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Does money paid by a debtor have to be repaid if a company goes into liquidation?

July 23, 2015

You may find that when you have been paid for goods or services by a company, which goes into liquidation, a liquidator requests that you repay some or all of that money. A recent Supreme Court case makes it easier for you to resist a demand from a liquidator in that regard, though you could still be caught.

If a company makes a payment when it is insolvent and it goes into liquidation within 2 years of making the payment, a liquidator can require you to repay the payment if the payment enabled you to receive more than you would have had the payment not been made and had the company been liquidated. However, you would have a defence if:

  • You acted in good faith that when you received the payment;
  • A reasonable person in your position would not have suspected, and didn’t have reasonable grounds to suspect, that the company was insolvent or that it would become insolvent;
  • You gave value for the payment or altered your position in the reasonably held belief that the payment was valid and wouldn’t be set aside.

There has been considerable debate as to whether the requirement to give value (something in return) for the payment meant that you had to give something further for the payment when it was made. The Supreme Court has decided that so long as you provided some value at some time for the payment e.g. the original supply of the goods or services, the requirement to give value as satisfied. That makes it tough for liquidators but easier for creditors.

However, there is still some risk for creditors. The main difficulty that you may face in resisting a demand from a liquidator to repay money paid to you by a company that has gone into liquidation is that you might have been aware, or it may be that you should have been aware, that the company was insolvent when it made the payment or that it was about to become insolvent. A clear example would be whether the debtor tells you that it can’t pay its debts but that it will pay you. (That is just one example but a clear one.)

The other point worth mentioning is that where you have a trading relationship with a debtor so that you make supplies from time to time and the debtor makes payment from time to time, there is likely to be what is called a running account and in determining what payments a liquidator might be able to recover from you, the beginning and end balance of the trading relationship would be taken into account. At present, there is some dispute as to at what particular point in time the opening balance should be considered – there is not a great deal of going into any detail on that at the moment because of the dispute (hopefully to be resolved by an appellate court decision soon). The point is that if there is an ongoing trading relationship and you receive a demand from a liquidator, you should get legal advice to see what the effect of the trading relationship may have in the circumstances.

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