Heartland Bank is thrashing out creditor security rights in respect of current assets: accounts receivable and work in progress. The High Court has left hanging the question of when secured creditors can lay claim to the proceeds of client invoices issued before liquidation but collected later.
Accounts receivable and work in progress can make up a large chunk of business current assets. Financiers lending on security of current assets want certainty they can collect if their client goes belly-up.
Stages Civil & Electrical Ltd went into liquidation insolvent in 2015. It was working as sub-contractor to a company then known as Transfield Services installing fibre optic cabling in Hamilton. At the date of liquidation, Stages owed Heartland Bank $1.2 million. The bank held an all-encompassing security over Stages’ assets. Nearly $900,000 was recovered after selling Stages plant and equipment. Claims to security over accounts receivable and work in progress were disputed.
The High Court was told Heartland agreed a ‘whole turnover factoring’ agreement with Stages. Every receivable generated by Stages was instantly ‘owned’ by Heartland with Stages appointed as Heartland’s agent for collection of the debt. Heartland installed proprietary software within Stages’ accounting system which tracked the issue of all invoices and payment receipt. Whilst legal documentation described Heartland as ‘owner’ of each receivable, the Personal Property Securities Act qualifies this ownership; employees and Inland Revenue as preferential creditors on liquidation can take priority.
Associate judge Smith questioned whether Heartland took priority for the value of invoices totalling $188,100 issued before liquidation, but not collected until after Stages went into liquidation. Under the Personal Property Securities Act this turned on whether Heartland provided ‘new value’; whether Heartland allowed Stages further credit on gaining ‘ownership’ of the invoices in question. Further evidence was called for.
Other issues were straightforward. Judge Smith ruled that $20,000 liquidators recovered from Stages’ shareholder as a current account debt goes to pay preferential creditors; the debt was not payable until liquidators made demand after liquidation. A $105,300 invoice issued by liquidators for work in progress completed, but unbilled, at the time of liquidation belonged to Heartland Bank; this invoice quantified the value of work in progress which was an asset covered by the Bank’s security at the time of liquidation.
Brown v. Heartland Bank Ltd – High Court (21.05.19)
19.096