If you have ever ‘stood-by’ a customer who is going through a rough patch by continuing to supply goods/services on credit and holding off on receiving payment, some of us will know there can be a happy ending to this story. With your goodwill and support your customer might manage to trade out of its difficulties, your relationship is stronger than ever and most importantly – you can be repaid in full.
Unfortunately, for some business owners, the story does not always end so happily when the liquidator comes knocking unexpectedly.
If the customer is later placed in liquidation, the liquidator may require the creditor to repay all or some of the payments (or other monetary or non-monetary benefits) received by the creditor from the liquidated company. This is known as the liquidator’s power to ‘clawback’ preferential transactions and is provided for under s 292 of the Companies Act 1993.
Sounds pretty unfair, right?
Voidable transactions (or liquidator’s ‘clawback’) regime is one of the most controversial features of insolvency law in New Zealand. It is designed to protect creditors against the tendency of the directors of troubled companies to pay themselves and their favourite or aggressive creditors before anyone else.
Norling Law have prepared a full analysis of the rational for the voidable transaction regime, including what a liquidator must prove and the defences to a claim.