The Supreme Court has today reversed a lower court's ruling on liquidators' abilities to claw back money, in a decision hailed by the construction industry as a "victory for common sense."
The highest court in the land has ruled that three companies, Allied Concrete, Fences & Kerbs, and Hiway StablilizersNew Zealand do not each have to return tens of thousands of dollars to liquidators, who wanted to set these transactions aside.
These companies had all done construction or landscaping work for firms now in liquidation.
A controversial part of insolvency is the ability of a liquidator to "claw back" money from individuals or companies who were paid up to 2 years' prior to their appointment.
Known as a voidable transaction, the payment can only be recovered if the company in liquidation was insolvent at the time someone was paid.
However, a Court of Appeal decision concerning voidable transactions from 2013 caused many people concern, particularly in the construction industry.
That 2013 ruling, according to those in the sector, meant that unless a subcontractor was paid upfront for work done for a company later found to be insolvent, the funds could be clawed back by a liquidator.
Specialist Trade Contractors Federation president Graham Burke said this meant money could be clawed back from tradespeople who had done work on credit, later received the payment and then paid out for workers and materials.
Allied Concrete, Fences & Kerbs, and Hiway Stabilizers New Zealand appealed the matter to the Supreme Court, which ruled in their favour this morning.
The appeal concerned an interpretation of a section of the Companies Act.
Under the relevant section, a court must not order repayment by someone who proves that when they received a payment from the insolvent company, they acted in good faith, had no grounds to suspect insolvency and importantly, "gave value" for the payment.
It's been a long fight but the Supreme Court decision has finally drawn a line under the issue. It's a victory for common sense
The point at issue in the Supreme Court appeal was the meaning of "gave value".
The Court of Appeal said this meant value given at the time the disputed payment was received.
Value given earlier when a debt was created was not sufficient, the Court of Appeal said.
Before the Supreme Court, the appealing companies argued the approach taken by the Court of Appeal was harmful to business and commercial certainty.
Their appeal was allowed in a unanimous decision from the Supreme Court this morning.
Industry organisations welcomed the ruling as a victory "common sense".
"This affected every business providing goods and services on account," Burke said. "The building trade was particularly aware of the issue because there are more insolvencies in the construction sector than in other sectors.
The Court of Appeal decision meant that any service supplied and paid for afterwards was a voidable transaction. That left businesses in a state of limbo - having been paid for a contract they had completed but with a risk that money could be clawed back for up to two years.
That uncertainty made it difficult for small businesses to invest and grow. It's been a long fight but the Supreme Court decision has finally drawn a line under the issue. It's a victory for common sense."
Malcolm Abernethy, executive officer for CCNZ, which represents members of the civil contracting industry, said the decision would come as a huge relief to members of the organisation, which had helped to fund the appeal.
"Voidable transactions are intended to ensure all creditors of insolvent companies are treated equally," said Abernethy.
"They are intended to recover payments that have been made that are essentially out of the ordinary. This decision gives contractors some surety that payments received will not be clawed back under the voidable transactions provisions of the Companies Act."
