Liquidators in for a shakeup

Liquidators can be some of the more colourful characters to be found in the business world.

The only qualifications required for entering the industry are that one is over 18 years of age and of sound mind. This undemanding threshhold has lead to an eclectic group of practitioners, ranging from top accountants to entrepreneurial figures with unconventional track records (even including the odd historic fraud conviction).

But a regulatory regime is in the pipeline is likely to change the shape of the industry, and a pending Court of Appeal decision may change they way they operate. The ruling will also have huge implications for Kiwi businesses.

Some business owners may be surprised to know that liquidators have the power to claw back payments made up to two years before a firm falls over. The rules are designed to stop creditor queue-jumping, such as paying off friends and family first when it looks like the business is going under.

They are known as voidable transactions, and many a small company has been hit by an unwelcome demand from a liquidator seeking to recover a sum received months earlier from a now collapsed client.

In some cases liquidators use voidable transactions as a means of funding liquidations that would otherwise be uneconomic.

It is possible to defend these demands. If the recipient of the payment can prove it acted in good faith, had no reason to suspect the business it was trading with was insolvent, and gave value for the funds received, then the claim can be rejected.

It's this last bit which has set the cat among the pigeons. It was added into New Zealand law five years ago to bring us into line with the Australians. However, relying on a rather fine legal point, Kiwi liquidators have so far argued that it depends on when the value was given.

Two High Court decisions in a row late last year kicked that argument into touch.

Auckland underground construction business Window Holdings had fallen on tough times and gone into liquidation in July 2011 owing $4.2 million. Its liquidators tried to reclaim a payment it had made to stabilising road construction contractor Hiway Stabilisers.

Justice Kit Toogood called the situation "absurd". There was "no reason in either logic or policy" why Hiway should be disadvantaged just because it had provided its services ahead of being paid - as most suppliers do.

He agreed with Associate Judge Tony Christiansen, who a month earlier ruled it was "immaterial" whether Taupo fencing contractor Fences and Kerbs gave value before or after receiving $50,000 in payments from industrial engineering business Contract Engineering.

Contract Engineering failed in mid-2011 owing $5.2m, and its liquidators had collected $457,000 in voidable transactions.

The upshot of the judges' rulings is that very few transactions are voidable because all suppliers give value in return for payment. Companies should be able to carry on without fear they are unknowingly trading with an insolvent firm, and liquidators should not be able to fund unviable liquidations by clawing back payments made to hapless suppliers.

Unsurprisingly, both High Court decisions have been appealed and a joint ruling is due any day.

Liquidators say they aren't the bad guys. Going into failed enterprises they see the unsavoury practices  -such as giving personal guarantees to key suppliers so the business can keep operating and then paying those suppliers ahead of others, or paying tax debt last because the taxman comes at the head of the creditors' queue in a collapse.

They say this kind of thing makes a mockery of the principle that all creditors are on an equal footing, which is the bedrock of our insolvency legislation.

Insolvency practitioners are keeping a close eye out for the decision, but Kiwi SMEs would also do well to take notice of the outcome.

- Maria Slade is morning editor at the Fairfax Business Bureau.