A recent decision of the Court of Appeal (Farrell v Fences & Kerbs Limited [2013] NZCA 91) will make it very difficult for creditors to successfully raise the good faith defence under section 296(3) of the Companies Act 1993 to a voidable claim by a liquidator.

Section 296(3) provides a defence to creditors who have received a payment found to be a voidable transaction under section 292 of the Companies Act. One of the elements that creditors need to establish under this defence is that they either provided value to the company or changed their position in reliance on the validity of the payment.

Where a creditor relies upon the provision of value to the company, the question arises as to whether this value needs to be provided at the time of the voidable payment. The question is important because creditors will usually be able to establish this element of the defence if the value can be provided prior to the voidable payment. Ordinarily creditors give value to the company in some form prior to receiving payment, usually through providing goods or services to the company.

In Farrell v Fences & Kerbs Limited, the Court of Appeal has found that only value given at the time of the voidable payment can be taken into account under section 296(3). In doing so, the court overturned three decisions of the High Court in late 2012 that held a creditor could rely on value given to the company prior to the voidable payment being made.

To read Bell Gully commentary on this case refer to our earlier client update Voidable defence is further limited.