The Court of Appeal has rejected the controversial "peak indebtedness" approach to calculating voidable transactions in a liquidation1.

The decision, released on Friday last week, concerned the correct method of calculating a voidable preference where the company had a "continuing business relationship" with a creditor – for example, an on-going supply contract. The defining feature of a continuing business relationship is the rise and fall from time to time in the level of indebtedness.

Under s292(4B) of the Companies Act 1993, a liquidator must treat payments that are part of a continuing business relationship as a "single transaction". In effect, this means that the liquidator may only claim the net indebtedness during the course of the relationship, rather than all payments to the creditor during the relevant period. The net indebtedness is the difference between the level of debt at the starting point of the assessment, and the level of debt at liquidation. A decrease in the level of debt indicates that the creditor was preferred; an increase indicates that there was no preference.

There has been long-standing uncertainty about the starting point for assessment of the net indebtedness. Under almost identical legislation in Australia, liquidators may choose any time during the specified period. Invariably, they will always pick the date of peak indebtedness within that period, soas to recoup the maximum amount possible.

On the other hand, the creditors contended that the starting point should be at the beginning of the specified period, or continuing relationship (whichever happened later).

In the Court of Appeal, the creditors' view prevailed. The decision was based on the statutory wording, which requires "all of the transactions" within a continuing business relationship to be treated together. The Court considered that in light of this plain wording, a liquidator could not then disregard some of the transactions during the specified period. It said:

It follows from this position that to arrive at some artificial point during the course of all the relevant transactions and to select the date of peak indebtedness (resulting in the transactions prior to this point being disregarded), would be to ignore the express wording used by Parliament.

Accordingly, the starting point for the calculation is the start of the specified period, or the start of the running account if it began later.

This decision diverges from the Australian case law, despite almost matching legislation. It is a definite "win" for individual creditors, particularly when considered together with the recent Supreme Court decision2 which widened the defence to voidable transaction claims.


1 Timberworld Ltd v Henry David Levin and Vivienne Judith Madsen-Ries; Henry David Levin and Vivienne Judith Madsen-Ries v Z Energy Ltd [2015] NZCA 111.

2 Allied Concrete Ltd v Meltzer (SC 51/2013), Fences & Kerbs Ltd v Farrell, Hiway Stabilisers New Zealand Ltd v Meltzer (SC 81/2013) [2015] NZSC 7. Our summary of this decision is here.

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