Voidable Transactions

The Liquidator is required to review payments made by the company during the two years prior to the commencement of the Liquidation to ascertain whether there are any transactions that fall within the ambit of section 292 of the Companies Act 1993.


By way of summary, a transaction is voidable by the liquidator if:

  • it is an “insolvent transaction” and

  • is entered into within the “specified period”.

While this is a complicated area of law, section 292 provides that an insolvent transaction is one where the transaction occurred when the company was :

  • unable to pay its due debts and
  • the party receiving the payment received more at that time than they would have received in the company’s liquidation.

The section goes on to provide that where an insolvent transaction took place in the six months before the liquidation commenced, the onus is on the party who received the payment to prove that the transaction fell outside the voidable provisions.

However, where a transaction took place in a time period greater than six months, but less than two years before liquidation commenced, then the onus is on the Liquidator to prove the transaction was voidable.

Where the Liquidator considers that a transaction falls within the provisions of section 292, he will write to the creditor concerned, advising of his position and seek an explanation from the creditor before any recovery action is initiated.

In the event that the Liquidator does challenge a transaction as voidable, such a challenge can be set aside by the High Court. Likewise, the Court may endorse a Liquidators view and order that payment be made. 

 

Easy_way_Hard_Way.jpg

SO WHO WILL GET CAUGHT?

Typically the types of transactions caught under this section of the act arise where a creditor of the company in liquidation, knew or should have known that the company was insolvent and the payments being made by the company were “not in the ordinary course of business.”

There are several strong indicators to such behaviour. Typically when a creditor is paid on a monthly basis, payment is either invoice specific, i.e. identified invoices are paid, or the account balance is paid based upon a statement.

The amounts paid rarely come out to round dollar amounts. For instance $2,397.68 is more likely to be paid, matching one or more  invoices , rather than a round  amount of $2,000.00 or $2,400.00.

Where a number of round dollar amount payments are made and these are consecutively paid (whether  weekly, monthly, bi monthly etc) they may indicate a payment pattern other than in the ordinary course of business.

When an arrangement is made to “pay off the old account at a flat rate”, (say a $40,000 overdue balance at $5,000 a month ) and to “keep the forward trading” on very strict credit terms, it  is an indication that at least the monthly payments of $5,000 per month were not in the ordinary course of business (and may also indicate that the “strict terms” payments were not either).

This could result in the creditor who received the moneys having to refund the lot of it to the liquidator.

Any arrangements that are put in place to address credit concerns need to be carefully thought out and meticulously applied. It is better to have strict and secured creditor terms before trading commences rather than have to rely upon “catchup” payments following debtor delinquency.

If you have problems with delinquent debtors then talk to us BEFORE you intiate your recovery actions. We may be able to provide you with a strategy that will assist in your recovery and minimise your risk of exeposure to a voidable preferences claim.