vendors served a settlement notice on Glenvar’s lawyers. Shortly before the settlement was to expire, Mr Chevin contacted Mr Cooper for assistance. They had dealt with each other before but not recently. Mr Cooper was on holiday in India at the time. They communicated by telephone and email. According to Mr Cooper, Mr Chevin said that he was managing the property development for Glenvar. He told Mr Cooper that the development was an excellent investment which Glenvar wanted to pursue. He was looking for a solution to what he said was a “short term cash flow issue”.

[8]	Mr Chevin sent Mr Cooper a registered valuation dated 21 March 2018 showing a current market value of $730,000 (including GST). He told Mr Cooper that, because of the potential for development, the land was worth much more than the valuation. He considered that with the location the land had excellent development potential. He was confident that resource consent could be obtained to develop 15 to

2	See Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2823 and Clear White Investments Ltd v Otis Trustee Ltd [2017] NZHC 1458.

17 terrace houses on the site and there would be a substantial profit. Mr Chevin was so optimistic that Glenvar was willing to offer Mr Cooper a good margin to hold the property until Glenvar could buy it back. Glenvar was expecting to receive funds from the sale of properties in Te Kauwhata and would need someone to help in the short term. He proposed that Mr Cooper buy the property but Glenvar would have the opportunity to buy the property back with money it expected to receive from the sale of the land-and-build packages at Te Kauwhata. Mr Cooper was interested, mainly in the prospect of obtaining the listings to sell the properties on a subdivision. He reckoned on obtaining $200,000 of  commissions.  This  led  to  the  proposal  that Mr Cooper’s company, Foster Crescent Ltd, take over the contract. Mr Cooper offered an additional $20,000 non-refundable profit to the vendors to persuade them to agree to the nomination of his company instead of cancelling. The vendors also required penalty interest.

[9]	The upshot was that Glenvar, Clear White and Foster Crescent Ltd entered into a deed dated 2 May 2018 under which Glenvar nominated Foster Crescent Ltd as the purchaser under the agreement to buy the property at 9B  Whangaparāoa  Road. Clear White acknowledged that the nomination had been made and it would no longer take title. Glenvar and Clear White acknowledged that, with effect from the date of the deed, all of Glenvar’s rights and interests as purchaser under the agreement, and all of Clear White’s rights and interests under the agreement, would pass to Foster Crescent Ltd. Glenvar undertook to comply with all the obligations of the purchaser up to the date of the agreement, and Foster Crescent Ltd undertook to comply with all obligations of the purchaser with effect from the date of the nomination. The deed does not provide for Foster Crescent Ltd to pay anything to Clear White or to Glenvar for the nomination.

[10]	On 24 April 2018, lawyers acting for Mr Cooper and for Glenvar agreed the terms for a buy-back option to be exercised by 30 November 2018. The buy-back price was $911,000 (inclusive of GST), but Glenvar would be credited with having already paid $71,000. Glenvar’s lawyers recorded that if the buy-back was not exercised, Glenvar would forfeit the deposit paid.

[11]	The purchase of Whangaparāoa Road settled on 18 May 2018. Foster Crescent Ltd made these payments to the vendors of the Whangaparāoa Road property:

The balance of the purchase price	$640,000.00	
An agreed contribution to the vendors’ legal costs	$2,300.00	
Compensation for loss to the vendors (bank fee)	$500.00	
Penalty interest from 8 March 2018 to 26 April 2018 (49 days)	$12,036.11	
Penalty interest from 27 April 2018 to 18 May 2018 (21 days)	$4,755.45	
	$659,591.56	

[12]	Foster Crescent Ltd’s legal fees on the transaction came to $7,047.50. It has been the registered proprietor of the Whangaparāoa Road property ever since. It has paid the rates on the property, $4,638.10 so far. Mr Chevin engaged consultants to begin work towards preparing an application for subdivision consent: engineering design, geotechnical investigation, traffic assessment and preparing a resource consent application. Foster Crescent Ltd paid them: $18,092.90. It was promised reimbursement.

[13]	Glenvar did not exercise its option under the buy-back agreement, nor did it repay Mr Ramani for his loan of $71,000. It did not reimburse Foster Crescent Ltd for the consultants’ fees it paid. Glenvar went into liquidation by shareholder resolution on 13 November 2019. Mr Davies was appointed liquidator. Mr Ramani  is the major creditor in the liquidation for $106,062.48 including $35,062.48 for interest.3 At no stage did Glenvar have funds or assets with which to repay Mr Ramani, to complete the purchase of the Whangaparāoa Road property itself, to exercise any buy-back option or to carry out any development work.

[14]	On 7 April 2020, lawyers instructed for Mr Davies wrote to Mr Cooper requesting information under s 261 of the Companies Act 1993. Mr Cooper replied that he was in the middle of lockdown but he would get his lawyers and accountants to give the information required within 10 working days after the lockdown was removed. The liquidator’s lawyers sent a follow-up on 8 May which advised that in the absence of a response, the liquidator was likely to make a claim against Foster Crescent Ltd for $110,100. Mr Cooper did not respond. The lawyers began this

3	There are two other, inconsequential, unsecured creditors.

proceeding on 10 June 2020 and served it on Foster Crescent Ltd’s registered office, at a firm of accountants in Newmarket, Auckland, on 17 June 2020. Foster Crescent Ltd did not file a statement of defence or take any other steps to oppose the proceeding. There was a formal proof hearing on 13 August 2020. Foster Crescent Ltd did not appear.

