Issue 68, Commercial eSpeaking, Spring 2024

Read the full issue here

Voidable transactions

Liquidator can claw back payments

The number of companies going into liquidation in New Zealand is on the rise after a Covid lull. According to Centrix,[1] 642 companies were placed into liquidation during the second quarter of 2024. This represents a year-on-year increase of 19%.

Most people in business know there is a substantial risk of not being paid by a company that goes into liquidation unless they have a secured debt. However, a payment made by a company before it goes into liquidation may also be at risk.

The liquidator can ‘claw back’ a payment made by the company to a creditor up to six months before the company was placed into liquidation by its shareholders or liquidation proceedings were filed in the High Court.[2] The liquidator may claw back the payment if it was made at a time when the company could not pay its debts, and the payment enabled the creditor to receive more than they would have received in the liquidation. Such a payment is known as a ‘voidable transaction.’

Pari passu rule

If a company has insufficient assets to meet all its debts, its available assets should be divided between its creditors in proportion to the debts they are owed. This is known as the pari passu rule.

There are several limits on the liquidator’s power to unwind voidable transactions. These are intended to strike a balance between upholding the pari passu rule and the conflicting objective of encouraging businesses to continue to trade out of their difficulties when facing financial problems.

Running account exception

The running account exception is one significant limitation on the liquidator’s power to claw back voidable transactions. It requires the liquidator to consider the net effect of a series of transactions between a creditor and the company, and to treat this as a single transaction.

In practice, if a company has a trading account with your business before it goes into liquidation, then any amount your business receives during the six months prior to liquidation that exceeds the value of any goods or services supplied during this period may be treated as a voidable transaction. For example, suppose your business supplies $10,000 worth of goods to a company during the six months before it is placed into liquidation, and you receive payments totalling $15,000 during the same period. Of that $15,000, $5,000 of the money you received went towards the debt that existed before the start of the six-month period. In that case, it is possible that a payment of $5,000 to your business was a voidable transaction, but the rest is safe.

The effect of the running account exception is that your business can keep any payment received for any goods or services supplied during the six months before liquidation.

Section 296 defence

This section[3] contains a ‘good faith’ defence available to creditors facing a claim to repay a voidable transaction. This statutory defence has three elements that must be satisfied:

The creditor must have acted in good faith
There was no reason for them to suspect the company was insolvent, and
They gave something of value for the payment or changed their position due to the payment. The value does not have to be provided at the same time as the payment.

The claw back procedure

The Companies Act sets out the procedure a liquidator must follow when seeking to claw back a payment.

If the liquidator cannot resolve the issues through correspondence with the creditors, the liquidator may issue a formal notice to set aside the transaction. The recipient has 20 working days to respond to the notice. If they do not respond, the payment automatically becomes a voidable transaction at the end of this period and must be paid back. If the recipient does respond, then the liquidator may still apply to the court to set aside the payment.

It is difficult to fully protect your business from claw backs for voidable transactions. One option is to seek a security or personal guarantee at the start of any trading relationship. You should talk with us before continuing to trade with a company you suspect may have financial difficulties, or if you are contacted by liquidators seeking to claw back a payment.

Embracing Tikanga Māori in your commercial contracts

Seeking ways to respect and incorporate differences into business practices

In recent years, there has been a growing recognition of the importance of incorporating – and (more importantly) the desire to incorporate – Tikanga Māori into commercial contracts.

To some extent, this shift is due to the growing appreciation that contracts should not only be robust and enforceable, but also culturally inclusive and reflective of our collective New Zealand heritage. Many people, however, particularly those not brought up in Te Ao Māori (the Māori culture), can find this daunting and maybe a little scary.

What is Tikanga Māori?

Tikanga Māori refers to Māori customs, values and practices. The word ‘Tikanga’ comes from the word ‘tika’ that means ‘correct’ or ‘right’; essentially, it is the ‘right way’ to do things.

In the context of commercial contracts, Tikanga can cover a range of concepts, from the way you manage relationships, to how you carry out your obligations. However, Tikanga is not a one-size-fits-all concept; its meaning and application can vary depending on the region, the iwi (tribe) and the parties involved.

