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Related companies stung by application to claw back voidable payments

By Claire Mansell - 27 Nov 2015

The recent case of Galvanising HB Limited v Fisk has sent out a warning to directors who pay debts owed to related companies over other creditors.

The Court of Appeal determined that certain transactions between a group of related companies including Galvanising HB Limited (GHL) were voidable transactions under the Companies Act. These companies had received more than they would have received in the liquidation of East Quip Limited (EQL), a related company in the group.

An internal arrangement existed between the companies whereby payment for goods and services was made through cash payments and followed by journal entries in each company's sub-account of the group accounts.

The shareholders of GHL acted as a "banker" for the group. They personally funded all of the various transactions between the entities and were the true creditors by virtue of capital investment.

The Court of Appeal rejected the appellant's argument that it was in fact the directors who incurred the obligation. It held that the directors were not part of the transaction and if GHL extended credit to EQL, the creditor would be GHL and the debtor EQL. The shareholder's actions in funding GHL were separate transactions.

The appellants also contended that the transactions between the companies were entered into as part of a continuing business relationship "running account". This running account defence would have significantly reduced the debt owing by EQL to GHL. In order to establish a running account defence, GHL had to show that the payments induced further supply of goods. The Court of Appeal held it was open to the High Court to dismiss this argument as it was improbable that future supplies would be withheld if payments were not made as the companies were all controlled by the same director.

This case highlights the need for directors to ensure that related companies are not preferred over other creditors otherwise they risk having payments clawed back under the voidable preference regime.

For more information on voidable transactions, please contact Claire Mansell or Rob Akroyd.


Claire Mansell

Rob Akroyd


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