In New Zealand, the liquidator of an insolvent company may have the power to claw back funds received by creditors or other parties in certain circumstances. This is known as a voidable transaction, and it can occur if:
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The transaction occurred within the two-year period before the company entered into liquidation, and
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The transaction involved the transfer of property or payment of money, and
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The transaction gave the creditor or party an unfair advantage over other creditors of the company.
If a transaction is deemed voidable, the liquidator may be able to claw back the funds received by the creditor or party. This is intended to ensure that all creditors are treated equally and that assets are distributed fairly.
Some specific examples of transactions that may be deemed voidable include:
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Preference payments: Payments made to a creditor shortly before the company entered into liquidation, which gave the creditor an unfair advantage over other creditors.
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Uncommercial transactions: Transactions where the company received less than market value for its assets, or where the company paid more than market value for goods or services.
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Transactions with related parties: Transactions with directors, shareholders, or other related parties that gave them an unfair advantage over other creditors.
It's important to note that not all transactions will be deemed voidable, and the liquidator must follow a strict process to determine whether a transaction should be clawed back. If you have received funds from an insolvent company and are concerned about the risk of clawback, it's advisable to seek professional advice from an insolvency practitioner or lawyer.
A real-life example of a voidable transaction in New Zealand occurred in the case of Mainzeal Property and Construction Limited. Mainzeal was a large construction company that went into liquidation in 2013, owing over $100 million to creditors.
In the liquidation process, the liquidators identified several transactions that they believed were voidable, including:
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Preference payments: Mainzeal had made payments of over $42 million to related parties, including its parent company and other companies associated with its directors, in the two years leading up to its liquidation. The liquidators argued that these payments were preferential and gave those related parties an unfair advantage over other creditors.
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Uncommercial transactions: Mainzeal had transferred ownership of several properties to related parties for nominal amounts shortly before its liquidation. The liquidators argued that these transactions were uncommercial and gave the related parties an unfair advantage.
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Transactions with related parties: Mainzeal had entered into several contracts with related parties for construction work and services. The liquidators argued that these transactions were uncommercial and gave the related parties an unfair advantage.
The liquidators pursued legal action to claw back the funds received by the related parties involved in these transactions. The High Court ordered Mainzeal's former directors to pay $36M in penalties. This order was overturned by the Court of Appeal and sent to the Supreme Court to reach a decision on total liability. The court decision is expected some time in 2023.
This example highlights the importance of understanding the risk of voidable transactions when dealing with an insolvent company, particularly when related parties are involved. It also underscores the need for careful consideration and professional advice when entering into transactions with an insolvent company or its related parties.