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.

In Commissioner of Inland Revenue v Property Ventures Limited (in Liq & In Rec), the liquidator of Property Ventures Limited (in liq and rec) obtained orders requiring the New Zealand Police to produce computer equipment holding certain company records. The Police obtained the relevant information from the offices of a Mr Henderson, following a complaint by the liquidator alleging a failure to comply with notices issued under section 261 of the Companies Act 1993. 

On 25 July 2013 the Court of Appeal issued its final judgment in Farrell v Fences & Kerbs Limited [2013] NZCA 329. The final judgment related to three conjoined appeals in which an interim judgment had been delivered on 27 March 2013 (Farrell v Fences & Kerbs Limited [2013] 3 NZLR 82). The interim judgment held that to rely on the defence to setting aside a voidable transaction in section 296(3)(c) of the Companies Act 1993 "new value" was required to be given at the time the payment that is sought to be set aside was made.

Syntax Holdings (Auckland) Ltd (in liquidation) v Bishop involved a claim by the liquidators of Syntax Holdings (Auckland) Ltd that Mr and Mrs Bishop (as directors) had breached certain duties to the company (and its creditors) under the Companies Act 1993.

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.

Shephard v Steel Building Products (Central) Limited [2013] NZHC 189 is a recent decision of Associate Judge Abbott which applied the "running account" test introduced into New Zealand's voidable transaction regime in 2007.  The test treats a series of transactions as a single transaction for the purpose of determining whether a creditor has received a preference, so long as the transactions form an integral part of a continuing business relationship.

Warren Metals v Grant [2013] NZHC 263 was a successful appeal against a District Court decision that struck out the appellant's cause of action on the basis that the District Court did not have jurisdiction to review the acts of liquidators.

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.