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National Bank of Fiji v Official Receiver [1991] FJHC 63; Hbc0116d.91s (6 December 1991)

IN THE HIGH COURT OF FIJI
At Suva
Civil Jurisdiction

CIVIL ACTION NO. 116 OF 1991

Between:

THE OFFICIAL RECEIVER
[Prov. Liquidator of Pinnacle
Frozen Foods Ltd. (in liquidation)]
Applicant

- and -

NATIONAL BANK OF FIJI
Respondent

Mr. H. Lateef for the Official Receiver
Mr. R. Patel for the Respondent

RULING

In this application the Official Receiver as provisional liquidator of Pinnacle Frozen Foods Ltd. (hereafter referred to as 'the company') by a summons dated the 12th of February 1991 seeks to set aside as 'fraudulent preferences' several payments totalling $13,565.01 made by the company to the respondent bank between the 7th and 23rd of September 1983.

At the hearing of the application learned counsel for the bank somewhat belatedly raised a preliminary issue that the action was statute-barred.

In particular, counsel drew the court's attention to the provisions of Section 4 of the Limitation Act Cap. 35 which provides (inter alia):

"4(1) The following actions shall not be brought after the expiration of six years from the date on which the cause of action accrued, that is to say -

(a) actions founded ... on tort;

(d) actions to recover any sum recoverable by virtue of any Act, other than a penalty or forfeiture ..."

Put simply counsel's argument was that the payments were made to the bank in September 1983 and the present action to recover them based as it is on a "tort" was not instituted until February 1991 (i.e. almost 8 years after the event which is 1 1/2 years out of time).

Learned counsel for the Official Receiver argued however that until the 16th of February 1987 the Official Receiver's 'cause-of-action' had not "accrued" in terms of Section 4(1). In addition he relied on the 'saving' provisions of Section 15 of the Limitation Act Cap. 35 which provides (inter alia):

"15. Where, in the case of any action for which a period of limitation is prescribed by this Act ... either -

(a) the action is based upon the fraud of the defendant ... or any person through whom he claims;

or

(b) the right of action is concealed by the fraud of any such person;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, ... or could with reasonable diligence have discovered it ... "

In counsel's submission the Official Receiver's cause-of-action did not 'accrue' until after the bank had categorically rejected his claim to the payments which event did not occur until the bank's letter of 16th February 1987 (i.e. 4 years to the date of the present summons).

In other words until the bank denied that the payments it had received were 'fraudulent preferences' the possibility always existed that it may have agreed with the Official Receiver's claim and voluntarily made-over the payments to him as provisional liquidator of the company.

If I may say so this latter submission has only a superficial attraction and in any event is incorrect.

Section 46 of the Bankruptcy Act Cap. 37 under which the present cause-of-action falls to be considered is a deeming provision which renders any successfully impugned payment "... fraudulent and void as against the trustee in bankruptcy".

In my view there is nothing that needs to be done by an alleged 'preferred creditor' before a payment which falls within the statutory prohibition can be challenged by the trustee in bankruptcy.

True the existence of the payment must be uncovered before it can be challenged, but once uncovered, the section itself lays down the circumstances under which it may be attacked.

Needless to say in my view even if the bank had admitted that it was 'preferred' by the company in respect of the payments being challenged that does not thereby absolve the court from having to consider and decide the issue of the relevant state of the debtor's mind at the time of making the payment. Such an admission, in the unlikely event that it was forthcoming, would be only one of the factors to be considered by the court in seeking to ascertain the debtor's intention at the relevant time. (See: Mehta and Anor v. Official Receiver 8 FLR 184.)

Furthermore even accepting without deciding that Section 15 of Limitation Act Cap. 35 applied in this case, this court's view would remain unchanged.

The Section in clear terms postpones the commencement of the period of limitation, for an action based on fraud or where the cause of action has been fraudulently concealed, "... until the plaintiff has discovered the fraud ... or could with reasonable diligence have discovered it". (my underlining)

In this regard Romilly M.R. a master of equity said as long ago as 1861 in Marquis of Clanricarde v. Henning 132 RR 227 at 231:

"... in these cases time begins to run from the period at which the fraud was discovered. That is the principle of all the cases. Until the fraud is discovered the time does not operate; but the fraud is considered to be discovered at the time when such reasonable notice of what has happened has been given to the person injured, as to make it his duty, if he intend to seek redress, to make enquiry, and to ascertain the circumstances of the case."

Clearly "discovery" precedes investigation and confirmation.

In this instance both the existence and preferential nature of the company's payments was first brought to the attention of the Official Receiver in a letter dated the 23rd of March 1984 from a secured creditor of the company. It was then in my view that the fraud (if any) was "discovered" for the purposes of Section 15.

Further if the submission of learned counsel for the Official Receiver was correct then the date on which the cause of action 'accrued' could be unilaterally and indefinitely postponed by the mere inactivity of the claimant such as to render nugatory any time limitation at all, and that could never have been the intention of the legislature.

