Did Creditors Really Win?

Did Creditors Really Win?


While there has been some rejoicing from the creditors involved in the recent “Fences & Kerbs” Supreme Court decision last month, the wider question has not been answered.  Have trade creditors, in general, benefited from this decision?


The New Zealand Voidable Preference regime dates back to early English insolvency law, and is an attempt to rectify situations where an insolvent party attempts to repay creditors it wishes to favour, in preference to its general creditors.  As liquidators, we frequently come across situations where apparently un-deserving parties, some being associates of the directors, are paid from the funds of a dying company in preference to the creditors who have been providing credit to the company right up until its liquidation.


The voidable preference regime had presented a relatively inexpensive option for liquidators to call back those payments, for the benefit of all creditors in the liquidation.  Until the Supreme Court decision, recipients of these last gasp payments often had no defence to a voidable preference claim, since they were not providing new value or credit.  As the law now stands, such a recipient is significantly better protected from recovery action by a liquidator.


At first glance, the decision appears to have put paid to the chances of success in a pending action for a group of creditors in the Ross Asset Management case.  The potential claim is against a group of clients who were repaid by David Ross, from funds provided by other later depositors.  This at a time when the company was clearly insolvent.


But is there a glimmer of light still on the horizon for those creditors?  Liquidators, PWC, have indicated that they believe they still have a cause of action under the Property Law Act 2007.  This Act provides for compensation to be paid to a creditor or liquidator of a creditor company, where it has been prejudiced by a disposition of property by the debtor, made in order to defeat its creditors.


It appears that the section 348 of the Property Law Act (PLA) will still provide an opportunity for the claw back of some preferential payments which the voidable preference regime of the Companies Act was designed to attack.  However, under the PLA, the Court can refuse to order repayment, if it believes the creditor received the funds in good faith without knowledge of the debtor’s situation.


We await the first Court decisions.  But without doubt, the Supreme Court decision has deprived liquidators representing the general body of trade creditors, of an inexpensive means of redress.  Perhaps it is time to replace the present voidable preference regime in the Companies Act, with a more straight forward approach to dealing with this problem.


Paul Sargison