'No clear winners' after ruling

Kelman & Co partner Peter Farrell said the ruling was being seen as a victory for sub-contractors.

A Rotorua-based liquidator at the centre of a highly anticipated Supreme Court ruling says there are no clear winners after a decision around the contentious issue of insolvent transactions in the event of a liquidation.

Kelman & Co partner Peter Farrell said the ruling was being seen as a victory for sub-contractors but that wasn't necessarily the case.

The Supreme Court last week overturned an earlier Court of Appeal ruling now making it more difficult for liquidators to claw back payments made by a company up to two years before its collapse.

The decision is being welcomed by the Specialist Trade Contractors Federation representing more than 5000 contracting firms, which said it would mean contractors were no longer left in limbo and would now have more confidence to invest and grow

However Mr Farrell said often companies had been insolvent for long periods of time before they were liquidated and the previous law gave liquidators more opportunity to claw back some of the funds, which had already been paid to creditors, and pro-rata those funds among unpaid creditors.

Mr Farrell said on one side, the ruling gave creditors receiving payments from insolvent businesses for goods and services more certainty that they can keep their payments.

On the other side, he said the ruling meant creditors were more likely to be treated unequally because some will get their money out prior to liquidation and some won't and there was now less opportunity to address that situation.

"In reality unsecured creditors are now less likely to get payout in a liquidation."

Mr Farrell said the decision also left more scope for company directors to choose which creditors get paid and which creditors don't prior to liquidation and he believed the current law didn't do enough to discourage directors from treating creditors unequally or to discourage creditors from seeking to obtain a preference.

"In Australia there are measures against directors who play this game and we will now need something like that in New Zealand."

Specialist Trade Contractors Federation president Graham Burke said the ruling would come as a relief to thousands of businesses.

"This affected every business providing goods and services on account. The building trade was particularly aware of the issue because there are more insolvencies in the construction sector than in other sectors."

He said the previous decision left businesses in a state of limbo - having been paid for a contract they had completed but with a risk that money could be clawed back for up to two years.

"That uncertainty made it difficult for small businesses to invest and grow."

He said it was a very important decision for the contracting market and would allow contractors to make decision about investing in their business.

Rotorua Chamber of Commerce chief executive Darrin Walsh said the issue of clawing back payments had always been contentious.

On the face of it he believed it was fair, however he said it did open the door to directors making payments to creditors to whom they may have closer personal ties.