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Bringing certainty to voidables: Allied Concrete Ltd [2015] NZSC 7

22 July 2015 - By Dale Nicholson and Darise Bennington

Trade creditors will have a lot more certainty about their commercial transactions following the Supreme Court's unanimous decision in Allied Concrete Ltd v Meltzer & Anor, Fences & Kerbs Ltd v Farrell & Anor, and Hiway Stabilizers New Zealand Ltd v Meltzer & Anor [2015] NZSC 7 (18 February 2015).

The Supreme Court has held that the defence to an insolvent transaction, as set out in s 296(3) of the Companies Act 1993, should be interpreted so that "value" includes "value given when the debt was initially incurred or value arising by the reduction or extinguishment of a liability to the creditor incurred by the debtor company as a result of an earlier transaction" (at [105]).

In other words, creditors no longer have to prove that they gave "new" value at the time the payment was made by the debtor company to come within the grounds of the defence.

In reversing the decision of the Court of Appeal, the Supreme Court has brought New Zealand's insolvent transaction regime back to what it says was originally intended by the 2006 insolvency law reforms.

The Court, in the decision delivered by Justice Arnold on behalf of himself and Justices Glazebrook and McGrath, cited the explanatory note in the Ministry of Commerce's 2004 discussion paper. The Court said that "the new s 296(3) defence was intended to be objective in nature and to 'give [creditors] more certainty that the transactions they are entering into will not be made void'" (at [101]).

The Supreme Court found that this approach was consistent with the corresponding Australian provision, s 588FG(2)(c) of the Corporations Act 2001 (Cth), and with the approach taken historically in relation to the requirement of "valuable consideration" in New Zealand's bankruptcy legislation. Previously, an antecedent debt had been sufficient to provide a defence to an alleged preferential payment.

A stark choice

The issue before the Supreme Court was based solely on the interpretation of s 296(3)(c). As the Chief Justice, Dame Sian Elias, observed at [128], "It is unfortunate in a provision of such great practical importance that the legislation in its own terms is not entirely clear."

The Supreme Court was aware that the choice it was being asked to make was "a stark one in terms of its consequences" (at [55]).

If the Court accorded primacy to the interests of creditors as a whole, it would be at the expense of creditors who had accepted payments in good faith and who had no reasonable basis to suspect the debtor company was technically insolvent.

If creditors were unable to show that any new value of a "real and substantial" nature had been provided when they received the payment, they would not be able to bring themselves within the defence, thereby entitling the liquidator to claw back the payment for the benefit of the pool of creditors.

Alternatively, if the Court accorded primacy to individual creditors, then this would be at the expense of the class of creditors as a whole and the concept of collective realisation. (Collective realisation focuses on the position of all debtors, and requires that they all be treated alike.)

In its review of the background to New Zealand's voidable transaction regime, the Court noted three points of significance (at [53]):

  • the voidable transaction provisions of the Companies Act were considered to be unsatisfactory due to their focus and complexity in operation;
  • while a defence was inconsistent with the principle of "collective realisation", it had been accepted that some form of defence was necessary in order to maintain confidence in the voidable transaction regime; and
  • there was a desire to take advantage of Australia's experience in relation to voidable transactions, by enacting provisions based on the same concepts.

A question of 'when'

Section 296(3) of the Act provides:

(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

a) A acted in good faith; and

b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

At issue in both the Court of Appeal and the Supreme Court was the use of the word "when". The Court of Appeal determined that the use of the word "when" meant that the judgment creditor had to prove that when it received the payments from the debtor company, value had been given for that payment at that time (Farrell v Fences & Kerbs Ltd [2013] NZCA 91 at [78]).

The Court, however, considered that the use of the word "when" did not have the significance given to it by the Court of Appeal (at [68]):

"The subsection simply requires that there be a link or connection between the impugned payment and the requirements of s 296(3)(a), (b) and (c) … We see no reason why, as a matter of interpretation, 'gave value' cannot be taken to encompass the notion of having given value earlier."

While the Supreme Court agreed with the Court of Appeal's findings on the differences it had identified between Australia's voidable transaction regime and New Zealand's, it did not find those differences to be decisive when it came to determining whether s 296(3)(c) required the giving of new value.

