When a company goes into liquidation, there is always the prospect that liquidators will seek to “claw back” money from other businesses or suppliers who have been paid within the previous two years. These payments can be recovered if the company was insolvent at the time the payment was made. These payments are known as “voidable transactions”.
A Court of Appeal ruling in 2013 caused some concern because the Court interpreted the law to say that payments were only safe from being clawed back if “value” had been given at the time of payment. Where supplies had been made on credit, no separate value was given at the time payment was received, so the payments were not safe from the claw back provisions.
The implication of this was that suppliers and contractors could not be sure that money received was safe in their hands despite the fact that work was done on normal credit terms and the payments received had been used to pay for staff and materials. This led to suggestions that the only safe payments were cash up front payments. This level of uncertainty over standard credit arrangements was generally unhelpful to business particularly in the construction industry where a number of insolvencies occur.
The Supreme Court has now reversed the earlier decision and there is no longer a requirement for separate value for payment to be given at the time the payment is received in order to avoid claw back.
Whilst this is a victory for the contractors, some insolvency practitioners have noted that the ruling will make the liquidator’s job of getting a fair result for all creditors harder to achieve. In order to claw back money paid out to other businesses or suppliers, liquidators will need to demonstrate that the recipient(s) had a reasonable suspicion that the money was coming from an insolvent company, and that may be difficult to do.
There is also a danger that an insolvent company may target payment of accounts where the directors have given personal guarantees or security, which could also lead to an unfair result for other creditors.
There are suggestions that further regulation is needed in this area. In Australia there are measures against directors who preferentially pay some creditors before others and it may be that type of regulation will eventually be seen here.