Voidable transactions: payments made outside usual payment pattern

The High Court has indicated that payments that do not fit a company's usual pattern of making payments, and that are made at a time when it cannot pay its debts, may be voidable on the application of a liquidator.

In a recent case1, the liquidators of EBFC claimed that digger hire payments made to WT at a time when EBFC was unable to pay its debts, which enabled WT to receive more towards satisfaction of its debt than it would otherwise have received or been likely to receive in liquidation, were voidable as transactions having a preferential effect under section 292 of the Companies Act 1993.

The High Court held that the payments were not made "in the ordinary course of business" because:

1. the usual pattern was for EBFC to pay WT's monthly invoices in the last week of the month following the invoice whereas the payments in question were lump sum payments made from time to time to reduce the balance outstanding; and



2. evidence also showed that EBFC chose which creditors it would pay when it started experiencing cashflow difficulties.

The High Court also declined to deny recovery to the liquidators under section 296(3) of the Companies Act 1993.

To succeed on this ground, WT had to prove that, even if the payments were made in the ordinary course of business, it had received the payments in good faith and had altered its position in the reasonably held belief that the payments were validly made and would not be set aside. It was also necessary for the Court to be of the opinion that it would be inequitable to order recovery.

However, the Court found that section 296(3) did not help WT in the circumstances because:

1. a letter sent by WT to EBFC requesting part payment of outstanding invoices indicated that subsequent payments were not received in good faith;



2. there was no evidence to suggest that, had the payments not been made, WT would have ceased hiring the digger to EBFC; and



3. there was nothing to suggest that it would be unfair for the liquidators to recover the payments.

 

1 Watchorn Transport v Blanchett (High Court, Hamilton,
23 November 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.