For non-Māori businesspeople who are used to clear, documented processes, this can be challenging, especially if you are worried about putting a foot wrong. Integrating Tikanga into commercial contracts, however, generally just involves the careful blending of Māori and Pākehā perspectives to create agreements that are long-term, community-focused and ethically grounded. Tikanga acknowledges the differences between Māori and Pākehā approaches but also actively seeks ways to respect and incorporate these differences into commercial practices.

Why incorporate Tikanga Māori?

There are several reasons we should consider incorporating Tikanga Māori elements into our contracts. These include:

Relationships: As Tikanga Māori places a high priority on relationships, emphasising trust, mutual respect and reciprocity, incorporating these values into contracts can help to strengthen the bonds between businesses and Māori partners, which can ensure longer-term, sustainable partnerships
Cultural competence and respect: Incorporating Tikanga Māori into contracts can help to show your business’ commitment to understand and respect Māori culture. This may not only enhance your reputation, but also help build trust within Māori communities and stakeholders
Enhanced dispute resolution: Tikanga Māori offers alternative dispute resolution methods, focused more on restoring harmony and balance than penalising/default mechanisms. This can lead to more agreeable and lasting solutions if there is disagreement, and
Alignment with Te Tiriti o Waitangi: One of the aims of Te Tiriti o Waitangi (Treaty of Waitangi) is to preserve the partnership between Māori and the Crown. Incorporating Tikanga Māori into contracts may help to demonstrate your commitment in upholding these values.

Looking ahead

If any of the above resonates with you, consider doing some of the following in your business:

Think longer time frames: In Te Ao Māori (the Māori worldview), time is often considered in generations rather than years. Māori organisations frequently plan with a longer-term perspective, focusing on the wellbeing of future generations rather than immediate short-term gains. This longer-term approach means that your contracts should ideally consider the broader implications, looking beyond the immediate benefits and considering longer-term issues such as community goals and sustainability, and
Focus on relationships: We tend to concentrate on our own individual obligations and financial outcomes when negotiating contracts. In a Tikanga Māori approach, however, the focus is more on relationships — both between the parties and with the wider community. This means that contracts should seek to prioritise, among other things, mutual respect, collective responsibility and the ongoing relationship between the parties.

You could consider including provisions that acknowledge the importance of whakapapa (genealogy) and manaakitanga (hospitality and respect), seeking to ensure that the contract strengthens, rather than undermines, relationships:

Consult with experts: Engage with Māori advisors, legal professionals or kaumātua (elders) while preparing your contracts. Their insights can ensure that the incorporation of Tikanga Māori is both authentic and appropriate in the context
Use Te Reo Māori: Where relevant and appropriate, consider including Te Reo Māori (Māori language) as part of the contract – whether as bilingual clauses or simply incorporating Te Reo Māori alongside the English words – as we have done in this article, and
Tweak your disputes clauses: Standard commercial contracts often include formal arbitration or court processes as dispute resolution mechanisms. Māori dispute resolution, however, leans more towards consensus and the restoration of harmony, as well as the concept of kanohi ki te kanohi (face-to-face) discussions rather than battling it out through lawyers or email. Incorporating these processes into contracts can help ensure that disputes are resolved in a manner consistent with Tikanga.

Using Tikanga Māori principles is advantageous

Incorporating Tikanga Māori principles into commercial contracts is a growing practice in this country. Doing so can result in agreements that are not only legally robust, but also culturally inclusive and ethically grounded. This approach can be beneficial to all parties, enhancing the relationship and supporting longer-term, sustainable partnerships.

Whaowhia te kete mātauranga:
Fill the basket with knowledge.

[1] Centrix August 2024 Credit Indicator Report.
[2] Section 292, Companies Act 1993.
[3] Section 296, Companies Act 1993.

DISCLAIMER: All the information published in Commercial eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Commercial eSpeaking may be reproduced with prior approval from the editor and credit given to the source. ©NZ LAW Limited, 2024. Editor: Adrienne Olsen, Adroite Communications. E: [email protected]. M: 029 286 3650.