Voidable defence is further limited

Thursday 11 April 2013

Authors: Murray Tingey and Nick Moffatt

​Sect​​ion 296(3) of the Companies Act 1993 (the Act) provides a defence to creditors who have received a payment found to be a voidable transaction under section 292 of the Act. One of the elements that creditors need to establish under this defence is that they either provided value to the company or changed their position in reliance on the validity of the payment.

Where a creditor relies upon the provision of value to the company, the question arises as to whether this value needs to be provided at the time of the voidable payment. The question is important because creditors will usually be able to establish this element of the defence if the value can be provided prior to the voidable payment. Ordinarily creditors give value to the company in some form prior to receiving payment, usually through providing goods or services to the company.

In a recent decision1, the Court of Appeal has found that only value given at the time of the voidable payment can be taken into account under section 296(3). In doing so, it overturned three decisions of the High Court2 in late 2012 that held a creditor could rely on value given to the company prior to the voidable payment being made.

The High Court decisions

The High Court decisions relied heavily on the equivalent to the section 296(3) defence in the Corporations Act 2001 (Cth) of Australia. It is clear both from the text of this provision and surrounding case law that the Australian defence allows a creditor to rely on value given to the company prior to the voidable payment being made. Both Associate Judge Christiansen (in the Fences & Kerbs and ACME cases) and Justice Toogood (in the Hiway Stabilizers case) considered that the amendments to section 296(3) introducing the ability of a creditor to rely on value provided to the company were intended to adopt the Australian position.

In coming to his conclusion, Justice Toogood placed strong reliance upon an explanatory note to the Insolvency Law Reform Bill remarking that the new tests had been based on the Australian provisions and that the Australian case law would provide guidance on their meaning. The amendment to section 296(3) allowing a creditor to rely upon the provision of value had its origin in the Bill.

The Court of Appeal decision

In coming to its decision, the Court emphasised the importance of the pari passu principle which is designed to secure the equal participation of creditors in the assets of the company. This principle underlies the voidable preference provisions which then attempt to strike a balance between the interests of all creditors in being able to share the company’s assets with the interests of particular creditors who believe the payments have been validly received and that they ought not to be required to pay them back. In this regard, the Court did not accept that it was inequitable for the insolvent company to be able to retain the benefit of goods or services supplied by a creditor as well as to recover what the company paid for those goods or services. Nearly all creditors will have provided value to the company prior to liquidation. Often it is entirely fortuitous as to who is repaid within the two year period.

The Court of Appeal placed heavy emphasis on the text of the section 296(3), noting that it was the best guide to statutory interpretation. Unlike the Australian provision, section 296(3) expressly provides that each element of the defence must be proved when the relevant payment is made. If Parliament had intended a contrary position to this, it would have said so.

The Court noted that to accept that value given prior to the voidable payment qualified under section 296(3) would also have represented a substantial policy shift by Parliament. Prior to the amendments, it was well established that the creditor needed to prove that they would suffer detriment through having to pay the money back to the liquidator. This detriment was something more than paying the money back; usually the creditor had to be worse off than if the payment had never been made. A creditor who had given value prior to the voidable payment would be no worse off than if the payment had not been made. The Court stated that it would not lightly attribute an intention to make a statutory change of this nature unless compelled to do so by the terms of the legislation.

The Court also considered that the reliance by the High Court on the Corporations Act was misplaced. The explanatory note to the Bill did not indicate an intention to follow the Australian voidable transaction provisions to the letter. Although many features of Australian insolvency law were adopted into New Zealand law through the successors of the Bill, there also remain clear intended differences between the law in each country.

Discussion

Given the tension between the High Court decisions and the language of section 296(3), the decision of the Court of Appeal provides welcome clarification as to how the defence is to be interpreted. The position adopted by the Court of Appeal accords with the general understanding of the section prior to the High Court decisions as reflected in earlier decisions of the High Court. It is possible though, given the importance of the decision, that the decision may yet be appealed to the Supreme Court.

The Court of Appeal's decision confirms that the amendments made to the Companies Act in 2006 make it very difficult for creditors to successfully raise the section 296(3) defence to a voidable claim. The creditor will need to show that they provided value at the time of payment, such as by agreeing to continue supply to the company, or that they have genuinely altered their position in reliance on the payment's validity, through, by example, on-paying the funds to a sub-contractor.

The Court has though left open for further submissions an alternative argument that the requirement for value to be given when the payment is made can be satisfied by the creditor forbearing to sue at the time of payment or by the creditor receiving the payment in satisfaction of the antecedent debt. There is a strong argument that provided there is sufficient evidence of a genuine forbearance or satisfaction of the debt that this should qualify as giving value under section 296(3).


1 Farrell v Fences & Kerbs Limited [2013] NZCA 91.

2 Farrell and Rogan v Fences & Kerbs Ltd [2012] NZHC 2865; Farrell and Rogan v ACME Engineering Ltd [2012] NZHC 2874; and Meltzer and Hayward v Hiway Stabilizers New Zealand Ltd [2012] NZHC 3281.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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  • Nick Moffatt

    Senior Associate Auckland
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