A company could be liquidated over a debt as small as $1000 thanks to a Court of Appeal ruling.
The appeal court this week said associate judge Roger Bell was wrong to consider proportionality when he decided Luxury Rentals NZ shouldn't be moved into liquidation.
The judge said the company shouldn't be declared insolvent because the liquidator's fees as proposed were likely to total much more than the $1000 to be collected.
EY Entrepreneur of the Year finalist Richard Conway's Pure SEO had won a Disputes Tribunal ruling against Luxury Rentals NZ which said the car hire firm must pay $1000 by February 2018.
Pure SEO assigned the debt to 90 Nine in October of that year. The debt-buying firm then took steps to liquidate Luxury Rentals NZ.
In March, associate judge Bell refused to liquidate the company, after hearing that 90 Nine had served a statutory demand and sent letters of demand. The minimum amount of debt for a statutory demand is $1000, according to regulations in the Companies Act 1993.
"I am not satisfied that this is an appropriate case to make a liquidation order. I regard liquidation of a company for a $1000 debt as disproportionate. It only needs two hours work by the liquidator for the amount of the debt to be consumed by the cost of the liquidation," his minute dated March 1 said.
The judge said that other steps should be taken to recover the debt.
However, 90 Nine director Brent Norling, as a matter of principle, took the case to the Court of Appeal which found in his favour. Despite the small debt, the court said the rules have to be upheld.
"We consider that there is considerable merit in Mr Norling's point that the utility of the statutory demand process would be substantially undermined if corporate debtors perceived that such demands could be ignored with comparative impunity.
"Creditors must have available to them the ability to obtain liquidation orders when there is a failure to respond to a demand."
"Consequently we consider that the issue of proportionality between the amount of indebtedness and the deployment of an application to wind up a debtor company is one for the creditor and liquidator," the judgment dated September 11 said.
The panel of judges - Justices Brendan Brown, Simon France and Rachel Dunningham - said that because there wasn't an abuse of the court's process, the appeal must be allowed. The matter was sent back to the High Court to be determined.
Having won the case, Norling told BusinessDesk he is not pursuing the liquidation further.
Lawyer's correspondence before the Court of Appeal had indicated the car rental firm's sole director and ultimate shareholder Adam Bsisou had left the country and the company had already been removed from the register.
Norling added that the economics of the case were bad - it cost about $5000 in proceeding fees plus his own time as a lawyer.
"I self-funded it and did it out of principle, but principles are expensive," Norling said. He would not say how much he paid for the debt.
"It's becoming increasingly difficult to get liquidation orders for small debt and the reality is the liquidation process is important because if it wasn't there nobody would repay small debts," he added.
There are few official statistics on liquidations but Official Assignee figures for 2018/19 show 51 per cent of the liquidations it administered have total debts of less than $100,000.
Figures from liquidator Gerry Rea from 2017 suggest that about 80 per cent of liquidation applications which are not brought by Inland Revenue do not result in liquidation. In those cases a settlement is reached, meaning there is usually payment at least in part.