«Gabrielle Smith A dissertation submitted in partial fulfilment of the degree of the Bachelor of Laws (Honours) at the University of Otago October ...»
Conclusion New Zealand’s voidable preference law has been gradually shifting towards recognition that creditor equality is its fundamental objective. Preference law shook off its antiquated morality notion when it abandoned the debtor’s state of mind as the key element of a preference in the Companies Act 1993. However, Parliament was reluctant to fully embrace the equality principle and thus shifted the focus to the creditor’s culpability in receiving a preference through the ordinary course of business exception and the alteration position defence.
There is an inherent desirability in identifying an element of culpability in preference law, as it is always easier to punish certain behaviour rather than set preferences aside on the basis of the principle of equality. Parliament is reluctant to enact a regime that fully embraces the equality rationale for fears that such a regime would appear too inflexible and be rejected by creditors. The notion of equality in the
is always very appealing to creditors when they face the possibility of non-payment, however, as soon as a preferential payment is received creditors are only interested in ensuring that the equality principle is not used against them. 171 Thus Parliament sought to create a distinction between ‘innocent’ and ‘guilty’ creditors on the basis of their knowledge of insolvency in the Companies Amendment Act 2006.
This attempt to treat one creditor as more culpable than another ignores the fact that preferences are entirely legitimate transactions outside of insolvency and only become illegitimate by the retrospective operation of voidable preference law. If liquidation occurred at the same time as technical insolvency, the voidable preference provisions would be entirely redundant. However, the lag time between insolvency and liquidation creates the need for voidable preference law to impose equality on preliquidation behaviour. This is the primary objective of preference law and the culpability or knowledge of a creditor has no relevance to that aim.
Telfer, above n 84, at 57.
The true nature of voidable preference law is akin to strict liability. However, an absolute, automatic avoidance regime is not suggested. The running account principle is based on the sound premise that insolvency law is concerned with the net effect of the dealings between a creditor and debtor and thus some preferential payments should be allowed to stand. Furthermore, a short vulnerability period prevents undue disturbance of settled transactions. However, the erosion to creditor equality through the alteration of position defence cannot be justified. Repeal of the defence would uphold the equality rationale, reduce litigation and allow for greater preference recovery for the benefit of collective body of unsecured creditors. The implementation of these recommendations would create a regime that finally operates to give unsecured creditors a real chance at a pari passu distribution.
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Appendix One: Companies Act 1993 ss 292, 294 – 296
292 Insolvent transaction voidable (1) A transaction by a company is voidable by the liquidator if it— (a) is an insolvent transaction; and (b) is entered into within the specified period.
(2) An insolvent transaction is a transaction by a company that— (a) is entered into at a time when the company is unable to pay its due debts;
and (b) enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company's liquidation.
(3) In this section, transaction means any of the following steps by the company:
(a) conveying or transferring the company's property:
(b) creating a charge over the company's property:
(c) incurring an obligation:
(d) undergoing an execution process:
(e) paying money (including paying money in accordance with a judgment or
an order of a court):
(f) anything done or omitted to be done for the purpose of entering into the transaction or giving effect to it.
(4) In this section, transaction includes a transaction by a receiver, except a transaction that discharges, whether in part or in full, a liability for which the receiver is personally liable under section 32(1) or (5) of the Receiverships Act 1993 or otherwise personally liable under a contract entered into by the receiver. (4A) A transaction that is entered into within the restricted period is presumed, unless the contrary is proved, to be entered into at a time when the company is unable to pay its due debts. (4B) Where— (a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including a relationship to which other persons are parties); and (b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;
then— (c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and (d) the transaction referred to in paragraph (a) may only be taken to be an insolvent transaction voidable by the liquidator if the effect of applying subsection (1) in accordance with paragraph (c) is that the single transaction referred to in paragraph (c) is taken to be an insolvent transaction voidable by the liquidator.
(5) For the purposes of subsections (1) and (4B), specified period means— (a) the period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and (b) in the case of a company that was put into liquidation by the court, the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order was made;
and (c) if— (i) an application was made to the court to put a company into liquidation; and (ii) after the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),— the period of 2 years before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
(6) For the purposes of subsection (4A), restricted period means— (a) the period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
294 Procedure for setting aside transactions and charges (1) A liquidator who wishes to set aside a transaction or charge that is voidable under section 292 or 293 must— (a) file a notice with the court that meets the requirements set out in subsection (2); and (b) serve the notice as soon as practicable on— (i) the other party to the transaction or the charge holder, as the case may be; and (ii) any other party from whom the liquidator intends to recover.