Secured Creditors may not be that secured – Liquidations and Voidable Transactions

November 26, 2014

in Insolvency

iStock_000017070264SmallThe law relating to liquidations and particularly voidable transactions continues to develop.  Liquidators are constantly looking at ways of trying to overturn transactions particularly payments to creditors.

While this might seem meritorious on its face the fact remains that in many instances innocent parties are being disadvantaged by having to pay back monies they have received in good faith in relation to debts owed to that creditor on the pretext that a creditor should not receive more than any other creditor in relation to a liquidation.

The High Court has recently extended this to the area of secured creditors who have traditionally been seen to be protected from voidable transactions and unsecured creditor claims.

The High Court has essentially agreed with a Liquidator that payments made to a secured creditor can be treated as a voidable transaction where the payments received by the secured creditor (albeit an amount due and owing to the creditor) exceed the value of the security the creditor holds.

The High Court held that to the extent that the payments exceeded the value of the security they were payments to the creditor as an unsecured creditor and required repayment of those amounts by the creditor to the Liquidator.

The case is a salient reminder to businesses to be very careful with their treatment of debtors and their credit control procedures.  Allowing debts to run into default and/or continuing to provide credit to businesses where there is a risk the business is insolvent, can result in significant loss to the creditor business.

In this case, where the business had supplied business chattels which tend to devalue more quickly, by the time it came time to exercise its security, it lost the benefit of money it received, where it was determined the security was worth less than what had been paid to the creditor.

Farry and Co are experts in all aspects of creditor remedies and insolvency.  If you require any advice or further information on the matters dealt with in this publication please contact the lawyer in the firm who normally advises you, or alternatively contact:

Paul Farry
09 379 0055 or 03 477 8870


The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.

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