Payment to associated company recovered by liquidator

The Court of Appeal refused an appeal against a summary judgment ordering recovery of an amount paid to an associated company by a company in liquidation.

In this case¹, a company that was placed in liquidation in June 2004 had paid $200,000 to another company in May 2001.  The liquidators sought to recover that amount on the basis that it breached section 298 of the Companies Act 1993 because it was paid to an associated company for no consideration within three years of the application for liquidation.

The Court of Appeal dismissed the appeal made by the recipient of the payment, agreeing with the following two main conclusions of the summary judgment.

There was no consideration for the payment

The directors and shareholders of the recipient company established a family trust, which borrowed $200,000 from a bank.  The company then on-lent the money to the company that subsequently went into liquidation, which paid the money to the associated company as a “procurement fee”, pursuant to which the associated company’s staff would move to the company that subsequently went into liquidation.  The arrangement was intended to result in lower accident compensation premiums for staff.

The court decided that the company received no benefit for its payment to the associated company.

The two companies were effectively under the same “control”

The two directors of the first company were also directors of the second company.  In addition, they were the shareholders of the company and, together with another person, owned the shares in the associated company. 

The court had no difficulty determining that the two companies were under the same control for the purposes of section 298 of the Companies Act 1993.

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