March 2015 . . . Construction subcontractors can breathe a sigh of relief after three construction companies recently won an appeal to the Supreme Court, which will greatly affect the construction industry, and provide clarity to insolvent transaction rules generally.

 

The case concerned the ability of a liquidator under section 292 Companies Act 2993 to “claw back” payments, known as “voidable transactions”, made by insolvent companies to third parties in the two years prior to liquidation.

 

Section 296(3) of the Act gives a defence to third parties who receive such payments in good faith, where there are no reasonable grounds for the third party to suspect the company was insolvent, and where the third party “gave value” for the payment, (or altered its position) in the reasonably held belief that the payment was validly made, and would not be clawed back.

 

For the last few years, the meaning of “gave value” has been a hot topic. The question has been whether “value” includes value given before the voidable transaction was made, or whether new value must also have been given after the payment. The former interpretation makes it easier for third party creditors to raise a Section 296(3) defence (for instance, where work is done on credit and paid for later), whereas the latter favours liquidators seeking to claw back voidable transactions.

 

In 2013, the Court of Appeal sided with the liquidators, holding that to prevent a claw-back, “value” had to be given by the third party after the otherwise voidable transaction. This caused particular concern to people in the construction industry, where insolvencies are not uncommon and it is normal for subcontractors to do work on credit, receive payment later, and then pay out workers and suppliers. 

 

That decision has now been reversed in a unanimous decision of the Supreme Court, which held that “value” includes value given before payment is actually received. Now, to make use of the claw-back defence, a third party creditor need only show that it acted in good faith, and that there were no reasonable grounds for it to suspect that the company was insolvent.

 

This means New Zealand’s approach is now consistent with:

To discuss any of the issues raised in this article, please contact David Robinson, Kate Logan or Isabella Broadbent.