In Strategic Finance Limited (in receivership & in liquidation) and Strategic Nominees Limited (in receivership) v Bridgman and Sanson CA 553/2011  NZCA 357 the Court of Appeal has, for the moment, settled what constitutes an "account receivable", and this provides certainty regarding the scope of the assets available to meet preferential creditor claims ahead of secured creditors with general security agreements.
Strategic, the holder of a general security agreement, argued that the term "accounts receivable" was limited to "book debts" of the debtor. The Commissioner of Inland Revenue, being a preferential creditor in respect of the debtor's GST arrears, claimed priority over various funds held by the liquidators of the debtor on the basis that the expression "accounts receivable" was not limited to "book debts".
The Court held, for the purposes of the preferential creditor regime, that "accounts receivable" was wider than "book debts", and has the same meaning given in section 16 of the PPSA. The Court found that "accounts receivable" related to monetary obligations, even where those obligations had not been earned by performance (excluding chattel paper, investment security and negotiable instruments). It noted that if Parliament had intended to limit "accounts receivable" to "book debts", it would have done so expressly. Importantly, the Court noted that any monetary obligation that is not expressly excluded is included. Such a monetary obligation is an existing legal obligation on another party to pay an identifiable sum to the debtor on an ascertainable date, and the obligation must be legally enforceable by the debtor (at the date of receivership or liquidation) on the basis that the other party has an existing liability to make the payment.
The Court also affirmed the principle that the crucial date for determining whether funds held constituted "accounts receivable" is the date on which a receiver or liquidator is appointed.
Applying the above rationale in respect of the various funds held by the liquidators the Court found:
- Amounts where the North Shore City Council had to pay the debtor in respect of development contributions that needed to be refunded were accounts receivable (because the obligation existed at the date of liquidation)
- A $3,000 bond was not an account receivable because the conditions relating to its repayment to the debtor had not yet arisen at the date of liquidation (even though it was shown in the balance sheet of the debtor)
- Amounts received from the Inland Revenue Department (IRD) in respect of GST refunded in error after the liquidator was appointed were not accounts receivable over which preferential creditors had priority because the Commissioner was not under a legally enforceable obligation to make the GST refund payment at the time of liquidation (but they could be recovered by the IRD under the principle in Re Condon, being that court appointed liquidators must act equitably where it would be unconscionable for them to retain the monies)
- Amounts in the debtor's solicitors trust account in relation to things like deposits on property sold were accounts receivable (and an argument that they were already property of the company failed).
The Court also indicated that if a debtor had sold all of its assets prior to liquidation, the amount outstanding in relation to those assets would be an account receivable and the IRD would have had a preference to it. The Court noted it would be unlikely that such a situation would occur if the secured lender hadn't consented, and if they had, then there was no reason why the proceeds of sale should not be viewed as "accounts receivable". This is an interesting issue for secured lenders to contend with where a distressed debtor is attempting to negotiate a sale with a deferred payment arrangement.
The net result of this decision is that preferential creditors have greater priority than they did prior to the enactment of the PPSA when priority would have been limited to book debts.