Investors in Ross Asset Management Ltd (in liquidation) ("RAM") were understandably surprised when the liquidators announced that payments to investors made by the company two years prior to liquidations may be set aside. The liquidators claim the payments may constitute "voidable transactions" pursuant to s 292 of the Companies Act 1993. Section 292 defines a voidable transaction as a payment of money that was made when the company was insolvent, and enabled the creditor to receive more towards the satisfaction of a debt than he or she would have received the company's liquidation.
On the other hand, investments which are held on trust will fall outside the Companies Act liquidation regime. Consequently, s292 of the Act will not apply to such investments.
The liquidators' announcement raises an important legal point: is it too simplistic to characterise the relationship between an investor and failed finance company as a creditor/debtor relationship? In some cases, it is clear that the relationship is something more. For example, under the Securities Act 1978, companies that issue securities to investors are obliged to have those investments held by an independent trustee. Similarly, in England, directives from the Financial Services Authority and the European Parliament require licensed deposit-takers to hold investments on trust in segregated bank accounts.
In New Zealand, an investment entity can trade free of such regulations, but that does not necessarily preclude a trust relationship from arising. It is possible that the company may represent to its investors some assurance which, by its nature, gives rise to trust obligations in relation to the investment. Alternatively, the director of the company, namely Mr Ross, may stand in a fiduciary relationship with the investor. The company could be bound or implicated by the director's dealing with the investment, thereby importing trust obligations over the investment. Indeed, in a recent judgment, Simpson v Jenks  NZHC 3533, the High Court found that Mr Hubbard owed fiduciary obligations to investors for the investments he managed. Consequently, the finance company which held the investment, and of which Mr Hubbard was director, was affected by Mr Hubbard's fiduciary obligations to manage the investment.
Interestingly, a similar relationship existed between Mr Ross, RAM and associated companies. In a report to the High Court, the liquidators' of RAM explained:
"David Ross was the sole director of all entities and appeared to have sole responsibility for all funds management, research and investment decisions, supported by two administrative assistants who advise that they had no significant decision making authority. Mr Ross also appears to have been the sole party who liaised with investors to attract new contributions and to inform them of the decisions he had made regarding their investment portfolios."
Whether or not the liquidators will be able to successfully invoke s 292 of the Companies Act will depend on facts and relationships relating to the investments the liquidators hope to impugn. However, one thing is clear: it is highly arguable more than a simple debtor/creditor relationship will exist.
As a final note, the collapse of RAM shows the ongoing problems investors may encounter when their investments can be construed as the company's contractual liabilities. The situation therefore serves as a reminder for potential investors to ensure deposits are managed by an independent custodian, preferably on trust.