Have you received a letter from a liquidator demanding money back for a company in liquidation? This article explains clawback provisions under the Companies Act 1993 (Act) and offers strategies for defence.
Liquidations on the rise
The number of companies being liquidated in New Zealand continues to increase. Centrix data for October 2024 shows company liquidations are up 25% year-on-year, the highest monthly total (306) in 10 years.
On 28 September 2024, the Press (citing data from the Ministry of Business, Innovation & Employment) reported that Kiwi companies are going bust at a rate not seen since the fallout from the Global Financial Crises.
This rise in liquidations has led to a corresponding rise in liquidators using the clawback provisions contained in the Act. Sections 291A – 296of the Act relate to “voidable transactions”. These provisions enable liquidators to recover funds paid by the company before liquidation and they can go to court to enforce these powers if payment is not made.
Defending a clawback claim when you are not related to the company in liquidation
If you receive a notice to set aside an insolvent transaction (Notice) from a liquidator or the solicitor for the company in liquidation, making demand for funds paid by a company that subsequently went into liquidation, the Act provides for the following procedure and defence:
- Send a written notice of objection (Objection) to the liquidator within 20 working days of service of the liquidator’s Notice. The onus is then on the liquidator to apply to court to have the transaction set aside. The Objection must contain full particulars of the reasons for objecting and must identify documents that evidence or substantiate the reasons for defending.
- The court must not order the recovery of property by a liquidator if the person from whom recovery is sought proves that when they received the property:
- They acted in good faith;
- A reasonable person in their position would not have suspected, and they did not have reasonable grounds for suspecting, that the company was, or would become insolvent. This is a “fairly onerous” test which must be met by the defendant; and
- They gave value for the property or altered their position in the reasonably held belief that the transfer of the property to them was valid and would not be set aside.
Beyond the provisions of the Act, in the case of Timberworld v Levin, the Court of Appeal recognised that the courts remain vested with a general residual discretion to not order repayment of funds to the company in liquidation if to do so would cause unfairness to the creditor. However, to be successful, the defendant must show more than a “general sense of unfairness – requiring instead some “cogent and compelling factor” beyond the statutory defence.
Defending transactions between the company and a related party
Liquidators may also seek to set aside transactions between the company prior to its liquidation and a “related party”. “Related party” is defined broadly at section 291A of the Act and includes a director, senior manager of the company or of a close body corporate of the company, the spouse of a director or extended family member of a director or senior manager (among other people).
If a related party files an Objection and the liquidator commences court proceedings to set aside the transaction, the following must be proved to defend the proceedings:
- For transactions that occurred during the “restricted period”, defined as the period commencing 6 months prior to the making of the application that the liquidator be appointed and ending on the date the court liquidated the company, the related party must prove that the company was able to pay its due debts at the time of the transaction and that the related party did not receive more towards satisfaction of a debt owed by the company than the person would be likely to receive in the company’s liquidation.
- For transactions during the “related party period”, defined as “the period commencing two years before the application to the court was made for orders appointing a liquidator, ending when the order was made that the liquidator be appointed, the onus is on the liquidator to prove that the company was unable to pay its debts at the time of the transaction and the related party received more towards satisfaction of a debt owed by the company than the person would be likely to receive in the company’s liquidation.
Whether a company can “pay its due debts”
The High Court case of Blanchett v Joinery Direct Limited summarises the principles for determining the solvency of a company:
- The inquiry is made at the time when the payment is made;
- The court may have regard to the recent past to see if the company was unable to pay debts as they became due;
- There must be consideration of the outstanding debts at the time;
- “As they become due” means as the debts become legally due;
- The ability to pay involves a substantial element of immediacy to provide payment from cash and non-cash resources. An excess of assets over liabilities will not by itself satisfy the test if there is no ability to pay. The ability to procure sufficient money to pay debts by selling, mortgaging or pledging assets within a relatively short period of time will satisfy the test.
- The issue of a company’s solvency requires a consideration of the company’s financial position in its entirely. A temporary lack of liquidity does not necessarily evidence insolvency. For that reason, a consideration of the debtor’s position over a period of time is required; and
- The test is an objective one.
There is analogous law with relation to voidable charges under s293 of the Act.
This article was researched and written without the assistance of AI. For further assistance on liquidation matters from real people, please contact Tarsha Makgill or Dayna Dunstan.
28 November 2024
