The
Court of Appeal has ruled against the “peak indebtness rule”, the rule favoured
by liquidators attacking payments made through a running account because it
claws back from creditors the maximum amount possible.
Liquidators challenging preferential payments
meet heavy resistance from creditors of an insolvent company fortunate to be
paid prior to liquidation. Creditors
paid in full do not want to repay money received in return for a minimal or
non-existent payment out of the unsecured creditor pool.
In 2006, company law was amended to deal with
the issue of “running accounts”: the commercial practice where supplier and
customer run a current account with no clear delineation between charges for
goods or services supplied and subsequent payments. Should the customer later go into liquidation
insolvent, it is difficult to identify which payments should be clawed back as
a preferential payment. Insolvency law
seeks to equalise payments to unsecured creditors, permitting a liquidator to
claw back payments made prior to liquidation and made at a time when the
customer was insolvent. Liquidators can
claw back payments made up to two years prior to liquidation.
The Court of Appeal was told liquidators have
been using what is called the “peak indebtedness rule”. This involves looking at the state of the
current account between customer and creditor for the entire period the
customer was insolvent, going back up to two years. Having identified the point within this time
period when the amount owed was at its highest (the peak indebtdeness),
liquidators then treat any reduction below this peak up to the point of
liquidation as being a preference having to be repaid. Creditors criticise the peak indebtedness
rule as being totally arbitrary and being designed to maximise the amount
clawed back.
The Court of Appeal said liquidators have been
wrong in using the peak indebtedness approach.
Instead, liquidators must identify the first point when a company was
insolvent and use as their starting point for recovering payments as
preferential the later of: two years prior to liquidation (if the company was
then insolvent) or the start date of the business relationship if this relationship
commenced during the two year period (again presuming the debtor company was
then insolvent). Only if there is a
reduction in indebtedness between this starting point and date of liquidation
are there grounds to claim there was a preferential payment.
The court said the peak indebtedness rule is in
conflict with the plain wording of the Companies Act. The Act was applied in two cases heard
together on appeal.
Timberworld Ltd was challenging a claw back
demanded by the liquidator of an insolvent customer, Northside Construction Ltd. Northside was proved to be insolvent in the
two years prior to liquidation and had carried on trading whilst
insolvent. Northside operated a running
account with its supplier, Timberworld.
During the two year period, indebtdness with Timberworld peaked at
$95,569. On liquidation Northside still
owed $47,650. Using the peak
indebtedness rule, the liquidator claimed $47,963. The Court of Appeal ruled the liquidator
could recover only $29,490 as a preference: the reduction in the current
account calculated between the start and the finish of the two year period.
In a second case, liquidators of Tarsealing 2000
Ltd unsuccessfully appealed a High Court ruling that Z Energy was not required
to repay $293,555 received for bitumen supplied. Tarsealing had a trade account with Z Energy
for a 17 month period before being put into liquidation by Inland Revenue. The trading account opened with a zero
balance due, peaked at $293,555 and dropped to a zero balance when the debt was
paid in full before the company went into liquidation. The starting point within the two year period
was zero when the trade account was opened, and was again zero at
liquidation. With a net difference of
zero between the two points there was nothing for the liquidator to claw back.
Timberworld
Ltd v. Levin – Court of Appeal (24.4.15)
15.038