The Companies Act 1993 (the Act) provides that in certain circumstances some transactions can be ‘voided’ (or sometimes referred to as ‘clawed back’ or ‘unwound’). To discuss this we must first understand whether a transaction is an insolvent transaction and then whether a transaction is voidable.
Section 292 of the Act defines an ‘insolvent transaction’ as a transaction that is entered into by a company at a time when the company is unable to pay its debts and enables another person to receive more towards satisfaction of a debt owed by the Company than the person would or would be likely to receive, in the company’s liquidation.
A transaction includes paying money and anything done or omitted to be done for the purpose of entering into the transaction and giving effect to it.
A transaction is then voidable by the liquidator if it is an insolvent transaction and is entered into within the specified period.
The specified period is two (2) years in most cases (but up to five (5) in certain circumstances).
Why do we care about insolvent transactions and void-ability or clawbacks? Do these actually matter? Once the money is gone, shouldn’t it just be gone and persons who receive it in satisfaction of a debt that is due and owing should be able to rely on it? And what about commercial certainty?
The primary objective of voidable transactions is simply ‘because it’s fair’, although interestingly the principles of fairness or equality were not the first point identified by Justice O’Regan in Robt. Jones Holdings Limited v Anthony John McCullagh and Stephen Mark Lawrence [2019] NZSC 86 [9 August 2019], who instead noted at [17] “it is the debtor’s act of giving preference that [is] viewed as wrongful, not the preference itself”; “a bankrupt could not be permitted to impose his own scheme of distribution”[1].
That being said the concepts of fairness and equality are well accepted as the key drivers for the voidable transaction regime, the New Zealand Law Commission reinforcing this stating “any system which creates a regime rendering some transactions void has to choose between competing interests. In this case, some measure of commercial certainty is sacrificed in favour of fairness to all creditors”.
It must be noted that there is an exception to the rule of when transactions are voidable (that preserves some commercial certainty); if a creditor can show that when it received the payment it acted in good faith, and did not have any reasonable grounds for suspecting the company was or would become insolvent and gave value for the property or altered its position in the reasonably held belief that the transfer was valid and wouldn’t be set aside, then the transaction will not be voidable.
In Robt. Jones Holdings Limited v Anthony John McCullagh and Stephen Mark Lawrence the Courts (High Court, Court of Appeal and then the Supreme Court) were faced with the question of whether a payment made to a creditor by a separate although related entity of the company came within the scope of section 292 as an insolvent transaction and consequently whether related parties to an insolvent company can come within the voidable transaction regime and the funds can be clawed back.
In this case Northern Crest (formerly a Blue Chip unit) leased a commercial property from Robt. Jones Holdings Limited (RJH). Northern Crest got into significant rental arrears (circa $751,000.00). Over a period of eight (8) months in 2010 two Australian-based third-parties, MSH No. 2 Pty Limited (MSH2) and Columbus Property Marketing Pty Limited (Columbus) settled the arrears to RJH in amounts totalling approximately $262,000.00 and $489,000.00 respectively. In late 2010 Northern Crest was moved into liquidation. In 2011 the liquidators applied to have the payments made by MSH2 and Columbus voidable.
The payment by Columbus had been previously accepted as being a voidable transaction and was not discussed further. The Supreme Court decision focused on the payment by MSH2.
Interestingly the Supreme Court also did not feel compelled to determine the basis on which the funds were advanced by MSH2 instead stating at [12] “we assume, without deciding, that the MSH2 payment was a loan by MSH2 to Northern Crest”. To this end the Court made clear that the basis for the funds was not of such significance that it needed to be determined, and (we assume) agreed with the liquidators deeming argument that [7] “any payment made by Northern Crest (as the MSH2 payment was deemed to be) must have come from Northern Crest’s coffer”. The basis for this was discussed in more detail in the Court of Appeal case (Robt. Jones Holdings Limited v Mccullagh [2019] NZCA 358 [10 September 2018], which stated at [19] that the payments were used to discharge Northern Crest’s indebtedness to RJH and therefore applied for the benefit of Northern Crest, and at [122] ‘the fact[s] set out above puts beyond argument that these payments were made, at the very least, with the full consent and knowledge of Northern Crest. While it is necessary that the insolvent company either direct or consent to the payment the fact of consent will usually be readily inferred where, as here, the insolvent party is involved in the transaction and proceeds on the basis that its debt is discharged by the payment’.
The principles of when a payment by a third party can amount to a transaction for the purposes of s292 pertain to substance rather than form; the transaction is the totality of the dealing initiated by the debtor so as to achieve the intended purpose of extinguishing the debt, irrespective of whether one or more of the dealings in question actually involve or require the participation of the debtor but do require the participation of a third party [16].
The key point to take from this case is that payments received in satisfaction of a debt of a company can be voidable even when those payments are received from third parties rather than the company itself. Creditors who receive payments of this kind and who have an inkling (or reasonably should have) should be wary of this, two years is a long time.
[1] (Robt. Jones Holdings Limited v Anthony John McCullagh and Stephen Mark Lawrence [2019] NZSC 86 [9 August 2019])
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