Even if this interpretation or approach were wrong the Court would nevertheless have to consider whether or not in the exercise of its equitable jurisdiction, to refuse relief to the Official Receiver on the ground of his acquiescence or laches. (See: Section 26 of the Limitation Act.)

Sir Barnes Peacock delivering the judgment of the Privy Council in Lindsay Petroleum Company v. Hurd (1874) 5 LR PC 221 said of the 'doctrine of Laches' at p. 239 and 240:

"Where it would be practically unjust to give a remedy, either because the party has, by his conduct done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy afterwards were to be asserted, in either of these cases, lapse of time and delay are most material ... Two circumstances always important in such cases, are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy."

In this latter regard the precise payments would have been confirmed from bank statements of the company made available to the Official Receiver at about the end of April 1986 pursuant to his request dated the 14th of April 1986, and, although the "precise amounts" of the payments could be said to have been 'known' only then (i.e. within 6 years of the institution of proceedings) there can be no doubt in this Court's mind that the payments had been or could have been 'discovered' much earlier had the Official Receiver exercised "reasonable diligence" in the matter.

Instead the available correspondence indicates that after learning of the payments in 1984 the Official Receiver procrastinated for over 2 years before even requesting the bank for the relevant statements of the company and, after receiving them, a further 7 months elapsed before a 'demand' was made for the return of the payments. Then, after the bank's denial of liability in February 1987, the Official Receiver waited a further 4 years before instituting the present proceedings for the recovery of the payments!

No effort has been made to explain or account for these 7 years of 'delay' which are directly attributable to the Official Receiver, and the bank not unjustifiably complains that it is prejudiced in presenting the facts and producing other relevant documents in the account.

The Earl of Halsbury L.C. in Watt v. Assets Company [1905] UKLawRpAC 31; (1905) AC 317 at p.333 in refusing relief on an alleged fraudulent concealment in an action brought after 20 years said:

"... at this distance of time I shall make every intendment in favour of that having been honestly done which purported to be done. I think I should expect some evidence to be produced contradicting that state of things rather than insist on evidence in its support at this distance of time and with the loss of evidence that undoubtedly has occurred from the delay that has taken place ... which has been the fault of those who are pursuers here - that is to say they have lain by upon their supposed rights all this time, during which time witnesses have died and the means of explanation have disappeared also to an extent which, to my mind, renders it impossible, or at all events extremely inexpedient as a matter of law and administration, to allow these things to be ripped up at this distance of time, when both the opportunities of explanation have gone by and when witnesses have passed away."

Needless to say there is no evidence nor was it suggested that the bank was a party to any 'fraudulent' or improper conduct of the company or was in any way responsible for the delay in bringing these proceedings and, although nothing is known of the present whereabouts of the officers of the company, its account with the bank "... has been closed for more than 6 years".

For the foregoing reasons this Court upholds the banks preliminary objection and finds that this action is statute-barred and may not be brought or entertained by the Court.

If however the above conclusion should be wrong then in deference to the extensive arguments addressed to the Court on the merits of the application, I turn to consider the Official Receiver's substantive application for a declaration that the payments made by the company to the bank were 'fraudulent preferences'.

Section 46(1) of the Bankruptcy Act Cap. 37 provides so far as relevant for present purposes:

"Every ... payment made, ... by any person unable to pay his debts as they become due from his own money, in favour of a creditor, with a view to giving such creditor ..., a preference over the other creditors, shall, if the person ... paying the same is adjudged bankrupt on a bankruptcy petition presented within three months after the date of ... paying the same, be deemed fraudulent and void as against the trustee in the bankruptcy."

By virtue of Section 261 of the Companies Act Cap. 216 this provision applies equally to any payments made by a company that is subsequently wound-up within the statutory time period.

It is sufficiently clear from the wording of Section 46 that 4 conditions must be established before any payment can be said to be a 'fraudulent preference'. These are, in the present context:

Firstly: that on the dates of the payments (i.e. between the 7th and 23rd of September 1983) the company was unable to pay its debts as they became due from its own money;

Secondly: that the payments were made in favour of a creditor;

Thirdly: that the company was wound up within 3 months of the payments; and

Lastly: (and perhaps most difficult of all to prove) that the payments were made by the company with a view to giving the bank a preference over its other creditors.

In this case neither party has called any oral evidence nor was there a request to cross-examine the deponents of the 3 affidavits and annexures filed in Court of which 2 are from the Official Receiver and 1 from an officer of the bank. No evidence has been forthcoming from the company or its officers and the Court must decide this application on the barest of evidence.

Be that as it may there appears to be little dispute over the facts and evidence that satisfies this Court that the first 3 conditions have been met and these may be briefly set out in chronological order as follows:

(1) Between the 7th and 23rd of September 1983 the company made payments totalling $13,565.01 into its overdraft account with the bank;

(2) On the 3rd of October 1983 a petition for the winding-up of the company was presented before the Supreme Court; and

(3) On the 11th of November 1983 the company was ordered to be wound-up and the Official Receiver was appointed the provisional liquidator of the Company.

