The Supreme Court has today considerably expanded the
"good faith" defence for voidable
Where a creditor "gave value" through the
original transaction, that creditor can now defeat a voidable
transaction claim by proving only that it acted in good faith, with
no suspicion of insolvency.
The Supreme Court has unanimously overturned the Court
of Appeal's decision in the Farrell v Fences and Kerbs
Limited litigation on the "gave value" limb of the
good faith defence in section 296(3)(c) of the Companies Act
Allowing the appeal, the Supreme Court has decided that value
given by a creditor at the time of the original transaction is
sufficient to engage the good faith defence. In a typical
transaction, that would be the original credit sale. A creditor
need not have given "new" value at the time of or after
the payment was made.
The value must be "real and substantial". That will be
measured at the time the value was given by the creditor, rather
than at the time the payment is received by the creditor. In
typical transactions (supply of goods or services on credit), we
would expect the value will always be "real and
While the Court carefully examined the language of the statute
and precedent from here and overseas, it recognised that the
decision was fundamentally a policy one.
The Court had to decide between two competing policy aims.
Is the purpose of the voidable transactions regime to protect
the creditors as a whole? Should the pari passu principle
reign supreme? If the liquidators' argument were to be upheld,
creditors could make use of the defence only if the
"value" they had provided was new value. That is, value
provided in exchange for the payment, rather than the value
originally supplied by the creditor when the debt was created.
Favouring this outcome would give legal certainty because the test
would be clear. It would, however, create commercial uncertainty,
particularly because of the lengthy two-year clawback period.
Alternatively, is it more important that individual creditors
be protected in their dealings with companies of questionable
solvency? That is, should "primacy ... be accorded to
fairness to individual creditors"? Should the law promote
the "broader social interest" in not disrupting
commercial transactions, even if this is at the expense of the body
of a company's creditors as a whole?
Ultimately, the Supreme Court favoured the second policy aim:
the protection of individual creditors. It has ruled that the
intention of the reforms (by which the defence was amended) was to
create greater certainty for individual creditors and to align the
New Zealand position with Australia.
Chapman Tripp Comments
It should be remembered that the defence has two other limbs.
Creditors wanting to use the defence will still need to show
they received the payment in good faith (without an intention
to gain a preference), and
they had no suspicion, or reasonable grounds to suspect, that
the company making the payment was insolvent.
But the result of this decision is to widen considerably the
scope of the defence. Many more creditors will now be able to take
advantage of it. In every case where a debt is being paid, there
will have been an earlier supply of goods or services, so the
"gave value" element will be satisfied.
The decision will be particularly welcomed by suppliers who
provide goods and services to companies in a one-off, credit-based
transaction - particularly suppliers who are not familiar with the
The law on this point has been unclear for some time.
Today's decision follows a hearing on 18 March last year. We
understand that many liquidators have been waiting on this decision
before taking action on existing claims. We expect that they will
now need to consider those pending claims carefully.
It may be that the market will now see fewer voidable
transaction claims as a result of this decision.
Another important voidable transaction decision is on its way
from the Court of Appeal. While it is on a different point (peak
indebtedness), it too may have the effect of increasing or
decreasing liquidators' claims. We will comment on that as soon
as it is available.
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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