An issue which is raised by creditors on occasion is whether payments (and other transactions) made by a company to a secured creditor are recoverable under section 292 of the Companies Act 1993.
The answer is that it depends:
Grant v BB2 Holdings Limited
Background
The general background of this case is as follows:
- In February 2008 BB2 Holdings Limited (BB2) sold computer hardware and software to the liquidated company, Doyle by Design Limited (Doyle) for $88,780 on credit
- Doyle was required to make an initial payment of $2,730 followed by a balloon payment one month later of $8,232. After these payments the balance of the purchase price was to be paid in monthly instalments of $1,365 over 56 months
- BB2 retained title in the equipment until it was paid in full, meaning BB2 was a secured creditor
- In January 2010, Doyle defaulted and BB2 Discovered that the director of Dyole had relocated to Australia and effectively abandoned the business.
- Following this, BB2 repossessed the equipment on 10 February 2010
The director of Doyle and BB2 eventually entered into an arrangement where BB2 would let the director have the equipment and the director would continue to pay the credit instalments. BB2 would be granted a mortgage over an apartment he still owned in Mt Eden as security.
A liquidation application was filed to place Doyle into liquidation on 16 April 2010;
With respect to payments:
- The liquidators sought to set aside payments totalling $42,720.78
- The first payment was made on 21 April 2008 and the last was made on 19 April 2010
- The payments made during 2010 totalled $6,876.15
The principal issue discussed was whether BB2 received more than it would have likely received in the liquidation of Doyle.
The specific question is BB2’s status as a secured creditor.
Liquidators’ arguments
The liquidators referenced section 17 of the Personal Property Securities Act 1999 (the PPSA) and argued that BB2 was entitled to the collateral (being the computer equipment) and the proceeds from the sale of that collateral.
The liquidators argued that after BB2 took possession of the equipment it allowed the director of Doyle to keep it. In those circumstances BB2 did not have any right to the equipment, and did not receive the proceeds of any disposition of the equipment. Therefore any funds BB2 has received must have come to it as an unsecured creditor. They say that as BB2 has been paid as an unsecured creditor, those payments can be attacked under s 292.
BB2’s arguments
Simplified, BB2 on the other hand argued that as BB2 was a secured creditor it sat outside the voidable regime.
Conclusion
The court ultimately found that a ‘partly secured creditor’ is a creditor who has security over assets of the Company, but the security is insufficient to cover the full value of the debt.
For example, if a secured creditor is owed $40,000 and the motor vehicle is worth $30,000 they are considered unsecured for $10,000.
The court held that when a creditor is ‘partly secured’ any payments the creditor receives goes first to the unsecured portion of the debt first.
In the case, it was found at BB2 Holdings was partially secured by early 2010 as BB2 Holdings had conceded in it’s evidence that the equipment was not enough to cover it’s secured debt.
The court then found that as BB2 was an unsecured creditor when it received the payments made during 2010 totalling $6,876.15 these payments were able to be set aside pursuant to section 292. The court found that it could not make a ruling on whether BB2 was partially secured on payments prior to 2010 as there was insufficient evidence put before the court.
The court ultimately ruled that the 2010 payments were able to be set aside.
Application
Grant v BB2 Holdings Limited appears to still remain the most current authority when dealing with whether secured creditors can be voided.
Practically speaking this means that creditors cannot rely on their status as a ‘secured creditor’ as a defence to the voidable regime. The nature and value of the secured creditors’ collateral is the principal concern; for example
- Creditors who have supplied inventory may find that their inventory is very minimal and the courts would find they would be ‘partly secured’
- Even secured creditors who have a security interest in All Present and After Acquired Personal Property could be voided in scenarios where the company has no assets
