In Lewis Holdings Ltd v Steel & Tube Holdings Ltd, the High Court held a parent company responsible to pay its subsidiary’s debts. The case highlights the importance of maintaining the independence of subsidiary companies from their parents. Failure to do so may result in the Court lifting the corporate veil via s 271 of the Companies Act 1993 (“the Act”).
Section 271 of the Act gives the Court the power to order a company related to another in liquidation to pay the claims made in the liquidation. It creates an exception to the general principle that a company is a legal entity separate from its shareholders.
This exception to the general principle is unique to New Zealand and Ireland with no similar provision found in any other common law jurisdiction.
Pooling provisions provide balance to the tensions between:
The separate legal identity of companies, and the right of commercial enterprises to run their business through subsidiary and related companies as they see fit; and
The mischief that can result from an unyielding application of separate corporate identity.
The facts
Lewis Holdings Ltd (“Lewis”) is the owner of a property. Stube Industries Ltd (“Stube”) leased the property from Lewis. Stube is a wholly owned subsidiary of Steel and Tube Holdings Ltd (“STH”). STH paid the rent which Stube was liable under the lease.
Stube was put into liquidation on 4 June 2013 and shortly after its liquidators disclaimed the lease as onerous property. As a result, Lewis claimed in the liquidation for its losses.
Lewis and the liquidators claimed against STH under s 271 of the Act seeking that it pay to the liquidator the whole of the Lewis claim in the liquidation.
The discussion and decision
Stubes constitution contained a standard provision which allowed the directors of Stube to act in the best interests of its holdings company, STH pursuant to section 131(3) of the Act. However, the Court considered that to properly apply this, it required the directors to recognise the status of the separate legal entities.
In this case, the CEO and CFO of STH were appointed as directors of Stube.
It was held that the directors of Stube did not conduct its affairs separately from STH. In particular:
No formal board meetings were held for Stube;
The directors of Stube and STH treated Stubes property as STH’s;
Stube’s liabilities were not considered separately from STH. If that was done, it would have been clear that Stube did not have the financial capacity to continue to trade without support from STH. If the companies had been treated as separate legal entities, legal arrangements would be needed to ensure the support. However, there were none.
Stube had no employees of its own, all matters were attended to by employees of STH;
Those employees used a STH letterhead without stating that he or she was acting for Stube;
There were no recorded arrangements for STH to provide management services to Stube and no intercompany charge for provision of services;
STH obtained legal advice regarding Stube’s liabilities but Stube did not obtain its own legal advice;
Stube was treated as a division of STH, for financial purposes;
Stube did not have its own bank account; and
Invoices to Stube were addressed to STH and STH paid those invoices.
The Court has held that the grounds considered above are not in itself of particular significance. Rather, as was submitted on behalf of Lewis and the liquidators, it was the cumulative effect. The Court ultimately held that whilst it is common practice in company groups that a range of services are undertaken centrally, the level of involvement from STH in Stube’s affairs was in essence, total.
Ultimately, the Court accepted submissions made on behalf of Lewis and the liquidators that Sutbe was a ‘slave’ of STH.
Additionally, it was held that the circumstances that gave rise to Stube’s liquidation are attributable to the actions of STH. In particular, when STH decided to withdraw its support to Stube, it was inevitable that Stube could not meet its liabilities and liquidation commenced.
It was submitted by Lewis and the liquidators that the constitution of Stube, which enabled the directors to take account of the interests of STH, does not operate as a ‘prophylactic against a pooling order’. This was accepted by the Court.
On that basis, the Court held that STH was liable for the total claims made in the liquidation of Stube, being to Lewis.
Key take outs
Whilst our company law regime is firmly grounded in the principle that a company is a legal entity in its own right separate from its shareholders, the Courts are willing to depart from this principle in certain circumstances.
In the event that the Courts do take such an approach, the consequences can be far reaching. It is advisable that proper steps are taken to ensure that proper processes are in place so that the separate legal identities of each company is maintained.
This article was also published in the February 2015 edition of LawNews.
On 18 February 2015, the Supreme Court determined three appeals which involved a short but important point about the operation of the voidable transaction regime under the Companies Act 1993 (“the Act”).
The three appeals involved creditors who provided supply of goods or services to debtor companies. The creditors invoiced the debtor companies, and the debtor companies then paid within few months of the invoices being issued. In each case, the debtor companies went into liquidation within two years. (It is noted that as of May 2020, the limitation for voidable transactions is six months from the date of making an application to the court to commence liquidation proceedings, or the resolution placing the company into liquidation, unless the parties are found to be “related parties”, in which case the limitation is still two years).
