A Supreme Court ruling that clears up a contentious area of insolvency law could put a hand brake on liquidators trying to claw back funds from creditors paid out before a company collapses.
One liquidator who was not involved in the case, Damien Grant, said yesterday’s decision meant there would be less distributions from liquidations in the future.
A lawyer who was on the losing side of the litigation, Kevin Bond, said directors of insolvent companies may now be encouraged to make preferential payments to creditors who have leverage over them.
On the other hand, representatives of the construction industry hailed the Supreme Court’s judgment as a “victory for common sense” that would come as a relief to “thousands of businesses”.
The unanimous decision from Justices Sian Elias, John McGrath, William Young, Susan Glazebrook and Terence Arnold concerned voidable transactions, where liquidators claw back money from individuals or companies who were paid up to two years prior to their appointment.
It follows a Court of Appeal decision from 2013 that caused many people concern, particularly in the construction industry.
That ruling, according to those in the sector, meant that unless a contractor or subcontractor was paid upfront for work done for a company later found to be insolvent, the funds could be recovered by a liquidator.
Three companies – Allied Concrete, Fences & Kerbs, and Hiway Stabilizers New Zealand – appealed the matter to the Supreme Court, which yesterday ruled in their favour.
The case centred on an interpretation of a section of the Companies Act.
Under the relevant section, a court must not order repayment by someone who proves that, when they received a payment from an insolvent company they acted in good faith, had no grounds to suspect insolvency and importantly, “gave value” for the payment.
The point at issue in the Supreme Court appeal was the meaning of “gave value”.
The Court of Appeal said it meant value given at the time the disputed payment was received and that value given earlier when a debt was created was not a sufficient defence to a voidable transaction claim.
After an 11-month wait, the five judges yesterday reversed that Court of Appeal decision, meaning a creditor does not need to have given value at the time of payment and that value given at the time of the original transaction can be a defence to a claw-back claim, provided the other limbs are satisfied.
“It’s been a long fight but the Supreme Court decision has finally drawn a line under the issue. It’s a victory for common sense,” said Specialist Trade Contractors Federation president Graham Burke.
Dan Hughes, a lawyer for Hiway Stabilizers, said the decision still didn’t create enough certainty for creditors.
He said the voidable transaction regime would be a lot simpler if all payments made six months before a liquidation were repaid, no matter who got the money under what circumstances. Any payments outside that time would then be able to be kept by the creditors, Hughes said.
Law firm Chapman Tripp said yesterday’s decision may mean the market sees fewer voidable transaction claims.
“We understand that many liquidators have been waiting on this decision before taking action on existing claims,” the firm said.
New Zealand Herald. Thursday 19 February 2015