Most Read Contributor in New Zealand, September 2016
Liquidators must seek a court order to recover an insolvent
transaction – even where the creditor has not objected in
time to a notice under section 294 of the Companies Act.
The importance of following the prescribed procedure was
recently reinforced by the High Court.1
We look at the decision and the conclusions to be drawn from
Liquidators appointed to Quantum Grow Limited (Quantum)
wrote to Lotus Gardens Limited (Lotus) in May, July and
September 2012 about payments worth $25,576.88 made to Lotus
between March and July 2010. Lotus did not reply.
In October 2012, the liquidators served a notice under section
294 of the Companies Act 1993 (the Act) on Lotus. Lotus
did not object to the notice.
In November 2012, the liquidators wrote to Lotus warning that if
no payment was received, a proceeding would be started in the High
Court for an order to confirm the setting aside of the
The liquidators did not apply under section 295 of the Act,
instead serving a statutory demand on Lotus. Again, Lotus did not
respond. The liquidators therefore issued a liquidation proceeding
Lotus raised two defences to the liquidation proceeding:
it was not indebted to the liquidators because they had not
obtained an order for payment under section 295 of the Act,
it was not the beneficial recipient of the payments, but a
conduit for funds paid by Quantum in reduction of its debt to
The Court refused to appoint liquidators to Lotus because
Quantum's liquidators had followed the wrong procedure to
recover the alleged insolvent transactions and also because there
was a genuine and substantial dispute as to Lotus' liability,
since it had simply passed payments on to BNZ.
A common law action for money had and received can no longer be
brought in relation to insolvent transaction claims. The only way
for a liquidator to recover insolvent transactions is through the
process described in sections 294 to 296 of the Act.
A transaction will be set aside if a creditor does not, within
20 working days, serve a notice of objection to a liquidator's
notice to set aside, but the setting aside does not automatically
create an obligation for the creditor to repay funds or return
Once a transaction is set aside, a liquidator should apply for
orders under section 295 for repayment or similar. Such orders are
discretionary, which is appropriate given the need for flexibility
in insolvent transaction claims – for example, in running
account cases, or where there is a question about value of property
In this case, because the liquidators did not get an order for
repayment under section 295, they were not creditors of Lotus and
had no standing to apply to put Lotus into liquidation.
From a procedural standpoint, even where there has been an
automatic setting aside under section 294, a recipient of the
payments can still challenge whether there was a transaction under
section 292 and, if so, what that transaction was, and to raise a
defence under section 296(3), at the time that a liquidator applies
for remedial orders under section 295.
The case is a useful reminder that an order under section 295 of
the Act is required before a creditor is indebted to liquidators.
There can be no shortcuts.
1Grant v Lotus Gardens Limited 
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
The Code envisages that the insolvency resolution processes will be conducted by insolvency professionals.
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