Upon liquidation, the liquidators sought to “claw back” the payments made by the debtor companies to the creditors pursuant to the voidable transaction provisions of the Act.
This case is a significant decision for creditors who receive funds from companies, insolvency practitioners and those who advise either of the above.
In our view, this case has significantly changed the recoverability of insolvent transactions.
The focus of the litigation
The focus of the defence was on the defence that is available to a recipient of funds.
It is a defence to a liquidator’s claim if a recipient can prove all three pillars of section 296(3). To succeed, the creditor must establish that when they received the payments:
they acted in good faith;
there were no reasonable grounds to suspect, and they did not suspect, that the debtor company was, or would become, insolvent; and
they either gave value for the payment or altered is position in the reasonably held belief that the payment was validly made and would not be set aside.
The focus of this litigation was on ‘gave value’.
The High Court and Court of Appeal
The High Court accepted that at the time of the payments, the creditors acted in good faith and did not suspect, nor were there any reasonable grounds to suspect, that the debtor company was or would become insolvent. This was not disputed by the liquidators. The primary issue in front of the High Court was whether the creditors could establish the third pillar of section 296(3) of the Act, being ‘gave value’.
The appeal hinged on whether “value” for the purposes of section 296(3)(c) means new value given at, or after the time the payment is received from the company, or whether it also includes value given prior to receipt of the payment when the antecedent debt was created.
In two of the High Court decisions, creditors successfully argued that the letter meaning was intended whilst in the third the former view was accepted.
The Court of Appeal held that the receipt of a payment in satisfaction of an antecedent debt was not “value” and a new value which was also “real and substantial” must be given at the time of the transaction.
In reaching its decision, the Court of Appeal considered that the use of the word “when” indicated that a temporal restriction was intended. The recipient had to give value at the time the payment was made – value given by the provisions of goods and service at an earlier point when the debt was created did not qualify.
This meant that the creditors could not rely on the defence because all payments received by them were in relation to the goods and services previously supplied.
The Supreme Court
At the Supreme Court, the Court considered the two competing policy aims:
If the respondents’ argument is accepted, primacy will be accorded to the interests of creditors as a whole, but that will be at the expense of fairness to individual creditors who have accepted payments in good faith and in circumstances where there was no reasonable basis to suspect that the debtor company was technically insolvent. In other words, what seemed at the time they were effected to be routine commercial transactions would be set aside. On this basis, there would be legal certainty in the sense that there would be a clear rule, routinely applied; but there would be commercial uncertainty in the sense that routine transactions would be vulnerable to challenge for up to two years after they occurred.
On the other hand, if the appellants’ argument is accepted, primacy will be accorded to fairness to individual creditors. Creditors who receive what appear to be routine payments in circumstances where they did not, and had no reason to, suspect insolvency will have certainty. This reflects the broader social interest in not causing any disruption to the routine flow of credit in commercial transactions. But that will be at the expense of the class of creditors as a whole and to the concept of collective realisation.
Ultimately, the Court favoured fairness and certainty for individual creditors as opposed to creditors as a whole.
While the Court agreed that “real and substantial value” had to be given by a creditor raising defence under section 296(3), it held that such value may be given prior to receiving payment.
The Supreme Court considered that while the use of the word “when” certainly indicates that there must be a linkage or connection between the impugned payment and the elements of section 296(3). However, the Court doubted that it could be taken further than that by holding that:
…”when” was simply referring to a state of affairs existing at the time of the payment. So it is not the use of the word “when” but rather the use of the words “gave value” that is significant in temporal terms.
The Court could see no reason why, as a matter of interpretation, “gave value” could not be taken to encompass the notion of giving value earlier.
The Supreme Court also analysed the legislative background of the voidable transaction regime under the Act and changes made to this regime by the Companies Amendment Act 2006 when the current provisions were enacted. The Court considered that the amendment was designed to temper the pursuit of collective justice for creditor as a whole with individual justice for a particular party in the circumstances of each case. There was a concern that, if the law failed to do this, it could impair the free flow of trade in New Zealand. The proposed changes were intended to give more certainty to creditors that the transactions they are entering into will not be made void.
