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Court of Appeal offers more certainty to creditors

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.


Claire Mansell

Tony Johnson


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