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 company.

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 practitioners.

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