[15]	In his judgment of 18 September 2020,4 Powell J found that the nomination of Foster Crescent Ltd to take title to the Silverdale property was an undervalue transaction under s 297 of the Companies Act made within two years of liquidation and when the company was insolvent. The difference in value was $91,000, the difference between the purchase price of $711,000 and $620,000. He accepted the liquidator’s submission that Mr Ramani must have contributed an extra $20,000. The liquidator also submitted that the difference in value should be assessed by the market value found by the registered valuer, but Powell J preferred the price negotiated with the vendors.

[16]	On 25 September 2020, the liquidator served a statutory demand under the Companies Act 1993 on the registered office of Foster Crescent Ltd seeking payment of the judgment sum, $116,735.00. In  response,  Foster Crescent  Ltd applied under s 290 to set aside the statutory demand.5 That application has been held over to await the outcome of this application to set aside the judgment.

Applications to set aside default judgments - general

[17]	The application to set aside the judgment is under r 15.10 of the High Court Rules 2016:

Any judgment obtained by default under rule 15.7, 15.8 or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.

Here judgment by default was given under r 15.9.

4	Glenvar Vault Capital Ltd (in liq) v Foster Crescent Ltd [2020] NZHC 2432, (2020) 21 NZCPR 402.
5	Foster Crescent Ltd v Glenvar Vault Capital Ltd (in liq) and Davies CIV-2020-404-1900.

[18]	The liquidator obtained judgment regularly. In such cases the approach laid down by the Court of Appeal in Paterson v Wellington Free Kindergarten Assoc Inc applies:6
In approaching an application to set aside a judgment which complies with the rule, the Court is not limited in the considerations to which it may have regard, but three have been considered of dominant importance. This was accepted by the Chief Justice in the Court below and by all counsel in this Court. They are, (1) That the defendant has a substantial ground of defence; (2) That the delay is reasonably explained; (3) That the plaintiff will not suffer irreparable injury if the judgment is set aside: Atwood v Chichester (1878) 3 QBD 722, Hovell v Ngakapa (1895) 13 NZLR 298, Trengrove v Inangahua Hospital Board [1956] NZLR 587. But, whilst it appears from these cases that delay, if reasonably explained and if it does not create irreparable injury, is not of itself a good reason for refusing to set aside, we do not doubt that where the delay is substantial, as it is here, the Court can more readily conclude that injury would be caused.

[19]	The amount in issue is relatively small for a proceeding in this court. The costs of litigating must be high in relation to the amount. Normally if a setting aside application is successful the court does not decide the final merits of the case. The defendant is required to show only a reasonably arguable defence.7 If the default judgment is set aside, there will be another hearing later, after interlocutory steps such as discovery. I wondered whether the costs of further litigation could be saved by my deciding the final merits now, given the power under r 15.10 to vary a judgment and that s 297 of the Companies Act is within the court jurisdiction of an associate judge. For Foster Crescent Ltd, Ms Robertson QC resisted that suggestion saying that a rehearing would involve more extensive evidence than had been provided for this hearing. Notwithstanding that, I have varied the judgment. A further hearing is not required. While I have found for Foster Crescent Ltd on some matters, others are not seriously arguable.

[20]	The liquidator accepts that in the light of Mr Cooper’s evidence, Mr Ramani did not contribute an extra $20,000 towards the purchase of the property. Apart from the funds for the deposit contributed by Mr Ramani, all the funds to buy the property came from Foster Crescent Ltd. The liquidator says that the judgment should be reduced by $20,000, but no more than that. The judgment should otherwise stand.

6	Paterson v Wellington Free Kindergarten Assoc Inc [1966] NZLR 975 (CA) at 983. See also
Russell v Cox [1983] NZLR 654 (CA).
7	Pioneer Farms Ltd v Stoddart [2012] NZHC 3114 at [33].

[21]	On the other hand, Foster Crescent Ltd denies that the transaction is caught by s 297, says that Glenvar received value through the buy-back option and claims a defence under s 296(3) of the Companies Act.

The explanation for the delay

[22]	The delay is in filing a defence in the 25 working days after the proceeding was served. Foster Crescent Ltd accepts that the proceeding was correctly served on its registered office and that its accountants sent the proceeding to Mr Cooper, but he did not deal with it.