Several matters are immediately clear from those 3 undisputed facts namely, that within 3 months prior to its winding-up the company made several payments to a creditor and, although it is not entirely clear on what ground(s) the petition to wind-up the company was based, the 2nd affidavit of the Official Receiver contains an assertion that "... the company was insolvent and/or was unable to pay its debts ..." at the time of the payments.

In the circumstances the sole issue that remains to be determined by the Court is whether the Official Receiver has discharged the onus of proving upon a review of all the circumstances of the case that the dominant intent of the company when making the payments was to prefer the bank over its other creditors.

In other words in the absence of direct or circumstantial evidence of such an intent the question for the court to decide is whether upon the facts in this case a dominant intent in the mind of the company to prefer the bank was so much the most probable of the possible explanations of its action in making the payments into the bank that the Court could properly hold it to be the true explanation. (per Jenkins L.J. in In re Cutts (1956) 1 WLR 739.)

In this regard the parties have advanced 2 "possible explanations" for the payments. The Official Receiver deposed that "... the directors of the company knew that the company was unable to pay its debts and its creditors were pressing unsuccessfully for payment and in the circumstances the company intended to prefer the bank", whereas the bank says that "... the payments were done in the ordinary course of business and further to reduce the overdraft sum owing to the Bank".

It is common ground that the company maintained an account with the respondent bank. It is also undisputed that the company at the relevant time also had an account with the Bank of New Zealand (as it then was). That these payments were made to one bank account and not to another does not in my view of itself give rise to an inescapable or 'most probable' inference that the company intended to prefer one to the detriment of the other.

Nothing is known of the extent of the company's liability to the Bank of New Zealand or of the nature of the account other than that it was secured by a debenture and other than the fact of the winding-up nothing is known about the grounds of the petition or who the petitioning creditor was, if indeed there was one. Needless to say no statutory demand notice has been produced and the law provides no less than 5 grounds for the winding-up of a company by the Court exclusive of an inability to pay due debts.

Nothing is known about the level and frequency of any payments, bankings or trading that was being conducted at about that time by the company through either bank account or to any other creditor (other than the contested payments) or how far the liquidation of the company has progressed (if at all).

The present whereabouts of the directors of the company is unknown nor does there appear to have been any correspondence exchanged with them or the company. Certainly none was produced and the Official Receiver's assertion that "... creditors were pressing unsuccessfully for payment of their accounts ..." remains a bald unsubstantiated assertion of doubtful weight. Indeed the number of creditors to whom the company owed monies is not disclosed nor its total indebtedness and assets.

Then it is claimed the payments were made to pay a debt owed by the company directors and guarantor, but nothing has been produced to support this contested assertion and in any event it is not known if the payments resulted in the company's entire overdraft with the bank being extinguished.

In supporting the application learned counsel for the Official Receiver relied heavily on In re Kushler Limited (1943) 1 Ch.D 248 as bearing some striking similarity to the present case. I cannot agree. In that case the directors had guaranteed a bank overdraft and although they had been advised that the company was insolvent, they knowingly made several voluntary payments to their bank extinguishing the company's overdraft and thereby obtaining for themselves "... a direct and immediate benefit".

This is clear from the words of Lord Greene MR when he said at p.251:

"These cases of guarantees of overdraft and securities deposited to cover overdrafts are very common, and where directors have given guarantees the circumstances of a strong element of private advantage resulting from payment of the debt may justify the court in attaching to the other facts much greater weight than would have been attached to similar facts in a case where that element did not exist."

On the other hand learned counsel for the bank referred the Court to Re F.L.E. Holdings Ltd. (1967) 3 All E.R. 553 which was a case where an insolvent company within a month of its winding-up voluntarily executed a first charge over lands to secure its bank overdraft. It was there

"Held: The execution of the legal charge ... was not a fraudulent preference of the bank ... because on the evidence, (the debtor's) dominant intention at that time was to keep on good terms with the bank in the hope of future facilities, not to confer on the bank a benefit or advantage."

The authorities are clear that the question whether a transaction is a fraudulent preference, that is to say, whether the debtor had the dominant intention to prefer a creditor is one of fact for the Court, and must be judged not from one fact, however important, but from all the circumstances of the case.

It is also well settled that the onus of proof in these cases is upon the person seeking to avoid the transaction to establish what the debtor really intended and that the real intention was to prefer (per: Lord Tomlin in Peat v. Gresham Trust Ltd. 1934 AC 252 at 262).

Bearing in mind that the onus in this case is upon the Official Receiver to establish the true intent of the company in making the payments to the bank and mindful of the extreme paucity of the evidence in that regard both direct and circumstantial, this Court is driven to the inevitable conclusion that the applicant has failed to discharge that burden and accordingly this summons must and is hereby dismissed with costs to the respondent.

(D.V. Fatiaki)
JUDGE

At Suva,
6th December, 1991.

HBC0116D.91S