The High Court has held that liquidators cannot rely on the common law to recover insolvent transactions, and must now proceed under the statutory provisions of the Companies Act.
In Grant v Lotus Gardens Limited, the liquidators of Quantum Grow Limited applied unsuccessfully for an order that Lotus Gardens Limited be put into liquidation on the grounds that it was unable to pay its debts, asserting that Lotus Gardens owed it $25,000 being the amount of preferential payments made to them.
The liquidators served the required notice under section 294 of the Companies Act on Lotus Gardens to set aside the transactions. Lotus Gardens took no steps to object to the notice and the preferential payments made to it by Quantum Grow were set aside.
However instead of then making an application for relief under section 295, the liquidators served a statutory demand on Lotus Gardens, seeking payment allegedly due to the payments that had been set aside.
The liquidators' case was that once a transaction is set aside by section 294, the creditor automatically comes under an obligation to pay back the sums demanded in the s.294 notice. The liquidators were seeking to rely on a non-statutory remedy, whereas statute sets out clear provisions for relief under s.295.
The court found that section 295 has taken over the job formerly done by the common law, and that common law relief is no longer available for insolvent transactions. Allowing such a remedy would allow liquidators to 'outflank' the courts discretionary power to adapt relief so as to eliminate the preference, but no more.
Without the section 295 order, the liquidators were unable to point to any right to payment outside that statutory provision. Without such an order, Lotus Gardens was not indebted to Quantum Grow. With the statutory demand therefore void, the liquidation application had to fail.