The new voidable preferences regime (which came into effect on 1 November 2007) provides a revised procedure for setting aside transactions and charges.
In the past, if a creditor objected to a notice by a liquidator setting aside a transaction or a charge, it was the creditor who had to apply to the Court. Now the onus is on the liquidator.
The new procedure is set out in section 294 of the Companies Act 1993, and requires a creditor's notice of objection to contain full particulars of the reasons for objecting, and to identify documents that evidence or substantiate the reasons for objecting.
This Brief Counsel refers to some recent cases which illustrate how the new regime is being interpreted.
Creditor’s notice of objection
The High Court has now given us some guidance on what is required in a creditor’s notice of objection. In Blanchett & Anor v The Roofing Specialists1, Justice Allan commented that section 294(4) seeks to ensure that liquidators are fully informed as to both the substance and details of a creditor’s objection before determining whether or not to pursue a challenge to a transaction or charge under sections 292 or 293 of the Act. The Judge said that the requirements of section 294(4) should enable liquidators to sift out frivolous objections that have no proper factual or legal foundation.
In Blanchett, the creditor's notice did not state that the creditor intended to argue that payments had been received in the ordinary course of business or, in the alternative, that the section 296(3) defence applied. Instead, the notice advanced two arguments that were not ultimately pursued in Court.
The Court acknowledged that non-compliance with express statutory procedural requirements can give rise to difficult problems, but the fundamental question will be what Parliament intended the result of the non-compliance to be. Justice Allan concluded that there may be cases where it will be appropriate for a creditor to advance an argument which has not been set out in the notice of objection. The Court acknowledged that the creditor's intention to argue the ordinary course of business point had been clearly set out in its opposition to the liquidator's court application. In those circumstances, the Court held that there had been sufficient compliance by the creditor with section 294.
While creditors need to be careful to include in their notice of objection all reasons for their objection, the Court maintains a discretion to determine whether or not a notice complies with section 294 of the Act.
Application of section 296(3) defence
In Reynolds v Glengary Hancocks Ltd2, Associate Judge Robinson held that the amended section 296(3) of the Act applies to transactions entered into prior to 1 November 2007, thereby overturning his own decision in TRC Consultants v Higgs & Dunbar3, where the opposite conclusion had been reached.
Section 296(3) provides that the Court must not order the recovery of property against parties who received the property in good faith, altered their position and did so in the reasonably held belief that the transfer was validly made and would not be set aside. Associate Judge Robinson noted that the amended section 296(3) is “far more restrictive than its predecessor” and that it will now be tougher for creditors to make out this defence.
100 hours community work for failing to attend on liquidator
Liquidators will no doubt take heart from the recent decision of Prasad v Ministry of Economic Development4. The High Court upheld a District Court sentence of 100 hours community work following the conviction of a company director under section 261 of the Act for failing to attend upon and supply information to a liquidator when required by a notice in writing to do so. A person convicted of an offence under section 261 of the Act is liable to a fine of up to $50,000 or imprisonment for a term not exceeding two years.
The director appealed the sentence and argued that 50 hours would be more appropriate in light of his employment obligations. The High Court did not hesitate in upholding the sentence of 100 hours community work as being appropriate.