The Supreme Court has today considerably expanded the “good faith” defence for voidable transactions. 

Where a creditor “gave value” through the original transaction, that creditor can now defeat a voidable transaction claim by proving only that it acted in good faith, with no suspicion of insolvency. 

The Court of Appeal has confirmed that if a secured creditor votes its secured debt in a liquidation meeting, the vote is invalid – and the security remains. 

Liquidation meetings are for unsecured creditors.  A secured creditor has no vote, except in respect of debt that is unsecured.

The case

A bankrupt’s KiwiSaver account balance is off limits to the Official Assignee.  Even if it were not, the Official Assignee could not use the bankruptcy to invoke the hardship-based early withdrawal provisions in the KiwiSaver Act 2006.

This is the effect of a Court of Appeal judgment, delivered on Friday.  Although justifiable in policy terms, the decision raises issues about the appropriate balance between promoting retirement savings and protecting creditor rights. 

Significance

“The peak indebtedness rule is not part of the law in New Zealand”, according to the Court of Appeal, in a decision dismissing two appeals on an issue “significant for both liquidators and creditors generally”.

The Court of Appeal has found that receivers can be personally liable for body corporate levies accrued during a receivership.

The judgment is based on a broader interpretation of the relevant provisions in the Receiverships Act 1993 than applied by the High Court in Body Corporate 162791 v Gilbert, and reverses that decision.¹    

Over the last couple of years, we have developed the habit of periodically pushing up the periscope to try to determine the ‘big five’ insolvency issues on the horizon. 

Below is a retrospective assessment of how we did last time and our best guess as to what will dominate the next 12 months.

The big five for 2015

Inland Revenue is now ahead of liquidators and receivers in the queue for payment where cash is available in liquidation and PAYE is owed.

Industry practice has been that PAYE is paid to the Commissioner of IRD only after the insolvency practitioners’ fees and employees’ wages have been paid but the Court of Appeal has accepted the IRD's argument that the Commissioner has first claim.¹

We picked the good faith defence in the voidable preference regime as one of the big five insolvency issues for 2013 and so it has come to pass, with a wealth of case law on the topic.

The High Court has found that a bankrupt member’s interest in a KiwiSaver scheme is available for distribution by the Official Assignee to creditors – but only after the bankrupt qualifies for a withdrawal (which will usually be at age 65) unless early partial release would alleviate the bankrupt’s significant financial hardship.

Three times in the last 12 months, liquidators have been told by the High Court that they cannot choose the “point of peak indebtedness” as the start of the “continuing business relationship” in an insolvent transaction claim. 

Of course, the three decisions are all from the High Court, and will not be binding in future cases.  The law will not be settled until the appellate courts hear the issue, and they may yet come to a different conclusion.