3. Objectives
3.1 Objective of Bankruptcy/Insolvency Law Generally20 and Avoidance Provisions Specifically
The main purpose of bankruptcy and liquidation systems is to provide for an orderly, compulsory and collective realisation of a debtor's assets. This is regarded as more efficient in maximising the pool of assets available to all creditors than would be the case were creditors left to pursue their individual remedies.
It has long been accepted that this collective realisation process must be a fair one, in which all like creditors are treated alike. Consequently, the "pari passu" principle21 has existed as a fundamental principle of insolvency law since the sixteenth century. It is also generally accepted that companies and bankrupts are almost invariably technically insolvent for some time before the commencement of formal insolvency procedures.
The general objective of avoidance provisions is to achieve some degree of equality between creditors and to ensure there is something left to distribute at the point of formal insolvency. The collective realisation and the pari passu principle are undermined if particular creditors are preferentially paid in the period immediately before formal insolvency, and/or if there are no assets remaining at formal insolvency. To prevent this occurring, voidable transactions law grants to the liquidator or the Assignee the power to set aside certain pre-liquidation transactions.
The existing avoidance provisions can be divided into at least two categories of provisions, which each have slightly different objectives.
First, "voidable preference" provisions22 are aimed at achieving equality23 amongst creditors. These provisions do this by overturning transactions between the debtor and any creditor when the company was technically insolvent. In doing this, the provisions effectively move the time at which the pari passu principle "bites" back from the date of formal insolvency to the date of technical insolvency. There is not necessarily anything "wrong", or any misconduct associated with, these transactions. However, they are set aside because it is considered inequitable for a debtor to pay one creditor in full on the eve of liquidation at the expense of the general body of creditors.
The second category of provision is designed to set aside those transactions that diminish the value of the debtor's net assets in a certain period before formal insolvency. While these provisions may incidentally achieve equality amongst creditors where the party to the transaction is a creditor, the emphasis is instead on the effect of the transaction on the debtor's assets and the provisions' application is not limited to transactions with creditors. Transactions that fall within this category include voidable gifts,24 improving another's property,25 and transactions at an undervalue.26 These provisions are therefore designed to ensure the assets of the debtor are not disposed of on the eve of formal insolvency.
Special provisions also exist, which could be considered a third category, relating to securities and charges given by insolvent debtors before formal insolvency. In the case of individuals, that stems from the fact that the term "gift" does not include the granting of a security. In the case of companies, these provisions exist because it is arguable that granting a security does not diminish the company's assets as such, but places an important encumbrance over them.
Finally, transactions with "insiders" are scrutinised more closely. The Companies Act specially provides for avoidance of transactions with those who have a close connection with the debtor company because they are deemed to have special knowledge of, and/or responsibility for, the company's situation.27 Transactions between husband and wife receive special attention in bankruptcy under the Matrimonial Property Act 1976 for similar reasons.28
3.2 Defences
In the context of voidable transactions law, a defence is an argument the recipient of an otherwise voidable transaction can use to avoid having the transaction set aside.
If the objective of voidable transactions law is to support the collective realisation of assets and thereby the pari passu principle, defences, by allowing a party to an otherwise voidable transaction to retain the benefit of that transaction, necessarily undermine that objective.
However, these defences exist notwithstanding that. Their objective is twofold. First, they are designed to ensure effective challenges cover only the type of transactions which the law is concerned to discourage or reverse. Secondly, they are designed to temper the pursuit of collective justice for creditors as a whole with individual justice for a particular party in the circumstances of each case. There is a risk that, if the law fails to do so, it might impair the free flow of trade by undoing transactions a reasonable New Zealander, aware of the facts known to the trader, would consider normal.
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