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10 September 2019
In Robt Jones Holdings Limited v McCullagh (2019 NZSC 86) the Supreme Court confirmed that the requirements outlined in Section 292 of the Companies Act 1993 are all that is required in order to void an insolvent transaction. In particular, the Supreme Court confirmed that there is no additional common law principle stating that the transaction must have diminished the net pool of assets available to creditors.
Robt Jones Holdings Limited (RJH) leased property to Northern Crest Investments Limited (NC), a company associated with the failed Blue Chip group. When NC fell behind on rental payments, RJH received payments from two NC subsidiaries, with the payment addressed by the Supreme Court referred to as the 'MSH2' payment. RJH received the MSH2 payment within two years of NC's liquidation, and the liquidator sought to set aside the payment pursuant to Section 292 on the basis that it had been an insolvent transaction. The liquidator succeeded in the High Court and Court of Appeal.
By the time that the case reached the Supreme Court it was accepted that the MSH2 payment met all of the requirements for a voidable insolvent transaction under Section 292 – specifically:
Accordingly, if the requirements under Section 292 were exhaustive, no more was required for the MSH2 payment to be set aside.
The essence of RJH's argument on appeal was as follows:
For its part, the liquidators argued that Section 292 was exhaustive, and required only the recipient of an insolvent transaction to have received more than it would otherwise have received in the liquidation. The act was intended to replace and simplify the previous corporate insolvency regime, and to add an additional common law beyond the requirements in Section 292 would frustrate this purpose. The liquidators also set out three potentially significant consequences that would have flowed from the acceptance of a common law diminution requirement:
The Supreme Court unanimously dismissed RJH's arguments and held that there is no additional requirement for a liquidator to demonstrate that a payment has diminished the company's assets. Its reasons can be summarised as follows:
In outlining its reasons, the Supreme Court provided a useful outline of the statutory history of voidable transaction legislation in New Zealand, the purpose of the insolvency regime in the Companies Act 1993 and an analysis of relevant case law across Australia, Canada and the United Kingdom
As there was no diminution requirement, it was unnecessary for the Supreme Court to address whether the MSH2 payment had, in fact, caused a diminution of the assets available in the liquidation.
This is a helpful decision which brings certainty to the test for voidable transactions and avoids adding unnecessary complexity into the corporate insolvency regime. In this respect, the approach adopted is consistent with the act's intention "to provide straightforward and fair procedures for realising and distributing the assets of insolvent companies".(1)
If the diminution requirement advocated for by RJH had prevailed, it would have increased the cost and complexity of liquidations by requiring liquidators to evidence both the source of funds for an insolvent transaction and that the transaction had had a negative impact on other creditors. It is telling (and was pointed out by counsel for the liquidators) that putting source of funds in issue in this case had resulted in a disputed discovery process which delayed the proceedings for some years. It would also have incentivised sharp practices enabling companies to structure transactions that preferred selected unsecured creditors prior to liquidation commencing. One example provided was that it could have incentivised directors to ensure preferential payments were made to extinguish personally guaranteed debts, in preference to debts not subject to a guarantee. The Supreme Court appears to have been aware of these ramifications, explicitly noting that it was hard to reconcile Parliament's simplification objective with the complexities inherent in the additional common law diminution requirement sought.
For further information on this topic please contact Guy Tompkins at Wilson Harle by telephone (+64 9 915 5700) or email (email@example.com). The Wilson Harle website can be accessed at www.wilsonharle.com.
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