Voidable transactions: payments made by receivers when trading on

Greg Blanchard and Ben Russell, The New Zealand Law Journal, February 2006

This article discusses a decision of the Wellington High Court in the first New Zealand case dealing with the issue of who a receiver acts for when it makes payments of pre-appointed unsecured debts and when liquidation follows receivership.

The recap of this case follows a recent article1 that disputes the High Court's decision. The authors of this article believe that the case was decided correctly.

In the case,2 a meat slaughtering and processing company had granted a debenture over all of its assets to a bank. Chartered accountants appointed by the bank revealed that the company was performing poorly financially and, after non-compliance with a demand, receivers were appointed.

The receivers decided that the company should continue to trade, but only by providing slaughtering and processing facilities to owners of stock, and no longer purchasing and on-selling livestock. The receivers made six payments to suppliers who had supplied livestock in the period before the receivers were appointed.

There were no retention of title provisions in the supply arrangements. However, the receivers decided that the stock, recently supplied to the company belonged to the suppliers and, in their mind, the company held the livestock on trust for those suppliers. Therefore, it was deemed inappropriate for the company to have taken the livestock on credit when payment could not have been made, so, rather than returning the stock, the receivers made payments to each of the suppliers.

Subsequently, liquidators were appointed to the company, who issued notices to each applicant seeking to set aside the payments under section 292 of the Companies Act 1993.

The applicants applied to set aside the notices on the grounds that:

• the payments were not "transactions" under the Companies Act as they were not "the payment of money by the company"; and
  
  
• if section 292 did apply, the payments were made in the ordinary course of business and so were not voidable.

The majority judgment held that the receivers made payments as agents of the secured creditor and refused to set them aside.

In addressing the first ground, the court determined that, when the receivers were appointed, the company lost its ability to dispose of its assets. Therefore, the receiver could not be acting as the agent of the company because the company did not have the power to authorise the receiver to do so.

With reference to the second ground, the court determined that the payments were outside the six month period, so the presumption under section 292(3) (that the payment was made otherwise than in the ordinary course of business) did not apply. The court considered whether the appointment of receivers and the change in business had effectively terminated the company's "ordinary course of business" as such and concluded that, as the payments made by the receiver would have been made despite the changed circumstances of the business, the payments were viewed as being in the company's ordinary course of business.

The authors' opinion is that the case was rightly decided from a practical point of view as it confirms that payments of pre-appointed debts by a receiver can be confidently accepted by unsecured debtors and cannot be claimed back by a liquidator. This has the benefits of:

• ensuring the company's continuity of supply;
  
  
• enabling the receiver to continue to trade (thereby maintaining or potentially increasing the value of the company's assets); and
  
  
• providing an alternative to an asset sale, which often results in a loss in value for all parties.

 

1 Brown, Receivers and Voidable Transactions (2005) 11 NZBLQ 95

2 Re Lakeview Farm Fresh Ltd (in rec and liq) [2006] 1 NZLR 238

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