New Zealand: Insolvency update - voidable transactions and payments made by third parties

A recent High Court case: McCullagh v Robt Jones Holdings Limited [2017] NZHC 2182, provides an interesting illustration of the application of the voidable transaction regime to payments made by third parties on behalf of a debtor company.

In this case, Robert Jones Holdings Limited leased premises to a company called Northern Crest Investments Limited (Northern Crest). Northern Crest defaulted on the lease, and a series of payments in discharge of the debt were made by two Australian registered companies, Columbus Property Marketing Pty Ltd (Columbus) and MSH No 2 Ltd (MSH2).

Were these payments "made by" Northern Crest for the purposes of s 292 of the Companies Act 1993 and therefore subject to claw back by the liquidator?

The High Court reviewed the case law and commentary around third party payments and noted that third party payments will be considered to be "made by" the company in liquidation if they fall into one of two categories:

  1. Where the money with which the third party makes the payment is, in reality, money owned by the company in liquidation; and
  2. Where the third party makes payment from money for which it owes to the company.
  3. Here, the Court accepted the liquidators' argument that the payments by Columbus and MHS2 were made by Northern Crest for the purposes of s 292.

In relation to the payments made by Columbus, the Court found that:

  • Some of the payments were redirections of licence fees owed to Northern Crest under an intellectual property licensing agreement;
  • Although the licensing fee was unrealistic in its terms, there was some intellectual property in the company to which it related and therefore, the arrangement was legitimate; and
  • The payments were made with the knowledge and consent of Northern Crest, which was sufficient even if there was no clear evidence that it was at its direction.

In relation to the payments made by MSH2, although it was not formally documented, the Court was satisfied that the payments were a loan to Northern Crest and that they were made with the knowledge and consent of Northern Crest. This was because the payments were treated as a loan in Northern Crest's accounts, MSH2 was a wholly owned subsidiary of Northern Crest, with its sole director also a director of Northern Crest and the directors had shown a consistent disregard for due process and legal requirements, which meant it was not surprising there was no formal documentation.

On this basis, the payments made to Columbus and MSH2, totalling $751,941.52, were voidable transactions and the High Court ordered them to be set aside.

This was a fairly orthodox application of the law in this area, but is a good reminder for companies on the receiving end of such payments, that just because a payment is made by a third party, this does not necessarily provide protection in the event of the liquidation of the debtor. If such a payment is proposed, the creditor should consider making enquiries about the basis upon which the payment is made and how it is being structured between the paying third party and the debtor company. At the very least, creditors receiving such payments should be prepared for the fact that there is the possibility of a finding of voidability.

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