Is forbearance to sue valuable consideration when determining whether to set aside a charge as voidable?

A case heard in the High Court at Wellington determined that forbearance to sue by a creditor is not valuable consideration that can prevent a charge in favour of that creditor being set aside as voidable under section 293(1)(a) of the Companies Act 1993.

The case1 concerned certain ship mortgages given in favour of an existing lender who had not made any fresh advances to the borrower.

The liquidator applied to have a charge granted in favour of the lender set aside as a voidable charge given the insolvency of the borrower.

The court determined that:

• “valuable consideration” has to have real and substantial value;
  
  
• where a company is, or is nearly, insolvent at a time when it grants a charge, it is usually evident that it received little, if any, value from the creditor’s agreement to delay repayment of an existing unsecured debt;
  
  
• there are three obstacles when seeking to rely on forbearance to sue as valuable consideration:
  
  
  • it is necessary to show that the forbearance has a real worth to the debtor in the circumstances;
    
    
  • the forbearance must be quantified to show that it has a value that corresponds to the value of the security; and
    
    
  • the charge must secure new consideration – the forbearance, and not merely the existing debt.

In this case, the real reason the ship mortgages were granted was because the borrower was unable to raise finance from another source and the lender wished to avoid disclosure to the shareholders of the borrower’s indebtedness to him. Neither of these considerations were adequate for the purposes of section 293.

1 Re Seafresh New Zealand Limited (Miller J, High Court, Wellington, CIV 2002-485-1331, 3 August 2004)

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.