Allied Concrete Ltd v Meltzer

Allied Concrete Ltd v Meltzer
Allied Concrete Ltd v Meltzer
Court	Supreme Court of New Zealand
Full case name	Allied Concrete Limited V Jeffrey Philip Meltzer And Lloyd James Hayward As Liquidators Of Window Holdings Limited (In Liquidation)
Decided	18 February 2015
Citation(s)	[2015] NZSC 7; [2016] 1 NZLR 141
Transcript(s)	Available here
Case history
Prior action(s)	Meltzer v Allied Concrete Ltd [2013] NZHC 977; Allied Concrete Ltd v Meltzer [2013] NZSC 102; Farrell v Fences & Kerbs Ltd [2013] NZCA 91; Farrell v Fences & Kerbs Ltd [2013] NZCA 329.
Court membership
Judge(s) sitting	Elias CJ, McGrath, William Young J, Glazebrook and Arnold JJ.
Keywords
	Voidable transactions, Insolvency

Last updated March 08, 2019

Allied Concrete Ltd v Meltzer was a landmark Supreme Court decision on the defence to a court order allowing a liquidator to claw back value from an insolvent transaction. The matter in contention concerned whether repaying an old debt satisfied the words "gave value" in section 296(3)(c) of the Companies Act 1993. The Supreme Court unanimously agreed that "gave value" includes value given when a debt was initially incurred by the now insolvent debtor company.

The Supreme Court of New Zealand is the highest court and the court of last resort of New Zealand, having formally come into existence on 1 January 2004. The court sat for the first time on 1 July 2004. It replaced the right of appeal to the Judicial Committee of the Privy Council, based in London. It was created with the passing of the Supreme Court Act 2003, on 15 October 2003. At the time, the creation of the Supreme Court and the abolition of appeals to the Privy Council were controversial constitutional changes in New Zealand. The Act was repealed on 1 March 2017 and replaced by the Senior Courts Act 2016.

In civil proceedings and criminal prosecutions under the common law, a defendant may raise a defense in an attempt to avoid criminal or civil liability. Besides contesting the accuracy of any allegation made against them in a criminal or civil proceeding, a defendant may also make allegations against the prosecutor or plaintiff or raise a defense, arguing that, even if the allegations against the defendant are true, the defendant is nevertheless not liable.

Background

Section 292(1) of the Companies Act 1993 says that an insolvent transaction entered into within two years of a company commencing liquidation can be voided by the liquidator. Section 292(2) of that Act defines an insolvent transaction as one that,

The Companies Act is an Act of Parliament passed in New Zealand in 1993.

Liquidation is the process in accounting by which a company is brought to an end in the United Kingdom, Republic of Ireland and United States. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

(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.

Section 295 of the Act allows a court to make a range of orders to set an insolvent transaction aside on the application of the liquidator. As Justice Arnold in the Supreme Court noted, "The court may, for example, order a person to pay the company an amount that fairly represents some or all of the benefits received because of the transaction."^[1]

A court order is an official proclamation by a judge that defines the legal relationships between the parties to a hearing, a trial, an appeal or other court proceedings. Such ruling requires or authorizes the carrying out of certain steps by one or more parties to a case. A court order must be signed by a judge; some jurisdictions may also require it to be notarized.

Section 296(3) of the Act provides a defence to the s 295 orders:

(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—

(a) A acted in good faith; and

(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and

(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.

The question before the Supreme Court was "whether the value referred to [in 296(3)(c)] must be given at or after the time of payment, or may precede it".^[2]

Judgment

McGrath, Glazebrook and Arnold JJ gave the majority judgment and Elias CJ and William Young J concurred in separate judgments. All three judgments overturned the Court of Appeal's decision that "gave value" did not include where a company had given value preceding the insolvent transaction.

Sir John Joseph McGrath was a judge of the Supreme Court of New Zealand, serving in that role from 2005 until 2015. He was also a judge of the Court of Appeal from 2000 to 2005, and the Solicitor-General of New Zealand from 1989 to 2000.

Dame Susan Gwynfa Mary Glazebrook is a judge of the Supreme Court of New Zealand.

Sir Terence Arnold is a judge of the Supreme Court of New Zealand. He was the Solicitor-General of New Zealand from 2000, before being made a judge of the Court of Appeal of New Zealand in 2006. He was elevated to the Supreme Court on 11 June 2013.

