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

Confirmation by the Court of Appeal that “accounts receivable” are more than just book debts and include other legally enforceable monetary obligations owed to a company will provide welcome certainty to receivers and liquidators.

The issue is significant because it determines the assets available to pay preferential claims.

The Court of Appeal has reversed the High Court’s decision in Healy Holmberg Trading Partnership v Grant on a PPSA issue it describes as being of “practical significance”. 

The lessons to be drawn from the Crafar receivership in relation to the Personal Properties Securities Act (PPSA) have now been distilled by the Court of Appeal, which has largely confirmed the High Court’s reasoning.

We discuss the implications of the litigation.

Big changes are proposed to the use of trusts as trading enterprises by the Law Commission as part of its ongoing review into trust law.

Recommendations include:

It’s now official.  Priority between competing security interests under the Personal Property Securities Act (PPSA) is assessed at the time those interests come into conflict.  This will usually, but not always, be when receivers are appointed. 

The PPSA is silent on the issue but the general view, now confirmed by the High Court, has been that the rule established in the Canadian Sperry¹ case is the correct approach.

The High Court has confirmed its broad power to bypass the strict legislative requirements that otherwise govern voluntary administrations.  Section 239ADO(1) of the Companies Act allows the Court to make any order that it thinks appropriate about how the voluntary administration provisions of the Companies Act are to operate in relation to a particular company.

The Law Commission is looking into whether the regulation of trading trusts gives enough protection to creditors and beneficiaries in circumstances of insolvency. 

Submissions are due on the issues paper by 2 March 2012.

What is a trading trust?

Making a payment to a creditor (in this case, the IRD) will in and of itself give that creditor priority over competing creditors.  A recent Court of Appeal judgment to that effect, under section 95 of the Personal Property Securities Act (PPSA), carries serious implications for receivers.¹

Receivers cannot escape personal liability on contracts they cause the company to enter into simply because all of the company’s assets have been paid out.

So the Court of Appeal found last week in a decision which explored the application of limitation of liability clauses where, as is common practice, the liability is limited to the “available assets” of the company.