By Claire Mansell - 30 Apr 2015
The recent case of Timberland Limited v Levin &
Anor is a victory for trade creditors. The case concerned the
voidable preference regime under the Companies Act. Under that
regime, a liquidator of a company can "claw back" payments made to
a creditor within two years of liquidation.
The regime provided limited protection to creditors who had a
continuing trade relationship with the debtor company. If the
debt owed to the creditor fluctuated up and down over time (for
instance, where there is a running account), the liquidator was
obligated to treat all transactions between the debtor and creditor
as a single transaction with only the net difference of payments
over supplies being voided.
It had been the practice of liquidators to pick any date they
wished within the 'two year' lead up to liquidation so as to
maximise the sum to be recovered from the trade creditor. This
became known as the "peak indebtedness rule" and was a practice
copied from Australia which has similar legislation to our own.
The Court of Appeal has reversed the rule. In the Court's view,
using the peak indebtedness approach arbitrarily disregarded
transactions which occurred within the two year period prior
to liquidation but before the point of peak indebtedness. From a
practical point of view, it meant that there could be vastly
different outcomes based on the creditor's individual credit
arrangements.
The Court of Appeal ruled that the continuous business
transaction should be taken as starting either two years prior
to liquidation or when the first goods or services were supplied,
whichever date is sooner. This approach, while also arbitrary, does
offer certainty to trade creditors so they know exactly how much
exposure they have to a liquidator clawing back payments made by a
company in liquidation.
Contacts
Claire
Mansell
Tony
Johnson