Liquidators are not limited to the procedure set out in section 295 of the Companies Act to recover a debt once an insolvent transaction has been set aside.
The Court of Appeal has reversed the High Court’s earlier decision in the Lotus Gardens casegiving liquidators more options. However, in most cases liquidators should continue to use the section 295 procedure to recover insolvent transactions that have been set aside.
We set out the facts of the case and the High Court’s earlier decision in a previous Brief Counsel.
In 2012, the liquidators of Quantum Grow took steps to set aside, as insolvent transactions, payments made to Lotus Gardens, who did not respond. As a result, the payments were automatically set aside. Instead of seeking an order under section 295 that they could recover the payments as a debt, the liquidators issued a statutory demand to Lotus Gardens, seeking recovery of the debt.
The High Court said the liquidators could not use a statutory demand because, until the Court made an order under section 295, the liquidators were not creditors of Lotus Gardens and did not have standing to seek a liquidation order. The Court of Appeal disagreed and sent the case back to the High Court, which appointed the Official Assignee as liquidator on 16 April 2014.
The Court of Appeal said that the section 295 procedure is not exclusive: “The setting aside of a transaction gives a liquidator the basis for recovery. It will usually be under section 295, but a liquidator may seek to recover a debt by different means.” The Court emphasised that it did not wish to be seen encouraging the use of a statutory demand as a remedy for liquidators claiming recovery of voided transactions. The Court stressed that the section 295 procedure is designed to deal with remedies following setting aside, and it is good practice to utilise that section.
The reason why it is good practice is that the automatic setting aside does not finally determine all aspects of an insolvent transaction. A creditor can still raise certain defences, including under section 296(3).
An unhelpful shortcut?
Using the statutory demand procedure may not help liquidators. As the Court pointed out, liquidators who do use the statutory demand procedure could well find themselves faced with a Court refusing to make a liquidation order and awarding costs against them. They would then have to apply under section 295, having wasted creditors’ funds on an unnecessary step.
The threshold for setting aside statutory demands is relatively low. A creditor just needs to show a genuine dispute exists about whether the debt is due. There is a real danger that if liquidators use the statutory demand process, creditors will be able to raise tenable arguments, including the “good faith” defence under section 296(3).
Chapman Tripp comment
The Court of Appeal’s interpretation does make sense from a strict legal standpoint. But, practically, it may have been simpler for all concerned if the section 295 process was regarded as a code, and the only way for liquidators to enforce insolvent transaction claims. Just because a transaction has been set aside does not mean that the matter is final. A creditor still has some defences available to them.
We expect most liquidators to continue their current practice.