Most Read Contributor in New Zealand, September 2016
The "good faith" defence for creditors facing
insolvent transaction claims has now been fully explored by the
Court of Appeal in two separate judgments relating to the
Farrell v Fences and Kerbs Limited1 litigation
– and has been confirmed on all points to have narrow
The Court found earlier this year that value must be given at
the time of payment, or after payment was made, to make out the
"gave value" limb of the defence. Value given before
payment was insufficient. In so finding, the Court overturned two
earlier High Court decisions. See our commentary
But the finding was interim only and was subject to a further
hearing on whether a creditor can give value at the time or
following payment by either:
forbearing to sue, or
discharging previously incurred/existing debt.
That door has now been firmly shut2, other than in
very exceptional circumstances.
Discharging previously incurred/existing debt – is it
In short, no.
The Court followed its reasoning from the earlier judgment in
reaching its decision. The purpose of the insolvent transaction
regime is to ensure that all creditors share equitably (on a pari
passu basis) in the pool of assets available to meet creditors'
claims, and to swell that pool. Receipt of payment in satisfaction
of a debt due does nothing to swell that pool.
Accordingly, any new value must be real and substantial in order
to make out the defence. Whether such new value is given will be a
question of fact in each case.
Forbearance to sue – is it "giving value"?
Yes, but in limited cases. To establish the defence, a creditor
must be able to demonstrate that the value given was real or
substantial - which will often be difficult (although not
impossible) to prove, especially as giving a company more time to
pay may only allow it to descend further into debt.
Relevant factors would include whether:
the forbearance allowed the company to trade on until it was
able to pay off its creditors
the creditor would have been able to recover the debt
successfully if it sued, and
there is evidence of a promise of forbearance to sue, at the
express or implied request of the opposite party. A creditor's
failure to take steps to enforce the debt does not amount to
Where to from here?
We are interested to see whether the three creditors apply to
the Supreme Court for leave to appeal the decision further. To
date, the Supreme Court has heard only one appeal on insolvent
transactions, and that appeal addressed a separate issue to the
"good faith" defence.
Our thanks to Janko Marcetic for writing this Brief
1 NZCA 91
2 NZCA 329
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
The Code envisages that the insolvency resolution processes will be conducted by insolvency professionals.
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