The interpretation adopted by the Court of Appeal significantly prevented individual creditors from using the defence under section 296(3). The Supreme Court found this to be inconsistent with the 2006 reform.
Key take outs
In overturning the Court of Appeal decision, the Supreme Court has considerably widened the applicability of the defence.
It is now certain that “value” for the purpose of section 296(3) can include value given when the debt was initially incurred, in particular, the supply that gave rise to the payment would likely be real and substantial value.
Our view on voidable transactions regime as it is currently
Whether a transaction will be set aside will now hinge on whether the recipient knew or ought to have known of the company’s insolvency.
We expect to see significantly less voidable transactions being pursued as a result of the Supreme Court’s decision and the current uncertainty as to how to calculate voidable transactions
A copy of the Supreme Court decision can be found here.
In February 2008, BB2 Holdings Limited (“BB2”) sold computer software and hardware to Doyle by Design Limited (“Doyle”). BB2 had a standard credit sale agreement whereby it retained title to the equipment until its debt was repaid in full. Additionally, BB2 had the rights to and registered its security interest under the Personal Property Securities Act 1999 (“PPSA”).
Under the credit sale agreement, Doyle was required to make an initial payment of $2,730.46 and a second payment a month later of $8,231.78 after which monthly payments of $1,365.23 over 56 months. Whilst Doyle was late from time to time, it generally kept up with the required payment arrangement but defaulted in January 2010 whereupon BB2 made enquiries and found that Doyle’s director, Mr Doyle, had gone to Queensland without any intention of returning and had effectively abandoned the business.
BB2 repossessed the equipment on 10 February 2010.
Instead of selling the seized equipment, BB2 agreed to return possession of the equipment to Mr Doyle in return for Mr Doyle giving a mortgage over an apartment that he owned and a promise to keep up with the instalments under the credit agreement.
Doyle was subsequently put into liquidation on 4 June 2010.
The issue: Did BB2 receive a preference?
The liquidators did not dispute the validity of BB2’s security. However, it was submitted that while BB2 holds a perfected purchase money security interest, its rights are defined under the PPSA and is limited to the rights contained in that Act which only entitles BB2 to the actual equipment and to the proceeds of the equipment under section 45 of the PPSA. Proceeds being defined as identifiable or traceable personal property derived from the realisation of the collateral.
Because BB2 took possession of the equipment from Doyle and then returned the equipment to Mr Doyle, it was submitted that BB2 did not have any right to the equipment and has not received any ‘proceeds’ of any disposition of the equipment. It therefore follows that the funds that it received must have gone to BB2 as an unsecured creditor which brings those payments within the ambit of the voidable transaction regime.
To the contrary, BB2 submitted that a secured creditor stood outside of the liquidation provisions of the Companies Act. Accordingly, the assets available for distribution are not to include assets subject to a charge. More importantly, BB2 relied on the following passage from Heath & Whale’s Insolvency Law in New Zealand:
The statutory order of priority will generally be disturbed if an unsecured creditor receives full payment of its debt during the specified period when the company is insolvent. However a payment made to a secured creditor will generally not be impugnable by the liquidator as such payment does not affect the position vis-à-vis the other creditors in the liquidation. Accordingly a payment made to a secured creditor, or to an unsecured creditor that enjoys priority over the general body of unsecured creditors, will rarely be able to be impugned as the effect of the transaction does not result in the creditor receiving more than it is entitled to in the liquidation. A preference may result, however, if the order of payment is deferred.
The Court’s findings
Associate Judge Bell decided that the value of the asset in relation to the debt payable is important to the analysis. Prudent secured creditors ensure that the asset over which they take security has sufficient value if they need to take enforcement steps so that they may be paid from the proceeds of sale. In such a case, they are fully secured creditors. In the event that the value of the asset is insufficient to meet the entire debt, the creditor is partly secured.
In citing Professor Goode’s text, His Honour adopted the following passage:
In general, payment to a secured creditor in reduction or discharge of the debt is not a preference, for the effect of the payment is to reduce or extinguish the security interest and thus pro tanto to increase the company’s equity in the previously charged assets and make them available to other creditors. Accordingly, the payment produces no change in the value of the assets available for the general body of creditors. Moreover, if the company were to refrain from making the payment, that would not help the other creditors, for the secured creditor would still be entitled to enforce his security, assuming the giving of it had not itself been by way of preference.
Having stated the general position, His Honour noted that there are exceptions. One of which:
… where the amount of the payment exceeds the value of the security; in that event, the payment is vulnerable to the extent of the excess.