[23]	Mr Cooper explains that in 2020 the COVID-19 pandemic and the associated lockdowns had a major disruptive effect on his real estate business. It owns 15 real estate agency franchises in North Shore, Westgate and  Hobsonville.  He manages  17 offices and employs 400 staff. His franchises include property management divisions which manage over 1,400 residential tenancies and over 250 commercial tenancies. He has been highly successful. The restrictions during the lockdowns from March to May 2020 affected his business and his staff. The real estate agencies were closed during alert levels 3 and 4. Over 160 auctions were cancelled. Tenancies managed by his business were renegotiated. Ways had to be found to market and sell properties remotely during changing lockdown levels. He was concerned to provide leadership to his staff who could not work and were feeling worried and uncertain. He had to deal with many urgent issues arising daily in relation to the business and his staff. He put other matters to one side, intending to come back to them later. It was hard keeping track of the changes, as lockdown restrictions were tightened and relaxed. Many normal business procedures and systems were put to one side. His focus was on his real estate business, not other matters. This period was stressful and he became mentally unwell. When the proceeding was served on 17 June 2020, the country had recently returned to level 1 following the level 3 and level 4 lockdowns. He was receiving a large number of emails every day. He focused on those matters which he considered essential for the operation of the real estate business and for the wellbeing of the staff. He did not have the time or mental ability to deal with anything else. He suffered a bout of depression and was not functioning properly at work. He tried to present to his staff as confident and positive so as to provide leadership, but he

was not dealing with matters very well that arose on a day-to-day basis. He had suffered depression before. He consulted his doctor, who prescribed medication. While he received the documents from his accountants he did not consider them in detail and did not realise that he needed to instruct lawyers to deal with them. He was unaware that judgment could be given against his company by default. He had not been sued like this before and he was unaware of the legal processes. Only when the statutory demand was served did he take steps.

[24]	In response, the plaintiffs put in evidence showing that Mr Cooper maintained a high public profile during the pandemic period, including making presentations and taking part in an awards ceremony for his business. They point out that Mr Cooper was able to obtain legal advice in 2018 while he was in India and he could have similarly referred the proceeding to his lawyers. He failed to take proper steps when he could have.

[25]	Mr Cooper cannot complain of any unfairness by the liquidator. His lawyers wrote before the proceeding outlining his view that there had been an undervalue transaction and advising that a proceeding may follow if he did not respond. Obviously, Mr Cooper ought to have responded to the requests under s 261 of the Companies Act as well as the proceeding. But where the issue is whether there has been a miscarriage of justice, Mr Cooper’s failure is understandable and excusable. The COVID-19 pandemic was enormously disruptive to many businesses. It created problems not encountered before. Faced with a crisis Mr Cooper set priorities. Dealing with Glenvar’s liquidator was not one of them. There is also a human tendency to put to one side matters we would rather not deal with and to give our attention to more fulfilling matters. That seems to have played a part here.  While  Mr Cooper did not keep his eye on the ball all the time, that lapse should not be held against him.

Will the plaintiffs be irreparably injured?

[26]	The liquidator says that he did everything by the book and has incurred considerable results which will be negated if the judgment is set aside. That consideration is often raised on applications to set aside judgments by default but is

not considered as showing irreparable injury. It can instead by addressed by costs. If the application is otherwise meritorious, the judgment creditor is not considered to be unduly prejudiced if required to prove its case in a defended hearing. The prospect that it may not be able to prove its case, because of the judgment debtor’s arguable defence, is not an irreparable injury that should count against the application.

[27]	Because I will vary the judgment instead of setting it aside and ordering a new hearing, the prejudice concerning the liquidator will not arise.

Is there a substantial ground of defence to the claim under s 297?

[28]	Section 297 of the Companies Act says:

297	Transactions at undervalue

(1)	Under subsection (2) the liquidator may recover from a person (X) the amount C in the formula A − B = C, where—

(a)	A is the value that X received from a company under a transaction to which the company was or is a party; and

(b)	B is the value (if any) that the company received from X under the transaction.

(2)	The liquidator may recover the difference in value (that is, C in the formula in subsection (1)) from X if—

(a)	the company entered into the transaction within the specified period; and

(b)	either—

(i)	the company was unable to pay its due debts when it entered into the transaction; or

(ii)	the company became unable to pay its due debts as a result of entering into the transaction.

(3)	For the purposes of this section,—

(a)	transaction has the same meaning as in section 292(3):

(b)	specified period means—

(i)	the period of 2 years 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

(ii)	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, and at the time at which, the order of the court was made; and

(iii)	if—

(A)	an application was made to the court to put a company into liquidation; and

(B)	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 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 and at the time of the commencement of the liquidation.

…

[29]	There is a preliminary procedural point. The liquidator is the only person with standing to apply for an order under s 297. Glenvar did not have to be joined as a plaintiff, as judgment could not be given in its favour. It is removed as a plaintiff.

[30]	Foster Crescent Ltd accepted that Glenvar was insolvent and that the transaction took place in the two years before Glenvar went into liquidation. The parties diverged on the nature of the transaction and what value was received. For the liquidator, the relevant transaction was the nomination of 28 April 2018 and Foster Crescent Ltd’s completion of the purchase in May 2018. His case is that Foster Crescent Ltd received more than it paid because the deposit under the agreement for sale and purchase had already been paid. The difference in value was $71,000.

[31]	On the other hand, Foster Crescent Ltd says that the transaction also involved the buy-back option, which had value to Glenvar. While it did not yet have evidence of that value, it was arguable that it was measurable in money terms and would reduce or eliminate the difference in values between what each party received.

