The Court of Appeal has ruled a $250,000 payment made by Andrew Krukziener as part of a 2009 deal with Hanover Finance was an insolvent transaction designed to sidestep the implications if the former property developer was bankrupted, the Court of Appeal has found.
Justices Lyn Stevens, Forrest Miller and Robert Dobson dismissed an appeal by HF Residual Obligations, formerly Hanover Finance, seeking to overturn a High Court decision deeming the payment to be an insolvent transaction, meaning it could be cancelled by the Official Assignee in charge of the bankruptcy of Krukziener's property. The Dec. 17 judgment was published on the Justice Ministry's website this week.
"We are satisfied that the deed, rather than documenting a genuine commercial transaction, was a device entered into by Hanover in an attempt to circumvent the limitation on one creditor obtaining preference over others in the bankruptcy of Mr Krukziener," the judgment, given by Justice Stevens, said.
The payment was the first instalment of a settlement Krukziener reached with Hanover in a bid to stave off bankruptcy after the finance company had been granted a summary judgment against the property developer over loans totalling some $4.2 million.
The deal would have seen companies associated with Krukziener pay $700,000 to purchase the debts from Hanover, paying $250,000 up front, a further 25 monthly instalments of $10,000 and a final payment of $200,000.
"The relevance of the substance of the transaction invites consideration of the commercial reality confronting Hanover and the Krukziener entities at the time the deed was drafted," the judgment said. "His solvency was questionable, so that any amount he was prepared to pay to forestall bankruptcy would only have value to Hanover if it could be structured in a way that protected Hanover from a claim for repayment in the event that Mr Krukziener was subsequently declared bankrupt."
Hanover submitted Krukziener didn't make the payment, rather it was made on behalf of the companies owing the debt, and that it wasn't to satisfy a debt owed by the property developer, and couldn't fall within the definition of an insolvent transaction.
The Official Assignee emphasised "the need to focus on the true nature of the transaction, namely, that Mr Krukziener had negotiated the settlement of the judgment debt owed by him to Hanover in order to avoid bankruptcy," the judgment said.
Hanover didn't want the initial payment to be challenged as an insolvent transaction if Krukziener didn't manage to stay afloat, but the judges deemed the provisions didn't achieve that purpose, the judgment said.
"That heavily discounted amount was payable pursuant to a deed that was designed to minimise the risk of the payment being characterised as a preference should Mr Krukziener pass into bankruptcy," it said.
"It had been designed about as well as clever drafting could achieve and, had the Official Assignee been bound to respect the form of the transaction, it was a structure that would have worked. However, it cannot withstand an analysis of the substance of the transaction."
Krukziener was bankrupted on a separate application by the tax department in December 2010, and has since been discharged last December.