Burns & Agnew v Commissioner of the Inland Revenue and Strategic Finance Limited (in rec) concerned a dispute between a secured creditor and the IRD (as a preferential creditor) in respect of certain funds received by the liquidators of Takapuna Procurement Limited (TPL). The liquidators applied to the High Court for directions as to the application of those funds and this required the Court to undertake an analysis of the concept of an "account receivable" for the purposes of determining whether such funds could be applied to satisfy preferential claims under the Seventh Schedule of the Companies Act ahead of the claim(s) of secured creditors. Whilst the case concerned a company in liquidation, the judgment will be equally relevant for the purposes of determining the extent to which preferential claims rank in priority to the claims of secured creditors in the context of receiverships.
Part of the funds in dispute were the proceeds of a GST refund that the IRD had paid to TPL after the liquidation started without realising that the liquidated company had outstanding GST debts. The Court (applying the rule established in Re Conlon (1874) 9 Ch App 609 (CA)) found that as the liquidators were officers of the court, who are required to act in accordance with the highest standards, it would be unfair and unconscionable for the liquidators to retain the GST refund, when it was a form of windfall that been paid to TPL in error.
On the question of whether the balance of the disputed funds constituted an "account receivable", the Court found that, consistent with the definition given to the term under the Personal Property Securities Act (Act), the term "account receivable" refers to any monetary obligation owed to the company whatsoever (with limited exceptions for chattel paper, investment securities, negotiable instruments and those interests which are excluded from the scope of the Act). In so finding the Court considered that the 2008 decision of Commissioner of the Inland Revenue v Northshore Taverns (in liq) (2008) 23 NZTC 22,074, which held that the term "account receivable" was substantially the same as the concept of "book debts" or ordinary trading debts, was wrong. The Court concluded that all the funds in dispute were "accounts receivable" for the purposes of the Seventh Schedule and were accordingly available for distribution to the IRD as preferential creditor ahead of the secured claim of Strategic Finance.
The Court also confirmed that an "account receivable" will only be available to meet the claims of preferential creditors under the Seventh Schedule when the relevant "monetary obligation" was owed to the company at the time that the receivership or liquidation commenced. For example, the debt arising from the sale of non-inventory assets on credit terms by a receiver or liquidator would not constitute an "account receivable" for the purposes of the Seventh Schedule because the relevant monetary obligation arises after appointment. In contrast any unpaid proceeds of the sale of the same asset by the company prior to an appointment would give rise to an account receivable to which the preferential creditor regime would apply.
Overall the effect of the decision is to increase the scope of potential funds that may be available for application to preferential creditors in priority to secured or other unsecured claims.
See Court decision here.