The Court of Appeal last week extended the armoury available to liquidators seeking to unwind a voidable transaction. Although the Companies Act sets out a procedure for liquidators to follow, the Court held that this is not exclusive, and that liquidators can also serve a statutory demand seeking payment of a voidable debt. Is this a shortcut likely to save costs, or is it a false economy?

The voidable claim

More than two years after the Commerce Committee reported back on the Insolvency Practitioners Bill, Parliament took up the second reading of the Bill late last week – the next step in what has been a long and protracted process.

The original Bill proposed a negative licensing regime, under which the Registrar of Companies would have the power to prohibit individuals from acting as insolvency practitioners.

In Dench v Gates, the New Zealand High Court considered its inherent jurisdiction to set aside a bankruptcy notice to prevent an abuse of process. Mrs Gates, the judgment debtor, had applied to the High Court to set aside a bankruptcy notice. The bankruptcy notice was based on an award of costs against Mrs Gates in respect of earlier District Court litigation initiated by her against Mr Dench, a solicitor, on the basis that he had conducted himself dishonestly while representing his client in a separate matter, in which Mrs Gates was the plaintiff.

Tegel sought summary judgment against Mr and Mrs Arnensen as guarantors of the obligations of Coastal Cuisine NZ Limited (In Receivership). The Arnensen's argued (in reliance on the equitable doctrine of marshalling) that Tegel ought not to be allowed to pursue the guarantees until the receivership of Coastal Cuisine had run its course.

In Bunting v Buchanan, the applicant shareholders sought discovery ahead of a hearing of their substantive application which involved the level of costs charged by two liquidators as a consequence of a drawn-out liquidation.

A recent decision of the High Court suggests that a creditor who has not objected to a notice given under section 292 of the Companies Act may be able to defend the claim at a later stage.

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.

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

The High Court has held that liquidators cannot rely on the common law to recover insolvent transactions, and must now proceed under the statutory provisions of the Companies Act.

In Grant v Lotus Gardens Limited, the liquidators of Quantum Grow Limited applied unsuccessfully for an order that Lotus Gardens Limited be put into liquidation on the grounds that it was unable to pay its debts, asserting that Lotus Gardens owed it $25,000 being the amount of preferential payments made to them.

Receivers are well aware that they can limit or exclude their personal liability on a contract by appropriately worded language, in accordance with the Receiverships Act. But what about litigation? Is a receiver sufficiently protected against a personal costs award if the litigation is in the name of the company rather than the receiver?