Liquidators are not limited to the procedure set out in
section 295 of the Companies Act to recover a debt once an
insolvent transaction has been set aside.
The Court of Appeal has reversed the High Court's
earlier decision in the
Lotus Gardens case1 giving liquidators more options.
However, in most cases liquidators should continue to use the
section 295 procedure to recover insolvent transactions that have
been set aside.
We set out the facts of the case and the High Court's
earlier decision in a previous
In 2012, the liquidators of Quantum Grow took steps to set
aside, as insolvent transactions, payments made to Lotus Gardens,
who did not respond. As a result, the payments were automatically
set aside. Instead of seeking an order under section 295 that they
could recover the payments as a debt, the liquidators issued a
statutory demand to Lotus Gardens, seeking recovery of the
The High Court said the liquidators could not use a statutory
demand because, until the Court made an order under section 295,
the liquidators were not creditors of Lotus Gardens and did not
have standing to seek a liquidation order. The Court of Appeal
disagreed and sent the case back to the High Court, which appointed
the Official Assignee as liquidator on 16 April 2014.
The Court of Appeal said that the section 295 procedure is not
exclusive: "The setting aside of a transaction gives a
liquidator the basis for recovery. It will usually be under section
295, but a liquidator may seek to recover a debt by different
means." The Court emphasised that it did not wish to be
seen encouraging the use of a statutory demand as a remedy for
liquidators claiming recovery of voided transactions. The Court
stressed that the section 295 procedure is designed to deal with
remedies following setting aside, and it is good practice to
utilise that section.
The reason why it is good practice is that the automatic setting
aside does not finally determine all aspects of an insolvent
transaction. A creditor can still raise certain defences, including
under section 296(3).
An unhelpful shortcut?
Using the statutory demand procedure may not help liquidators.
As the Court pointed out, liquidators who do use the statutory
demand procedure could well find themselves faced with a Court
refusing to make a liquidation order and awarding costs against
them. They would then have to apply under section 295, having
wasted creditors' funds on an unnecessary step.
The threshold for setting aside statutory demands is relatively
low. A creditor just needs to show a genuine dispute exists about
whether the debt is due. There is a real danger that if liquidators
use the statutory demand process, creditors will be able to raise
tenable arguments, including the "good faith" defence
under section 296(3).
Chapman Tripp comment
The Court of Appeal's interpretation does make sense from a
strict legal standpoint. But, practically, it may have been simpler
for all concerned if the section 295 process was regarded as a
code, and the only way for liquidators to enforce insolvent
transaction claims. Just because a transaction has been set aside
does not mean that the matter is final. A creditor still has some
defences available to them.
We expect most liquidators to continue their current
1Grant and Khov v Lotus Gardens
Limited  NZCA 127
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Security interests must be registered correctly to avoid assets vesting in a company if placed into administration.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).