Creditors who received payments from companies prior to
liquidation will be claiming victory today – but there may be
less to go around for those who were left unpaid. The Supreme Court
has released a judgment1 which clarifies the grounds
upon which liquidators can recover funds paid to creditors by a
company that subsequently has a liquidator appointed. The decision
provides greater certainty over which payments might be subject to
claw back. It will be seen as a victory for creditors that have
received payment for work done as it confirms that the defence to
voidable claims is available regardless of whether the creditor
gave value before or after receiving the payment.
The voidable transactions regime under the Companies Act 1993
allows liquidators to claw back payments which the company made up
to two years before the liquidation if certain criteria are met.
The liquidator then makes those funds available to other creditors
– although in practice this often means preferential and
secured creditors benefit from this money, and there may be little
or nothing for the general pool of unsecured creditors.
The case in the Supreme Court saw three creditors challenging a
liquidator of two companies. The liquidator sought to have payments
that had been made to the creditors set aside under the voidable
transactions provisions. Some payments were a series of instalments
in satisfaction of one invoice, some were single payments of full
invoices, and another series of payments was part of a continuing
credit relationship between the creditor and the company.
The Companies Act provides a defence to the voiding of the
payments by the liquidator if the creditor has acted in good faith,
there is no suspicion by the creditor that the company was
insolvent and the creditor gave value for the payment or altered
its position in the belief that it would not be set aside.
The question for the Supreme Court was the meaning of
"gave value" and the principal question was
whether "value" means new value given at, or
after, the time payment is received from the debtor company or
whether it also encompasses the original value given by the
creditor when the goods or services were supplied. The questions of
whether the creditors had acted in good faith or had any suspicion
the companies were insolvent were not an issue for the Court.
The Supreme Court unanimously overturned the decision of the
Court of Appeal and decided that the creditors had satisfied the
"gave value" requirement when their outstanding invoices
were paid. The satisfaction and release of an existing debt (that
is, by paying an outstanding invoice) met the "giving
value" criteria that is needed under the Companies Act. The
Court recognised that the focus now will be on the knowledge of the
creditor of the financial circumstances of the insolvent
The Court of Appeal had said that "value" referred to
new value given at the time of the impugned payment. This meant
that the later payment of a one-off invoice could never meet the
"giving value" requirement unless further goods or
services were supplied.
The desire to harmonise the New Zealand approach with that of
Australia was an influencing factor in the decision, as was what
the Court regarded as Parliament's aim of increasing certainty
for creditors. The approach also provides consistency with the
historic view of the "valuable consideration" requirement
in bankruptcy legislation, a longstanding feature of which has been
the protection of creditors who have acted in good faith, without
knowledge of the debtor's liquidity problems and who have
provided value for payments. The approach of the Court of Appeal
left little scope for the operation of the legislative defence in
relation to voidable transactions and the Supreme Court said that
it was implausible that Parliament intended such an outcome.
The decision settles an issue which has been the cause of
considerable uncertainty for many businesses and insolvency
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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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 Government has formulated a plan to refurbish the prevailing bankruptcy laws and replace them with one that will facilitate stress-free and time-bound closure of businesses.
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