By: Guy Carter
Published: 9/04/2014
The recent decision of the Court of Appeal in Damien Grant and Stephen Khov v Lotus Gardens Limited [2014] NZCA 127 overturns a High Court decision which held that liquidators could not use the statutory demand process to collect monies under transactions that had been set aside under the voidable transaction provisions of the Companies Act 1993 (the "Act").

The Court of Appeal held that s 295 of the Act is not the only process available to liquidators to recover transactions that have been set aside.  Section 295 of the Act sets out the various discretionary orders a Court can make following a transaction being set aside.

Despite some media commentary suggesting otherwise, the implications of this decision for creditors are not significant, as the considerations under s 295 and the defence under s 296 will still be available, regardless of the procedure a liquidator adopts.  That said, in some cases, liquidators may well use this option as it will be procedurally simpler.

The Facts
Damien Grant and Stephen Khov were appointed as liquidators of Quantum Grow Ltd on 20 March 2012.  The liquidators investigated payments by Quantum Grow Ltd to a related company, Lotus Gardens Ltd, and identified $25,576.88 worth of payments they considered to be insolvent transactions under s 292.  The liquidators wrote to Lotus Gardens asking what the payments were for on three occasions in May, July and September 2012 and received no response.

On 15 October 2012 a notice to set aside a voidable transaction under s 294 was served on Lotus Gardens.  Lotus Gardens did not raise an objection within the 20 working day timeframe required under the Act.

The liquidators wrote to Lotus Gardens on 15 November 2010 pointing out that no objection had been received, that the transactions had been automatically set aside and making demand for $25,576.88.  The letter warned that if no payment was received the liquidators would initiate proceedings in the High Court confirming that the transactions were set aside.  Again Lotus Gardens did not respond.

At this stage the liquidators declined to follow the "usual" procedure under s 295 and rather issued a statutory demand under s 289.  The demand recorded an indebtedness of Lotus Gardens to the liquidators of Quantum Grow Ltd (in liquidation) in the sum of $25,576.88 for non-payment of voided transactions.  It required that sum to be paid within 15 working days of the service of the notice.

Lotus Gardens did not apply to set aside the statutory demand nor make payment under it.  Accordingly, the liquidators then filed a notice of proceeding and statement of claim to put Lotus Gardens into liquidation. 

On 8 February 2013 Lotus Gardens filed an application for leave to extend the time for filing a statement of defence and leave to appear.  Leave was granted and a statement of defence filed.  That defence relied on, amongst other things, that (a) a debt can only arise on an order under s 295; and (b) in any event, Lotus Gardens was merely a conduit for funds paid by Quantum in reduction of its debt to BNZ.  The liquidation application was heard in the High Court on 10 April 2013.

The High Court held that the liquidators had followed a procedure that was unavailable to them when attempting to recover the voidable transactions.  That decision was appealed by the liquidators.
 
The Court of Appeal decision
The Court of Appeal overturned the High Court decision and held that while s 295 is the usual process, it was not the only method a liquidator could use to obtain orders to set transactions aside. 

The Court of Appeal did not agree with the High Court that the Act had effected a significant change in the liquidators' ability to recover monies paid under a set-aside transaction.  The Court said that, although under the Companies Act 1955 the test was intention-based rather than effects-based, there was still a procedure in place whereby a liquidator could initiate a setting aside and, if no steps had been taken within the statutory timeframe, the transaction was set aside by operation of the statute.

Ultimately, the Court agreed with the central planks of the liquidators' argument; those being (a) where a transaction is set aside under s 294 due to a failure to object within the required timeframe, the creditor automatically comes under an obligation to repay the sum demanded; and (b) notwithstanding s 295, there are common law rules that remain in force which have the effect that, upon a setting aside under s 294, obligations come into effect without requiring a court order [1].

The Court was of the view that Parliament expressly contemplated a court ordering recovery of property that was the subject of a voidable transaction through processes other than those set out in the Act by use of the express words in s 296(3).

The Court looked at the purposes of the Act which, among others, were to provide for straight-forward and fair procedures for realising the dispersed assets of insolvent companies.  On applying the purposive approach to interpretation the Court said there was no reason why an order under s 295 should be treated as the exclusive method for a liquidator to obtain an order following a setting aside.  Moreover, the Court considered that s 295 did not use exclusive or mandatory language excluding any other remedy. 

In coming to this conclusion the Court considered its broad discretion to set aside a statutory demand under s 290.  They held that if the claim of the liquidators is outweighed by some factor making it plainly unjust for liquidation to ensue then no liquidation would be ordered.  If there was a receipt of the property where the conditions of s 296(3) arguably could be made out, then the court would refuse to make an order.  Further, if there were factors that might lead a court to decline to make an order for payment of the sum sought under s 295 of the Act, or in the alternative for some different order to be made, then that could also be a consideration that would persuade a court to refuse to liquidate the company under s 290. 

Turning to the facts, it was then held that there was no arguable defence that the payments to Lotus Gardens were as a conduit.  Therefore, it did not consider the statutory demand should be set aside.  The Court of Appeal concurred with the High Court that a defence under s 296(3) was not available to Lotus Gardens and accordingly an order for liquidation of Lotus Gardens was made.

Implications of the Court of Appeal decision
While the procedure a liquidator can use to recover transactions that have been set aside has been widened by the Court of Appeal’s decision, the relevant considerations open to the court in making such an order have not.

A party subject to an alternative process cannot be placed in a worse substantive position because the liquidator has chosen an unorthodox recovery route.  The considerations under s 295 and s 296(3) will still be open to and relevant to the court's decision regardless of the procedure a liquidator chooses to recover the transaction.

The timeframes for responding to set aside a statutory demand or file a notice of opposition to a s 295 application are the same - ten working days.

Importantly, the Judges in Court of Appeal noted [2] that they did not wish to be seen as encouraging the use of the statutory demand processes as a remedy for liquidators claiming recovery for set aside transactions.  They went on to say that the s 295 procedure is designed to deal with remedies following setting aside and it is good practice to utilise that section.  In doing so, the Court of Appeal sounded a warning to liquidators who use the statutory demand procedure that they could well find that they have taken an unnecessary step and are faced with a Court that refuses to make an order for liquidation.  That would leave them facing costs and still having to apply under s 295, having wasted creditors’ funds on an unnecessary step.



[1] Westpac Banking Corporation v Nangeela Properties Limited [1986] 2 NZLR 1 (CA); McKinnon v Falla Holdings NZ Limited (in liq) (1999) 8 NZCLC 262.
 
[2] Grant & Khov v Lotus Gardens Limited [2014] NZCA 127 at [46]
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