Supreme Court voidable transactions decision favours creditors

Yesterday, the Supreme Court released its decision in relation to the Fences & Kerbs Limited, Hiway Stabilizers New Zealand Limited and Allied Concrete Limited appeals.  The decision is favourable to creditors and provides some much needed clarity on the voidable transaction provisions under the Companies Act 1993.

The Companies Act allows liquidators to ‘claw back’ any payments made to creditors in the two years leading up to a company’s collapse, if it is established that the company was insolvent when the payments in question were made.  The Companies Act provides a defence to this provision, in that the Court must not order repayment by a party who establishes that when it received payment from the insolvent company it:

  1. Acted in good faith
  2. Had no reasonable grounds to suspect, and it did not suspect, that the debtor company was, or would become insolvent
  3. Gave value for the payment or altered its position in the reasonably held belief that the payment was validly made and would not be set aside

The Supreme Court was asked to determine whether the ‘giving of value’ portion of the Companies Act defence required ‘new’ value to be given after the original transaction, or whether the original transaction itself constitutes ‘value’ for the purposes of the Companies Act defence.

The Court found that ‘value’ encompasses value given at the time the debt was initially incurred. The Court noted that this interpretation is consistent with Parliament’s aim of increasing certainty for creditors that the transactions they enter into will not be made void.   Not only does this interpretation provide clarity, but it broadens the circumstances in which the defence can be invoked.

The decision provides much needed security to those who deliver goods and services on credit, particularly in the construction industry.  Specialist Trade Contractors president Graham Burke anticipates the effect of the decision is a ‘huge relief’ which ‘will be felt across construction industry’.

Kensington Swan acted for Hiway Stabilizers New Zealand Limited on the Supreme Court appeal, backed by CCNZ and its members. Click here for more from Kensington Swan on this much anticipated decision.

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