Diminution Not Required For Voidable Transactions

In Robt. Jones Holdings Limited v McCullagh [2019] NZSC 86 the Supreme Court confirmed that the requirements outlined in s 294 Companies Act 1993 (“Act“”) are all that is required in order to void an insolvent transaction. In particular, the Supreme Court confirmed there is no additional common law principle that the transaction must have diminished the net pool of assets available to creditors.


Robt Jones Holdings Limited (“RJH”) leased property to Northern Crest Investments Limited (“NC”), a company associated with the failed Blue Chip group. When NC fell behind on rental payments, RJH received payments from two NC subsidiaries, with the payment addressed by the Supreme Court referred to as the MSH2 payment. The MSH2 payment was received by RJH within 2 years of NC’s liquidation, and the liquidator sought to set aside the payment pursuant to s 292 on the basis that it was an insolvent transaction. The liquidator was successful in the High Court and Court of Appeal.

By the time the case reached the Supreme Court it was accepted that the MSH2 payment meet all the requirements for a voidable insolvent transaction in s 292. It was a transaction entered into by NC at a time when it was unable to pay its due debts, occurred within the specified period, and its effect was that RJH received more than it would otherwise have received in the liquidation. Accordingly, if the requirements in s 292 were exhaustive no more was required for the MSH2 payment to be set aside.


The essence of RJH’s argument on appeal was:

  1. In addition to the requirements specified in s 292, for a transaction to be voidable it must have the effect of diminishing the pool of assets available to unsecured creditors in the liquidation.  This, it was argued, is a common law principle which had survived the reforms introduced by the Act.
  2. As the MSH2 payment immediately replaced the debt owed by NC to RJH with an equivalent debt to the subsidiary company, there was no diminution to the pool of assets available in the liquidation.

For its part, the liquidators argued that s 292 was exhaustive, and only required the recipient of an insolvent transaction to have received more than it would otherwise have received in the liquidation. The Act was intended to replace and simplify the previous corporate insolvency regime, and to add an additional common law principle beyond the requirements in s 292 would frustrate this purpose. The liquidators also set out three potentially significant consequences that would have flowed from the acceptance of a common law diminution requirement:

  1. The simplicity of the corporate insolvency regime would be compromised. The regime was intended to be a summary and cost-effective one but requiring liquidators to prove that diminution was caused would necessitate detailed information about the source of payments.
  2. A diminution requirement would create problems for payments made from an unsecured overdraft account during the specified period. Such payments are, by definition, funded by bank debt and therefore no diminution occurs as the reduction in debt owed to the recipient is offset by a contemporaneous increase in debt owed to the bank. This would create significant practical complexities for liquidators, particularly where multiple payments are made from the same bank account in quick succession, some of which may have occurred when the account was in credit and others whilst it was in overdraft.
  3. It would create artificiality. The liquidator pointed out that, if the NC subsidiary had advanced NC the funds required to make the payment to RJH rather than paying RJH directly, there would technically have been diminution of NC’s assets. However, the economic effect would have been exactly the same, and there was no public policy justification for distinguishing between the situations.


The Supreme Court unanimously dismissed RJH’s arguments and held that there is no additional requirement for a liquidator to demonstrate that a payment had diminished the assets of the company. Its reasons can be summarised as:

  1. Key policy objectives underpinning s 292 are creditor equality and creditor deterrence, to prevent a race between creditors to obtain payment on the eve of insolvency.  Preventing reduction in the pool of assets was no longer the primary policy objective.
  2. There was nothing in the text of s 292 to indicate that diminution of assets was intended to exist as an additional requirement over and above those expressly detailed in the section. There was nothing to indicate that the definition of “insolvent transaction” in s 292(2) was incomplete, and therefore no room for a further common law requirement to be read in.
  3. Whilst historic provisions required a consideration of intention, s 292 focused solely on the effect of transactions. Authorities decided under previous regimes must be read in this context.  
  4. An additional common law diminution requirement would result in significant additional complexity and artificiality. The practical consequences highlighted by the liquidators were forceful.  
  5. Parliament’s stated purpose in reforming the insolvency regime in the Act was to simplify the regime, and provide straightforward and cost effective procedures for realising and distributing assets to creditors. It was difficult to reconcile this objective with the significant complexity inherent in an additional common law diminution requirement.   

In outlining its reasons, the Supreme Court provided a useful outline of the statutory history of voidable transaction legislation in New Zealand, the purpose of the insolvency regime in the Companies Act 1993, and an analysis of relevant case law across Australia, Canada and the United Kingdom  

As there was no diminution requirement, it was not necessary for the Supreme Court to address whether the MSH2 payment had, in fact, caused a diminution of the assets available in the liquidation.


This is a helpful decision which brings certainty to the test for voidable transactions, and avoids adding unnecessary complexity into the corporate insolvency regime.  In this respect, the approach adopted is consistent with the stated intention of the Act “to provide straightforward and fair procedures for realising and distributing the assets of insolvent companies”.[1]

If the diminution requirement advocated for by RJH had prevailed, it would have increased the cost and complexity of liquidations by requiring liquidators to evidence both the source of funds for an insolvent transaction, and that the transaction had a negative impact on other creditors. It is telling (and was pointed out by counsel for the liquidators) that putting source of funds in issue in this case had resulted in a disputed discovery process which delayed the proceedings for some years. It would also have incentivised “sharp practices” enabling companies to structure transactions that preferred selected unsecured creditors prior to liquidation commencing. One example provided was that it could have incentivised directors to ensure preferential payments were made to extinguish personally guaranteed debts, in preference to debts not subject to a guarantee. The Supreme Court appears to have been alive to these ramifications, explicitly noting that it was hard to reconcile parliament’s simplification objective with the complexities inherent in the additional common law diminution requirement sought.

[1] Clause (e) of the long title to the Companies Act 1993