When a business goes into receivership, the question of which assets constitute "accounts receivable" can determine whether preferential creditors get paid. A recent High Court judgment has ruled on this significant gap in New Zealand insolvency law.

Background

Every service business carries uninvoiced work-in-progress – time and effort that has been delivered to clients but not yet billed. When these kinds of businesses go into receivership, a critical question arises: does the right to be paid for that work exist as a legal obligation at the date of appointment, or does it only come into existence when an invoice is issued?

The answer determines priority. Under the Receiverships Act 1993 and schedule 7 of the Companies Act 1993, proceeds from a company's “accounts receivable” must be paid to preferential creditors (employees and the Commissioner of Inland Revenue) in priority to secured creditors. If uninvoiced work-in-progress falls outside that category and is not an “accounts receivable”, the funds will be paid to secured creditors.

ELE Limited (in receivership and liquidation) (ELE) previously operated a labour hire business, providing temporary workers primarily in the construction sector, with approximately 1,898 employees at the date of receivership. ELE was placed into receivership on 20 December 2023.

In Webb v Booth [2026] NZHC 1635, the receivers of ELE sought court directions regarding $1,596,233.20 they held. This comprised monies collected for services ELE had provided to customers prior to the receivers' appointment on 20 December 2023, but for which invoices were not issued until after their appointment (or, in the case of a small number of invoices, were reissued following correction after the date of receivership). If the funds were accounts receivable, they would be paid to ELE's preferential creditors first (being 1,865 former employees, and the Commissioner of Inland Revenue, who were together owed approximately $3.5 million). If not, the funds would go to subrogated secured creditors within the ELE Group, being companies that had paid out the first ranking secured creditor under an interlocking guarantee.

Legal framework in New Zealand and Australia

The Companies Act (through adoption of the definition in the PPSA) defines “account receivable” as “a monetary obligation that is not evidenced by chattel paper, an investment security, or by a negotiable instrument, whether or not that obligation has been earned by performance.”

In Brown v Heartland Bank Limited [2019] NZHC 1105, the High Court considered the specific issue of whether “unbilled work in progress” was an account receivable as at the date of liquidation, and determined that it was not, as it could not have created any existing obligation on the counterparty to pay.

The Court of Appeal in Strategic Finance Ltd (in rec & in liq) v Bridgman [2013] NZCA 357, [2013] 3 NZLR 650 has also previously considered the meaning of “monetary obligation” in the context of funds held by a company in a liquidation:

… “monetary obligation” in the context of the PPSA means an existing obligation imposed on, or assumed by, one party to pay a certain sum of money to the other party on a specific or ascertainable future date. An obligation of this nature will involve an existing liability on the part of the first party which is legally enforceable by the second party. […] A possible liability to pay in an unidentifiable sum at an unascertainable future date will not suffice.

The position has also arisen in Australia, including in Re RCR Tomlinson Ltd (admins apptd) [2020] NSWSC 735, in which the Supreme Court of NSW had to consider whether certain recovered amounts were accounts receivable. In that case, services had been rendered by the appointment date, and all that remained to give rise to a right to payment was for an associated invoice or demand or request for payment to be issued. The Court found that these amounts were a monetary obligation and therefore an account receivable.

The court's analysis

In this case, the High Court did not follow Brown v Heartland, but instead followed the Australian line of cases, particularly given that those decisions were founded on the principles in Strategic Finance and the relevant New Zealand and Australian statutory definitions are materially similar.

The Court’s key findings were that:

1. Where services have been performed prior to the receivers' appointment, the company will be entitled to be paid if the amount to be paid and the time for payment is ascertainable from the agreement between the parties, or alternatively the company has a claim for damages for that identifiable sum.

2. Issuing an invoice crystallises the time for payment but does not otherwise create a monetary obligation where none previously existed.

Applying this to ELE, the Court found the disputed funds were accounts receivable: services had been rendered prior to the receivers' appointment, and the contractual arrangements provided all the elements for the customer to ascertain the amount and date payable, including an agreed hourly rate and an ascertainable payment date in accordance with the credit terms.

The Court also addressed a secondary argument. ELE's standard terms of business required customers to authorise timesheets before invoices were processed. The Court held that this certification requirement did not constitute a condition precedent to payment, and rejected the argument that no obligation existed until the customer had ticked the box. This was primarily because the Court considered that a customer cannot be permitted to rely on its own breach of obligation, i.e. by failing to authorise the timesheets, as a basis for avoiding a payment obligation.

Practical implications and key takeaways

• This is a significant decision for preferential creditors. The pool of accounts receivable available to meet their claims is broader than Brown v Heartland had previously suggested. Uninvoiced, but earned, services generally count.

• Completed but uninvoiced services can constitute "accounts receivable" if the contractual framework provides an ascertainable amount and payment date.

• If so, the nature of an invoice is a demand and crystallises the time for payment. It is not an essential element of performance, and does not create an underlying obligation to pay.

• Counterparty approval requirements (such as timesheet authorisation) will not generally be treated as conditions precedent if the counterparty can thereby avoid its own payment obligation.

• Contracting parties should review payment mechanism clauses in contracts to identify if there is a mechanism that provides an ascertainable amount and payment date, such that performance will be complete once the work has been performed.

If you would like to discuss any of the issues raised in this article, please contact our insolvency and restructuring team.