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Can you breathe a sigh of relief once you have been paid?

So, after months of uncertainty that debtor company you were worried about has paid you in full. You can relax  . . . or can you?

If your debtor goes into liquidation less than two years after your debt was paid, then no you can't.
Why is that? Section 296 of the Companies Act gives the liquidator of the company the ability to claw back the payment you received on the basis that it was an "insolvent transaction."

Seems unfair doesn't it? After all, you've done the work, you deserve to be paid. Why does this section exist? According to the Court of Appeal in Farrell and Rogan as liquidators of Contract Engineering Limited (in receivership and in liquidation) v Fences and Kerbs Limited (2013) NZCA 91, Section 296's purpose is to recover funds or other dispositions by the insolvent company during the two year period before liquidation to swell the pool of funds available to the company to be shared amongst all creditors.

So, is that it? Do you have to pay back the money, or is there a way you can retain it? Help may be at hand if your payments falls within section 296 (3) of the Companies Act.

How does it work? Section 296 (3) says that the liquidator can't recover the money paid for your debt if you can prove the following when you received the money:
(a) you acted in good faith; and
(b) a reasonable person wouldn't have suspected, and you didn't, have grounds to suspect that the company is, or would become insolvent; and
(c) you gave value for the payment, or altered your position in the reasonably held belief the payment was valid and wouldn't be clawed back.

The third requirement (c) is the tricky one. In Farrell the creditor argued they "gave value" when they receipted the payment in satisfaction of the debt. The liquidator argued that the creditor had to establish new value at the time the payment was made, and that satisfaction of the debt was not enough.

The Court of Appeal agreed with the liquidators saying that the objective of section 296 was to achieve fairness between all creditors, and generally all creditors should be treated equally. The Court of Appeal took the view that creditors had to prove that value was given at the time of payment. If parliament had contemplated that such value could include the time when the debt was created, then it would have said so.

So, can you relax? The answer remains no you can't. Not until a two year period has passed since the payment was made. A long time until you can breathe easy!

Just another reason that you need to pursue any outstanding money earlier rather than later. If you need some assistance please contact CollectIT on 07 834 9111 or info@collectit.co.nz