Priority determined by meaning of "accounts receivable" in Schedule 7 to Companies Act

The expression "accounts receivable" in Schedule 7 to the Companies Act 1993 includes all "monetary obligations" and is only limited by the exclusions contained in the definition of accounts receivable and in section 23 of the Personal Property Securities Act.

The case¹ was an application in the High Court by the liquidators of a failed property development company, for directions under s 284 (1)(a) of the Companies Act as to the proper characterisation of certain funds held by the liquidators on behalf of the company.

The funds in question included:

• refunds to the company from the council of:

• payments made earlier by the company to the council for development contributions of $450,000; and

• bonds paid earlier by the company to the council of $3,000;

• a GST refund of $169,000 released by the Commissioner of Inland Revenue to the company in error; and

• funds of $158,000 held by the company's solicitors relating to the earlier property development.

The first respondent, the Commissioner of Inland Revenue, was the only preferential creditor of the company, and the second respondent, a finance company in receivership, was the only remaining secured creditor. Both the Commissioner and the finance company sought, after payment of the liquidators' costs, payment of the balance of the collected funds.

Whether the funds were payable to the Commissioner or to the finance company turned on the meaning of "accounts receivable" in Schedule 7 to the Companies Act, a defined term in the Personal Property Securities Act (PPSA).

The Commissioner and the finance company both claimed that Schedule 7 gave them priority.

The primary issue, relating to all the categories of collected funds, raised the question whether the liquidators were required to pay these amounts to the Commissioner as a preferential claimant under section 312 of the Companies Act rather than to the finance company as a secured creditor holding a general security interest over the company's assets.

Clause (2) of Schedule 7 gives preferential creditors priority over the claims of any person under a security interest to the extent that the security interest is over all or part of the company's accounts receivable and must be paid out of any "accounts receivable" subject to that security interest.

The finance company argued that Parliament's intention was for "accounts receivable", as mentioned in clause (2), to mean "book debts" of the company.

The Commissioner argued for the broader definition of "accounts receivable" as defined in the PPSA - that it is to be a "monetary obligation" that is not evidenced by chattel paper, an investment security, or by a negotiable instrument.

The court found that the term "accounts receivable" is not limited to book debts. A book debt is a subset of accounts receivable, in so far as it is a monetary obligation. The only limits on "monetary obligation" are the exclusions contained in the definition of accounts receivable, and those contained in section 23 of the PPSA.

The Court found that each category of the collected funds held by the liquidator constituted a "monetary obligation" in terms of section 16 of the PPSA and were thereby an "account receivable" in terms of Schedule 7 of the Companies Act. Accordingly, the Commissioner's claim to those collected funds had priority pursuant to the statutory preference regime.

The liquidators were directed under s 284 (1) of the Companies Act to pay the collected funds to the Commissioner as a preferential creditor of the company in priority to the finance company as secured creditor.

¹ Burns v The Commissioner of Inland Revenue, HC Auckland, 10 August 2011 CIV-2010-404-7387

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