His Honour continued and held that so long as the value of the asset taken as security is worth more than the debt payable by the company, there can be no element of preference as payments to a secured creditor will either reduce the debt or prevent the debt increasing on account of additional interest arising upon default. On payment made to a fully secured creditor, any equity left is available for unsecured creditors.
However, where a creditor is partly secured, payments it receives are first applied to the unsecured portion before being applied to reduce the secured debt. In this case, such payments could be attacked as a voidable transaction.
Outcome
On this basis, his Honour decided that payments between 19 January 2010 and 19 May 2010 totalling $6,876.15 were voidable as there was correspondence evidencing that BB2 was to some extent partly secured by early 2010. However, in relation to the rest of the payments between 21 April 2008 and 17 December 2009 totalling $35,844.63, his Honour held that there was insufficient evidence to show that BB2 was partly secured at that stage. Accordingly, His Honour refused to void that sum.
Jennings Roadfreight Ltd (“Jennings”) was placed into liquidation on 24 March 2011. At liquidation it owed the IRD approximately $50,000 for PAYE.
At liquidation date Jennings held $14,076.38 in its bank account. After liquidation, pursuant to its seemingly infinite powers, the IRD caused Jennings’ bank to pay the funds to the IRD.
The liquidators of Jennings made an application to recover these funds.
In response to the application, the IRD submitted that in the event that the IRD is owed PAYE and the liquidated company has a credit balance in its bank account, then the IRD is entitled to receive the balance pursuant to the statutory trust created by s 167(1) of the Tax Administration Act 1994 (“the TAA”). The liquidators submitted that the statutory trust created by s 167(1) of the TAA is extinguished by the liquidation of a company.
The liquidators were successful at the High Court and Associate Judge Doogue held that the ‘trust’ ended at liquidation.
However, that decision was overruled by the majority of the Court of Appeal (Wild and White JJ), with Ellen France J dissenting.
The Court of Appeal decision was significant for the insolvency industry. The key take outs are:
Under s 167(1) of the TAA, any credit in Jennings’ bank account at liquidation were held on trust from the IRD.
As such, the bank account of Jennings does not form part of the estate in the liquidation.
The decision effected the order of priorities under Schedule 7 of the Companies Act 1993 (“the CA”) as the IRD effectively obtained a super priority as against all other creditors.
The issues for the Supreme Court
The Supreme Court (Elias CJ, McGrath, William Young, Glazebrook and Arnold JJ) were tasked with considering:
The relationship between s 167(1) and (2) of the TAA; and
The nature of the “trust” created by s 167(1).
Decision of the Supreme Court
On 7 November 2014 the Supreme Court released its decision in respect of this matter. The decision is also significant to the insolvency industry.
The Supreme Court has held that the IRD’s interpretation of s 167(1) of the TAA would have the effect of allowing the IRD to ‘leapfrog’ ahead of other preferential creditors. The Supreme Court considered that this would be contrary to the scheme of the legislation.
The Supreme Court agreed with Ellen France J and Associate Judge Doogue and held:
[46] All the PAYE at issue in this case had been deducted but not paid to the Commissioner on its due date and it remained unpaid at the time of liquidation. The funds were not kept by Jennings in a separate account. This means that all of the PAYE that was unpaid at the time of liquidation in this case (including the credit balance in the bank account of $14,076.38) is dealt with under s 167(2) and is thus distributed in accordance with the priorities set out in sch 7 of the Companies Act.
In the writer’s opinion, the Supreme Court’s decision restores unison between the CA and the TAA. More importantly, certainty is achieved in a liquidation where the order of priorities is unambiguous and centralised in a single identifiable schedule.
On the basis of the Supreme Court’s decision, creditors of failed companies have certainty that assets of the liquidated company will be distributed in accordance with schedule 7 of the CA.
There is however a question left open as to whether the IRD is entitled to retain funds it has received prior to liquidation of a company. In particular, whether a liquidator could claw these back pursuant to the voidable transaction provisions.
This article was also published in the November 2014 edition of LawNews
Maclean Computing Limited was placed into liquidation on 13 July 2012 and liquidators at Waterstone Insolvency were appointed.
In March 2011, Maclean reached an agreement between the IRD and its three major suppliers. Westcon Group NZ Limited was among this select group. Between March 2011 and April 2012 Maclean paid Westcon $274,617.49. The liquidators sought to set aside these transactions totalling $274,617.49 received by Westcon in accordance with the repayment arrangements.
