A creditor wanting to keep the benefit of a potentially voidable transaction must be able to prove that value was given to the debtor company at the time payment was received, the Court of Appeal has held in Farrell v Fences & Kerbs Limited  NZCA 91.
Section 296(3) of the Companies Act 1993 provides a defence to creditors who are a party to a voidable transaction that a liquidator is attempting to upset. To keep whatever they received from the company, a creditor must satisfy the three criteria set out in section 296(3). At the time they received the payment or other property, the creditor must be able to prove they:
- had acted in good faith;
- had no reasonable grounds for suspecting that the company was, or would become, insolvent; and
- gave value to the company.
It is the third element, concerning the giving of value, which has received the most recent attention from the Courts.
In Farrel v Fences & Kerbs Limited  NZHC 2865, Farrell v ACME Engineering Limited  NZHC 2874 and Meltzer v Hiway Stabilizers New Zealand Limited  NZHC 3281, the High Court temporarily derailed the accepted thinking as to what was meant by "giving value" by holding that value given by the creditor at any time - not just at the time of the challenged transaction - was sufficient. The High Court looked to the Australian equivalent of section 296(3) and held that there was no intention that New Zealand would depart from the well-settled position in Australia that, by receiving a payment made to discharge an earlier debt, the creditor has given value at the time of the transaction.
The Court of Appeal's reversal of the High Court's position was met with a warm welcome from the insolvency industry. The Court of Appeal recognised the importance of the rights of all creditors under the pari passu rule, noting that "it is important to keep in mind the rationale for the avoidance provisions... The object is to swell the pool of funds available to the company to be shared rateably amongst all creditors of the same class... this objective would be substantially undermined if the mere receipt of funds to discharge an antecedent debt were sufficient to meet s 296(3)(c)".
The Court of Appeal emphasised that the wording of section 296(3) meant that creditors had to prove value was given at the time payment was made, and that if Parliament had intended "value" to include earlier debt, then it would have noted this in the Act. It also considered that the High Court's reliance on the Australian approach was "misplaced", principally due to the difference between the New Zealand and Australian provisions, stating that "the best guide to statutory intention is the language used. In that respect, New Zealand has deliberately adopted different language".
- Any transaction that has the effect of settling earlier debt between a creditor and an insolvent company has the potential to be attacked, and the payment to the creditor clawed back, by liquidators under section 292 of the Act
- A defence may be available to creditors under section 296(3) if they can show that some form of value was provided by the creditor to the insolvent company at the time of receiving payment, and that the creditor was also acting in good faith and without knowledge of a current or impending insolvency
- If payment is received two years before the liquidation, the payment cannot be recovered as a voidable preference (unless the creditor falls into one of the categories of related persons)
- Even if a creditor has entered into a voidable transaction, it is not always the case that a liquidator will pursue the money owed
- Creditors can minimise the risk of a voidable transaction through credit management, and monitoring changes to payment times of any companies that they are trading with