[32]	As to “transaction”, in Dalton v Avanti Finance Ltd, I said:8

Under [s  297],  “transaction”  has  the  same  meaning as  the  definition in  s 292(3) of the Companies Act:

292	Insolvent transaction voidable

…

(3)	In this section, transaction means any of the following steps by the company:

(a)	conveying or transferring the company’s property:

(b)	creating a charge over the company’s property:

(c)	incurring an obligation:

(d)	undergoing an execution process:

(e)	paying	money	(including	paying	money	in accordance with a judgment or an order of a court):

(f)	anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.

It is necessary, however, to take some care with that definition. While that definition serves its purpose well in the context of s 292, in s 297 it is used in a different context. Section 292 deals with voidable insolvent transactions. These are transactions by which an existing creditor receives more towards satisfaction of a debt than the creditor would receive in the company’s liquidation. Transactions under s 292 about reducing existing indebtedness involve no more than a one-way transfer of value from the company to the creditor. There is usually no corresponding transfer of value back to the company (or, if there is, it is usually netted out, as under s 292(4)(b)). Transactions under s 297 are different. The section is directed at transactions between a company and another party, under which there is an exchange, but the exchange is not of equal value. That therefore involves more than one transaction as defined in s 292(3). There may be a payment by one side and the transfer of something of value to the other. The section requires that the difference in value between the two transactions be measured. Generally, where a statute provides a definition of a word the court must apply that definition. But where the context clearly requires that another meaning be adopted, the court is not required to apply the statutory definition.9 That is the case, even if the statute does not expressly have the saving: “unless the context otherwise requires”. Accordingly, to apply the definition of “transaction” sensibly to s 297 requires accepting that the section applies when there is more than one “transaction”. It requires looking at both sides of an exchange. “Transaction” refers to the entire exchange, not just to what the company paid or transferred. Nor need the exchange be contemporaneous. One side may transfer value ahead of the other, as under a loan contract, under

8	Dalton v Avanti Finance Ltd [2020] NZHC 1020 at [72]–[74].
9	Police v Thompson [1966] NZLR 813 (CA) at 818.

which a lender advances funds and the borrower later repays an equivalent sum plus interest.

What I have said is, I suggest, consistent with a statement by Miller J in Kings Wharf Coldstore Ltd (in rec and liq) v Wilson, where he said:10

I conclude that a transaction for the purposes of s 297 comprises at minimum a disposition of a company asset to another person. It may also take the form of a contract or arrangement, or a series of them, where the series is properly characterised as a single transaction, that results in property of a company being transferred to another person. In such a case persons other than the recipient of the asset may be parties to the transaction. Because the section is concerned with the transfer of property, the better view is that it uses “party to” in the narrower sense of a side to a contract or litigation or, in this case, to a disposition or arrangement forming part of the transaction under which the property was transferred.

[33]	Under the liquidator’s approach, for s 297 the transaction involves both Glenvar’s assignment to Foster Crescent Ltd of its rights under the agreement to buy the Whangaparāoa Road property and Foster Crescent Ltd’s payment to the vendors of the balance of the purchase price.  The assignment is a transfer of property under  s 292(3)(a). The payment to the vendors comes under s 292(3)(e). The discharge of someone else’s debt may be a transaction.11

[34]	The liquidator says that the buy-back option did not meet the requirements for an enforceable agreement under s 24 of the Property Law Act 2007. The buy-back arrangements are not recorded in the deed of nomination but were dealt with separately in emails between lawyers. On 24 April 2018 an email by Foster Crescent Ltd’s lawyer to Glenvar’s lawyer included:

Please also confirm that the nomination is in consideration of the grant to your client of the option to purchase the property at a price of $911,000 (inclusive of GST) if settlement is completed by 30 November 2018 (time being of the essence).

The response of Glenvar’s lawyer included:

I confirm that I am  instructed  that  the  buy-back  price,  if  exercised  by  30 November 2018 is $911,000 (inclusive of GST) with our client being

10	Kings Wharf Coldstore Ltd (in rec and liq) v Wilson [2005] 2 NZCCLR 1042 at [79].
11	Glenvar Property Holdings Ltd (in liq) v 153 Holdings Ltd [2016] NZHC 2272; Apollo Bathroom and Kitchen Ltd (in liq) v Ling [2019] NZHC 237.

credited with the deposit already paid of $71,000. I am checking to see whether $71,100 or $71,000 was paid. We understand that if our client does not exercise the buy-back, it forfeits the deposit paid.

[35]	Both emails showed the names of the lawyers at the end. They are electronic signatures under ss 209 and 226 of the Contract and Commercial Law Act 2017. They meet the purpose of a signature for an agreement for sale and purchase of land as showing an intention to be bound in law.12 The lawyers had their clients’ authority to bind them. An exchange of correspondence, including by email, with appropriate signatures by authorised agents may satisfy the formal requirements under s 24(1) of the Property Law Act 2007 for the contract to be written and signed by the party sought to be bound.13 Those requirements were met in this case. The buy-back option was enforceable.

