The Companies Act 1993
This act allows a liquidator to recover payments made by an insolvent company to creditors in the lead up to a liquidation as a voidable transaction. The rationale for this is that all creditors should be treated equally, and the payments are likely to have given the recipient a preference over the other creditors.
This has the potential to have some severe consequences for the receiving creditor, as such parliament have provided a defence to these claims. The defence has three elements:
1) the creditor has acted in good faith
2) the creditor gave value for the payment (i.e. they have supplied something)
3) when the creditor received the payment they had no reason to suspect the company was insolvent.
A recipient must establish all three elements in order to meet the defence.
Build a case
In a recent liquidation conducted by Gerry Rea Partners we identified a series of payments which we believed to be voidable and sought to have them set aside. The creditor sought to rely on the above defence.
The liquidators conceded that the creditor had given value (as they were a supplier) and had acted in good faith. The liquidators, however, believed the creditor had knowledge that the company was insolvent, and couldn’t meet the third element of the defence. The liquidators and the creditor could not agree on this point and the matter went to court.
The summarised facts of the case
- The creditor had ceased trading prior to the payments being made. The company was still trading
- The company paid the outstanding balance over a period of 4 months in Lump Sum payments
- The company director regularly met with the creditor’s General Manager to discuss trading
- The company got further behind with its other major creditors
- The creditor was a member of an industry group which collated and shared debtor data on the major customers (including the company)
- The collated data showed the company was on stop creditor with at least one supplier, and a trend of increasingly aging debt.
On this occasion, the court held the lump sum payments and the collated data was enough to prevent the creditor establishing they ought not to have suspected the company may be insolvent.
The case provides useful guidance to liquidators and creditors as to when the statutory defence may be available.
Unsure if a creditor fits the criteria above? Any insights you would like to add? Please email Ben at bfrancis@gerryrea.co.nz