Creditor’s defence to voidable transaction revisited by Court of Appeal

January 9, 2014

in Insolvency

iStock_000017070264SmallIn August we reported on the Court of Appeal decision of Farrell v Fences & Kerbs Limited [2012] NZCA 91 which saw the limiting of the defence under the Companies Act 1993 (“the Act”) which relates to voidable transactions when a company becomes insolvent.

In the Farrell case the Court held that all three elements of the defence under s296(3) need to be established in order to rely on the defence.  This position was confirmed in a further decision of the Court of Appeal in the case of Madsen-Reis v Rapid Construction Ltd [2013] NZCA 489.

The three elements of the defence which must be established at the time value is given or other company property is received, are;

  • That the creditor acted in good faith; and
  • That a reasonable person in the creditor’s position would not have suspected, and they did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
  • The creditor gave value for the property or altered their position in the reasonably held belief that the transfer of the property to them was valid and would not be set aside.

The case of Madsen-Reis looked more specifically at the third point above which deals with the element of the defence that the creditor provided value to the company or changed their position in reliance on the validity of the payment.  While the Court in the case of Madsen-Reis  confirmed that all three elements of the defence must be established at the time the payment or other property company is received they noted that there was one exception stating that in “some cases the alteration of the position might occur contemporaneously with receipt of the property…”.  The Court found that a contemporaneous alteration of position was sufficient.

The Court further noted the following;

  • A creditor’s alteration of position following receipt of payment must be a conscious one;
  • The creditor must show that it would not have undertaken that course but for receipt and a belief on the payments validity;
  • That a contemporaneous alteration of position was sufficient provided the decision is a conscious one to act in reliance on the payment.

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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