Proof of debt in the payment

A North Shore cabling company is stunned to learn it may have to repay $37,000 it earned last year because it should have known the firm it did the work for was insolvent.

Infrastructure cabling business Boss Systems has received a demand for the funds from the liquidators of Aden Electrical, a firm it was subcontracted to.

Aden always paid on time and Boss received its final payment from the electrical company in June last year.

Aden went into liquidation in March, owing $3million.

Now the firm's liquidators, Jollands Callander, say Boss Systems should repay the $37,000 final bill because Boss would have known Aden Electrical was in trouble at the time and had, therefore, been paid ahead of other creditors.

Under Section 292 of the Companies Act, liquidators can claw back payments made by an insolvent company up to two years prior to it going under. The law aims to prevent creditor queue-jumping, such as the company's directors paying off mates or people they have given personal guarantees to first.

It used to be that firms could argue any payments they received within that two years were made in the ordinary course of business. But that defence was removed from the law three years ago. Boss will now have to prove it had no idea Aden was insolvent when it traded with the firm.

"It's absolutely ludicrous," Boss general manager Brayden Jack said. "What this means is that every single business in New Zealand should never bank any money for two years.

"How do you go about proving someone is solvent? If they're paying their bills as far as I'm concerned they're solvent."

Jack said he was disputing the demand and if it went as far as a court hearing it could cost $10,000 in legal fees.

Jollands Callander said it was not able to comment on the matter because it might go before the courts.

Liquidators say Section 292 is a commonly used tool. However, they agree most small to medium enterprise (SME) owners would have no idea the provision existed.

"You've got to look at it from the liquidator's point of view - he's there to try to get money for the other creditors," said Kenneth Brown, of Tauranga accountancy firm Rodewald Hart Brown.

The lesson for SMEs is to keep as much intelligence on their customers as they can, and if there is any indication of trouble to collect debts as fast as possible. "If it does get clawed back, at least you've had the use of it in the meantime."

Dennis Parsons, of Hamilton firm Indepth Forensic, said $37,000 was an amount most liquidators would pursue.

There was a restricted period six months immediately before a liquidation in which those trading with a company were deemed to know it was insolvent, he said. If a payment was made within that time that was over and above what the creditor would get out of the liquidation they were obliged to hand it back.

Ironically, if the creditor was struggling to get paid and had put the pressure on, that was an indication it knew the client company was in trouble.

Kensington Swan senior associate Tyrone Cooley said he had recently helped several clients deal with demands under Section 292 and there was probably more use of the provision now because of the economic downturn.

Because the payment to Boss Systems was made outside the six-month restricted period, the onus was on the liquidator to prove Aden Electrical was insolvent at the time.

Barrister Michael Bos said the advice for SMEs was to maintain good credit control and aim for regular billing, perhaps more often than monthly.

Advice from the experts
* In the current economic environment, a firm can go from trading well to being in trouble quite quickly, Kensington Swan senior associate Tyrone Cooley says. As soon as a customer is slow to pay "your guard needs to go up and you need to probably do a bit more digging around". If you're not satisfied with what you hear, supply services on a cash-up-front basis.

* Bill regularly, barrister Michael Bos says, possibly even weekly. "I know there are some builders who will require payment immediately."

* Don't be afraid to continue to collect money, even though applying pressure indicates you know the firm is in trouble. "It's better to have the money than not," Bos says.

* If you receive a notice from a liquidator trying to claw back a payment, it is vital to respond within the stipulated 20 working days, Cooley says. A letter explaining why you should not have to pay it back will do. "If you don't do that, then the transaction is deemed to be set aside."

The Companies Act - voidable transactions:
* A liquidator can claw back money if the company was unable to pay its due debts and the creditor got more than they would in the liquidation. This can go back two years.

* Payments in the six months before liquidation are presumed to have been made when the company was unable to pay its debts.


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