Company Liquidation and Voidable Payments 11 Dec 2011
When a New Zealand company goes into liquidation, the liquidator can ask its creditors to refund payments they received prior to the liquidation. Parry Field Lawyers provide advice designed to help creditors avoid this risk.
What happens if one of my customers is liquidated?
Have you ever supplied goods or services to a company, received some payment, but the company has gone into liquidation leaving you owed the rest?
If so, the liquidator may have asked you to file a claim form. You do so, but do not believe you will receive any further payment, take the loss, write the debt off and put it down to a bad experience. But have you then received a letter from the liquidator asking you to refund the payments you have already received?
What is a Voidable Payment?
Section 292 of New Zealand's Companies Act 1993 ("Act") provides that payments made by a company within a certain period before it goes into liquidation are voidable, and as such can be set aside and claimed back by the liquidator. This is the case if you received payment:
- At a time when the company was unable to pay its due debts, and
- Which enabled you to receive more towards satisfaction of your debt than you would otherwise have received in the liquidation, unless the transaction took place as an integral part of a continuing business relationship (such as part of a running account) where the company’s net indebtedness to you was increased or reduced from time to time.
There are two time periods to be concerned about - within six months and within two years of the liquidation. If the transaction took place within six months the ability to resist the setting aside is considerably more difficult.
The liquidator must serve you with a notice which sets out the transactions to be set aside. If you take no action, the transactions are set aside and the liquidator is entitled to pursue you to recover the amount involved. In order to avoid this, you must object in writing to the liquidator giving reasons, supported by evidence, for your objection to the transaction being set aside. If the liquidator wishes to maintain their claim, they must apply to the court to have the transaction set aside.
The ‘continuing business relationship’ test is a recent change to the Act, replacing the former test of whether the transaction took place 'in the ordinary course of business', which proved to be somewhat problematic in practice. There is currently little guidance on what will amount to a continuing business relationship, however it appears that a payment needs to have an element of inducing further supplies as part of the continuing relationship, rather than simply discharging or reducing an existing debt. So, looking objectively at the relationship, a creditor needs to have accepted a payment ‘looking forwards rather than backwards’.
What Can You Do?
Even if the order to cancel the notice is not made by the Court, there is some further possible relief for creditors. Section 296 of the Act provides that recovery may be denied wholly or in part if the person from whom recovery is sought:
- received the property in good faith; and
- a reasonable person in the creditor’s position would not have suspected, and the creditor did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
- the creditor gave value for the property or altered their position in the reasonably held belief that the transfer was valid and would not be set aside.
Even in these circumstances however, you may have to go through the time and expense of a hearing to determine if you will get relief.
Companies that go into liquidation can cause real and serious problems for suppliers by not only leaving debts unpaid, but also opening up the possibility that payments received may be set aside. There are possible ways to deal with these problems and you should contact your lawyer to discuss them.