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Valuable judgment for those extending credit: liquidators lose in the Supreme Court

Home Insights Valuable judgment for those extending credit: liquidators lose in the Supreme Court

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Published on: February 18, 2015

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Allied Concrete Limited v Meltzer
Fences & Kerbs Limited v Farrell
Hiway Stabilizers New Zealand Limited v Meltzer

In a much-anticipated judgment, the Supreme Court has overturned the Court of Appeal and held that, in voidable transactions cases brought by liquidators, value may be given prior to payment by a debtor company in order to satisfy the good faith defence.  In doing so, the Supreme Court has followed the approach taken in Australia.

Key Points

  • Creditors who supply on credit terms now have stronger grounds to resist claims by liquidators for voidable transactions.
  • Creditors will satisfy part of the good faith defence test if they provide value prior to receiving payment.  
  • New Zealand is now more closely aligned with the Australian position on defences to liquidator claims.
  • There is likely to be a renewed focus on the mental state of the creditor and whether they suspected, or had reasonable grounds to suspect, insolvency when receiving payment.

Background

The Supreme Court was asked to consider three cases heard together involving creditors providing a one-off supply of goods or services on credit to a debtor company.  In each case, the creditor invoiced the debtor and the debtor paid the creditor within, or over an instalment period of, a few months of the invoice being issued. The debtor company then went into liquidation within the two year claw back period.  The liquidators sought to claw back the payments under section 292 (voidable transactions) of the Companies Act 1993.

The cases were considered together as they turned on whether the good faith defence was available to creditors under s 296(3) of the Companies Act 1993.  The principal issue was the proper interpretation of the words "gave value" in s 296(3)(c).  The Court of Appeal had held that value given prior to payment (eg by the supply of the relevant goods or services) was not sufficient for the defence to operate.  There was no dispute that each creditor satisfied the other limbs of the defence (ie they each acted in good faith and did not have reasonable grounds to suspect the insolvency of the debtor company).

Supreme Court decision

The Supreme Court agreed with the Court of Appeal that the words "gave value" provide that the creditor must have given consideration that has a "real and substantial value." However, the Supreme Court held that "value" can include value given when the debt was initially incurred by the debtor company as a result of an earlier transaction. 

Section 296 was amended in 2006 and has been the subject of uncertainty ever since.  The Supreme Court considered that the purposes of the amendment were to provide greater certainty for creditors that transactions they enter into would not be void, and to align the New Zealand position with that in Australia.  The approach adopted by the Court of Appeal had left little scope for the good faith defence to operate in relation to voidable transactions (ie preference) actions: a supplier under a one-off credit based transaction would be precluded from qualifying for the defence where the debtor pays in accordance with terms of supply simply because value was provided before, not at the time or after payment.

Greater certainty for creditors

The Supreme Court's decision brings welcome certainty for those providing goods and services on credit with no security (eg sub-contractors in the construction industry).  Value can include value given when the debt was initially incurred.  New Zealand's good faith defence is now aligned in this respect with the equivalent provision in Australia.  This consistency will be welcomed by businesses operating on both sides of the Tasman. 

In circumstances where creditors provided value for their payment, a payment to a creditor will not be voidable where the creditor both acted in good faith and had no reasonable grounds to suspect insolvency.  We expect that greater focus will now be placed on whether creditors suspected, or ought to have suspected, insolvency at the time of payment and whether substantial value was given by the creditor. There are other potential elements to the defence, for example alteration of position, which were not considered.

The decision contained three judgments, all of which were aligned on the central issue.  The majority confirmed that cash on delivery or payment in advance does not give rise to voidable transaction exposure, as no repayment of debt occurs.

A copy of the Supreme Court decision can be found here.

 

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This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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