Old Value versus New Value
Insolvency practitioners are waiting with interest for the release of a Supreme Court decision in relation to insolvent (voidable) transactions.
The reserved judgment is an appeal from a 2013 Court of Appeal decision in relation to three creditors who were subject to insolvent transaction actions from liquidators.
As part of the liquidation process, a liquidator will look back at transactions that arose prior to their appointment to identify possible insolvent (more commonly referred to as voidable) transactions.
In essence, the section of the Companies Act relating to insolvent transactions gives a liquidator the power to void a transaction, through a High Court action, that has occurred in the period leading up to liquidation. The action by the liquidator can stretch back to include transactions that arose as far as two years prior to the date the liquidation commenced, although the older the transaction the harder it generally becomes for a liquidator to be successful in voiding them.
The underlying reason for the insolvent transaction rules is to enable a liquidator to recover funds or assets from a creditor who has been paid in preference to others while the company was insolvent.
There is a protection in the rules for creditors which they can rely on in certain circumstances if they find themselves at the wrong end of an insolvent transaction claim.
In summary, an insolvent transaction will not arise if the recipient of the of the property, in receiving it from the company prior to liquidation, did so in (a) good faith, and (b) had reasonable grounds for not suspecting the company was or would become insolvent and (c) gave value or altered its position in the reasonably held belief that the transfer of the property was valid and would not be set aside.
The key issue in the cases heard by the Supreme Court centred around the issue of “gave value” and how this should be interpreted.
The common business relationship is for a supplier to supply goods and services on credit and for these to then be paid by the purchaser at a later date.
On the face of it, a supplier would think that having provided goods and services to a customer and then having received payment at a later date would mean the funds received would not be an insolvent transaction (after all they gave value – the goods or services supplied) in return for the subsequent payment received.
However, the interpretation of the Courts (pending the judgment of the Supreme Court) is that when considering the meaning of “gave value” in the context of insolvent transaction it requires there to have been new value given by the supplier at the time they received the payment. They cannot rely on the original supply of goods or services on credit to meet the requirement of gave value. Taking the example of a standard supplier supplying goods to a customer on credit terms, the position, if upheld by the Supreme Court, would be that there are in effect two separate transactions. The first is the supply of the goods and the creation of a debt owed by the customer. The second transaction, and the one which would be potentially subject to an insolvent transaction claim against the supplier, is the subsequent payment by the customer to the supplier. In this second transaction the supplier would have to give value at the time the payment is received.
Needless to say, the ultimate outcome of these cases will be looked at closely by both insolvency practioners and businesses alike.