In relation to the restructuring proposal between the major creditors of Maclean, the parties attempted to ring fence the existing debt owed and to have the debt paid off by regular monthly instalments. These select creditors of Maclean were paid within 12 months of the deal. The IRD and other creditors were not.
Aside from the IRD, who was owed debts dating back to July 2009, the creditors in the liquidation relate to debts incurred by Maclean from March 2012 until the liquidation of Maclean. This is the restricted period, a period where a company is presumed unable to pay its due debts.
At the High Court, the focus was on two issues:
Was Maclean unable to pay its due debts; and
Did Westcon receive more than it would otherwise receive, or would be likely to receive in Maclean’s liquidation.
Was Maclean unable to pay its due debts?
Westcon submitted that by entering into rescheduling agreements, Maclean was able to pay its due debts as the major creditors have relinquished their right to call for payment or are estopped from recovering the debt.
It was the liquidator’s position that those agreements amounted to little more than indulgences and did not affect the payment obligations to creditors because at all times those debts were due for repayment in accordance with the original contractual commitments. Further, the liquidators were provided correspondence from Westcon indicating that they sought to give merely the ‘perception of support’. The liquidators were of the view that this strategy allowed select creditors to obtain an advantage over other creditors of Maclean before it failed.
In addition to the above, the liquidators submitted that a balance sheet analysis evidenced corporate insolvency. During the relevant period Maclean was operating at a $2m deficit. Accordingly, notwithstanding the willingness of major creditors to defer repayment obligations, the liquidators submitted that Maclean was unable to pay its debts as they fell due.
In addition, although Maclean entered into an instalment arrangement with the IRD, its failure to pay GST and PAYE and other tax obligations is further evidence of insolvency. Maclean was unable to keep up to date with its tax obligations from July 2009 until liquidation. The liquidators submitted that this was a sure sign of a company who is unable to pay its due debts.
Westcon argued that the rescheduling agreement was more than a mere indulgence. In particular, those agreements were reached after a careful and thorough exchange of correspondence; the solutions were not originally proposed by Maclean and it appeared that Maclean would have had enough support to obtain approval to a Part 14 compromise under the Companies Act 1993 which would have had the effect of binding minority creditors. The Court agreed.
The Court held that a debt becomes due when it is payable. Further, whether it is payable is a matter of considering what obligations bind the company; it is not about the fact that the creditor might not be prepared to insist on payments strictly in accordance with agreed terms.
The Court accepted Westcon’s submission that a creditor who agrees to formally reschedule its debt goes further than just forbearing to sue; it relinquishes its right to call for payment of the debt which has previously been due and owing. Having entered into the agreement, Westcon was required to abide by the terms of the agreement and await payment of the debt over 12 monthly instalments, as each instalment fell legally due.
On this basis, the Court found that Maclean was able to pay its due debts as a result of these agreements.
Did Westcon, as a secured creditor receive more towards the satisfaction of its debt?
Westcon held a registered security interest in the goods it supplied to Maclean, which extended to the proceeds of the sale of the goods (a PMSI).
Westcon held the view that it did not receive a preference. This view was based on its status as a secured creditor; it argued that it was entitled to the funds over the other creditors of Maclean.
The bank account of Maclean, that the proceeds were received into was both comingled funds and overdrawn. As such, the liquidators were of the view that the funds Westcon received do not fit the definition of ‘proceeds’ as it cannot identify the funds, nor can it trace the funds. In effect, Westcon received the banks money, not the proceeds from Westcon’s supplied goods.
The Court accepted the liquidators’ view and determined that although Westcon’s security interest attached to the proceeds of the sale of its product, Maclean’s bank account was in overdraft and was intermingled funds. The Court accepted that no property exists in those overdrawn accounts which are capable of sustaining a claim of a security interest. This is consistent with the Court of Appeals decision in Rea v Russell.
Accordingly, Westcon’s security interest was defeated and the Court confirmed that a secured creditor can in fact receive a preference capable of a liquidator clawing back the funds.
Outcome
Although Westcon had received a preference over other creditors of Maclean, the Court declined to set the transactions aside on the basis that Maclean was able to pay its due debts.
