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Breaking News: Good news for contractors but bad news for liquidators

By Claire Mansell - 18 Feb 2015

Under the voidable transaction regime, the liquidator of a company can "claw back" payments made to a creditor within the two years prior to liquidation. In order to do so liquidators must show the payment was made at a time when the company was insolvent and allowed the creditor to receive more than they would have in the liquidation.

The philosophy behind the regime is that all creditors should be treated equally and that one creditor should not get paid in preference to another. It's also a scheme which has been around for a long time, first kicking off in 1758 with Lord Mansfield's case Worsley v de Mattos case and subsequently brought into legislation by the Bankruptcy Act 1869.

Creditors do have a defence under section 296 of the Companies Act. If the creditor can prove that they:

  1. Acted in good faith; and
  2. Did not reasonably suspect that the company would become or was insolvent; and
  3. Gave value for the property or altered their position in the reasonably held belief that the transfer of the property to them was valid and would not be clawed back.

Allied Concrete Limited v Meltzer & Ors

Today's Supreme Court decision Allied Concrete Limited v Meltzer & Ors is about when a creditor can say they gave value for the property and invoke the defence in section 296. The Court of Appeal held that mere payment towards old debt does not constitute giving value under section 296. Value must be something new which is real and substantial. This approach had been widely accepted for some time.

The Supreme Court reversed the Court of Appeal decision. In the Supreme Court's view, the Court of Appeal's approach created uncertainty for contractors as transactions which occurred some years before could be reversed. They also found that the circumstances where the section 296 defence could be invoked was inconsistent and did not necessarily reflect the overall merits of the case. They were also influenced by the case law in Australia and the overall policy of the voidable transaction scheme.

In their view, giving value did not mean that the creditor had to give something "new". It could include value that was given prior to the transaction - such as payment towards an old debt.

What does it all mean?

Creditors now have a stronger defence to liquidators as value will almost always be given. However, to rely on the defence in section 296, creditors will still need to show that they received payment in good faith and did not suspect that the company was insolvent.


Claire Mansell

Tony Johnson


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