Review to examine 'voidable' payments

By BRIAN FALLOW economics

The Government is reviewing the law on insolvency, but it will not specifically consider the issue of whether family trusts are being used to shelter assets from creditors.

The review is, however, looking at "voidable transactions" - payments a company makes before it becomes formally insolvent but which can, with considerable difficulty, be clawed back.

"Anecdotally, I hear people complaining about the abuse of trusts - people using them to deliberately avoid paying creditors," said David Brown, a senior law lecturer at Victoria University.

"But if people are doing that the present law has remedies.

"There is nothing special about trusts."

A company in trouble is unlikely to stash money in a trust directly. More normally there are two steps to consider: a transaction between the company and an individual, such as a director or other insider, and secondly, a transaction between that individual and another party, which might be endowing a trust, or gifting money, or selling assets at below value.

While the purpose of a limited liability company is to limit shareholders' losses if the firm fails, the Companies Act places personal liabilities on directors who allow a firm to continue trading when it is insolvent.

The convener of the Law Society's insolvency committee, Michael Webb, said a number of provisions allowed dealings that might have prejudiced creditors to be examined, especially related-party dealings, but in many cases the action had to be taken by a liquidator, who must have the necessary funds.

Martin Fowke, of the Ministry of Economic Development, said that in looking at any changes to the law on voidable transactions, policymakers had to balance two considerations: the desire to maximise the pool of assets available for creditors, against the need for certainty in financial transactions.

Bell Gully lawyer Peter Barker said a transaction up to two years earlier could be set aside if the company was insolvent at the time, if the transaction was not made "in the ordinary course of business," and if the recipient received a benefit he would not otherwise have got.

Beyond a six-month period, the onus was on the liquidator trying to overturn the transaction to show that all those conditions had been met.

Within six months the onus was on the recipient to show at least one of them had been met.

Mr Barker said it could be difficult to establish that a transaction should be set aside, and the costs of trying to do so fell on creditors.