Two court judgments which could significantly affect New Zealand’s insolvent transactions regime are due out soon.  When they are released, we will provide a Hothouse seminar on their potential implications for creditors and liquidators (sign up here). 

We discuss the cases briefly here and provide an overview of the current liquidation “market” based on information supplied by the Companies Office.

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.

The Supreme Court has today considerably expanded the “good faith” defence for voidable transactions. 

Where a creditor “gave value” through the original transaction, that creditor can now defeat a voidable transaction claim by proving only that it acted in good faith, with no suspicion of insolvency. 

The Court of Appeal has confirmed that if a secured creditor votes its secured debt in a liquidation meeting, the vote is invalid – and the security remains. 

Liquidation meetings are for unsecured creditors.  A secured creditor has no vote, except in respect of debt that is unsecured.

The case

A bankrupt’s KiwiSaver account balance is off limits to the Official Assignee.  Even if it were not, the Official Assignee could not use the bankruptcy to invoke the hardship-based early withdrawal provisions in the KiwiSaver Act 2006.

This is the effect of a Court of Appeal judgment, delivered on Friday.  Although justifiable in policy terms, the decision raises issues about the appropriate balance between promoting retirement savings and protecting creditor rights. 

Significance

“The peak indebtedness rule is not part of the law in New Zealand”, according to the Court of Appeal, in a decision dismissing two appeals on an issue “significant for both liquidators and creditors generally”.

Terms of Trade

Ensure your Terms are robust

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 has found that a bankrupt member’s interest in a KiwiSaver scheme is available for distribution by the Official Assignee to creditors – but only after the bankrupt qualifies for a withdrawal (which will usually be at age 65) unless early partial release would alleviate the bankrupt’s significant financial hardship.

Three times in the last 12 months, liquidators have been told by the High Court that they cannot choose the “point of peak indebtedness” as the start of the “continuing business relationship” in an insolvent transaction claim. 

Of course, the three decisions are all from the High Court, and will not be binding in future cases.  The law will not be settled until the appellate courts hear the issue, and they may yet come to a different conclusion.