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?
The “good faith” defence for creditors facing insolvent transaction claims has now been fully explored by the Court of Appeal in two separate judgments relating to the Farrell v Fences and Kerbs Limited1 litigation – and has been confirmed on all points to have narrow application.
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 High Court has provided useful guidance as to how receivers should apportion their fees to accounts receivable and inventory.
This Brief Counsel draws out some key messages from the judgment.
Like many legal tests, the test for insolvency is easy to state, but hard to apply in practice.
The United Kingdom Supreme Court (UKSC)1 has recently issued an important clarification, which confirms that an element of forwards projection must be applied – extending in extreme cases to assessments of balance-sheet as well as cash-flow solvency.
This liberal approach is likely to be followed in New Zealand, despite differences in statutory wording.
A recent decision of the Court of Appeal (Farrell v Fences & Kerbs Limited [2013] NZCA 91) will make it very difficult for creditors to successfully raise the good faith defence under section 296(3) of the Companies Act 1993 to a voidable claim by a liquidator.
The recent Court of Appeal case of Kakara Estate Ltd v Savvy Vineyards 3552 Ltd [2013] NZCA 101 provides a useful reminder that an assignment and a novation of an agreement are different. When an agreement is assigned, the assignor remains a party to the agreement. If the agreement is novated, a new agreement is created between the assignee and the continuing party, and the "assignor" is released.
A creditor wanting to keep the benefit of a potentially voidable transaction must be able to prove that value was given to the debtor company at the time payment was received, the Court of Appeal has held in Farrell v Fences & Kerbs Limited [2013] NZCA 91.