The liquidators of Quantum Grow Limited at Waterstone Insolvency served a voidable transaction notice on a related company, Lotus Gardens Limited, seeking to set aside $25,576. The Notice was issued pursuant to the process prescribed in s 294 of the Companies Act 1993 (“the Act”). Lotus Gardens neglected to object to the voidable transaction notice within 20 working days.
The liquidators therefore considered that by operation of s 294(3) of the Act, the transactions had been automatically set aside. Demand was made by the liquidators against Lotus Gardens setting out that $25,576 had automatically been set aside and payment of $25,576 is due. Again, Lotus Gardens failed to respond.
The debt remained undisputed; the liquidators then served a statutory demand on Lotus Gardens. No dispute was raised nor was any application made to set aside the statutory demand pursuant to s 290 of the Act.
The liquidators then filed proceedings to liquidate Lotus Gardens. If Lotus Gardens wanted to defend the liquidation proceedings, it was required to file and serve its defence within 10 working days of service. It did not. Lotus Gardens filed an application to extend time to file its defence just a few working hours before the hearing. The High Court granted this extension and the issue went to a defended hearing.
The common director of Lotus Gardens and Quantum Grow, Alan Canavan, gave evidence regarding the payments from Quantum Grow to Lotus Gardens. His first story was that there was no connection between the companies other than him being a common director and shareholder. His second story was that Lotus Gardens had advanced a loan to Quantum Grow and that the funds were to satisfy that loan. His third story was that Lotus Gardens was simply a conduit of the funds in relation to a loan to the Bank of New Zealand. All three versions were given under oath at different times by Mr Canavan.
The High Court
This case was heard by Associate Judge Bell and on 17 May 2013 his Honour released his decision.
The learned Associate Judge was of the view that the liquidators were relying on a common law right to enforce a debt that had arisen from the transaction being set-aside, a right that had been legislated away in the changes from the 1955 Act to the 1993 Act. Accordingly, the liquidators were told they should have applied to the Court under s 295 of the Act to seek an order before issuing a statutory demand.
Because the liquidators had used the wrong procedure, the learned Associate Judge held that Quantum Grow was not a creditor and therefore had no standing to liquidate Lotus Gardens. The liquidation application failed.
The key take outs from the High Court were:
Although a transaction is automatically set aside when a recipient of funds does not object, a debt does not arise under a claim for money had and received, but under a Court Order. Accordingly, a liquidator must first obtain an order under s 295 of the Act before a debt is due.
Lotus Gardens was free to contest whether there was a transaction under s 292 of the Act and to raise the defence outlined in s 296(3) of the Act.
On the basis that the liquidators did not obtain a Court Order pursuant to s 295 of the Act, they were not creditors and could not liquidate Lotus Gardens.
The Court of Appeal
The liquidators appealed the decision of the learned Associate Judge and recently the Court of Appeal (O’Regan P, Stevens and Asher JJ) confirmed the liquidators submissions in full.
The Court of Appeal confirmed that the voidable transaction provisions of the Act are not a code and a liquidator may pursue set aside transactions by other means. The Court of Appeal further confirmed that the procedure in the Act is not exclusive.
Accordingly, when a creditor receives funds from an insolvent company and a liquidator serves a notice to set aside those transactions, if the creditor does not reply, a liquidator may pursue the recovery of those funds, as a debt and/or for money had and received. Further, a liquidator may serve a statutory demand on the non-payment of that debt.
The Court of Appeal caveated the right of a liquidator to invoke this process. In particular, if the creditor could make out an arguable defence under s 296(3) of the Act or argue that it did not in fact receive a transaction then the Court ought not to make a liquidation order. In the circumstances of this case, Lotus Gardens sought to argue that it had a defence pursuant to s 296(3) of the Act and it said it was simply a conduit of the funds and therefore no order ought to be made. The Court of Appeal dismissed these defences and considered they were not arguable.
The Court confirmed that best practise is to utilise the process under s 295 of the Act (the orthodox recovery route). However, the Court of Appeal allowed the appeal by the liquidators and made an order placing Lotus Gardens into liquidation together with costs on appeal and at the High Court.
Key take outs
Whilst liquidators can shortcut the usual process, liquidators should invoke this process with caution as it is limited to certain circumstances, namely where the creditor does not seek to object to transactions being set aside and they have no realistic defences under s 296(3) of the Act. Liquidators should consider whether the creditor may stump up a defence at a later stage and pre-empt those defences. If those defences are arguable, the orthodox procedure ought to be utilised as the short route may prove to be a longer route as confirmed by the Court of Appeal.
