Supreme Court decision on Voidable Transaction Defence

POSTED BY Karl Stolberger
Rachael Cederwall
05 March 2015

posted in Insolvency | Company Law

VIEWED 6361 TIMES

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The Supreme Court of New Zealand has recently released a decision giving clarity to the operation of the voidable transaction provisions within the Companies Act 1993.

Section 292 of the Act allows liquidators to claw back transactions entered into by a company in the two-year period prior to that company’s liquidation.

Section 296(3) of the Act however also provides a defence to a creditor if, when that creditor received the payment at issue, the creditor:
        1.    acted in good faith;
        2.    did not have reasonable grounds for suspecting that the debtor would become insolvent; and
        3.    either gave value for the property or reasonably altered their position in reliance on the transfer of the property.
The Supreme Court in its recent judgment was required to consider the correct interpretation of the section 296(3) defence that a court must not order repayment of a voidable transaction where the party “gave new value for the payment”.

The Supreme Court determined whether the “value” referred to in that defence must be given at or after the time of payment or the value given may precede payment by a debtor.

Following analysis of the legislative background, statutory language and various policy considerations the Supreme Court concluded that although it is contrary to the generally accepted view in New Zealand, “value” may be given prior to payment by a debtor.

The Supreme Court acknowledged that there were two competing principles at play in the voidable transaction regime. In making its decision in this case the Court was required to either favour the equal treatment of creditors as a whole or protect fairness to individual creditors by allowing them a greater ability to retain payments received in good faith.

The practical implication of the Supreme Court’s decision that “value” includes value given prior to payment by a debtor, has preferred the interests of individual creditors by reducing the ability of liquidators to make recoveries on voidable transaction claims.

POSTED BY Karl Stolberger
Rachael Cederwall
05 March 2015

posted in InsolvencyCompany Law

VIEWED 6361 TIMES

PERMALINK

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