Creditor’s defence of voidable transaction further limited by Court of Appeal

August 12, 2013

in Insolvency

iStock_000017070264SmallA Court of Appeal decision is bound to have a big impact on future commercial dealings and relationships with creditors, so you need to be aware of the change in judicial thinking.

The  recent decision of Farrell v Fences & Kerbs Limited [2013] NZCA 91, has seen the Court of Appeal limit the defence under section 296(3) of the Companies Act 1993 (“the Act”) offered to creditors against liquidators making voidable preference claims.

The Companies Act 1993 (“the Act”) provides that payments made by a company within a certain period before the company goes into liquidation are “voidable”.  This gives the liquidator the right to set aside and claw back the payment.

Section 296(3) of the Act provides a defence to creditors who have received a payment deemed to be a voidable transaction.  One of the elements of this defence is that they (the creditor) provided value to the company or changed their position in reliance on the validity of the payment.

Previous High Court decisions have held that a creditor could rely on value given to the company prior to the voidable payment being made, that is at the time the antecedent debt was created.  However the recent Court of Appeal decision of Farrell has overturned this approach and found that only value given “at the time” of the voidable payment can be taken into account.  The Court confirmed that proof of all three elements of s296(3) of the Act is to be established at the time the payment or other company property is received and does not include value given to the company at an earlier time.

In reaching its decision the Court of Appeal was emphasising the importance of creditors being on an equal footing and to ensure the equal participation of creditors in the assets of the company in liquidation.  In doing so the Court’s approach was that unless all elements in the defence can be established at the time the payment or company property is received then the amount received must be paid back for the benefit of all creditors.

If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co who normally advises you, or alternatively contact:

Kirsten Maclean

(03) 477 8870 or (09) 379 0055


The information contained in this publication is intended as a guide only.  It does not constitute legal advice and should not be relied upon as such.  Professional advice should be sought before applying any of the information to particular circumstances.  While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.

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