Liquidators’ ability to recover funds for unsecured creditors has been strengthened in one context and weakened in another by two recent court judgments.
The Court of Appeal in Farrell v Fences & Kerbs Limited1 has overturned previous decisions from the High Court, which had considerably widened the availability of the “good faith” defence for creditors. But the finding is interim only, subject to a further hearing on a closely related issue.
Section 296(3) of the Companies Act 1993 (the Act) provides a defence to creditors who have received a payment found to be a voidable transaction under section 292 of the Act. One of the elements that creditors need to establish under this defence is that they either provided value to the company or changed their position in reliance on the validity of the payment.
The High Court has provided useful guidance as to how receivers should apportion their fees to accounts receivable and inventory.
This Brief Counsel draws out some key messages from the judgment.
Like many legal tests, the test for insolvency is easy to state, but hard to apply in practice.
The United Kingdom Supreme Court (UKSC)1 has recently issued an important clarification, which confirms that an element of forwards projection must be applied – extending in extreme cases to assessments of balance-sheet as well as cash-flow solvency.
This liberal approach is likely to be followed in New Zealand, despite differences in statutory wording.
A recent decision of the Court of Appeal (Farrell v Fences & Kerbs Limited [2013] NZCA 91) will make it very difficult for creditors to successfully raise the good faith defence under section 296(3) of the Companies Act 1993 to a voidable claim by a liquidator.
The recent Court of Appeal case of Kakara Estate Ltd v Savvy Vineyards 3552 Ltd [2013] NZCA 101 provides a useful reminder that an assignment and a novation of an agreement are different. When an agreement is assigned, the assignor remains a party to the agreement. If the agreement is novated, a new agreement is created between the assignee and the continuing party, and the "assignor" is released.
A creditor wanting to keep the benefit of a potentially voidable transaction must be able to prove that value was given to the debtor company at the time payment was received, the Court of Appeal has held in Farrell v Fences & Kerbs Limited [2013] NZCA 91.
Re Tames involved an application for the Court to approve a debtor's proposal to creditors under section 333 of the Insolvency Act. The applicant was the provisional trustee for the proposal and sought the Court's approval of the proposal's terms. If the proposal was accepted, Ms Tames (the debtor) would only pay $0.05 on the dollar to her unsecured creditors. The application for approval was opposed by ASB, one of Ms Tames' unsecured creditors.
In Hutchins v Edwards [2013] NZHC 336, the High Court declined an application for an adjournment by a debtor who sought further time to liquidate property in order to pay a judgment debt.
The Wellington litigation team successfully defended a voidable transaction claim under section 296(3) of the Companies Act 1993 by the liquidators of Contract Engineering Limited in the High Court in Farrell v ACME Engineering Limited [2012] NZHC 2874.
ACME Engineering manufactured and delivered a flash silencer to Contract Engineering in May 2010 and issued an invoice for it. The invoice was paid late and pursuant to a payment plan. Contract was placed into receivership in late 2010 and then into liquidation in July 2011.