Are transactions with a debtor of a company subject to the same voidable preference rules as transactions with a creditor of a company?

The Court of Appeal has overturned a decision of the High Court in determining that section 292 of the Companies Act 1993 does not apply to a transaction where a debtor of an insolvent company paid off its debt.

In this case1, a company became insolvent after its squash crop failed. The company subsequently sold some equipment to a related company on a deferred payment basis. This increased the debt owed by that related company to the insolvent company.

When the local council successfully sued the insolvent company, it was put into liquidation and the liquidator sent a notice to the related company setting aside the sale of the equipment as a voidable preference.

The related company sought an order of the High Court that the transaction not be set aside. The order requested was refused on the basis that the related company received more in satisfaction of a debt than it would otherwise receive in a liquidation.

The related company appealed to the Court of Appeal, arguing that it was not a creditor, but a debtor of the insolvent company, and so the transaction was not subject to section 292.

The appeal was allowed because the related company had not received more in satisfaction of a debt than it would otherwise have done in a liquidation as it was a debtor, not a creditor, of the insolvent company.

1 Preston Farms Limited v Managh [2004] 1 NZLR 629

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