On 18 February 2015, the Supreme Court determined three appeals which involved a short but important point about the operation of the voidable transaction regime under the Companies Act 1993 (“the Act”).

The three appeals involved creditors who provided supply of goods or services to debtor companies. The creditors invoiced the debtor companies, and the debtor companies then paid within few months of the invoices being issued. In each case, the debtor companies went into liquidation within two years. (It is noted that as of May 2020, the limitation for voidable transactions is six months from the date of making an application to the court to commence liquidation proceedings, or the resolution placing the company into liquidation, unless the parties are found to be “related parties”, in which case the limitation is still two years).

Upon liquidation, the liquidators sought to “claw back” the payments made by the debtor companies to the creditors pursuant to the voidable transaction provisions of the Act.

This case is a significant decision for creditors who receive funds from companies, insolvency practitioners and those who advise either of the above.

In our view, this case has significantly changed the recoverability of insolvent transactions.

The focus of the litigation

The focus of the defence was on the defence that is available to a recipient of funds.

It is a defence to a liquidator’s claim if a recipient can prove all three pillars of section 296(3). To succeed, the creditor must establish that when they received the payments:

  1. they acted in good faith;

  2. there were no reasonable grounds to suspect, and they did not suspect, that the debtor company was, or would become, insolvent; and

  3. they either gave value for the payment or altered is position in the reasonably held belief that the payment was validly made and would not be set aside.

The focus of this litigation was on ‘gave value’.

The High Court and Court of Appeal

The High Court accepted that at the time of the payments, the creditors acted in good faith and did not suspect, nor were there any reasonable grounds to suspect, that the debtor company was or would become insolvent. This was not disputed by the liquidators. The primary issue in front of the High Court was whether the creditors could establish the third pillar of section 296(3) of the Act, being ‘gave value’.

The appeal hinged on whether “value” for the purposes of section 296(3)(c) means new value given at, or after the time the payment is received from the company, or whether it also includes value given prior to receipt of the payment when the antecedent debt was created.

In two of the High Court decisions, creditors successfully argued that the letter meaning was intended whilst in the third the former view was accepted.

The Court of Appeal held that the receipt of a payment in satisfaction of an antecedent debt was not “value” and a new value which was also “real and substantial” must be given at the time of the transaction.

In reaching its decision, the Court of Appeal considered that the use of the word “when” indicated that a temporal restriction was intended. The recipient had to give value at the time the payment was made – value given by the provisions of goods and service at an earlier point when the debt was created did not qualify.

This meant that the creditors could not rely on the defence because all payments received by them were in relation to the goods and services previously supplied.

The Supreme Court

At the Supreme Court, the Court considered the two competing policy aims:

  1. If the respondents’ argument is accepted, primacy will be accorded to the interests of creditors as a whole, but that will be at the expense of fairness to individual creditors who have accepted payments in good faith and in circumstances where there was no reasonable basis to suspect that the debtor company was technically insolvent. In other words, what seemed at the time they were effected to be routine commercial transactions would be set aside. On this basis, there would be legal certainty in the sense that there would be a clear rule, routinely applied; but there would be commercial uncertainty in the sense that routine transactions would be vulnerable to challenge for up to two years after they occurred.
  2. On the other hand, if the appellants’ argument is accepted, primacy will be accorded to fairness to individual creditors. Creditors who receive what appear to be routine payments in circumstances where they did not, and had no reason to, suspect insolvency will have certainty. This reflects the broader social interest in not causing any disruption to the routine flow of credit in commercial transactions. But that will be at the expense of the class of creditors as a whole and to the concept of collective realisation.

Ultimately, the Court favoured fairness and certainty for individual creditors as opposed to creditors as a whole.

While the Court agreed that “real and substantial value” had to be given by a creditor raising defence under section 296(3), it held that such value may be given prior to receiving payment.

The Supreme Court considered that while the use of the word “when” certainly indicates that there must be a linkage or connection between the impugned payment and the elements of section 296(3). However, the Court doubted that it could be taken further than that by holding that:

…”when” was simply referring to a state of affairs existing at the time of the payment. So it is not the use of the word “when” but rather the use of the words “gave value” that is significant in temporal terms.

The Court could see no reason why, as a matter of interpretation, “gave value” could not be taken to encompass the notion of giving value earlier.

The Supreme Court also analysed the legislative background of the voidable transaction regime under the Act and changes made to this regime by the Companies Amendment Act 2006 when the current provisions were enacted. The Court considered that the amendment was designed to temper the pursuit of collective justice for creditor as a whole with individual justice for a particular party in the circumstances of each case. There was a concern that, if the law failed to do this, it could impair the free flow of trade in New Zealand. The proposed changes were intended to give more certainty to creditors that the transactions they are entering into will not be made void.

The interpretation adopted by the Court of Appeal significantly prevented individual creditors from using the defence under section 296(3). The Supreme Court found this to be inconsistent with the 2006 reform.

Key take outs

In overturning the Court of Appeal decision, the Supreme Court has considerably widened the applicability of the defence.

It is now certain that “value” for the purpose of section 296(3) can include value given when the debt was initially incurred, in particular, the supply that gave rise to the payment would likely be real and substantial value.

Our view on voidable transactions regime as it is currently

Whether a transaction will be set aside will now hinge on whether the recipient knew or ought to have known of the company’s insolvency.

​We expect to see significantly less voidable transactions being pursued as a result of the Supreme Court’s decision and the current uncertainty as to how to calculate voidable transactions

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