Test case on voidable transactions

The process for setting aside a preferential transaction was changed in 2008. A recent High Court decision is the first using the new process.

The process

A transaction that was entered into when a company was insolvent, and which had the effect of preferring one creditor over other creditors, may be set aside by a liquidator.

The process is commenced by the liquidator:

• filing a notice under s294(2) of the Companies Act in court; and
• serving a copy of this on the creditor.

Previously, a creditor who received a notice was required to file an application with the court in order for the transaction not to be set aside. Failure to file a court application resulted in the transaction automatically being set aside. Now, the creditor need only send the liquidator a written notice of objection within 20 working days of being served with the notice to avoid the transaction being automatically set aside. If the creditor takes this step, it is the liquidator who must file an application with the court in order to set a transaction aside.

To combat the prospect that a creditor without genuine grounds for objection would simply send a pro-forma notice of objection to the liquidator, creditors are required to set out full particulars of their reasons for objecting, identifying documents that evidence or substantiate these reasons. This requirement is also designed to ensure that:

• the information imbalance between a liquidator, who often has limited records, and the creditor, is addressed; and
• liquidators are fully informed as to both the substance and detail of a creditor's objection before determining whether or not to pursue a challenge.

The first case

To some extent, the decision of the High Court in this case¹ undermines the rationale around the requirement to provide full particulars of the reasons for objection, because it shows that a creditor will not be prevented from relying on an argument that it has not set out in its notice of objection.

In the case, the creditor opposed the liquidator's notice on the basis that the company was solvent at the time of the transactions, and that the payment did not confer a preference on the creditor. At the hearing, however, the creditor pursued neither of these grounds and instead argued that the payments were made in the company's ordinary course of business.

Despite this, the judge held that the interests of justice required that the creditor should be permitted to advance the new argument. The judge conceded that, in certain cases, a liquidator would be prejudiced by a late argument to such an extent that the creditor should not be permitted to advance a new argument at all. However, in the present case, he considered that the creditor had filed a very detailed notice of opposition that set out its intention to raise the new argument and, accordingly, there had been sufficient compliance with section 292(4) to justify leave being granted to advance the argument.

The decision's merits

While one of the policies behind section 294 – ensuring that liquidators are able to make informed decisions about whether to commence proceedings – is eroded by allowing creditors to raise arguments that should have been identified when the notice objection was served on the liquidator, in our view the decision is a fair one.

The significance of a notice to set aside a transaction is not always fully appreciated by creditors. It will often be the case that creditors do not seek legal advice until proceedings are issued. At this point, the creditor's legal advisers may well identify legitimate reasons why a transaction should not be set aside that the creditor did not raise itself. Except in cases where a creditor raises new arguments at a stage so late in the proceedings that the liquidator has no opportunity to respond to them, the creditor should be allowed to raise additional grounds not specified in the notice of objection. However, in such situations, it is appropriate that the liquidator be compensated in terms of costs, if he or she would not otherwise have issued proceedings had the argument been raised in the notice of objection.

¹ Blanchett v Roofing Specialists Ltd HC Hamilton, CIV-2007-419-00691, 5 May 2009

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