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Voidable transaction law hits home in Cardinal case

By Chris Hutching

Friday 31st March 2000

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A High Court judgment has sent a clear signal to the business community that if you are dealing with a company in financial trouble you run the risk that payments you extract will have to be paid back if the company goes into liquidation.

The ruling was delivered by Master Venning in the High Court at Christchurch and involved Cardinal Community Laboratories (in liquidation) and creditor Cardinal Network, one of the Aoraki group of companies known for its Jade software development.

When the official assignee, acting as liquidator, investigated the accounts he concluded that two payments totalling $76,388.37 were voidable under a292 of the Companies Act 1993. The thinking behind this section of the act is that it takes time for a company to become insolvent and some creditors may be aware of its precariousness and take steps that leave other unsecured creditors worse off.

Master Venning outlined how in the early 1990s the principal of Cardinal Laboratories, John Mathewson, was partly responsible for the Aoraki group setting up Cardinal Laboratories with the aim of using computers to transmit pathology results to doctors' surgeries.

By 1994 Mr Mathewson proposed to buy the company from Aoraki and the deal was concluded by April 1995. But within a month Cardinal Laboratories had fallen into arrears over debts owing to Aoraki subsidiary Cardinal Network.

Mr Mathewson unsuccessfully tried to sell the company during early 1996. A letter from his lawyer said buyers were "aghast" at the cost of software services from Cardinal Network.

Aoraki made demands for repayment and $65,624 was repaid on April 30, 1996, with a further $10,764.19 repaid on May 6.

The two companies continued their trading relationship and the indebtedness of Cardinal Laboratories continued to grow. On September 6 Aoraki subsidiary Cardinal Network made a statutory demand for repayment of $500,574 and on its petition Cardinal Laboratories was wound up on December 9, 1996.

The payments made to the Aoraki group occurred within the six month "restricted period" before an application to place Cardinal Laboratories in liquidation was made, as spelt out in the Companies Act.

"The circumstances known to [Aoraki subsidiary] Cardinal Network at the time should have put it on notice that Cardinal Laboratories was in financial difficulty and payments to it would have been at the expense of other creditors," Master Venning said.

Christchurch official assignee Lynn Saunders said the judgment reinforced the law relating to voidable payments and in cases where the official assignee was appointed there would be surveillance of a company's records to ensure all creditors were treated equally according to their statutory rankings.

Crown settles SCI suit for $450,000

A $2.4 million suit from the Southern Cardiothoracic Institute against the Crown has been settled out of court for $450,000.

The executive director of SCI, John Mathewson, was recently released from serving a prison sentence related to another company he was operating at the time, so the settlement may help him back on his feet financially. The lawsuit against the Crown arose about three years ago under the previous coalition government.

SCI obtained a contract with the Southern Regional Health Authority to provide cardiac services in Christchurch and Dunedin hospitals. But the then deputy health minister and New Zealand First MP, Neil Kirton, overturned it because of his concerns about privatisation of the health system.

His actions and subsequent political fallout helped lead to the breakup of the National-led coalition government.

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