News & Thinking
Supreme Court clarifies the law under s292 of the Companies Act
The Supreme Court has now issued a judgment in Robt. Jones Holdings Limited v McCullagh and Lawrence in  NZSC 86.
The decision clarifies the test under section 292, giving liquidators and advisors certainty around what must be proven in a claim for recovery. It is significant as the decision had the potential to turn the preference regime in New Zealand on its head, leaving every day loan transactions outside the ambit of the preference regime. It has also avoided some significant complexities and evidential issues for liquidators looking to bring recovery actions.
Northern Crest Investments Ltd (Northern Crest) (parent company of the Blue Chip group) leased a property owned by Robt. Jones Holdings Ltd (Robt Jones). Northern Crest fell behind on its rent payments. Northern Crest and Robt. Jones entered into settlement agreements under which they agreed on the amount Northern Crest was to pay to satisfy its liability under the lease. Payments were subsequently made on account of Northern Crest’s liability to Robt. Jones, though the payments were not made directly by Northern Crest.
The dispute with the liquidators started in 2011, following the liquidation of Northern Crest. The liquidators sought to recover approximately $750,000 which had been paid to Robt. Jones in the year preceding liquidation, on the basis that Robt. Jones had been preferred in accordance with the test set out under s 292 of the Companies Act 1993.
The complicating factor in the case arose because the payments received by Robt. Jones were not paid directly by Northern Crest, but rather two other companies, Columbus Property Marketing Pty Ltd (Columbus) and MSH No 2 Pty Ltd (MSH2). The liquidators claimed that the Columbus money represented licence fees that were due to be paid by Columbus to Northern Crest, in discharge of Columbus’ obligations under a licence agreement. The liquidators also argued that the MSH2 money was either a re-direction by Northern Crest of licence fees, or alternatively was an inter-company loan from MSH2 which was paid directly by MSH2. In both cases, the liquidators claimed that the money was paid with Northern Crest’s consent and knowledge and for its benefit.
The case in both the High Court and Court of Appeal engaged the question of when third party payments can amount to voidable transactions under the preference regime set out s 292 of the Act. Under s 292, the liquidator is able to claw back a payment if it is deemed to be an insolvent transaction and is made within two years of liquidation. An insolvent transaction is one that is entered into at a time when the company is unable to pay its due debts and enables the creditor to receive more than they would receive in the company’s liquidation.
The High Court and Court of Appeal found in favour of the liquidators, determining that the requirements of s 292 were satisfied.
In the final chapter, Robt Jones sought to appeal to the Supreme Court, arguing that in addition to meeting the requirements set out in section 292 of the Act, a liquidator was also required to establish that the transaction had the effect of diminishing the pool of assets available to unsecured creditors. Robt Jones argued that no diminution occurred because the payment was a loan from MSH2 to Northern Crest. It was argued that the loan meant that there was no change in the position of Northern Crest (no diminution of assets) in so far as other creditors were concerned, because Robt Jones was simply replaced by MSH2 as a creditor.
The liquidators argued that to the extent diminution was required, it was already embedded in section 292 of the Act. This is because a liquidator already needed to establish that the transaction had the effect of conferring a benefit over and above what the creditor would have received in the liquidation. The liquidators also contended that the potential effects of imposing a diminution element would undermine the objectives of the regime and Parliament’s intention in enacting the section.
The Supreme Court dismissed Robt Jones’ arguments in their entirety. The full bench of the Supreme Court agreed with the liquidators, finding that section 292 does not require proof of the additional element of diminution.
The Supreme Court observed that section 292 focuses on the effect of the payment, rather than the intention with which the payment was made (which was the emphasis of the previous Companies Act and Privy Council authority). It also found that:
- the wording of section 292 did not leave room for importation of a further common law requirement;
- overseas case law did not support the argument that diminution should be tacked on to the statutory test; and
- an additional diminution requirement would introduce unjustified complexity into the clawback regime.
Regarding the consequences of imposing the diminution test, in addition to unjustified complexity, the Court further held that it would create evidential issues with respect to overdrawn accounts and artificial outcomes.
The decision is a welcome one and provides certainty in the law going forward.
If you would like to view the judgment, you can do so here
Anthony Harper acted on this matter