[36]	That does not however alter the exchange of values under s 297 of the Companies Act. Ms Robertson submitted that the buy-back option was of value to Glenvar, but that is similar to assimilating an agreement to a transfer. The buy-back option was wholly executory and was never carried into effect. Until it exercised the option and the Whangaparāoa Road property was made over to it, Glenvar did not receive value under s 297. Creating an expectation of obtaining an interest in an asset is not a receipt of value until the interest has been transferred. The inability to ascribe a value to the expectation is a pointer that the alleged value is amorphous. While Foster Crescent Ltd could not dispose of the property (or not without requiring the purchaser to honour the option), that restriction does not transfer value. The point being made here is much like that in Re MC Bacon Ltd, where the grant of security over company assets was held not to involve an undervalue transaction under the English equivalent of s 297, as the company’s assets were not depleted.14

[37]	The value Glenvar received was the discharge of its indebtedness to the vendors by Foster Crescent Ltd paying the balance of the purchase price: $659,591.56. That was not only the $640,000 which the liquidator accepts but also further amounts to cover interest for late settlement, the vendors’ legal fees and a bank fee. The extra

12	Welsh v Gatchell [2009] 1 NZLR 241 (HC).
13	Geneva Healthcare Ltd v Essential Assets Ltd [2014] NZHC 3236, (2014) 15 NZCPR 826.
14	Re MC Bacon Ltd [1990] BCC 78 (HC).

$19,591.56 was required to persuade the vendors to complete the sale. After all they were entitled to cancel after Glenvar did not comply with the settlement notice. It cannot be seriously claimed that after the expiry of the settlement notice Glenvar could have completed the purchase for less, even if it had come into funds. The $659,591.56 was in exchange for Glenvar assigning its rights under the agreement for sale and purchase to buy the property worth $711,000. The liquidator did not renew his argument that the property was worth $730,000. The difference in value between what Glenvar received and what Foster Crescent Ltd received was $51,508.44. That difference is more than nominal.

[38]	Foster Crescent Ltd wants other payments brought into account to reduce the amount of the undervalue: its lawyers’ fees on the purchase, rates it has paid and the consultants’ fees. The first two were costs it incurred but they are not tangible benefits that Glenvar received under the transaction. The conveyancing fee was part of Foster Crescent Ltd’s cost of the transaction. The rates are an outgoing that was apportioned on the transfer of title. Foster Crescent Ltd paid its rates that fell due during its ownership of the property. It did not pay Glenvar’s. The consultants’ fees were not part of the transaction in issue in this case. They were incurred separately. They are better considered under the defence in s 296(3) of the Companies Act.

[39]	Foster Crescent Ltd also relied on this statement in Re Burgess Homes Ltd:15

Section 311C(2) of the Companies Act is one of a series of useful remedial provisions added by the legislature in 1980. It has a wide scope, which the Court should not abridge, but in our opinion it is designed within that wide scope for reasonably clear cases of inadequate consideration. The Court should be slow to condemn under it a bona fide commercial or family bargain negotiated at arm’s length and with no intention of defeating creditors.

[40]	That was a decision under the Companies Act 1955. The counterpart to s 311C of that act is s 298 of the 1993 act, which allows liquidators to recover when a company has acquired a business, property or services for excessive consideration from directors and other related persons or has disposed of a business or property to those persons or provided services to them at an inadequate consideration. There is a three year claw-back period. Proof of insolvency and of knowledge of insolvency are not

15	Re Burgess Homes Ltd [1989] 1 NZLR 692 (CA) at 696.

required. Burgess Homes Ltd turns on its own facts. The governing director of a holding company with sole control of the company and its subsidiary made a deed surrendering control of the holding company in favour of his son, the other shareholder, but keeping control of the subsidiary for life. The Court of Appeal held that there was overall no imbalance of consideration when all the circumstances were considered. The passage relied on is a general concluding comment.

[41]	In this case Glenvar was insolvent. It had no funds to repay Mr Ramani or to complete the purchase of Whangaparāoa Road. Mr Chevin was obviously keen for Glenvar to obtain the property, even if that meant allowing Foster Crescent to take title by paying the balance due, not making any arrangements to repay Mr Ramani at the same time and making a buy-back arrangement which had only very limited prospects. The transaction was clearly improvident. It also allowed Foster Crescent to buy the property at an undervalue. The Court of Appeal did not have those circumstances in mind.

The defence under s 296(3) of the Companies Act

The subsections says:

(3)	A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

(a)	A acted in good faith; and

(b)	a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

(c)	A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

[42]	The parties accepted that the provision applies to claims under s 297.16 “Recovery of property” also includes recovery of money.17 The onus is on Foster Crescent Ltd to make out the defence. Most of the cases on the subsection have dealt

16	Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141 at [25].
17	MacMillan Builders Ltd (in liq) v Morningside Industries Ltd [1986] 2 NZLR 12 (CA).

with claims for voidable transactions under s 292 of the Companies Act. But just as liability under s 297 is not the same as liability for a voidable transaction under s 292, the defence must also be moulded to the recovery claim. For example, in Allied Concrete Ltd v Meltzer, in the context of a voidable transaction case the majority in the Supreme Court held that “gave value” in clause (c) meant “a real and substantial value and not one which is merely nominal or trivial or colourable” but noted that may not be the case for transactions at an undervalue.18

Did Foster Crescent Ltd act in good faith?

