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You supply timber on credit to a small local furniture company, “Fancy Furniture Limited”.
Fancy Furniture finds itself in a bit of financial strife due to the Covid-19 lock-down and owes you $50,000.00 for the goods that you have been supplying. You stop supplying to Fancy Furniture, however a pleasant surprise comes a few months later and Fancy Furniture pays you $50,000.00 in full.
A year later Fancy Furniture’s financial position worsens, and it is placed into liquidation, and a few months after that, you receive a letter from the liquidator advising that the repayment of $50,000.00 from Fancy Furniture to you was a voidable transaction and that you will now need to pay the money back to the liquidator.
A voidable transaction is one that is made by a company that has become unable to pay its debts to a creditor which results in that creditor receiving more than it would have in the liquidation of the insolvent company. Liquidators are able to set aside, or apply to the Court to have set aside, a voidable transaction, and claw back the payments made by the insolvent company to creditors up to two years prior to the commencement of liquidation. It is interesting to note that during the six months immediately preceding the start of the liquidation, the company is presumed unable to pay its due debts. In other words, the first criteria is presumed to be met and the liquidator only needs to show that a payment allowed the recipient to obtain more than it would have otherwise received in the liquidation before the liquidator could claim claw-back.
The key policy driver of voidable transactions is simply ‘fairness’– it is not fair for one creditor to be paid because it was preferred by the insolvent company or it was more aggressive or vigorous than the others in demanding repayment, and to ensure fairness to all creditors, some measure of commercial certainty is sacrificed in favour of that fairness.
The regime contained under ss 292-296 of the Companies Act 1993 operates on the assumption that a company in liquidation usually trades for some time before it is placed into liquidation and therefore all parties who traded with that company during the period of insolvency should bear an equal burden of having traded with an insolvent company. The regime is aimed at “swelling the pool of funds available to the company to be shared rateably amongst all creditors”.
There is no doubt that the voidable transaction regime has been one of the more contentious and thorny areas that has been central to many Court debates. Depending on your perspective (as a debtor company or as a creditor company), you will have many questions including whether it is still advisable to adopt an aggressive strategy in demanding repayments, or is it okay to pay some creditors first and delay payments for the others, especially when times are as challenging at the moment and many businesses are already experiencing the impact brought upon by Covid-19.
While it is not possible to give a one-size-fits-all advice to you in this article as each business differs and advice needs be tailored, the law does provide a defence to a liquidator’s claim to void a transaction.
Liquidators will serve the creditors with a voidable transaction notice attempting to void the payments that it believes that could be clawed back. The creditor being served will need to formally object within 20 working days otherwise the transaction at stake will automatically be set aside meaning that the creditor will need to pay back the money or benefits they received from the insolvent company.
Under s296(3) of the Companies Act 1993, you have a full defence against voidable transactions if you can show that at the time the liquidated company paid you:
You acted “in good faith”; and
You didn’t suspect, and shouldn’t reasonably have suspected, that the company was in trouble; and
You gave up something of value in exchange for the payment or changed your position in reliance on the payment.
While it is again a question of fact and degree if the above three branches to the defence are satisfied, you could always enter negotiations with the liquidator and argue your case robustly if you are served with a notice of voidable transaction claim.
You can limit your exposure to the liquidators’ claws by ensuring goods supplied on credit are subject to a security interest properly registered on the Personal Property Securities Register, and/or supply goods based on cash on delivery with companies that you suspect are going through troubled waters. We suggest that you seek professional advice early, to ensure your interests are protected.