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ARE YOU DOING BUSINESS WITH A COMPANY RESCHEDULING ITS DEBT?

Grant v Westcon Group NZ Ltd [2013] NZHC 3419

The court has recently held that a formal debt rescheduling arrangement with creditors was sufficient for the Company to be able to pay its debts as they fell due. This prevented liquidators from succeeding in setting aside payments to a creditor as an insolvent transaction. This case should give creditors more confidence in dealing with companies who enter into formal debt rescheduling arrangements. It is also a timely reminder to liquidators to look beyond the balance sheet test, particularly where there is a formal debt rescheduling arrangement in place that is being complied with.

The payments were made at a time when the Company had entered into debt rescheduling arrangements with its major creditors. Agreement was later reached that the existing debt of the major suppliers would be ring fenced and paid off by regular monthly payments for 12 months. The Company met its obligations for 8-9 months before being put into liquidation. The Company's annual balance sheets showed that the Company's liabilities exceeded its assets by around $2m throughout the period the payments were made. The liquidator applied under s292 Companies Act 1993 to have those payments set aside as insolvent transactions.

In order for the liquidators to succeed with their setting aside application, they had to prove that the Company could not pay its due debts and that Westcon received more from the Company's payments than it would have in the Company's liquidation. While the liquidators were able to prove that Westcon had received more in the transactions than it would have in the Company's liquidation, the principle issue in this case was whether, because of the agreement with the major creditors, the Company was able to pay its debts as they became due.

The Court observed that it appeared there would have been sufficient support from the Company's major creditors to have enabled the Company to obtain approval to a Part 14 Companies Act 1993, that formal arrangements had been concluded and this was not the giving of a mere indulgence.

The Court found that despite having a poor balance sheet, the Company's debt rescheduling arrangements offered a viable proposition for its purpose of meeting its debt obligations as they fell due. During the period of 8-9 months when the payments were made, it appeared the recovery objectives were being attained and the Company met its obligations as they fell due under that debt scheduling arrangement. The Court found that the payments were not an avoidable transaction.

Written by Matthew King, Nicola Scott at 09:00

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