[43]	In Madsen-Ries v Rapid Construction Ltd the Court of Appeal said in a voidable transaction case:19

In summary, the recipient of a disputed payment must show an honest belief that the transaction would not involve any element of undue preference either to itself or any guarantor.20 A creditor is likely to fail this test where it has actual or implied knowledge of the company’s financial difficulties – for example where the company’s cheques are dishonoured, there is a failure to pay cheques on time, or other circumstances indicate serious cash flow problems.21 An awareness of financial difficulty, however, is not necessarily enough to establish a lack of good faith.

[44]	Foster Crescent Ltd says that in addition to the payments of legal costs, rates and the consultants’ fees, the buy-back option should also be taken into account for the defence under s 296(3). The elements have to be satisfied under s 296(3). The onus is on Foster Crescent Ltd to establish all three. The first requirement is that it acted in good faith.

[45]	In the context of liability under s 297, the honest belief is that the transaction did not involve consciously taking advantage of the company to obtain an asset at an undervalue while it was insolvent. The test is subjective, but as the Court of Appeal points out, inferences may be drawn from matters known to the liable party. Whether

18 Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141 at [76].
19 Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489, [2015] NZAR 1385 at [11].
20 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [54] approving Re Orbit Electronics Auckland Ltd (in liq), WH Jones & Co (London) Ltd v Rea (1989) 4 NZCLC 5, 170 (CA) and Re No One Men Ltd (in liq), Meltzer v Axiom International Ltd (2001) 9 NZCLC 262, 671 (CA).
21 Levin v Market Square Trust [2007] NZCA 135, [2007] 3 NZLR 591 at [54]. See also Rees v Bank of New South Wales (1964) 111 CLR 210.

the belief is also objectively justifiable comes at the next stage. That is where hindsight judgments about what someone ought to have understood come in.

[46]	Mr Cooper did not initiate the deal. Mr Chevin contacted him out of the blue. As Mr Cooper was in India, he relied on his lawyers to handle much of the matter. He had dealt with Mr Chevin in the past, but not recently. He had had at least one successful buy-back with Mr Chevin before. Mr Cooper knew that Mr Chevin had been bankrupt before and that he had pleaded guilty to charges laid by the Serious Fraud Office, but he accepted Mr Chevin’s assurances suggesting that the matter was not so serious. While he was aware that the settlement notice for the Whangaparāoa Road property was about to expire, he believed Mr Chevin that this was only a temporary cash-flow difficulty as money would come through from the sales of properties in the Te Kauwhata development. After the purchase Mr Chevin reassured him on this by  sending  a  schedule  of  proposed  settlements  for  Te  Kauwhata.  Mr Cooper was not a developer and he did not buy the property to develop it. He was only going to hold it until Glenvar bought it back. Mr Chevin explained why the buy- back price made sense. 17 affordable homes could be built on the land. Even at
$911,000 the land price component  still  made  the  development  very  attractive. Mr Cooper was confident that Mr Chevin would buy back the property. While there would be a profit for Foster Crescent if the buy-back went ahead, it did not occur to Mr Cooper that he would be buying the property at an undervalue if there was no buy- back. Mr Cooper did not recognise the red flags. He was gullible. In his words, he was “suckered”. On the balance of probabilities, he acted in good faith.

Did Foster Crescent Ltd not have reasonable grounds for suspecting insolvency?

[47]	Clause (b) has a twofold test. Foster Crescent Ltd must prove both that a reasonable person in its position would not have suspected that Glenvar was or would become insolvent and that it did not have reasonable grounds for suspecting that Glenvar was or would become insolvent. The provision is the same as s 588FG(2)(b) of the Corporations Act 2001 (Cth).22 The Australian courts have pondered whether there is any real difference between the suspicion of a reasonable person in the position

22	Previously, s 588FG(2)(b) of the Corporations Law (Cth).

of the defendant and the defendant’s reasonable grounds for suspecting.23 Some have suggested that the difference in only in perspective,24 whereas others have insisted on maintaining a distinction between the reasonable person in the circumstances of the defendant and the defendant acting reasonably in its view of the matters in issue.25 In my view if there is a real distinction between the two tests there must be few cases where they would produce different results. New Zealand courts do not seem to have made a point of maintaining the distinction.26

[48]	On suspicion, Kitto J’s dictum in Queensland Bacon v Rees is commonly cited:27
A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to “a slight opinion, but without sufficient evidence” as Chamber’s Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which “reason to suspect” expresses…is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes — a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.

At the same time it is also important to recognise that suspicion is not the same as belief or knowledge. If you suspect something, you think that it may be the case, but you are not certain. If you believe it, you think that it is the case and you are not in doubt, even if you are wrong. If you know it, your belief is true and justified, that is, well-founded. Under cl (b) a defendant must prove that there was no reasonable basis for suspicion. That is more difficult to show than to prove absence of actual knowledge or absence of reasonable basis for belief.

