When a company goes into liquidation, a liquidator has the power, in certain circumstances, to require a creditor who has received a payment from the company to pay that money back. These are known as “insolvent transactions”, and while it is designed to help ensure that unsecured creditors share equally in a liquidation, for the creditor who is being asked to pay money back, it can be a frustrating situation. A creditor can, however, defend a liquidator’s attempt to claw back a payment by relying on a statutory defence under s296 of the Companies Act 1993. It is this defence that the Court of Appeal was recently called upon to consider in the case Madsen-Ries v Rapid Construction Limited [2013] NZCA 489. Both the High Court and the Court of Appeal provided a very useful summary of the three elements that need to be established in order to successfully raise the s296 defence. In particular, the creditor must prove that, when they received the payment, they (1) received it in good faith, and (2) did not have reasonable grounds for suspecting insolvency, and (3) gave value or altered its position in a belief that the payment was valid and would not be set aside. Since trading with companies is an inevitable part of business, it pays to be aware of, and understand, insolvent transactions, and the power a liquidator has to claw back certain payments. While the creditor can argue the s296 defence, there are important time limits that apply, and more often than not, the issues are strongly contested on both sides. Accordingly, it is prudent for a creditor to seek advice early on.
