Alarm at 'absurd' clawback decision

16:00, Oct 16 2013

Contractors say they and many other businesses will be left high and dry over payments if a recent Court of Appeal decision is not challenged.

A recent ruling by the Court of Appeal backed a liquidators' power to claw back payments made by an insolvent company to a contractor up to two years before its collapse.

The president of the Specialist Trades Contractors Federation, Graham Burke, said the implications "potentially affect all businesses in New Zealand".

"The building trade is affected because we tend to have a lot of insolvencies, so I guess that is why it comes to our attention more than others. But . . . any service that you supply and then you're paid afterwards, under this current ruling is a voidable transaction, and I can't believe the legislation was drawn up with that in mind.

"It flies in the face of natural justice."

Commercial law expert Stephen Franks said the issue centred on whether a company was insolvent when it paid other parties.

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"It doesn't affect parties where the company was solvent at the time of payment, but became insolvent within two years. But the problem for people is, companies are usually insolvent well before the time that the balloon goes up."

The chief executive of the New Zealand Contractors Federation, Jeremy Sole, said his group was financially supporting the contractor involved to take the case to the Supreme Court if it granted leave to appeal.

The case involved Hiway Stabilisers, ordered to repay $13,000 to the liquidators of Auckland underground construction firm Window Holdings, which failed in July 2011 owing $4.2 million. Hiway Stabilisers had carried out the work for the developer two years before.

Its payments fell under "voidable transactions" rules, designed to prevent queue-jumping among creditors.

Sole said the situation was absurd. "Hiway completed the contract properly, they were paid, and the deal was closed off. They then paid their suppliers and staff and invested the profit. Now they're being asked to give it all back."

He suggested if the ruling stood, "perhaps all businesses that invoice in arrears should now have a permanent impairment on their balance sheet".

Burke said if the Supreme Court appeal did not go the contractor's way, he hoped there would be a law change.

Franks did not think the appeal court was "straining the words" of the Companies Act, but there was ambiguity in the law, altered in 2007 to harmonise with Australia.

BusinessDay