[49]	I assess reasonableness of suspicion by the information known to Foster Crescent Ltd, not by other information which it could have found out if it had made

23	See the discussion in Paul Heath and Mike Whale Heath and Whale Insolvency Law in New Zealand (3rd ed, LexisNexis, Wellington, 2018) at 24.133.
24	Smith v Federal Commissioner of Taxation (1997) 75 FCR 339.
25	Sims v Celcast Pty Ltd (1998) 16 ACLC 1140.
26	See for example, Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489, [2015] NZAR 1385 at [19].
27	Queensland Bacon v Rees (1966) 115 CLR 266 (HCA) at 303.

more inquiries.28 Foster Crescent Ltd is not to be considered as having the skills of a financial analyst or the knowledge of others who have come to grief at the hands of Mr Chevin. But it is held to the standards of an ordinary prudent business person.

[50]	Mr Cooper knew that Glenvar needed funds to complete the purchase of the Whangaparāoa Road property but did not hold them. It had no funds or assets. Ordinarily a developer buying a property for development would have finance organised for the purchase and the development. Mr Chevin sent Mr Cooper a copy of the agreement for sale and purchase. It had a due diligence clause. Developers typically use the clause to assess the viability of developing the property and to arrange finance. As an experienced real estate agent, Mr Cooper would understand the purpose of the due diligence clause. The agreement had become unconditional without finance for the purchase having been arranged. The agreement was made in November 2017 with settlement to take place in early 2018. Instead the vendors had issued a settlement notice because of Glenvar’s failure to complete. Glenvar had had time to arrange finance but had been unsuccessful. Mr Chevin contacted Mr Cooper very late – when the settlement notice was about to expire. Mr Cooper had dealt with Mr Chevin in the past but Mr Cooper is primarily a real estate agent, not a financier or a developer. He was not an obvious person to finance the purchase. Even more so as he was in India at the time. Buy-back arrangements are last resort measures for developers to arrange finance. They are high risk transactions with high margins. Mr Chevin had run out of other options. Mr Chevin was prepared to offer the Whangaparāoa Road property at an undervalue – Mr Cooper would not have to account for the deposit that had already been paid. That suggests some desperation on Mr Chevin’s part. Mr Chevin had baggage. He had been bankrupted three times. Multiple bankruptcies are unusual and are consistent with a chronic inability to stay solvent. While he was in effective control of Glenvar, he was not its director. He had been prosecuted by the Serious Fraud Office and had been convicted on his guilty plea. There is a high risk of a property development failing when it is under-capitalised, even more so when the developer has a history of insolvency.

28	Cussen v Federal Commissioner of Taxation (2003) 47 ACSR 107 at 552.

[51]	Against those matters pointing to insolvency, Foster Crescent Ltd relies on Mr Chevin’s assurances that funds would become available from the anticipated completion of sales at Te Kauwhata. Its case was that Glenvar had only a short term cash flow problem and there was no reason to think that it was or would become insolvent. It cited Madsen-Ries v Rapid Construction Ltd and Madsen-Ries v Donovan Drainage and Earthmoving Ltd as authorities recognising that short term liquidity problems are not to be equated to insolvency.29 The second decision was about a property development company that went into liquidation, where it was recognised that cash flow is lumpy in property development.

[52]	I disregard the schedule of anticipated completions Mr Chevin sent Mr Cooper as that was after the purchase of Whangaparāoa Road had been completed.30

[53]	The reasonable businessman entering into an undervalue transaction with a company is taken to make a risk assessment of the company being or becoming insolvent when according to the information available it cannot meet the cost of a major transaction it has entered into. While assurances from those in control of the company that the difficulty is only temporary might reduce the risk, they are only part of the information available. When the assurances come from someone who has been bankrupted more than once and has a recent business-related criminal conviction, the reasonable businessman will put less weight on them. They are less likely to be reliable. Notwithstanding Mr Chevin’s assurances, the reasonable businessman in  Mr Cooper’s position would still consider that the inability to pay was likely more than short term and there was a reasonable chance that the inability to pay was chronic. He would not necessarily be certain in his mind about insolvency but it would be more than idle wondering. It is not reasonably arguable that he would not suspect insolvency.

29	Madsen-Ries v Rapid Construction Ltd [2013] NZCA 489, [2015] NZAR 1385; Madsen-Ries v Donovan Drainage and Earthmoving Ltd [2016] NZCA 301.
30	I have also disregarded Mr Ramani’s loan to Glenvar. There is no evidence that Mr Cooper knew about the loan.

Did Foster Crescent Ltd give value for Whangaparāoa Road property or alter its position?

[54]	As I have held that Foster Crescent Ltd cannot reasonably argue that it did not reasonably suspect dishonesty, it is not strictly necessary to deal with cl (c). I set out my views in case this goes further.

[55]	The question of giving value does not arise. It has been established that there was an undervalue under s 297: $51,508.44. Foster Crescent Ltd cannot escape liability by saying that it gave value even if it was not full value.31 The buy-back option does not come into calculating the difference in value.

