When commencing a receivership we often expect that it will involve a relatively straightforward sale, realisation and distribution process. However, it is increasingly common in these economic times for the receivers of an insolvent company to be considering and dealing with not only its creditors' interests but the positions and creditors of other, potentially competing, insolvent entities.
The factual scenario
Matakana was a winemaker. It had a related company, Goldridge, whose role was to market the wine. The Vintage companies ("Vintage") were set up to raise money from outside lenders and to hold that money to be paid when invoiced for the cost of the grape juice and for bottling the wine, and then supply the bottled wine to Goldridge. The use of the funds from Vintage's secured creditor was supposed to be monitored by an independent accountant. That accountant was supposed to be a cheque signatory and control the flow of funds according to the terms of the loan agreement.
There were agreements in place for each stage, except notably there was no agreement between Vintage and Matakana for the actual winemaking. Personal Property Securities Register ("PPSR") registrations were made pursuant to the written loan agreements.
In fact, what was happening was that Vintage drew down all of the loan funds. Matakana was then almost immediately paid all of the funds by Vintage contrary to the lending terms, purchasing the grapes, commencing winemaking and later billing Vintage for the cost of the juice. Later, when it finished and bottled the wine, Matakana would send another invoice to Vintage. Vintage would then sell the finished wine to Goldridge.
In late May 2009 Matakana had invoiced Vintage for 400,933 litres of juice. Matakana had maintained detailed wine records as required by law. This was ultimately very helpful in resolving the ownership issues.
It was intended that Goldridge would pay for the wine sold to it by Vintage in stages so that Vintage could meet its obligations to its lenders.
Four Vintage companies were placed into receivership in December 2010. Boris van Delden (Partner at McDonald Vague) was appointed receiver. Vintage had borrowed money on specific terms from a third party secured creditor. Vintage had lent the borrowed funds to Matakana, contrary to the loan terms. Matakana had different secured creditors to Vintage.
At the time Vintage was placed into receivership, Matakana and Goldridge had been in liquidation for about three weeks. There were many vats of grape juice or wine on the site that all the entities operated from. Matakana's liquidators said the wine was Matakana's or was held by them as bailee, and Vintage said it was theirs.
As you would expect, correspondence ensued between the Vintage receivers and Matakana's liquidators, including a warning from the receivers to the liquidators not to deal with the assets without the receivers' prior consent. The issues were not resolved, and Matakana's liquidators went ahead and sold most of the wine in the vats.
The High Court legal action
The dispute was taken to the High Court by Vintage's secured creditor and the receivers ("the plaintiffs"). Vintage's secured creditor said that under the terms of its security agreements it was entitled to possession of the juice on default, and the liquidators had committed conversion by not giving possession of the wine and by selling it.
Alternatively, all of the plaintiffs said that the wine was Vintage's and that the liquidators had converted it.
The liquidators denied these claims and said that Vintage was at best an unsecured creditor in the liquidation, and that the lenders' security was subordinate to the General Security Agreement ("GSA") held by Matakana's bank. We note that Matakana's bank held no security interest over Vintage. Matakana argued that the sale to Vintage was not in the ordinary course of business, and that as the companies were related, all were on notice about each others' security interests.
The Court's findings
In a decision issued in late October 2011, the High Court agreed with Vintage's secured creditor that most of the wine was the secured creditor's, and that the liquidators had converted it.
This was because the security interests had attached to most of the wine in May 2009 when the property in the original and/or later commingled wine passed to Vintage. The sales were in the ordinary course of business. This was easily proven, as the arrangements had been in place since 2001.
While the invoices from Matakana had not been specifically paid by Vintage, the funds advanced by Vintage to Matakana were sufficient to show that Matakana had received value for the invoices. Therefore, Vintage had paid for the invoiced juice in the vats, and the invoices were not merely an installment for the finished product that was to be invoiced and supplied to Goldridge. In concluding this, the Court relied on the face value of what the invoices actually said and in the absence of any other agreements Matakana was not able to convince the Court to infer any other interpretation of the invoices.
But the juice in the vats was not all Vintage's. Some of it had been commingled with Matakana's own juice and the juice of others at different times. The Court had to consider:-
- What juice had not been blended at all;
- What juice had simply been blended with other Vintage-invoiced stock; and
- What juice had been blended with Matakana stock.
in each case as at 19/20 May 2009 when Matakana had invoiced Vintage.
On each question the Court referred to the provisions of the Sale of Goods Act 1908.
The Court went back to May 2009 (being the invoice dates) because that was the clear starting point to ascertain if property in the juice had been acquired by Vintage. The Court decided that Vintage was not entitled to any juice that had been mixed with Matakana's juice prior to the 19/20 May 2009 invoicing, as the relevant goods being transferred could not be ascertained despite the May 2009 invoicing. Where Vintage owned the juice, as a result of the May 2009 invoicing, and it was later mixed with other juice ("commingled"), Vintage owned the juice as tenants in common with any other entities whose juice was commingled with Vintage's.
The Court held that the liquidators were responsible for conversion. This is only the second instance we have come across of insolvency practitioners being found guilty of conversion. The Court also awarded substantial costs to the plaintiffs.
Recovery of the losses arising from the conversion is still under way.
Footnote
An action is under way against the independent accountant who was supposed to oversee the control of the lenders' funds.
DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.