The End Of Voidable Transactions? – Not Quite
The release of the Supreme Court decision relating to voidable (insolvent) transactions has had quite a bit of commentary in the media.
While the decision may curtail some voidable transaction actions taken by liquidators, suppliers will still need to be alert to the potential insolvency of customers when being paid for supplies provided on credit.
We briefly explained in our monthly newsletter earlier this week (click here to read more) that 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.
An insolvent transaction should not arise if the recipient 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.
It is the interpretation of “gave value” which the Supreme Court has ruled on.
However, the protection afforded to parties subject to an insolvent transaction claim also requires that when the payment was received the recipient acted in good faith and had reasonable grounds for not suspecting the company was or would become insolvent.
The current or future solvency status of the other party can often be problematic for parties defending an insolvent transaction claim from a liquidator.
Each case will turn on the facts and particular parties involved, but if there is evidence that the creditor was aware the company being transacted with was in difficulties, for example issues with late payments of invoices, credit recovery actions or even stop credit processes being put in place, then the creditor may have difficulty in arguing that they had “reasonable grounds” for not suspecting the company was or would become insolvent. Also, the ability to argue “reasonable grounds” in these circumstances will often get more difficult the closer to the date of liquidation a transaction occurs.
The upshot of this is that companies need to carefully manage supplies on credit terms with customers. The first signs of trouble with customers paying should lead to a review of credit and payment terms.
Once companies become aware, or should have reasonably become aware, of solvency issues with a customer they still risk being subject to an insolvent transaction claim in the event the customer ultimately goes into liquidation.