[56]	As to altering its position, the normal expenses Foster Crescent Ltd incurred on the purchase of the property and its ongoing ownership, the lawyers’ fees and property rates, are not an alteration of position. Those costs go with buying and owning the property. The position is analogous with the recipient of a payment voidable under s 292 who uses the funds for ordinary day-to-day expenses.32

[57]	On the other hand, the consultants’ fees might be an alteration of position, as they were paid after buying the Whangaparāoa Road property but were not part of the normal outgoings. But Foster Crescent Ltd must show that it reasonably believed that its purchase of the property was valid and would not be set aside. Section 311A(7)(a) of the Companies Act 1955 included the words, “has altered his position in the reasonably held belief that the transfer or payment of the property to him was valid and would not be set aside”. In MacMillan Builders Ltd (in liq) v Morningside Industries Ltd, a voidable transaction case, the Court of Appeal said:33
It will seldom be the case that a person who receives a cheque in the ordinary course of business has any occasion to address his mind consciously to the validity of the payment to him. He will assume it in the absence of some reason to the contrary. In such cases the fact that a payment is received in good faith must of itself be sufficient, when accompanied by an alteration of position as a consequence of the receipt, to satisfy the provisions of ss (7)(a). Where the payee is put on notice in circumstances other than receipt in the

31	The point reserved by the majority in  Allied Concrete Ltd v Meltzer  [2015] NZSC 7, [2016]     1 NZLR 141 at [76] applies.
32	Baker Timber Supplies v Apollo Building Assocs (Tauranga) Soc Ltd (in liq) (1990) 5 NZCLC 66,791 (HC).
33	MacMillan Builders Ltd (in liq) v Morningside Industries Ltd [1986] 2 NZLR 12 (CA) at 10.

ordinary course of business there may be initial doubt or grounds for considering the matter. Whether a finding of a reasonably held belief can be made in such cases will turn on what is disclosed in evidence.

[58]	This case does not involve a voidable transaction, but an undervalue transfer. Unlike the discharge of an existing liability, an undervalue transfer is more likely to trigger doubts. For Mr Cooper it was not in the ordinary course of business. While  he personally did not realise that the transaction could be set aside, he must show that his belief was reasonable. I have already held that Foster Crescent Ltd has not shown that a reasonable person in its position would not have suspected insolvency. It is hard to see how it would be reasonable to believe that the transaction could stand when there were grounds to suspect insolvency and Glenvar was transferring its rights to buy the property at an undervalue.

Outcome

[59]	There would be a miscarriage of justice if the judgment of Powell J were not varied. While Mr Cooper did not keep his eye on the ball, his inattention is understandable and excusable given the difficult circumstances his business faced during the pandemic, both during the alert level 3 and 4 lockdowns and afterwards. Foster Crescent Ltd should be allowed to show that the amount of the judgment is too high, given its evidence that it contributed more to the purchase of the Whangaparāoa property than was apparent on the evidence before Powell J. The liquidator will not be irreparably prejudiced if the judgment is varied. While the amount of the judgment is varied to take account of the extra contributions, the payment of conveyancing fees, rates and consultants’ fees are not part of the value Glenvar received. It is not reasonably arguable for Foster Crescent Ltd that it has a defence under s 296(3) of the Companies Act, mainly because it does not have an arguable case for not suspecting insolvency.

[60]	Accordingly, the judgment of Powell J of 18 September 2020 is varied:

(a)	The amount of the judgment is reduced from $91,000 to $51,508.44;

(b)	Interest will be calculated on the new judgment sum, but is to run from the same date;

(c)	Glenvar Vault Capital Ltd (in liq) is removed as a judgment creditor;

(d)	There is no change to the original costs order.

[61]	As to costs, the liquidator relied on the principle that costs on applications to set aside a judgment by default go against the party applying as they are seeking an indulgence. Against that, Foster Crescent relied on cases where costs were not ordered because the plaintiff had been at fault in obtaining judgment for the amount entered.34 I do not consider that the liquidator can be criticised for obtaining judgment for
$91,000.  He had made proper efforts to obtain information by giving notices under  s 261 of the Companies Act to both Foster Crescent Ltd and the lawyers who acted for Glenvar on the purchase. Neither replied. On the information available it was reasonable to infer that the difference in value was $91,000. Accordingly, Foster Crescent Ltd is to pay the liquidator costs under category 2 on the application to set aside the judgment. If counsel cannot agree, memoranda are to be filed.

[62]	Foster Crescent Ltd’s application under s 290 of the Companies Act 1993 to set aside the liquidator’s statutory demand in CIV-2020-404-1900 is to be called in the companies miscellaneous list on Friday 12 March 2021 at 11.45 am for further directions.

…………………………………….
Associate Judge R M Bell

Solicitors:
Meredith Connell (K C Fancis/B J Hamilton), Auckland, for Glenvar Vault Capital Ltd and K J Davies Davenports Law (Jeremy Parsons), North Harbour, Auckland, for Foster Crescent Ltd

Copy for:
Suzanne Robertson QC, Bankside Chambers, Auckland, for Foster Crescent Ltd

34	Callis v Ward McCulloch (1993) 7 PRNZ 175 at 176; Active Leisure (Sports) Pty Ltd v Crocodile Sports & Leisureware Ltd [1997] 1 NZLR 350 at 358.