Prior to liquidation, a company paid more than $80,000 to its bankers so that the bankers could provide a bank cheque to a creditor. The company's liquidators served notices to have the payment effected by the bank cheque set aside on the basis that it had a preferential effect under s 292 Companies Act 1993. The creditor who received the bank cheque argued that the payments made by the company to the bank and under the bank cheque did not constitute preferential payments and accordingly were not voidable.

In reaching its decision, the Court took into account whether the:
- Company was able to pay its debts at the time of transaction;
- Transactions enabled the creditor to receive more than it would otherwise have received or been likely to receive in the liquidation; and
- Transactions were in the ordinary course of business of the company and received by the creditor in good faith.

The Court held that the debiting of the company's account and the subsequent issuing of the bank cheque were in effect a single transaction embarked on because the company at the time did not have a cheque book.

While the debiting of the company's account was not a preferential transaction under s 292 Companies Act 1993, the payment to the creditor by bank cheque was. In finding the transaction to be a voidable preference the Court noted the:
- Company's inability to pay its due debts at the time of the transaction;
- Fact the creditor was paid in full;
- Payment was not in the ordinary course of business (but as a result of pressure); and
- Creditor had knowledge of the company's state of affairs and therefore did not receive the payment in good faith.

This is a general summary only and should not be taken as a substitute for specific advice.

Russell McVeagh, law firm
Web site: Russell McVeagh

March 2001