Voidable transactions and Ponzi schemes – the Supreme Court ruling

The Supreme Court's decision in McIntosh v Fisk has confirmed how the courts will deal with claw back claims under the voidable transactions regime in the context of Ponzi schemes. Liquidators' recoveries will be limited to the fictitious profits for which there was no value given.

A copy of Chapman Tripp's submission to the Insolvency Working Group regarding the voidable transactions regime and Ponzi schemes can be accessed here.

The context

In 2007, Mr McIntosh entered into an agreement with Ross Asset Management Ltd (RAM) to manage his $500,000 investment portfolio. Unbeknownst to Mr McIntosh, RAM was operating as a Ponzi scheme. When an investor paid money to RAM under a management agreement, RAM would misappropriate the funds to a pool of cash and securities, which it used to pay other investors wishing to cash up their investments. The Ponzi scheme was not sustainable and eventually RAM collapsed.

Prior to RAM's collapse, Mr McIntosh had decided to cash up his portfolio and withdraw the amount which, according to the fictitious reports he had received from RAM, totalled $954,047. RAM's liquidators sought to claw back that entire payment under the voidable transaction provisions in the Companies Act 1993 and the Property Law Act 2007.

Supreme Court

The majority of the Supreme Court affirmed the earlier decisions of the lower courts. Mr McIntosh was not entitled to retain the fictitious profits, and the liquidators could not claw back payment equivalent to Mr McIntosh's initial investment. Mr McIntosh successfully argued that the fact that RAM's fraudulent activity destroyed the value of the initial investment should not undermine the nature of the value given.

However, the Court rejected Mr McIntosh's attempt to retain the fictitious profits, stating that the Court of Appeal was correct to confine the calculation of value to a sum that equalled the antecedent debt, where the antecedent debt was both quantified and fixed. The Court was concerned that if a payment exceeding the antecedent debt by nearly 100 per cent was defensible, what would not be?

The minority view

In the Court of Appeal's judgment1, the majority expressly noted that, had they not felt bound by the Supreme Court's ruling in Allied Concrete2 on the meaning of "gave value", they would have agreed with the minority and required Mr McIntosh to pay back not just the fictional profits, but also the amount equivalent to his initial investment.

Justice Miller expressed the...