Voidable transactions revisited

By Alan Johnston March 01, 2015 Full Credit

Credit management can be a very uninteresting topic at the best of times.

However voidable transaction claims and cases (or voidable preferences as they are sometimes known as) have a habit of engaging and animating even the dourest of Credit Managers and business owners.

Hence I have decided to revisit this topic, even having covered it just a year or so ago in this same magazine. This time, though, I am coming from a different perspective.

To refresh the memory, this part of insolvency law relates to a liquidator’s ability to “claw back” money from companies or individuals who were paid up to two years prior to the commencement of the liquidation proceedings, based on the assumption the company was insolvent at the time of the payments.

As I write this, the announcement has just been released regarding the Supreme Court’s decision to reverse an earlier Court of Appeal ruling in Farrell v Fences and Kerbs Limited which has gone in the favour of the creditor.

This will be welcome relief to contractors and tradies who may otherwise believe themselves in the position of having to get payment up front for jobs and avoid credit situations with customers at all costs in future.

Although the full Judgment ruling hasn’t been released at this time, it seems that good sense has prevailed in this instance at least, hopefully setting a precedent going forward.

 

NOT THE LAW BUT THE APPLICATION

My argument however, has never been specifically against the law itself, but how it is applied.

Problem Number One – About four years ago I was on a panel of advisors to a Ministry of Economic Development Sub-Committee appointed to review the possible regulation of Insolvency Practitioners – an area which had been sorely overlooked in recent times.

Just so you are aware, anyone over the age of 18 and without a criminal record can supposedly put themselves forward as a liquidator. No other qualifications are necessary.

While it was the desire of the panel to see qualification criteria and a register set up and overseen by a reputable body (the Society of Chartered Accountants perhaps?) eventually a “three strikes and you’re out” approach was preferred – as long as you are not deemed to have deceived or defrauded creditors on at least three occasions, you can continue to operate as a liquidator.

Problem Number Two – If the law was applied equally and fairly across the board, then there probably wouldn’t be so much concern surrounding “claw backs”. However although a liquidator is legally bound to peruse the books for voidable transactions in a liquidation, they do not have to pursue every situation they uncover.

In other words, they can “cherry pick” those they decide to challenge and take all the way to court at their discretion. This approach usually results in those who have a greater capacity to repay in the event of being found culpable (the “cash cows”) being more avidly pursued, than those who it is perceived probably can’t pay back the money even if found liable.

Problem Number Three – New Zealand is one of the only countries in this part of the world where the taxman takes a priority position in the disbursement of monies retrieved via successful voidable transaction claims. It certainly doesn’t apply in Australia.

And unfortunately in the majority of liquidations there are inevitably overdue taxes outstanding. Liquidators’ fees and associated costs also hold a priority position (and the liquidator sets their own hourly rate).

It is therefore understandable when creditors fight tooth and nail to avoid repaying monies under the voidable transaction regime.

 

PREVENTION IS BETTER THAN THE CURE

Ultimately, prevention is better than cure. If you manage your debtors effectively and don’t continue supply when it is obvious your client is in financial difficulty, you stand a better chance of not being targeted by the liquidator if the company fails.

So, avoid demonstrating knowledge of insolvency while still supplying (by accepting part payments, lump sum amounts, payment arrangements) and register your supply relationship in advance on the PPSR.

If you are caught up in a liquidation, do some research on the reputation of the liquidator. Request a list of creditors (which you are entitled to), call around to compare notes and garner support to hold a creditors meeting (which you are also entitled to do) with a view to replacing the liquidator if you are not satisfied.

There are many reputable companies out there who will give you a fair shake of the dice, but equally there are some who will apply the rules to best suit their own needs.

However, while the law exists in its current form, do familiarise yourself with it and improve your chances of not being a victim to its vagaries into the bargain.

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Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

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