In
deciding who should be the winners and who the losers when a company goes
belly-up, the Supreme Court decided it would follow the Australian rules. That is what parliament intended even if it
is not what New Zealand insolvency legislation says exactly.
A company wound up insolvent
does not have enough to pay every creditor in full. There is a conflict: collective realisation
sees assets realised and creditors sharing; but this conflicts with the need
for individual justice – a business paid up to two years previously could see
the liquidator demanding back money received.
Creditors squeal when a liquidator seeks to recover money received well
in the past, money which has been applied for business purposes and is not
sitting in a bank account readily available.
Insolvency rules governing
voidable payments have been in a state of flux for the last two decades with
several major changes to legislation.
Each change has met with howls of protest that the rules lack certainty
and disrupt business.
In a test case involving
payments made by three different insolvent companies, the Supreme Court was
asked to provide some clarity. Current
rules allow the liquidator of an insolvent company to recover payments made in
the previous two years. To resist repayment,
a creditor must prove three things: at the time payment was made (1) it acted
in good faith; (2) it did not suspect the debtor company was insolvent, and (3)
it gave value. Arguments have raged over
the phrase “gave value”. The Court of
Appeal ruled that this was limited to new benefits given to the debtor company
in return for the payment now under attack. This interpretation meant creditors who had
supplied goods and services in the past on credit could not claim they had
provided “value” when later paid. If
this later payment was made inside the two year time limit they were out of
pocket, having to pay back the cash received.
Rather than looking closely at
the wording of the insolvency rules, the Supreme Court concentrated on the
policy reason behind the rules deciding that giving “value” could include
payment made for goods and services delivered in the past. The court emphasised that these creditors
would still have to also prove that they acted in good faith and did not
suspect the debtor company was insolvent when making payment – significant
requirements, not easily met, said the court.
Allied
Concrete v. Meltzer – Supreme Court (18.2.15)
15.008