September 2004

Creditors versus liquidators

Steps to avoid being the Victim

Whenever a company is placed in liquidation, there is inevitably wide spread concern amongst the company’s unpaid suppliers at their prospects of being paid. Other creditors who have been paid some or all of the debt outstanding to them may be tempted to breathe a sigh of relief.

However, such creditors are certainly not immune from the consequences of liquidation. They may find that the liquidator seeks to recover payments made to them by the company before it was placed in liquidation. If such payments fall within the definition of a “voidable transaction” under the provisions of the Companies Act 1993, then the liquidator is entitled to recover the payment from the creditor.

Voidable Transaction 

A transaction may be set aside on the application of the liquidator if the transaction:

• Took place at a time when the company was unable to pay its due debts; and
• Took place within the “specified period” of two years prior to the commencement of the liquidation; and
• Enabled the creditor to receive more towards satisfaction of a debt than the creditor would have otherwise received or been likely to have received in the liquidation;
  – unless the transaction took place in the ordinary course of business.

Furthermore, if the transaction took place within the “restricted period” of six months prior to the commencement of the liquidation, there is a presumption that the transaction took place at a time when the company was unable to pay its debts and outside the ordinary course of business.

Procedural Steps 

Usually, the liquidator will write to all creditors and former creditors of the company that the liquidator believes may have been in receipt of a voidable transaction.

However there is no requirement for the liquidator to send such a letter. Instead, the liquidator can file a notice in the High Court seeking to have the transactions set aside and serve it on the creditor. Unless the creditor applies to the High Court for an order that the transaction not be set aside within 20 working days, the transaction will automatically be set aside.

Ordinary Course of Business 

In most instances where creditors have applied for an order that the transaction not be set aside, the application has been determined on whether or not the payment was made in the ordinary course of business. A payment will generally be regarded as having been made in the ordinary course of business if a payment was made:

• In accordance with past payment patterns and industry standards;
• Within the applicable terms of trade;
• Without the need for arrangements for the debt to be paid over time to be made;
• Without any pressure being applied to extract payment.

Payment Received in Good Faith 

If the creditor is unable to show that the transaction was not a voidable transaction, the Court may nevertheless deny recovery by the liquidator in whole or in part if the Court is satisfied that:

• The person who received the payment did so in good faith.
• The person who received payment altered their position in the reasonably held belief that the payment was going to be made and would not be set aside.
• It is inequitable to award a recovery.

Our Advice 

Whilst there is nothing particularly new in the above, it is important that those in business remain aware of the position because there are certain steps that can be taken to minimise the risks of having to repay funds to a liquidator.

For example:

1. Be vigilant in pursuing debtors. 
2. Make sure overdue balances are kept to a minimum to reduce your exposure to claims from liquidators. 
3. Ensure that your terms of trade provide for personal guarantees from the directors of all limited liability companies to whom you extend credit. 
4. If any of the above circumstances occur contact us immediately. Time is of the essence to protect your position as far as possible.