The Court of Appeal last week extended the armoury available to liquidators
seeking to unwind a voidable transaction. Although the Companies Act sets out a
procedure for liquidators to follow, the Court held that this is not exclusive,
and that liquidators can also serve a statutory demand seeking payment of a
voidable debt. Is this a shortcut likely to save costs, or is it a false
The voidable claim
The case, Grant v Lotus Gardens Limited  NZCA 127,
concerned the liquidation of Quantum Grow Ltd. The liquidators alleged that a
payment made by Quantum Grow to Lotus Gardens Ltd was voidable. They served a
notice on Lotus Gardens under s 294 of the Companies Act, but no objection
was made by Lotus Gardens within the 20 working day time limit. As a result, the
payment was automatically deemed to be set aside.
Ordinarily, a liquidator would then apply for orders under s 295 that
the recipient repay the amount to the company. The recipient could seek to
defend that claim by relying on a s 296 defence, arguing that it gave value
or reasonably altered its position, and that it acted in good faith and did not
Here, however, the liquidators chose to serve a statutory demand on Lotus
Gardens. Lotus Gardens did not respond or apply to set aside the demand, and so
the liquidators applied to liquidate Lotus Gardens on the basis that Lotus
Gardens was presumed to be unable to pay its debts. Lotus Gardens then took
steps for the first time, opposing the application for liquidation.
Did the liquidators follow the right procedure?
Associate Judge Bell ruled that the liquidators had followed the wrong
procedure. He said that a liquidator’s only remedy for a voidable transaction is
to seek orders under s 295, and he therefore refused to make an order
liquidating Lotus Gardens.
The Court of Appeal disagreed. It said that “the s 295 procedure is not
exclusive. The setting aside of a transaction gives the liquidator a basis for
recovery. That will usually be under s 295, but a liquidator may seek to
recover a debt by different means”, such as a statutory demand.
What of the s 296 defences? The Court of Appeal ruled that the statutory
demand procedure could not be used to avoid these defences. It said that
s 296 is a defence not only to a claim under s 295, but would also
justify setting aside a statutory demand or opposing an application for
liquidation. Further, the Court said that if there were factors that would not
justify an order for payment under s 295, those factors would also justify
setting aside the statutory demand.
The Court of Appeal found that here, Lotus Gardens had no defence. It quashed
Associate Judge Bell’s order, and ordered that Lotus Gardens be placed into
Should liquidators now serve statutory demands for voidable
Although the Court of Appeal allowed the liquidators to use the statutory
demand procedure, it warned liquidators against using it. The judges said that
“we would not wish to be seen as encouraging the use of s 289 processes as
a remedy for liquidators claiming recovery for set aside transactions” and that
“it is good practice to utilise” s 295 instead.
As serving a statutory demand is quicker, cheaper and more effective than
filing a court application, liquidators may wish to use this procedure,
particularly if they have concerns about the financial position of the
However, there are increased risks in serving a statutory demand:
A statutory demand should not be issued if the liquidator knows that the
voidable claim is disputed. Increased costs may be ordered against the
liquidator personally if the demand was improperly issued.
Even if a liquidator does not know whether the voidable claim is disputed
before serving a statutory demand, a recipient may raise a change of position
defence in response to the demand. Given the Court of Appeal’s warning, the
demand would likely be set aside and costs would likely be ordered against the
It is difficult to know in advance whether a recipient may raise a change of
As JRR Tolkien said in The Fellowship of the Ring, “short cuts make
long delays”. Where it is clear that there is no real dispute, a statutory
demand will be the quickest and easiest procedure. But where there may be a
dispute, serving a statutory demand may be the long way round, requiring a
liquidator to incur additional costs before applying for orders under
s 295. Where there is a potential dispute, liquidators should think
carefully about whether it will be cheaper and more efficient to apply for
orders under s 295, rather than seeking to shortcut the process by serving
a statutory demand.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.