Supreme Court finds in favour of creditors concerning voidable transactions

April 2, 2015

in Insolvency

iStock_000017070264SmallWe have discussed in a previous post a Court of Appeal decision which had essentially curtailed one of the basic defences for small businesses against liquidators trying to claw back money that has been received from a company that has gone into liquidation.

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

The Court of Appeal had earlier found that the provision of value by the creditor had to occur at the time of payment.  The practical reality is that in most cases the creditor would provide goods or services and then subsequently receive payment.  The Court of Appeal said that was not value given at the time of payment and if the payment was within a two year period prior to liquidation the creditor would have to potentially pay that money back to the liquidator.

This was seen as highly unfair and putting the multitude of small businesses in an extremely disadvantageous position against liquidators given that most companies supply goods or services and then received payment subsequently – sometimes a long time after provision of the goods or services.

The case was appealed to the Supreme Court and the Supreme Court has recently decided unanimously that the Court of Appeal was wrong in its interpretation.  The Supreme Court found that in order to qualify for the defence to a voidable transaction under the relevant section that it was sufficient if value was provided prior to the payment received by the creditor (even within the two years prior to liquidation) if the creditor had acted in good faith and provided value for the payment.  The Supreme Court said to find otherwise would essentially undermine the operation of the defence provided under section 296(3).

The Supreme Court said it would be highly unusual if Parliament intended that for a creditor to qualify for the defence that the creditor had to provide the goods or services at the time of or after the payment was received.  Clearly in most business situations the goods or services are supplied before 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:

Paul Farry
09 379 0055 or 03 477 8870


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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