Supreme Court Clarifies Position for Creditors and Liquidators
In overturning the Court of Appeal in the Fences and Kerbs case[1] the Supreme Court has issued an important decision which affects both liquidators and anyone who supplies goods and services on credit terms.
The decision relates to voidable transaction claims brought by liquidators of failed companies, and firms up a defence for creditors who supplied goods and services to the failed company and later accepted payment in good faith, prior to liquidation, and without having reasonable grounds to suspect the insolvency of the company at the time of payment.
Facts
The decision relates to three cases heard together involving creditors who provided goods and services on credit to failed companies. In each case these failed companies were in the construction industry and the creditors were trade suppliers.
The creditors had all supplied goods on credit and had been paid by the failed companies after the amount was due under the suppliers’ payment terms. The failed companies subsequently went into liquidation and the liquidator in each case sought to “claw back” the payments made to the supplying creditor under the voidable transaction provisions of the Companies Act.
Voidable transactions
A voidable transaction is a transaction made by an insolvent company to a creditor which results in the creditor receiving more than they would have in the liquidation of the company. Liquidators have the ability to “claw back” voidable transactions paid to creditors up to two years prior to the liquidation.
The underlying rationale of the claw-back is to ensure that the creditor who has been paid does not receive a preference over other creditors of the failed company.
Creditors have a defence to the claw back[2] if they can establish that when they received the payment:
- they acted in good faith; and
- a reasonable person in the creditor’s position would not have suspected, and the creditor did not have grounds for suspecting, that the company was or would become insolvent; and
- the creditor gave value for the payment or altered the creditor’s position in a reasonably held belief that the payment was valid and would not be set aside.
Giving value
This case centred around the third limb of that test and specifically the question of whether giving “value” means that new value is needed to be given at or after the time the payment was received from the failed company, or whether value given by the supplying creditor prior to receiving payment was sufficient.
The Court of Appeal had decided that value given prior to the payment (for example, value from the actual supply of the goods and services to the failed company) was not sufficient for the defence to be relied upon and that in effect new value at or after the time the payment was received is required. That interpretation made the defence limited in its application.
The Supreme Court has overruled the decision effectively determining that the “value” provided did not need to be new value, but accepting that value could be provided by the creditor before the payment was received and need not be at the time or after the payment.
A rebalancing
The decision is significant in rebalancing the scales between creditors and liquidators. The Supreme Court had to balance on the one hand the interests of creditors of a failed company as a whole against fairness to individual creditors who have accepted payments in good faith and in circumstances where they were not aware that the company they were supplying was insolvent.
While to rely on the defence creditors will still need to show that when they received payment for supplies they made (i.e value they provided) that they did so in good faith, and a reasonable person would not have suspected, or did not have grounds to suspect, that the company that they were supplying was insolvent.
The decision makes a final determination on an important area of law and will be welcomed by those who supply goods and services on credit, particularly those in the construction and contracting sectors.
Please contact Ben Johnston, Simon Munro or Anne McLeod if you would like any further information.
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[1] Allied Concrete Limited v Meltzer (SC 51/2013); Fences & Kerbs Limited v Farrell (SC 80/2013); Hiway Stabilisers New Zealand Limited v Meltzer (SC 81/2013) [2015] NZSC 7 at [55].
[2] Section 296(3) Companies Act 1993.