In Madsen-Ries & Anor v Donovan Drainage and Earthmoving Limited  NZCA 301, the liquidators of a failed property development company, Te Pua, applied to set aside as insolvent transactions a number of payments which Te Pua made to a drainage contractor, Donovan.
After Donovan completed drainage works for Te Pua, Te Pua advised Donovan that it did not have the funds to pay its account, but that it would be able to make payments in the future. Following this discussion, Donovan completed and invoiced Te Pua for further drainage works and subsequently received several payments from Te Pua.
In the High Court, Associate Judge Christiansen concluded that the payments could not be set aside as insolvent transactions as Donovan satisfied the defence under s 296(3) of the Act; at the time that the payments were received, Donovan acted in good faith and neither Donovan, nor a reasonable person in its position, would have suspected that Te Pua was or would become insolvent.
On appeal, the liquidators challenged the High Court's finding that Donovan had discharged its onus on the question of suspicion of insolvency. The Court of Appeal dismissed the appeal and held that:
- Liquidity is not co-extensive with solvency. A temporary liquidity problem, including an inability to pay debts when legally due, will not necessarily establish insolvency
- Donovan reasonably understood the delay in payment was due to a temporary cash-flow problem. Neither Donovan nor a reasonable person in its position would have suspected at the time of the payments that Te Pua was, or would become, insolvent
- If anything, the payments that Donovan received suggested to Donovan that Te Pua was back on track.
See Court decision here.