Confirmation by the Court of Appeal that "accounts
receivable" are more than just book debts and include other
legally enforceable monetary obligations owed to a company will
provide welcome certainty to receivers and liquidators.
The issue is significant because it determines the assets
available to pay preferential claims.
The debate about what is an account receivable has raged for
several years. The High Court originally limited accounts
receivable to book debts1, before adopting a broader
definition2. See our comments on these cases
The Court of Appeal, in what we hope is a judgment settling the
matter, has confirmed the broader definition3. In doing
so, it has provided helpful guidance on some of the finer detail of
Strategic Finance and the IRD were fighting over $782,000
(the Fund) held by the liquidators of Takapuna Procurement
Strategic claimed that its GSA (General Security
Agreement) over Takapuna's property entitled it to the
Fund, because the IRD's claim as a preferential creditor was
limited to book debts and therefore did not include most of the
Under Schedule 7 of the Companies Act, preferential creditors
have priority over GSA holders to accounts receivable and inventory
or their proceeds - but not over PMSI (Purchase Money Security
Interest) holders and factors where they have registered in
The Court of Appeal decided that:
the meaning of accounts receivable in the Companies Act is the
same as in the PPSA
a monetary obligation in the context of the PPSA means an
existing obligation imposed on, or assumed by, one party to pay a
certain sum of money to the other party on a specific or
accounts receivable is not limited to book debts
money held in a bank account will be an account receivable
money held in a solicitor's trust account for a client will
be an account receivable
a possible liability to pay an unidentifiable sum at an
uncertain future date does not amount to an account receivable, but
an existing monetary obligation that is not earned by performance
under a contract does.
On this basis, the Court held that most of the Fund held by the
liquidators should be paid to the IRD.
Chapman Tripp comment
The broader scope of "accounts receivable" is
consistent with the language of the PPSA, and results in a test
that is easier to apply. We believe the decision will provide
certainty for liquidators and receivers.
We are also pleased that the Court has clarified two important
aspects of the test. The first is that the time for determining
whether a fund is an account receivable will be the date of
appointment of a receiver or liquidator. Receivables generated
after the appointment of a receiver or liquidator will not be
subject to any preferential creditors' claim.
Also, the Court explained the impact of the words "whether
or not that obligation has been earned by performance". An
amount that will become payable upon the company performing its
part of the contract will not be an account receivable as at the
date of liquidation if the company has yet to perform its
obligations. That is, accounts receivable do not include "an
obligation that requires performance in order to come into
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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