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Due process needed in insolvent transaction recovery

03 July 2013

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Liquidators must seek a court order to recover an insolvent transaction – even where the creditor has not objected in time to a notice under section 294 of the Companies Act.

The importance of following the prescribed procedure was recently reinforced by the High Court.1  

We look at the decision and the conclusions to be drawn from it.

The case

Liquidators appointed to Quantum Grow Limited (Quantum) wrote to Lotus Gardens Limited (Lotus) in May, July and September 2012 about payments worth $25,576.88 made to Lotus between March and July 2010.  Lotus did not reply.

In October 2012, the liquidators served a notice under section 294 of the Companies Act 1993 (the Act) on Lotus.  Lotus did not object to the notice.

In November 2012, the liquidators wrote to Lotus warning that if no payment was received, a proceeding would be started in the High Court for an order to confirm the setting aside of the transactions. 

The liquidators did not apply under section 295 of the Act, instead serving a statutory demand on Lotus.  Again, Lotus did not respond.  The liquidators therefore issued a liquidation proceeding against Lotus.

Lotus raised two defences to the liquidation proceeding:

  • it was not indebted to the liquidators because they had not obtained an order for payment under section 295 of the Act, and
  • it was not the beneficial recipient of the payments, but a conduit for funds paid by Quantum in reduction of its debt to BNZ.

The Court refused to appoint liquidators to Lotus because Quantum’s liquidators had followed the wrong procedure to recover the alleged insolvent transactions and also because there was a genuine and substantial dispute as to Lotus’ liability, since it had simply passed payments on to BNZ. 

Key take-outs

  • A common law action for money had and received can no longer be brought in relation to insolvent transaction claims.  The only way for a liquidator to recover insolvent transactions is through the process described in sections 294 to 296 of the Act.
  • A transaction will be set aside if a creditor does not, within 20 working days, serve a notice of objection to a liquidator’s notice to set aside, but the setting aside does not automatically create an obligation for the creditor to repay funds or return property.
  • Once a transaction is set aside, a liquidator should apply for orders under section 295 for repayment or similar.  Such orders are discretionary, which is appropriate given the need for flexibility in insolvent transaction claims – for example, in running account cases, or where there is a question about value of property transferred.
  • In this case, because the liquidators did not get an order for repayment under section 295, they were not creditors of Lotus and had no standing to apply to put Lotus into liquidation. 
  • From a procedural standpoint, even where there has been an automatic setting aside under section 294, a recipient of the payments can still challenge whether there was a transaction under section 292 and, if so, what that transaction was, and to raise a defence under section 296(3), at the time that a liquidator applies for remedial orders under section 295.

The case is a useful reminder that an order under section 295 of the Act is required before a creditor is indebted to liquidators.  There can be no shortcuts.

For further information, please contact the lawyers featured.

Footnote:

1  Grant v Lotus Gardens Limited [2013] NZHC 1135. 

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