Dispute Resolution

Supreme Court Decision Clarifies Voidable Transaction Defence

A new Supreme Court decision has clarified a defence available to creditors to resist liquidators clawing back payments.  What is the effect for creditors and liquidators?

  1. Last week’s Supreme Court decision Allied Concrete Ltd v Jeffrey Philip Meltzer and Lloyd James Hayward as Liquidators of Window Holdings Ltd (in liquidation) [2015] NZSC 7 has a marked impact on the voidable transaction regime under the Companies Act 1993.
  2. Sections 292 to 301 of the Act give liquidators the ability to void certain transactions made by insolvent companies.  Transactions can be reviewed up to two years before the date of the company’s liquidation.  These powers are founded upon the idea of equal distribution amongst creditors, a concept known as “pari passu”.  Thus some parties lose out by repaying payments received from an insolvent company to the liquidator “for the greater good” of all creditors. This does not mean that they lose the ability to get some of their funds back; they do so on the same rateable basis as the other creditors in the pool.
  3. Many liquidators’ notices under s294 of the Act result in strident opposition. Companies faced with voidable transaction notices are often incredulous at the demands of the liquidator and feel aggrieved that they are being asked to repay what they see as legitimate payments.
  4. Any party wishing to resist a voidable transaction has a series of defences available to them under ss292 and 296(3) of the Act.
  5. The defence under s296(3) is in three parts, all of which must be proven on the balance of probabilities.  A Court must not order the recovery of a payment by a liquidator if a creditor can prove it received the money:
    (a)  In good faith;
    (b)  Where a reasonable person in its position would not have suspected, and did not have reasonable grounds to suspect, that the company was, or would become, insolvent; and
    (c)  Where it gave value for the property or altered its position in the reasonably held belief that the transfer of the property was valid and would not be set aside.
  6. The Supreme Court decision deals solely with the question of whether value was given.  It focuses on whether “value” means new value given at (or after) the time payment is received from a debtor company or whether “value” also includes value given prior to receipt of the payment when the previous debt was created.Giving Value
  7. The earlier Court of Appeal decision held that “value” could only be conferred at, or after, the time payment was received from the debtor company and that value could not be given prior to receipt of payment.   This meant that where a credit arrangement was entered, for example providing timber of the value of $200 with terms for it to be paid for within 30 days, then this was not giving value in accordance with the Act.  The upshot being that value given by providing goods or services at an earlier point when the debt was created did not qualify for “giving value”.  This meant that the defence would not function for a large number of debtor companies.
  8. The Supreme Court noted that it was difficult to understand the Court of Appeal’s approach.  They noted:First, although some suppliers may require cash on delivery, credit arrangements (such as payment within seven days from presentation of invoice or payment within 30 days of date of supply) are commonplace.  In this context, the existence of any form of credit arrangement, no matter how short term and common place, is critical.  It is difficult to see why a supplier under a ‘one-off’ credit based transaction of a type commonly entered into should be precluded from qualifying for the defence where the debtor company pays in accordance with the terms of supply, particularly where the supplier is not familiar with the debtor company.  Although such a one-off supplier might be able to take advantage of the defence where the debtor did not comply with the credit arrangement and the creditor agreed not to enforce its rights (for example, to interest for late payment) in return for immediate payment, it is difficult to see any rational reason for this difference in treatment between the two situations:  a payment that appears to be a routine compliance with a commonplace credit arrangement will not be protected, while a payment which is made in breach of a credit arrangement might be protected if the creditor is perceived as having given something additional by way of value when receiving the payment.Implications for liquidators
  9. The Supreme Court unanimously decided that the creditors had satisfied the “gave value” requirement when their outstanding invoices were paid.   The decision has been lauded by many commentators as a victory for small business, traders, contractors and the like.  This fails to take into account the effect on the pools of creditors looking for a recovery of sums unpaid by a company in liquidation.  The liquidator’s duties are to ensure that the concept of equal distribution (or pari passu) occurs to the greatest extent possible.
  10. The Supreme Court decision does not mean that voidable transaction applications under the Act will diminish but rather that the focus will be on the knowledge of the creditors of the financial circumstances of the insolvent company.  Liquidators, and the creditors whose interests they serve, will continue to strive to obtain recovery for those creditors.