Timberworld Ltd v Levin

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Timberworld Ltd v Levin
Coat of arms of New Zealand.svg
Court Court of Appeal of New Zealand
Full case nameTimberworld Ltd v Henry David Levin and Vivienne Judith Madsen-Ries
Decided 24 April 2015
Citation(s) [2015] NZCA 111; [2015] 3 NZLR 365
Transcript(s) Available here
Case history
Prior action(s)Levin v Z Energy Ltd [2014] NZHC 688; Levin v Timberworld Ltd [2013] NZHC 3180
Court membership
Judge(s) sitting O'Regan P, Stevens and Miller JJ
Peak indebtedness rule, Insolvency

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.

New Zealand Constitutional monarchy in Oceania

New Zealand is a sovereign island country in the southwestern Pacific Ocean. The country geographically comprises two main landmasses—the North Island, and the South Island —and around 600 smaller islands. New Zealand is situated some 2,000 kilometres (1,200 mi) east of Australia across the Tasman Sea and roughly 1,000 kilometres (600 mi) south of the Pacific island areas of New Caledonia, Fiji, and Tonga. Because of its remoteness, it was one of the last lands to be settled by humans. During its long period of isolation, New Zealand developed a distinct biodiversity of animal, fungal, and plant life. The country's varied topography and its sharp mountain peaks, such as the Southern Alps, owe much to the tectonic uplift of land and volcanic eruptions. New Zealand's capital city is Wellington, while its most populous city is Auckland.

In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets under such circumstances of the company and settling all claims against the company before putting the company into dissolution.

Court of Appeal of New Zealand

The Court of Appeal of New Zealand is principal intermediate appellate court of New Zealand. It is also the final appellate court for a number of matters. In practice, most appeals are resolved at this intermediate appellate level, rather than in the Supreme Court. The Court of Appeal has existed as a separate court since 1862 but, until 1957, it was composed of Judges of the High Court sitting periodically in panels. In 1957 the Court of Appeal was reconstituted as a permanent court separate from the High Court. It is located in Wellington.



When companies go into liquidation the liquidator is entitled under s 292 of the Companies Act 1993 to clawback property transferred, money paid, and goods or charges given if it is an insolvent transaction entered into within two years of the company commencing liquidation. An insolvent transaction is a transaction that, as per s 292 (2) of the Act, "(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". [1]

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.

Companies Act 1993

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

This is because the "fundamental principle" underpinning insolvency law is the pari passu or equal step principle. [2]

Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing". It is sometimes translated as "ranking equally", "hand-in-hand", "with equal force", or "moving together", and by extension, "fairly", "without partiality".

However, as per section 292 (4B) of the Companies Act a "series of transactions will be treated as a single transaction where such transactions are an integral part of a continuous business relationship between the parties (as where the parties have used a running account) and the level of the debtor company’s indebtedness fluctuates from time to time as a result of the various individual transactions. With a transaction of this type the liquidator will only be entitled to claim the net difference of payments made and goods and services received from a creditor, where there is an ongoing business relationship with the debtor company." [3]

A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower.

The liquidators in these two appeals heard together sought the court's adoption of the "peak indebtedness rule". The rule this; "would enable the liquidators to choose the point during the two-year specified period when the relevant indebtedness was at its highest, as opposed to an earlier date taking into account transactions predating peak indebtedness." [4]

As Justice Stevens summarised of the decision's importance, "Naturally liquidators will wish to use the point where the indebtedness of the company is at its highest. On that basis, any later transactions under which the creditor provides further value to the company will be exceeded in value by other transactions reducing the company’s indebtedness. Liquidators could then point to the net reduction in indebtedness as amounting to a preference. Suppliers, however, will seek to use an earlier date so that any increase in indebtedness is offset by earlier transactions through which the creditor supplier gave value to the debtor company." [5]

Supply chain system of organizations, people, activities, information, and resources involved in moving a product or service from the point where it is manufactured to where it is consumed

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.


