Unfair Preferences

How a liquidator can claw back

payments from creditors

February, 2015

Legal Disclaimer

This presentation is offered for general information

purposes only. It does not constitute specific legal

advice or opinion. You should not act or rely upon any

of the information contained within this seminar

without seeking the advice of a qualified solicitor who

specialises in the particular area of expertise and

jurisdiction that you require.

Presentation Outline

1. Unfair Preferences 4

2. Did the creditor receive a preference? 6

3. Was the company insolvent at the time? 7

4. Transaction must involve the creditor 8

5. The timing of the transaction 9

6. An Unsecured Debt 11

7. Defences: Continuing Business Relationship 12

8. Defences: Statutory Defence 16

9. Defences: Good faith and suspicion of insolvency 18

10. Contact Us 24

Slide #

Unfair Preferences

A Liquidator may seek to recover (claw back)

payments made or to void a transaction entered

into by a company with a creditor as an unfair

preference under the provisions of

the Corporations Act 2001.

Similar legislation exists

for trustees in bankruptcy.

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Unfair Preferences

To establish that a creditor has received an unfair

preference, the Liquidator must show:

A transaction was entered into between the company

and one of its creditors;

The transaction resulted in the creditor receiving more

from the company than it would have received if it

proved for the debt in the liquidation;

The company was insolvent at the time of the or as a

result of the transaction; and

The transaction was entered into during the period of six

(6) months ending on the relation-back day.

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Unfair Preferences:

Did the creditor receive a preference?

The creditor must receive more from the company

than it would have received if it proved for the debt

in the liquidation.

This is commonly proved by comparing the return

to creditors with and without the subject payment

being recovered.

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Unfair Preferences:

Was the company insolvent at the time?

The company must have either been insolvent at

the time of the transaction, or became insolvent

because of entering into the transaction.

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Unfair Preferences:

Transaction must involve a creditor

The transaction must involve one of the company's

creditors.

Transfers to parties that are not creditors may be

voided under other provisions of the Act.

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Unfair Preferences:

The timing of the transaction

The transaction involving a non-related creditor

must have been entered into during the period of

six (6) months ending on the relation back day.

If the recipient is related to the company the period

is extended to four (4) years before the relation-

back day and if there is any attempt to delay or

defraud creditors the period is extended to 10

years before the relation-back day.

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Unfair Preferences:

The timing of the transaction

The relation back day is the day on which the

liquidation is recognised to have commenced.

Essentially, there are three possibilities.

If the Liquidation followed a voluntary administration,

then it is the day that on which the administrators were

first appointed to the company,

If the Liquidation was by order of a Court, then it is the

day on which the application was filed with the Court,

and

If the Liquidation is a creditors' voluntary winding up,

then it is the date of the resolution to wind up the

company.

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Unfair Preferences:

An unsecured debt

The creditor must be an unsecured creditor.

An unfair preference cannot be given to a secured

creditor so long as the value of the security held is

greater than the amount of the debt.

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Defences:

Continuing Business Relationship

Section 588FA(3) of the Act states that where:

A transaction is an integral part of a continuing business

relationship between a company and creditor, and

In the course of the relationship the level of the

company's net indebtedness is increased and reduced

from time to time, then

All the transactions are taken to be a single

transaction for the purposes of establishing

whether there was an unfair preference.

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Defences:

Continuing Business Relationship

In plain terms this states that where there is a

'continuing business relationship' the amount of

the unfair preference will be determined by

considering all of the transactions (payments and

further supplies) between the company and the

creditor between the relevant dates and calculating

the net effect of these transactions to determine

whether a preference has been received.

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Defences:

Continuing Business Relationship

The Courts have allowed Liquidators to choose the

starting date of the period as the date which best

suits them, so long as it falls within the relation

back period.

The end date is the

commencement of the

winding up.

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Defences:

Continuing Business Relationship

Therefore, the amount of the preference will

usually be the difference between the highest

amount owed during the period and the amount

owing at the time of the appointment.

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Defences:

Statutory Defence

Section 588FG(2) of the Act states that a Court is

not to make an order regarding a voidable

transaction if a creditor can prove that:

1. It became a party to the transaction in good faith,

2. At the time when it became a party: (a) It had no

reasonable grounds for suspecting that the company

was insolvent or would become insolvent, and (b) A

reasonable person in its circumstances would have had

no such grounds for suspecting insolvency, and

3. It provided valuable consideration under the transaction.

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Defences:

Statutory Defence

The onus of proving the above defence lies with

the creditor and the creditor must establish all

three elements to be successful.

The hardest points to prove are that the creditor

became a party in good faith and had no suspicion

of insolvency.

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Defences:

Good faith and suspicion of insolvency

It is not even necessary that the creditor knew or

expected that the company was insolvent to lose

the benefit of the defence.

It is sufficient if a reasonable person in the

circumstances would have had reasonable

grounds to suspect insolvency.

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Defences:

Good faith and suspicion of insolvency

It has been held by the Courts that some factual

basis for a suspicion must be proven and that this

consideration is to be made without applying

hindsight.

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Defences:

Good faith and suspicion of insolvency

It is important to note that the fact that a debtor

company pays late does not necessarily mean that

the creditor should or does suspect insolvency.

This was considered by the Court in the often

quoted case of Seller & Anor v Offset Alpine

Printing Pty Ltd wherein…

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Defences:

Good faith and suspicion of insolvency

1. The Liquidator relied on the following signs of

insolvency:

a) poor payment history;

b) the age of the debts;

c) earlier assurances that they could pay;

d) statements that they were in fact having

difficulty in making the payments; and

e) forceful demands made by the creditor's

solicitors for a guarantee and provision of a

statement of solvency.

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Defences:

Good faith and suspicion of insolvency

2. The creditor relied on the Statutory Defence

and stated that even though the creditor's

terms were 30 days, it was not unusual for the

company's accounts to be outstanding for long

periods of time, and the company had a habit of

not paying until it had itself received payment.

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Defences:

Good faith and suspicion of insolvency

3. In upholding the Defence, the Court noted that

although the matters raised by the Liquidator

were relevant, the test to be applied in

defending a voidable preference action was

one based on the actual circumstances known

to those who benefit from the insolvent

transactions, which must be examined to see

whether a person in those circumstances and

with that particular knowledge could have had

no reasonable belief as to the insolvency of the

company.

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Turnbull Hill Lawyers – Contact Us

If you have any further questions about this topic or

you'd like to discuss a related matter, please

contact our Commercial Litigation Team.

We will endeavour to respond to your enquiry

within 24 hours.

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