The “good faith” defence for creditors facing insolvent transaction claims has now been fully explored by the Court of Appeal in two separate judgments relating to the Farrell v Fences and Kerbs Limited¹ litigation – and has been confirmed on all points to have narrow application.

Confirmation by the Court of Appeal that “accounts receivable” are more than just book debts and include other legally enforceable monetary obligations owed to a company will provide welcome certainty to receivers and liquidators.

The issue is significant because it determines the assets available to pay preferential claims.

Liquidators must seek a court order to recover an insolvent transaction – even where the creditor has not objected in time to a notice under section 294 of the Companies Act.

The importance of following the prescribed procedure was recently reinforced by the High Court.¹

We look at the decision and the conclusions to be drawn from it.

The case

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.

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.

Eagle v Petterson

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.

New Zealand is a highly entrepreneurial society.  Even during the sluggish economic growth of the past three years, we have maintained an average company registration rate in excess of 45,000 a year. 

The Court of Appeal has reversed the High Court’s decision in Healy Holmberg Trading Partnership v Grant on a PPSA issue it describes as being of “practical significance”. 

The lessons to be drawn from the Crafar receivership in relation to the Personal Properties Securities Act (PPSA) have now been distilled by the Court of Appeal, which has largely confirmed the High Court’s reasoning.

We discuss the implications of the litigation.

The High Court has clarified the extended good faith defence, introduced into the Companies Act in 2007, for creditors facing ‘claw back’ of a payment by liquidators.¹

The Court’s interpretation, while good news for creditors, may make it more difficult for liquidators to recover insolvent transactions.

The 2007 amendment to section 296(3)