GOOD TIMES FOR SUPPLIERS

In the normal course of business, suppliers provide goods and services to a company, give credit, chase the debt and finally get paid.  But sometimes they are faced with the problem of a debtor in liquidation. Under the Companies Act 1993 a liquidator can “clawback” the payment in the next two years on the basis that it is an unlawful preference over other creditors.

A supplier has “an out” if it can show that it acted in good faith, had no reasonable grounds for suspecting that the debtor company was in trouble and gave value to the debtor (in the reasonable belief that the payment would not be overturned).

The problem until recently was the requirement to give value.  If new goods and services had to be supplied, this was often a major hurdle because a creditor  would not continue to supply a late payer.

After different views on what value meant at the High Court and Court of Appeal levels, the Supreme Court has finally declared “good times for supplier” in Allied Concrete Limited and others v Meltzer and others, see [2015] NZSC 7 (available on line at http://www.nzlii.org/nz/cases/NZSC/2015/7.html ).  The Supreme Court held that a supplier giving value had to give real or substantial value, but (and this is the important point for the supplier), that the value can include the value of the original supply.  Therefore, the current practical point is that where a supplier provides real value in the original supply and has the required innocent mental state, a liquidator will not be able to claw back the payment.