Justice Arnold, delivering the majority judgment held,

As we have said, the Court of Appeal’s interpretation of s 296(3) does not advance the objective of providing creditors with more certainty that the transactions they enter into will not be made void but, rather, undermines it. We think it implausible that Parliament intended the types of outcome that we have just identified. Accordingly, we consider that s 296(3) should be interpreted consistently with the Australian provision, which is consistent with the approach that was taken historically in relation to the “valuable consideration” requirement in the bankruptcy legislation. On that approach, “value” under s 296(3), while it must be real and substantial, can include value given when the debt was initially incurred or value arising from by the reduction or extinguishment of a liability to the creditor incurred by the debtor company as a result of an earlier transaction. In this context, it must be remembered that before a creditor can take advantage of the s 296(3) defence, it must show that it acted in good faith and there were no reasonable grounds for a creditor in its position to believe that the company was technically insolvent. These are significant requirements, not easily met.^[3]

In addition, as a Russell McVeagh publication notes, "The majority confirmed that cash on delivery or payment in advance does not give rise to voidable transaction exposure, as no repayment of debt occurs."^[4]

Significance

The decision is good for creditors of companies. As was noted in one case comment,

The Supreme Court's decision brings welcome certainty for those providing goods and services on credit with no security (eg sub-contractors in the construction industry). Value can include value given when the debt was initially incurred. New Zealand's good faith defence is now aligned in this respect with the equivalent provision in Australia. This consistency will be welcomed by businesses operating on both sides of the Tasman.

In circumstances where creditors provided value for their payment, a payment to a creditor will not be voidable where the creditor both acted in good faith and had no reasonable grounds to suspect insolvency. We expect that greater focus will now be placed on whether creditors suspected, or ought to have suspected, insolvency at the time of payment and whether substantial value was given by the creditor. There are other potential elements to the defence, for example alteration of position, which were not considered.^[4]

Related Research Articles

A number of legal systems make provision for companies trading while insolvent to be unlawful in certain circumstances, and provide for directors to become personally liable for a company's debts if they have acted improperly. In most legal systems, the liability in respect of unlawful transactions only extends for a certain period of time prior to the company going into liquidation.

Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".

An unfair preference is a legal term arising in bankruptcy law where a person or company transfers assets or pays a debt to a creditor shortly before going into bankruptcy, that payment or transfer can be set aside on the application of the liquidator or trustee in bankruptcy as an unfair preference or simply a preference.

An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors. Under Australian insolvency law they are referred to as uncommercial transactions.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called "under administration" – is an alternative to liquidation, or may be a precursor to it. Administration is commenced by an administration order. A company in administrative receivership is operated by an administrator on behalf of its creditors. The administrator may recapitalize the business, sell the business to new owners, or demerge it into elements that can be sold and close the remainder. Most countries distinguish between voluntary (board-decided) and involuntary (court-decided) receivership. In voluntary administrative receivership, the administrator is appointed by the company directors. In involuntary administrative receivership, the administrator is appointed by a judicial court. The legal terms for these processes vary from country to country, and the processes may overlap.

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986 ), the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

Re Sarflax Ltd [1979] Ch 592; [1979] 1 All E.R. 529 is a UK insolvency law case concerning voidable preferences and fraudulent trading, now in the Insolvency Act 1986. It concerns the definition of "intention to defraud", which is found in a number of legal provisions.

Re MC Bacon Ltd [1990] BCLC 324 is a leading UK insolvency law case, concerning transactions at an undervalue and voidable preferences.

Re Parkes Garage (Swadlincote) Ltd [1929] 1 Ch 139 is a leading UK insolvency law case, concerning a voidable floating charge for past value.

Swadif (Pty) Ltd v Dyke NO is an important case in South African contract law, especially in the area of novation. It was heard in the Appellate Division by Wessels JA, Muller JA, Miller JA, Joubert JA and Trengove AJA on 15 September 1977, with judgment handed down on 22 November.

Insolvency in South African law refers to a status of diminished legal capacity imposed by the courts on persons who are unable to pay their debts, or whose liabilities exceed their assets. The insolvent's diminished legal capacity entails deprivation of certain of his important legal capacities and rights, in the interests of protecting other persons, primarily the general body of existing creditors, but also prospective creditors. Insolvency is also of benefit to the insolvent, in that it grants him relief in certain respects.

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003 and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Anguillan bankruptcy law regulates the position of individuals and companies who are unable to meet their financial obligations.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

Timberworld Ltd v Levin was a landmark legal decision concerning whether the peak indebtedness rule operated in New Zealand. The peak indebtedness rule concerns how much a liquidator can claw back of the value paid to a creditor of a company, as part continuing business relationship, prior to the debtor companies liquidation. The Court of Appeal judgment rejected the liquidators contention that the rule should be adopted in New Zealand law.

Brooks v Armstrong[2016] EWHC 2289 (Ch), [2016] All ER (D) 117 (Nov) is a UK insolvency law case on wrongful trading under section 214 of the Insolvency Act 1986.

Re MC Bacon Ltd [1991] Ch 127 is a UK insolvency law case relating specifically to the recovery the legal costs of the liquidator in relation to an application to set aside a floating charge as an unfair preference.

References

↑ Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [23].
↑ Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [26].
↑ Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [105].
1 2 "Valuable judgment for those extending credit: liquidators lose in the Supreme Court | Russell McVeagh". www.russellmcveagh.com. Retrieved 2016-06-20.

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[1] Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [23].

[2] Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [26].

[3] Allied Concrete Ltd v Meltzer [2015] NZSC 7 at [105].

[:0-4] 1 2 "Valuable judgment for those extending credit: liquidators lose in the Supreme Court | Russell McVeagh". www.russellmcveagh.com. Retrieved 2016-06-20.