Decisions put Ross claims in doubt

It may prove difficult for the liquidators of Ross Asset Management to claw back payments already made to some investors ahead of others, following two High Court cases.

The decisions have shaken up the generally accepted understanding around insolvent transactions - payments made by a troubled firm in the run-up to it going under.

Under the Companies Act, liquidators can claw back payments made by a company up to two years before its liquidation. The law is designed to prevent creditor queue-jumping.

Suspected Ponzi scheme operator Ross Asset Management was placed in receivership in early November owing $439 million to investors.

The receiver, PricewaterhouseCoopers, is applying to place the company and related entities into liquidation.

Some investors had more than their original deposits returned in the form of income, while others received no income or repayments.

Under the clawback rules, to avoid a claim creditors have to prove that they acted in good faith in trading with the now-failed firm, that they had no reason to suspect it was in trouble, and that they gave value for the payment they received.

The third point was added in a 2007 amendment to the legislation designed to align New Zealand law with Australia's. The two recent decisions have clarified that point.

In a note on the two cases law firm Chapman Tripp says it means that every creditor will have provided value by advancing the credit in the first place, and that as long as they acted in good faith and didn't suspect insolvency they can't have a payment clawed back off them.

Partner Michael Arthur said it shifted the balance in the creditors' favour, and the defence could be used against a wide variety of clawback claims.

"There are a lot of voidable transaction claims that get made by liquidators, they are very routine.

"This is quite a radical change to what had been previously understood."

However he noted the decisions may be appealed.

Shaun Adams, head of restructuring and insolvency at KPMG, said there was no morally right or wrong answer.

However he believed the situation needed tightening up. "It's all been very one-sided in favour of the liquidator or insolvency practitioner."

He agreed the new situation could apply to the Ross Asset Management collapse, but said providing financial services was different to providing goods and he questioned whether one principle should be applied across the board.

David Webb, New Zealand managing partner of PPB Advisory, said the court decisions may change the behaviour of liquidators.

"Many liquidators fund their business on being able to claw back insolvent transactions.

"More-established practices with processes may make educated decisions not to take jobs where they are solely reliant on insolvent transactions.

"Because they're not taking appointments, it may be that the only parties that are available are those who have less-stringent rules in place."