Voidable Transactions - The New Regime 

July, 2009 - Thierry Koenig

On the 1st June 2009, the major parts of the Insolvency Act 2009 (“the Act”) came into operation. The Act has completely revamped the insolvency regime in Mauritius and new provisions now govern “voidable transactions” following a company liquidation. The “ordinary course of business” test, which was prevailing under the former regime, has now been abandoned and replaced by what is known as the “running account principle”. These new provisions have been heavily borrowed from the New Zealand legislation which itself was brought into line with the Australian legislation. The new rules will affect all those who deal with companies facing potential insolvency. The relations between creditors, traders, and lenders seeking payment or security from a company in difficulty may no longer be the same. The new regime raises pertinent questions such as whether creditors, traders and lenders will be later “forced” to hand over to a liquidator the money received or security granted?
 


Voidable Transactions



The new regime for voidable transactions has been introduced in sections 313 to 327 of the Act. Under the new rules, a payment or other transaction within two years of the liquidation may be set aside if it was made when the company could not pay its debts, and if it enabled the creditor to receive more than it would have in a liquidation.  According to the new regime, where there is a “continuing business relationship”, the liquidator must look at all transactions as if they were one.



This “running account principleis explained in section 313(4)(b) of the Act as being “where in the course of the relationship, the level of the debtor’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship”.



What is now therefore required is an arithmetical exercise to show whether the net balance on the debtor’s account has been reduced while the debtor was insolvent. That net reduction will be voidable unless the creditor can show that it did not know of the insolvency, had no reason to know, and acted in good faith. A little knowledge of the debtor’s position will make that defence difficult to establish.


An example of how this “running account principle” works is as follows:-


say that in 2001 a company X commenced trading with a company Y. By 2007, Y owed X a sum of Rs 500,000. Six months later, Y owed X a sum of Rs 1 million. In 2009, within two years, a winding up order is made against Y. The sum due by Y to X at the time of liquidation amounts to Rs 200,000. On this scenario, the liquidator could argue that the X has been preferred by Rs 800,000 being the difference between the highest point of indebtedness (Rs 1 million) and the amount owed to X by Y when it was liquidated (Rs 200,000).



The new rule prevents a liquidator from cherry picking a single payment and ignoring the fact that the creditor continued to trade with the company as a result of that payment. As can be gathered such a system is not free from difficulty and raises questions particularly, when does the running account start? In the above example, should it start at Rs500,000.- or Rs1,000,000.-?



It would appear that some Australian decisions have said that the liquidator is free to choose the highest point, but it is not certain that the Mauritian Court will follow this liberal interpretation. Some commentators have suggested that it is wrong in principle to provide a liquidator with the discretion to choose a starting date within the two year period.



The defence which existed prior to the 1st June 2009 that if the creditor acted in good faith remains a valid defence, although the Act has added a further qualification: - there must have been no reason to believe that the company was insolvent.  As it appears creditors seem to be better off not knowing that their debtor is insolvent. However, this seems to be at odds with prudent credit management and such knowledge will usually be hard to avoid. Also, a transaction made within 6 months’ of the winding up order is presumed, unless the contrary is proved, to be made when the debtor is unable to pay his due debts.



The Act provides that alienation of property made by the debtor within 5 years of the winding up order with intent to defraud creditors may be set aside.



A gift by a debtor to any person may be set aside by the Court if made within 2 years of the winding up order and a gift made within 6 months’ of the winding up order is presumed, unless the contrary is proved, to be made when the debtor is unable to pay his due debts.



The same principle as described above apply to a bankrupt as from the date of adjudication.



Voidable Charges



The Act gives a very wide definition of “charge” embracing all different types of security including unregistered agreements whereby the debtor has agreed to give priority payment to a claim. Charges given within two years are now vulnerable. Charges granted within 6 months’ of the winding up order is presumed, unless the contrary is proved, to be made when the debtor is unable to pay his due debts.



New procedure in connection with voidable transactions



One change that will be welcomed is the fact that as from now it is the liquidator who must issue the court proceedings to set aside the transaction. The liquidator must first send a notice of his intention to set aside the transaction. The interested creditor, trader or lender has 28 days to object, failing which the voidable transaction is automatically set aside as against the person named in the notice 5 days after the 28 days objection period. Upon an objection, the liquidator cannot set aside the transaction otherwise by referring the matter to Court.



To discourage creditors without genuine grounds for objection to simply send a pro-forma notice of objection to the liquidator, creditors are required to set out full particulars of their reasons for objecting and identify documents that evidence or substantiate these reasons. This requirement is also designed to ensure that the information imbalance between a liquidator, (who often has limited records), and the creditor is addressed; and liquidators are fully informed as to both the substance and detail of a creditor's objection before determining whether or not to pursue a challenge.



In summary



It does seem that it will now be easier for liquidators to claw back payments made by insolvent companies. The new regime provides for an arithmetical exercise to show whether the net balance on the debtor’s account has been reduced while the debtor was insolvent. That net reduction will be “voidable” by the liquidator unless the creditor, trader or lender can show that it did not know of the insolvency, had no reason to know, and acted in good faith. For creditors, traders or lenders, the Act emphasizes the dicta that "little knowledge is dangerous” since little knowledge of the debtor’s position will make any defence hard to run. 


The new voidable transactions regime will certainly require some guidelines for its application by the Court.


 

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