Insolvency 101 series: Voidable transactions
Following on from our earlier article on statutory demands, Jade Young looks at another issue that regularly catches out businesses dealing with a customer or debtor that later ends up in liquidation: voidable transactions.
A voidable transaction is a payment or other transfer of value made by a company in the period before it goes into liquidation that unfairly prefers one creditor over the others. Under section 292 of the Companies Act 1993, a liquidator can claw back that payment from the creditor who received it, even if the payment was entirely legitimate at the time it was made.
This regime exists to protect the principle that, once a company is insolvent, its remaining assets should be shared fairly (pari passu) among its unsecured creditors rather than being scooped up by whoever was quickest, loudest, or best-connected in the final months before liquidation.
A transaction will be an “insolvent transaction” if it was made while the company was unable to pay its due debts and it left the recipient better off than they would have been in the liquidation. The look-back period depends on whether you are a related party and is:
six months before liquidation for ordinary creditors; or
two years for related parties (a much broader category than you might expect – it can capture family members of directors and senior managers who have never had any direct dealings with the company).
Proposed reforms currently before Parliament would extend the related party period to four years. We covered the background to these changes in more detail in an earlier article; this one focuses on what to do if you receive a voidable notice.
There is also a running account exception: where payments were part of a continuing trading relationship, the law treats the whole course of dealing as one transaction and looks only at whether the creditor’s net position improved overall. A creditor who kept supplying goods or services in exchange for payment, without ending up ahead of where they started, is unlikely to have received a voidable preference.
Voidable transaction notice
If a liquidator considers a payment that you or your business received is voidable, they will usually make contact in the first instance to discuss it. If this informal process does not resolve the matter, a liquidator can file a formal notice under section 294 of the Companies Act setting out the transaction the liquidator intends to set aside including the relevant dates, amounts, and nature of the payment.
Critically, the notice will tell you that you have 20 working days from being served to send the liquidator a written notice of objection. If you do nothing, the transaction is automatically set aside and you must repay the amount claimed without the matter ever going near a courtroom.
What to do if you receive a notice
As with a statutory demand, the first step is to diarise the 20-working day deadline. Then, gather your paperwork: invoices, statements and correspondence that shows the nature and timing of your dealings with the company. If the payments in question formed part of an ongoing trading relationship, this evidence will be essential to assessing whether the running account exception applies.
You should also turn your mind to what you knew or ought to have known about the company’s financial position at the time you were paid.
Options to respond
Once you understand the transaction the liquidator is reviewing, you generally have three options:
Do nothing. The transaction will be set aside once the 20-working day period expires.
Object. A written notice of objection must contain full details of your reasons for objecting and identify any supporting documents. Once you object, the liquidator cannot simply void the transaction. If they wish to pursue it, they must apply to the High Court for an order.
Negotiate. Liquidators are often open to a commercial resolution, particularly where the running account exception reduces exposure or a full recovery is doubtful. A negotiated settlement can save both sides the time and cost of a contested application.
Defences
Even where a transaction technically meets the definition of an insolvent transaction, section 296(3) provides a good faith defence. To succeed, the recipient must show that at the time of the transaction:
they acted in good faith;
a reasonable person in their position would not have suspected, and they did not have reasonable grounds to suspect, that the company was or would become insolvent; and
they gave value for the transaction or changed their position in reliance on it in the reasonably held belief that the payment was valid and would not be set aside.
The “gave value” limb has been the subject of significant consideration by the Courts, including by the Supreme Court which confirmed it extends to value given when the underlying debt was first incurred, not just value given at the time of payment (Allied Concrete Ltd v Meltzer [2015] NZSC 7). This interpretation is particularly relevant to trade creditors who often supply goods on credit.
Whether the defence succeeds usually turns on what you or your business knew, or should have picked up on, about your customer’s circumstances e.g. were payments becoming later or more irregular, was there talk in the industry etc.
Other points to note
A voidable transaction notice does not have to be served formally in the way that court proceedings do; email or post will usually suffice.
The liquidator bears the onus of establishing that the transaction was an insolvent transaction. Once that is made out, the onus shifts to the recipient to establish a defence.
Voidable transaction claims can catch out businesses that did nothing wrong beyond being paid for goods or services they had genuinely supplied. If you have received a notice, or a liquidator has been in touch about a payment your business received, please feel free to get in touch.
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