Mr Pala and Mr Luthera were directors of Shanton, a large retailer of women's clothing in New Zealand.  BTC Group Limited (BTC) was in the business of supplying clothing to Shanton in accordance with Shanton's stock orders.  BTC had obtained guarantees from Shanton's directors, pursuant to which each director guaranteed the obligations of Shanton to BTC.  Earlier this year, Shanton was unable to pay its debts as they fell due and was placed into voluntary administration owing creditors over $7m.

Directors beware – unless you are careful to maintain a subsidiary’s independence, the parent company may be liable for the debts of its subsidiary.

That is the effect of a recent High Court decision invoking a rarely used provision in the Companies Act.

We analyse the judgment and draw some practical advice from it.

Section 271

Section 271(1)(a) of the Companies Act 1993 (the Act) has been used only rarely and is unique to New Zealand law, although Ireland has a similar provision.

Terms of Trade

Ensure your Terms are robust

If asked to provide information to a liquidator, the safest course may be to provide it under oath under section 261 of the Companies Act 1993 because the High Court has found that immunity will apply to such statements.

We look at the decision.

The case

In Strategic Finance Limited (in receivership & in liquidation) and Strategic Nominees Limited (in receivership) v Bridgman and Sanson CA 553/2011 [2013] NZCA 357 the Court of Appeal has, for the moment, settled what constitutes an "account receivable", and this provides certainty regarding the scope of the assets available to meet preferential creditor claims ahead of secured creditors with general security agreements.

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New Zealand in a Nutshell

Voidable Transactions

Can be a significant risk for businesses

When an insolvent company goes into liquidation it’s accepted that not all creditors will get paid 100 cents in the dollar.However it often comes as a shock to creditors when the liquidator requires them to refund payments that had been made up to two years before the company was liquidated.

The High Court recently granted an application for an exemption from the requirement to send the liquidator's six monthly report to every preference shareholder of the company in liquidation. In FCS Loans Ltd (in liq) v Fisk & Anor, the High Court granted the liquidators' application for an exemption on the basis that the cost of supplying six monthly reports to the 3,141 preference shareholders (estimated to be $4,719.16) is not proportionate to any likely benefit to those shareholders from having the reports mailed to them.

Syntax Holdings (Auckland) Ltd (in liquidation) v Bishop involved a claim by the liquidators of Syntax Holdings (Auckland) Ltd that Mr and Mrs Bishop (as directors) had breached certain duties to the company (and its creditors) under the Companies Act 1993.

Section 296(3) of the Companies Act 1993 (the Act) provides a defence to creditors who have received a payment found to be a voidable transaction under section 292 of the Act. One of the elements that creditors need to establish under this defence is that they either provided value to the company or changed their position in reliance on the validity of the payment.