Under Schedule 7, clause 2(1)(b) of the Companies Act 1993 (“the Act”), preferential creditors have priority over secured creditors over the company’s accounts receivable and inventory (and their proceeds).
The Court of Appeal in Strategic Finance Ltd (in rec & in liq) v Bridgman provided useful guidance on the definition of ‘accounts receivable’ under the Act. In Brigman, the Court had to determine whether the following funds held by the liquidators of Takapuna Procurement Ltd (“the Company”) are accounts receivable:
- Development contribution funds paid to the North Shore City Council (“NSCC”), which a previous court held was wrongfully paid by the Company;
- Engineering and construction bond, refundable once the NSCC was satisfied that the Company’s works complied with their standards;
- GST refund released by the Commissioner of Inland Revenue to the Company “in error”; and
- Funds held by the Company’s solicitors on trust, on behalf of the Company.
Clause 2(2) of the Act provides that for the purposes of clause 2(1)(b), the term ‘account receivable’ has the same meaning as in the Personal Property Securities Act 1999 (“the PPSA”). Section 16 of the PPSA identifies three key features which form the definition of ‘account receivable’:
- (a.) There must be a “monetary obligation”;
- (b.) but not one “evidenced by chattel paper, an investment security, or by a negotiable instrument”; and
- (c.) the obligation need not have been earned by performance.
Each term in (b) is separately defined in the PPSA. After deciding that none of the terms in (b) applied in the present case, the Court undertook a closer examination of limbs (a) and (c).
The Court held that “monetary obligation” in the PPSA context is an existing obligation by a debtor to “pay a certain sum of money to the other party on a specific or ascertainable future date”.[1] A possible, unspecific liability to pay will not suffice. This would exclude the right to damages in tort or equity.
The obligation needing not have been earned by performance means that the obligation to pay should exist without requiring further performance. The absence of performance will simply mean there is no obligation in existence.[2] The time at which this obligation must exist is at the date of liquidation, because once a company is in liquidation, there may be no prospect of performance justifying payment.[3]
Applying this definition to the aforementioned funds, the Court found that the following are accounts receivable
- Development contribution funds: The refund was an identifiable sum and already payable to the Company from at least the time of the court decision, which was prior to its liquidation.
- Funds in solicitor’s trust account: These funds were said to be no different in concept to funds held by a bank in a bank account, where, like a bank, there is a legally enforceable obligation to pay the money to the Company.
On the other hand, the following funds were not accounts receivable –
- Engineering and construction bonds: The NSCC had not been satisfied that the Company’s works complied with its standards until after the date of liquidation, therefore there was no existing monetary obligation.
- GST refund: At date of liquidation, Commissioner was under no obligation to pay the GST refund. On the contrary, the Company was in GST arrears.
[1] Strategic Finance Ltd (in rec & in liq) v Bridgman [2013] NZCA 357, [2013] 3 NZLR 650 at [54].
[2] At [59].
[3] At [61].