The Court of Appeal ruled against the liquidators,

We are satisfied the peak indebtedness rule is not part of the law in New Zealand. If Parliament had intended to adopt it, it could have done so without difficulty. It chose not to do so. Any change to the legislative policy as we have interpreted it would be a matter for Parliament. We therefore dismiss the liquidators’ appeal and cross-appeal. [6]

Justice Stevens, giving the judgment of the court, explained the "arbitrariness of peak indebtedness in operation" through an example where three different creditors supply goods on differing terms to a company, but because of the peak indebtedness rule, the preference they are said to receive is wildly different as some transactions are disregarded by the calculation.

Despite each creditor advancing the same value of goods to Company X and receiving the same payments in return, the peak indebtedness rule can operate to produce vastly different outcomes, merely on the basis of the particular credit arrangements in each case. [7]

Justice Stevens also noted that,

The legislature did not see fit to address the peak indebtedness rule, or to include it in the wording of s 292(4B). ...The effect of the section, taken on its face, is to require all payments and transactions within the continuing business relationship to be netted off against one another. This includes both payments to the creditor and the supply of goods to the debtor. Of course where the business relationship began before the start of the two year period, only the transactions occurring within the period are taken into account. The statutory wording does not permit a liquidator to disregard some of those transactions. There is also no basis on which the liquidator can commence with only the first payment, and disregard the first supply of goods. The plain meaning of “all transactions” is just that. [8]

Furthermore, Stevens J observed that similarly to the rule in Allied Concrete Ltd v Meltzer [2015] NZSC 7,

The distinct treatment of trade creditors is, in our view, a similar mechanism. Parliament took the decision to set aside a particular group of creditors who continue to provide credit and goods on the assumption of future trade. That is seen as having distinct commercial benefits in the context of liquidation. It is a policy choice consistent with New Zealand’s insolvency scheme generally. [9]

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.

An officer of the Insolvency Service of the United Kingdom, an official receiver (OR) is an officer of the court to which he is attached. The OR is therefore answerable to the courts for carrying out the courts' orders and for fulfilling his duties under law. He also acts on directions, instructions and guidance from the Service's Inspector General or, less often, from the Secretary of State for Business, Energy and Industrial Strategy.

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.

In law, set-off or netting are legal techniques applied between persons with mutual rights and liabilities, replacing gross positions with net positions. It permits the rights to be used to discharge the liabilities where cross claims exist between a plaintiff and a respondent. The result being that the gross claims of mutual debt produces a single, net claim. The net claim is known as a net position. In other words, a set-off is the right of a debtor to balance mutual debts with a creditor. In bookkeeping terms, set-offs are also known as reconciliations. To determine a set-off, simply subtract the smaller debt from the larger.

United Kingdom insolvency law

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.

Principles of Corporate Insolvency Law by Roy Goode of the University of Oxford is a leading textbook on UK insolvency law. The forthcoming edition in 2010 will be taken over by Professor Robert Stevens, of University College London.

<i>Re Barleycorn Enterprises Ltd</i>

Re Barleycorn Enterprises Ltd [1970] Ch 465 is a UK insolvency law case, concerning the priority of creditors in a company winding up. It was held that fees for liquidation came in priority to preferential claims and floating charges. This was overturned by the House of Lords in Buchler v Talbot, but reinstated by Parliament through an amendment to the Insolvency Act 1986 s 176ZA.

British Virgin Islands bankruptcy law

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

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

The anti-deprivation rule is a principle applied by the courts in common law jurisdictions in which, according to Mellish LJ in Re Jeavons, ex parte Mackay, "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." Wood VC had earlier observed that "the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors."

Anguillan bankruptcy law

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:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

Hong Kong insolvency law

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.

<i>Allied Concrete Ltd v Meltzer</i>

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.

<i>Re MC Bacon Ltd</i> (No 2)

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.


  1. Companies Act 1993, s 292(2).
  2. Timberworld Ltd v Levin [2015] NZCA 111 at [49].
  3. Timberworld Ltd v Levin [2015] NZCA 111 at [30].
  4. Timberworld Ltd v Levin [2015] NZCA 111 at [1].
  5. Timberworld Ltd v Levin [2015] NZCA 111 at [5].
  6. Timberworld Ltd v Levin [2015] NZCA 111 at [99].
  7. Timberworld Ltd v Levin [2015] NZCA 111 at [90].
  8. Timberworld Ltd v Levin [2015] NZCA 111 at [99].
  9. Timberworld Ltd v Levin [2015] NZCA 111 at [98].