Vol 12 (2015) - Issue 5

Article preview

New Zealand’s Good Faith Defence to Voidable Transactions: Shift in Focus to Creditor’s State of Mind

Introduction
For over a year, insolvency practitioners and creditors alike have been awaiting the Supreme Court judgment in Allied Concrete Limited v Meltzer [2015] NZSC 7 ('Allied Concrete'). The decision was expected to provide welcome clarity in relation to the operation of the good faith defence to voidable transactions in New Zealand.
The voidable transactions regime has always been a contentious area, where competing interests converge. Parliament and the judiciary have been tasked with balancing the freedom of day-to-day commerce with the importance of maintaining fairness amongst creditors of a company in liquidation.
New Zealand legislation, as in many other jurisdictions, starts with the basic premise that transactions occurring within a prescribed timeframe prior to liquidation are able potentially to be clawed back by liquidators. If the transaction occurred when the company in liquidation was unable to pay its debts and meant one creditor was preferred over another, the liquidator is likely to attempt to have it set aside.
The problem, from the counterparty’s perspective, is that it may have been very difficult to know that the company was insolvent at the date of the transaction. There may have been no warning signs or perhaps the signs came too late. In these circumstances, so as not to unduly punish creditors to the company, parliament has provided a positive defence to actions by liquidators. That defence is contained in section 296(3) of the Companies Act 1993:
'A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property –
(a) A acted in good faith; and
(b) a reasonable person in A’s position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c) A gave value for the property or altered A’s position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.'
In Allied Concrete, the Court was asked to clarify the New Zealand position on the timing at which value must be provided by a creditor for the purposes of limb (c) of the defence.
The Supreme Court responded by aligning New Zealand with its neighbour across the Tasman Sea. Following Allied Concrete, the test in New Zealand now allows a creditor to have the benefit of the defence if it gave value prior to the date of payment by the company. That is, if goods or services are supplied before payment and no further goods or services are supplied at or after payment, the defence can still apply. This effectively overturned a number of first instance decisions which were based on an apparent literal reading of the language and has made the good faith defence easier for creditors to satisfy.

History of the voidable transactions regime
The Supreme Court judgment in Allied Concrete was influenced by the history of the voidable transaction regime, and in particular, the 2006 amendments to the Companies Act 1993, which were intended to bring the New Zealand good faith defence in line with the Australian defence.
Prior to the 2006 amendments, the good faith defence provided relief to a creditor who had received property in good faith and altered his or her position, if in the opinion of the court, it would be inequitable to order recovery.