Most Read Contributor in New Zealand, September 2016
We picked the good faith defence in the voidable preference
regime as one of the big five insolvency issues for 2013 and so it
has come to pass, with a wealth of case law on the topic.
We take a look at a recent decision of the Court of Appeal,
where a payment recipient which traded closely with the company in
liquidation successfully relied on the good faith defence when
faced with a voidable claim.
Giant Engineering Limited (Giant) manufactured and
supplied equipment to the scrap metal and rubbish collection
industry, and provided certain services to Rapid Construction
Limited (Rapid) over a number of years.
After a fire at Giant's premises, Rapid agreed to help Giant
trade through by entering an agreement under which it would net the
value of the services Giant had provided to Rapid against the value
of the materials Rapid had supplied to Giant.
At the relevant point in time, Giant owed Rapid $129,482.22 and
Rapid owed Giant $90,713.50. For reasons of accounting
simplicity and transparency, the parties swapped cheques for those
respective amounts. Giant later became insolvent and liquidators
The liquidators challenged the payment out of Giant as a
voidable transaction in terms of section 292 of the Companies Act
1993 (the Act). Rapid relied on the good faith
defence under section 296 of the Act.
Section 296 provides a defence to payment recipients faced with
voidable claims, and in this case allowed Rapid to argue that the
payment by Giant was not voidable, because:
it was made and received in good faith (which involves an
inquiry into whether the recipient knew of the counter-party's
Rapid did not have reasonable grounds to suspect Giant was or
would become insolvent, and
Rapid gave value for the payment or altered its position in the
reasonably held belief that the payment was valid and would not be
The Court of Appeal upheld the High Court's
decision1 and confirmed that Rapid had successfully made
out the elements of the defence. Key to the Court's
reasoning was that:
Rapid honestly believed the payment would not result in any
undue preference, nor would a reasonable person suspect as
much. This was so despite Rapid's knowledge of the fire
at Giant's premises, email correspondence between the two
companies regarding late payments, and the fact that Rapid had
agreed to the cheque swap arrangement in order to assist Giant in
meeting its payment obligations
there is a distinction between knowledge of liquidity issues and
knowledge of actual insolvency. A company may well have other
means of meeting its obligations even where it does not have
sufficient cash to hand. The Court accepted that Rapid saw
Giant's problems as "primarily logistical and not
Rapid had altered its position (to its detriment) by making
the payment in reliance on the validity of Giant's reciprocal
payment (see our earlier comment on this limb of the good faith
defence here). Rapid had foregone the
opportunity to 'set-off' the two companies' mutual
debts, which is allowed by section 310 of the Act. This was a
contemporaneous alteration of position and the Court agreed that
such an alteration could meet this limb of the section 296
Chapman Tripp comment
We agree with the Court's comment that there is necessarily
a difference between a creditor's knowledge of liquidity issues
and knowledge of actual insolvency. Just because a company
does not have current cash at hand does not necessarily mean it is
on the verge of liquidation or has no other means to make good with
However, we also think that this is quite a fine line and that
subsequent decisions could go the other way on different but
similar facts. Ultimately, non-payment is a tell-tale sign
of, or a stepping stone to, a state of insolvency.
The case could be seen as an encouragement to businesses that
are willing to stay the course when a counter-party experiences an
adverse event. But we caution that these types of decisions
turn on heavily factual arguments.
It was not fatal to the defence that Rapid had knowledge of
Giant's short term liquidity issues. Had the evidence
shown real concern about Giant's ability to meet its long term
obligations, however, the Court may well have taken a different
Our thanks to Finn Howie for writing this Brief
Counsel. For further information please contact the
1 CA76/2013  NZCA 489
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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The Code envisages that the insolvency resolution processes will be conducted by insolvency professionals.
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