Proposed changes to voidable transactions: feedback sought

WW
Wynn Williams Lawyers

Contributor

Wynn Williams is a renowned law firm in New Zealand, offering a full range of legal services with a team of skilled lawyers. Established in 1859, the firm is known for its expertise, straightforward advice, and strong client relationships. Recognized in prestigious legal directories, Wynn Williams is proud of its heritage and commitment to honest, experienced guidance for clients. Offices are located in Auckland, Christchurch, and Queenstown.
The Government's Insolvency Working Group has this week issued its second report.
New Zealand Insolvency/Bankruptcy/Re-Structuring
To print this article, all you need is to be registered or login on Mondaq.com.

The Government's Insolvency Working Group (Working Group) has this week issued its second report, which includes its recommendations on changes to the voidable transactions regime.

Two key changes are proposed:

  • A reduction in the period of vulnerability for voidable transaction clawbacks from two years to six months (where the debtor company and creditor are not related parties); and
  • Narrowing the scope of the creditor's defence under section 296(3) by repealing the "gave value" part of the test. This change would increase the protection provided to creditors as a whole by reinstating the "altered position" test.

While the reduction in the clawback period is to be welcomed, overall these changes may make it more difficult for creditors to resist a liquidator's application to recover property that is the subject of a voidable transaction.

Section 296 and the "gave value" test

The Companies Act 1993 allows liquidators to challenge a range of transactions and charges entered into by a company, including voidable transactions. Currently, a creditor faced with a potentially voidable transaction has a defence under section 296(3) if:

  1. It acted in good faith;
  2. It did not have reasonable grounds to suspect that the company was or would become insolvent; and
  3. It gave value for the property or altered its position in the reasonably held belief that the transfer of the property was valid and would not be set aside.

The first two elements have been referred to as the "moral" test. The latter element was clarified by the Supreme Court in Allied Concrete v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141. The Supreme Court held that a creditor has provided value regardless of whether value was provided before, at the time of, or after the voidable payment. "Value" can include value given when the debt was initially incurred, which means that a typical trade creditor will always have given value for the payment received.

The Working Group's views

The Working Group is critical of Allied Concrete because it says that, on its interpretation, the "gave value" element is almost always satisfied. This means that the alternative "altered position" test is rendered nearly irrelevant and the knowledge (or lack of) on the part of the creditor is the key determinant in the defence. They say this is undesirable because it focuses the enquiry on a creditor's intent, which can be difficult to establish. It also incentivises creditors not to enquire about a debtor's financial position and ability to pay debts, which is commercially inefficient as it rewards inactive creditors over diligent creditors.

The Working Group believes that this has resulted in excessive compliance and administration costs because liquidators have to review more documents and make more enquiries to try and ascertain intent. The effect is an excessive weighing of the interests of individual creditors and inadequate weighting of creditors' collective interests, because liquidators are less likely to pursue a possible preferred payment.

For this reason, the Working Group proposes repealing the "gave value" test, which it says returns the law to an "effects based test" (rather than an intent based one) and, in parallel, significantly reducing the clawback period from two years to six months.

The Working Group acknowledges that removing the "gave value" part of the test would, to some extent, reverse the commercial certainty benefits to individual creditors obtained by Allied Concrete. However, it takes the view that the interests of individual creditors are better protected by reducing the vulnerability time limit to six months for unrelated party creditors. While the reduction in the clawback period will have real benefits to creditors, the repeal of the "gave value" test may be of concern, particularly to smaller unsecured creditors, who are less likely to benefit from liquidators' attempts to clawback funds for the collective interest of creditors.

There are a range of important reasons why the Supreme Court in Allied Concrete decided to interpret "gave value" in the way that it did:

  • First, it aligns the test with the law in Australia, as was intended by Parliament;
  • Second, the removal would restore the position that existed prior to the decision in Allied Concrete, which saw liquidators actively pursuing creditors for repayment of funds that had been paid to them for debts that were outstanding to them, in circumstances where they had acted in good faith and had no knowledge of the potential insolvency of the company;
  • Third, there was potential for this to be abused because in many instances liquidator's fees would be incurred which had a first priority over any funds recovered, such that there may have been no funds left over for the unsecured creditors, even after recoveries were made. It also penalises creditors with good credit practice who actively seek early payment of their debts; and
  • Finally, it removes the commercial certainty that the law now provides to creditors who have acted innocently.

Want to have your say?

MBIE is seeking submissions on the recommendations made by the Working Group in its report. Submissions are to be submitted to corporate.law@mbie.govt.nz and close at 5pm on 23 June 2017. We are happy to help you craft your submission and discuss how the changes may affect you.

The Working Group also recommends a host of other, more technical, changes to the voidable transactions regime as well as changes to the law around Ponzi schemes and other corporate insolvency matters. If you would like more information, please contact one of the team to discuss.

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.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More