Common sense approach to claw back payments

Contractors and sub-contractors benefit from the Supreme Court decision on a liquidator’s powers to claw back payments made by an insolvent company to a contractor. Comment by MALCOLM ABERNETHY, executive officer, Civil Contractors NZ.

Last month the Supreme Court overturned an earlier Court of Appeal ruling allowing liquidators to claim back payments made by a company up to two years before its collapse.

Obvioulsy this decision was strongly welcomed by both CCNZ and the Specialist Trade Contractors Federation (STCF).

‘Voidable transactions’ are intended to ensure all creditors of insolvent companies are treated equally, and recover payments that have been made that are essentially out of the ordinary, and are designed to give improper preference when the recipient should have known that insolvency was imminent.

Part 16 of the Companies Act 1993 enables the liquidator of a company to recover any payments made within the previous two years if it was insolvent at the time payment was made. Section 296 (3) provides an exception if the party which received the payment can prove that: (a) They acted in good faith; (b) there was no reason they should have suspected that the company was or would become insolvent; (c) and they gave value for the property or altered their position on the reasonable belief that the payment was not voidable.

The exception requires all three requirements to be proved and these three aspects are not always easily proved.

This section of the Companies Act was copied from Australian legislation, which provides, in effect, that payments made in the ordinary course of trading cannot normally be clawed back. There has to be something improper about the payments that put the other creditors at a disadvantage – payments a well-run company would not have made, favouring directors or related parties and so on. In New Zealand any payment made by an insolvent company in the two years before it is liquidated is liable to be clawed back, regardless of whether it was made in the ordinary course of business or fair value for goods or services actually supplied. No additional element of improper conduct was required.

Following on from the earlier Court of Appeal decision, Civil Contractors NZ (then NZCF) went to its membership to seek support for a joint appeal to the Supreme Court on behalf of Hiway Stabilisers (CCNZ members) with the legal support of Kensington Swan.

The situation contractors were facing was that when a liquidator did manage to convince a company to pay back an alleged voidable transaction the funds ended up being paid out to cover liquidators’ fees, employees of the company that went bust, and the Inland Revenue. Contractors are generally unsecured creditors and would often receive nothing from the liquidators’ money pool.

The decision from the Supreme Court, announced on February 18, provides surety to subcontractors, suppliers and the wider business community that payments that have rightfully been received remain the property of the payee.

The Supreme Court’s decision to allow the appeals was unanimous – with all five judges in agreement on the issue.

The Court has decided that creditors in the position of the appellants did meet the “gave value” requirement in s 296(3) (c). The Court reached this view after a close consideration of the legislative background. It noted that this interpretation is consistent with – Parliament’s aim of increasing certainty for creditors that the transactions they enter into will not be made void; the approach taken in Australia; and with the approach taken historically to the “valuable consideration” requirement in bankruptcy legislation (a longstanding feature of which has been the protection of creditors who have acted in good faith, without knowledge of the debtor’s liquidity problems and who have provided value for payments).

The Court considered that the approach of the Court of Appeal left little scope for the operation of the s 296(3) defence in relation to voidable transactions and that it was implausible that Parliament intended such an outcome.

The Court also ordered that the respondents in each appeal (the liquidators) must pay costs of $10,000 to the appellants (Allied Concrete, Fences and Kerbs and Hiway Stabilisers) in the relevant appeal, plus the appellant’s reasonable disbursements.

Kensington Swan will be undertaking a series of seminars around the country with Civil Contractors NZ explaining the decision and its implications.