"While we accept … that there are differences between the Australian and the New Zealand provisions, we do not see them as assisting in the resolution of the particular issue before us," the Court said at [77]. "What is important is that the legislative history indicates that a policy decision was made to align New Zealand's position with that of Australia. We do not see the language used as being inconsistent with that policy decision."

A question of context

In determining the meaning of "gave value", the Court said the words must be interpreted in the context of s 292.

In analysing s 292, the Court considered the example of a creditor receiving a payment from a debtor company which is partly on account of existing indebtedness and partly in full payment of further goods or services provided by the creditor on a cash-on-delivery sale. The payment for the later supplied goods would not constitute a voidable transaction, as the new value was received by the supplier not as a creditor but for the contemporaneous supply of goods or services. Nor would it result in the creditor receiving more funds, in respect of that payment, than it would have received in the liquidation.

On that basis, the Court said that "gave value", in s 296(3), "must refer to something other than further goods or services provided by the creditor at the time of the disputed payment because the payment for the new value would not be a voidable transaction" (at [92]).

Qualifying for the defence

The Court found that the Court of Appeal's interpretation of "gave value" would confine the defence to situations where the new value was provided on credit or was intangible (at [92]). However, this could cause further issues for a creditor, the Court noted, because if the creditor had made alternative arrangements in respect of enforcing its debt (such as promising further supply if the existing indebtedness was resolved, or promising not to enforce default rights if payment was made), then it could be arguable that the creditor was aware that the debtor company had liquidity issues.

The Court also took issue with the Court of Appeal's interpretation, as that Court's restrictive reading of s 296(3)(c) would mean Parliament had effected a "fundamental" and "unheralded" change in policy (at [102]). The Supreme Court's analysis of the policy decisions behind the voidable transactions regime showed that Parliament's intention was that the new s 296(3) defence was intended to be similar to that contained in the Australian legislation (at [101]).

"It is legitimate to ask how this objective could be achieved on the Court of Appeal's interpretation of s 296(3)(c) as the provision would generally operate to preclude reliance on the defence even where a creditor acted in good faith and in the absence any reasonable grounds to believe that the debtor company was technically insolvent."

The Court found that it would be improbable in most situations that a creditor would give value in the sense envisaged by the Court of Appeal's interpretation. And as the Chief Justice noted in her judgment at [174]: "It would leave very little scope for creditors to invoke the s 296(3) defence since new value for repayment of a debt is highly unusual and most unlikely except perhaps in circumstances of doubtful insolvency, where the defence will be excluded."

Yet another issue for the Court was the effect that the Court of Appeal's interpretation of "gave value" would have on one-off, credit-based transactions. The Court noted that credit arrangements of the type where goods or services are supplied, with payment due within seven days of the invoice or within 30 days of supply, (or by the 20th of the month) are commonplace (at [103]). Under the Court of Appeal's reasoning, these suppliers would never be able to bring themselves within the s 296(3) defence.

"It is difficult to see why a supplier under a 'one-off' credit-based transaction of a type commonly entered into should be precluded from qualifying for the defence where the debtor company pays in accordance with the terms of supply, particularly where the supplier is not familiar with the debtor company."

Conclusion

While it may appear that the decision has set trade creditors "free" so to speak, the "widened" s 296(3) defence will only apply to creditors who can bring themselves fully within it. And as the Court noted at [105], the requirements of s 296(3) are significant and are not easily met.

It is one less hurdle for trade creditors to overcome, but to be successful they will still need to prove that they acted in good faith and that there are no reasonable grounds for a creditor in their position to believe that the company was technically insolvent at the time the voidable transaction occurred.

It is this latter requirement – the "lack of knowledge of insolvency or reasonable suspicion of it" – which the Australian Law Reform Commission saw as the central question for the defence (per Chief Justice Elias at [153]).

While some may feel the choice of the individual over the whole offends against the strict adherence to the concept of collective realisation, others may feel this decision results in a more just outcome – with only those who knew or should have known that the debtor company had liquidity issues required to divest themselves of the debtor company's property for the good of the trade creditors as a whole.

Dale Nicholson is a litigation partner in Duncan Cotterill's Auckland office and Darise Bennington is a senior solicitor who is also based in Duncan Cotterill's Auckland office. They both specialise in commercial dispute resolution and insolvency.

This article was also published in LawTalk 860, 13 March 2015, page 26.

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Last updated on the 23rd July 2015