Bankruptcy judges cannot block a debtor company winding up just because the amount owed is small, the Court of Appeal ruled. Creditors frequently use threats of winding up to force payment from debtor companies.
Internet marketer Pure SEO Ltd was owed $1000 by Auckland vehicle rental company Luxury Rentals Ltd for search engine marketing. Luxury Rentals didn’t pay. Pure SEO sold the debt to collection agency, 90 Nine Ltd.
Chasing the debt, 90 Nine asked the High Court to put Luxury Rentals into liquidation under Companies Act rules winding up insolvent companies. The bankruptcy judge refused: forcing liquidation on a $1000 debt was disproportionate, he said. Other debt recovery steps should first be taken. It is often uneconomic or not practical for creditors to try and seize debtor company assets, said 90 Nine. It simply increases recovery costs and creates delays.
The bankruptcy judge was perturbed that 90 Nine had nominated as potential liquidator an insolvency specialist intending to charge $500 per hour. Two hours charged out at this rate would consume the amount owed. Liquidation is disproportionate, given the indebtedness, the bankruptcy judge said.
90 Nine has a statutory right to apply for Luxury Rentals’ winding up, the Court of Appeal ruled. It is not for courts to question the economic rationality of legal action taken, it said. Bankruptcy judges cannot refuse a winding up order on the simple ground that the debt claimed is a small amount. Current regulations set a minimum debt of $1000 for a winding up order. Once appointed, a liquidator takes control of all company assets.
The court was told Luxury Rentals’ sole director Adam Bsisou has left New Zealand, with no intention of returning. Luxury Rentals has been struck off the companies register for failing to file an annual return.
90 Nine Ltd v. Luxury Rentals NZ Ltd – Court of Appeal (11.09.19)
19.164