Recent developments in voidable payments

A decision of commercial interest to all SME's, including franchising businesses, is the recent Supreme Court decision in Allied Concrete and Others v Meltzer and Others, handed down on 18 February 2015.

Most SME’s in New Zealand will, at some stage of their lifetime, have the experience of dealing with extracting payment from companies facing financial difficulties. When those companies are placed into liquidation and where a creditor has received a payment from such a company, liquidators have the power to claw back that payment under the voidable payments provisions of the Companies Act.

There is nothing more frustrating in the running of a business than receiving payment of a debt, spending it in the belief it is legitimately yours, only to then have to repay it at some point in the future.

In grappling with the issue of whether creditors should have to repay moneys to a liquidator, there are two competing underlying policies, which are often at loggerheads with each other:

a) On the one hand, the need to protect an insolvent company’s creditors as a whole as against depletion of assets available to them on a liquidation by virtue of one particular creditor having received an advantageous payment prior to liquidation. This is known as the pari-passu rule which requires equal treatment of creditors in like positions.

b) On the other hand, the need to recognise that where creditors enter into transactions with companies who reach the point of insolvency, they should be entitled to protection in certain circumstances. There are cases where this is indeed fair and there would be risk to commercial confidence if what appeared to be everyday commercial transactions could be reopened long after the event.

There have been a number of key legislation changes over the years in the area of voidable payments and the tests which should be applied for determining when they should be repaid. The most recently change was in 2006 when Parliament changed the test again, with the purpose of creating more certainty for creditors by giving clearer protection to them.

Under S292(1) of the Companies Act, a transaction by a company is voidable by a liquidator if it is an insolvent transaction and is entered into within 2 years of the commencement of the company’s liquidation. An insolvent transaction is one which a company entered into when it was unable to pay all its due debts and enabled another person to receive more towards satisfaction of a debt than that person would have received with the company in the company’s liquidation.

There is however a defence provided in the Companies Act which is that the court must not order repayment by a party who proves that when it received the payment:

a) It acted in good faith;

b) There were no reasonable grounds to suspect and the party did not suspect that the company debtor was or would become insolvent; and

c) It either gave value for the payment or altered its position in a reasonably held belief that the payment was validly made and would not be set aside.

The question on the appeal in the Allied Concrete case was whether the expression ‘gave value’ meant giving new value, in other words providing fresh services and goods from the point of receiving the voidable payment or whether ‘gave value’ was a reference to value that had already been given.

In most voidable transaction cases the bulk of the value that is provided is the historic value. Often, a creditor will, upon receiving a payment, continue to do further work for a company although generally speaking the bulk of the work done and for which payment was not made was historic work.

In the Allied Concrete case, the Court thoroughly considered all the relevant issues including the history of the legislation and the policy and purpose behind the changes which had occurred in 2006, namely, to provide certainty and to protect creditors.

In the Court of Appeal, the liquidators had succeeded with the Court of Appeal finding that the expression “gave value” was a reference to future services to be provided. This meant that where a creditor received a voidable payment and did not continue to provide fresh services then it had not given value and had to pay the money back.

After considering the matter in detail however the Supreme Court overturned the finding that the expression ‘gave value’ was a reference to historic value. On that basis, it disallowed the liquidator’s claim to claim back those monies.

The case is a great victory for small businesses in New Zealand and is likely to give us all a measure of comfort when dealing with companies facing financial difficulty. Often a creditor does not know whether the business it is dealing with is solvent or not. It is fair in those circumstances that a voidable payment should not have to be repaid, especially where the creditor has acted in good faith and has then used the money for other purposes.

(February 2015)