Before 1993, the question of whether a creditor of a corporation being wound up had received an unfair preference from that corporation was determined under section 122 of the Bankruptcy Act 1966 (Cth). In 1993, a new Part 5.7B was inserted into the Corporations Act to deal with voidable transactions such as unfair preferences. Since then two lines of divergent judicial authority have developed:
- one line of authority progressed on the basis that it was only necessary to apply the literal words of section 588FA of the Corporations Act to determine whether a creditor had received an unfair preference: it was only necessary to show that the creditor received more than it would receive if left to prove in the winding up1; and
- the other line of authority progressed on the basis that it was necessary to also have reference to the ultimate effect of the entire transaction to determine whether the creditor body as a whole was worse off because of the impugned transaction, which was necessary under section 122 of the Bankruptcy Act2. There are some inconsistencies within this line of authority.
In McKern v Minister administering the Mining Act 1978 (WA)  VSCA 140 the Victorian Court of Appeal has sought to resolve these divergent lines of authority.
The doctrine of ultimate effect
In Airservices Australia v Ferrier (1995) 185 CLR 483 (a decision under section 122 of the Bankruptcy Act) the majority of the High Court of Australia held:
where the payment is a step in a wider transaction, 'its actual business character must be seen and when it forms part of an entire transaction which if carried out to the intended conclusion will leave the creditor without any preference, priority or advantage over other creditors the payment cannot be isolated and construed as a preference'.
However, reading only the express written words of section 588FA(1)(b) of the Corporations Act, a transaction is an unfair preference "if, and only if" the creditor receives "more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove in a winding up of the company." The explanatory memorandum for the amendments which introduced section 588FA into the then Corporations Law provided that "The new provisions set out comprehensively matters which may be taken into account by a court" [emphasis added].
Whether it was necessary to consider the ultimate effect of the entire transaction under section 588FA of the Corporations Act was considered in VR Dye & Co v Peninsula Hotels Pty Ltd (in liquidation)  3 VR 201. In that case an accountant had received $8,500 into his trust account before commencing work for a company that was ultimately wound up. The accountant then billed approximately $4,100, which he withdrew from his trust account. A magistrate and single judge of the Supreme Court of Victoria held that the payment of $4,100 to the accountant was a preference. The Court of Appeal took a different view. Ormiston J (with whom Winneke P and Tadgell JA agreed) said although section 588FA of the Corporations Act was "differently expressed" to section 122 of the Bankruptcy Act the new provisions in the Corporations Act "were not intended to make any significantly different provision for identifying what is an unfair preference, except in a few minor respects". Ormiston JA then went on to hold that in each case the ultimate effect of the entire transaction must be considered and, in that case, the entire transaction was a prepayment. VR Dye was followed by the New South Wales Court of Appeal in Beveridge v Whitton NSWCA 6 and the Supreme Court of New South Wales in Mann v Sangria Pty Ltd (2001) 38 ACSR 307. Collectively, these 3 decisions stand for the proposition that, in order for a transaction to be an unfair preference under section 588FA of the Corporations Act, the liquidator must establish that the transaction as a whole resulted in a decrease in the net assets available to creditors. In some respects it is difficult to reconcile those three cases: in VR Dye the accountant received money into trust before he did the work but in Beveridge v Whitton, another case about a payment to an accountant during the relation-back period, the accountant had no money in trust and was paid after he did the work. In Mann v Sangria payments for the supply of goods were found not to be preferences because some were COD (which is plainly correct) but some payments were made shortly after delivery and, consequently, were not strictly COD.
The judgments in VR Dye and Beveridge v Whitton are also difficult to reconcile with:
- New Cap Reinsurance Corporation Ltd (in liquidation) v All American Life Insurance Company (2004) 49 ACSR 417 where Gzell J said, "In my view, it is no part of the proof of an unfair preference to establish an affectation upon the assets of the insolvent company and it is unnecessary to plead any such affectation"; and
- Sheldrake v Paltoglou where De Jersey CJ (with whom McMurdo P and Muir J agreed) said, "In terms of s 588FA of this legislation, it sufficed, for there to be an unfair preference, that in respect of the unsecured debt, the respondent received more than she would receive were she left to prove in the winding up, and that was plainly the position here."
McKern v Minister administering the Mining Act
Centaur Mining & Exploration Limited (receivers and managers appointed) (in liquidation) and its subsidiaries (Centaur) operated nickel and gold mines in Western Australia. Voluntary administrators were appointed on 14 March 2001. Between 31 December 2000 and 14 March 2001 Centaur made three payments of mining royalties to the Minister totalling approximately $1.2 million and 10 payments to the Minister of rent totalling approximately $400,000 for mining tenements on which mining operations were conducted. The Minister admitted that Centaur was insolvent on and from 31 December 2001 and that he had reasonable grounds to suspect that insolvency.
The original trial
Before Robson J in the Supreme Court of Victoria, the Minister successfully argued that all ten rent payments and all three royalty payments had been paid to secure for Centaur the continued enjoyment of its mining tenements. According to the Minister, had any of those thirteen payments not been made, the Minister could have forfeited Centaur's mining tenements or, alternatively, outstanding amounts of rent and royalties would have to have been paid by Centaur's receivers when they sold the tenements. Additionally, the Minister argued that the value to Centaur of retaining the mining tenements exceeded the value of the payments made to the Minister.
In accepting the Minister's arguments in respect of the ten rent payments Robson J followed Re Discovery Books Pty Ltd (1972) 20 FLR 470 (a decision under section 122 of the Bankruptcy Act) where Fox J held that that the effect of the payment of rent was not to give a preference, priority or advantage at the expense of other creditors, as the payments enabled the company to retain the use of its business premises.
Robson J also treated the three royalty payments in the same manner as the rent, finding that it was a condition of Centaur's mining leases that the royalties were paid and, had the royalties not been paid, the leases would have been forfeit or, alternatively, Centaur's receivers would have paid the royalties in any event when they sold the tenements. His Honour distinguished Telecom v Russell Kumar & Sons (1992) 10 ACSR 24, Sutherland v Liquor Administration Board (1997) 24 ACSR 176 and Olifent v WorkCover Corporation of South Australia (1996) 135 FLR 423 in which statutory or quasi-statutory bodies had received unfair preferences in circumstances where they were threatening to take steps to wind up or withdraw services from an insolvent debtor company. In each of those cases the payments later found to be preferences had allowed the relevant company to continue to trade.
Centaur's liquidators appealed to the Victorian Court of Appeal. There were 10 grounds of appeal, but the main grounds were:
- that the doctrine of ultimate effect was no longer operative under section 588FA of the Corporations Act so that the ten rent payments and three royalty payments were all unfair preferences; and
- if the doctrine of ultimate effect did continue to operate under section 588FA of the Corporations Act the three royalty payments were of the same character as the unfair preferences found in Telecom v Russell Kumar & Sons, Sutherland v Liquor Administration Board and Olifent v WorkCover Corporation of South Australia because the relevant transactions were merely the payment of an antecedent debt.
Mandie JA (with whom Nettle JA and Beach AJA agreed) said the Court was bound to follow VR Dye and Beveridge v Whitton because his Honour was not convinced that those decisions were plainly wrong and his Honour thought the reasoning "very persuasive". That being the case, the doctrine of ultimate effect did continue to operate under section 588FA of the Corporations Act. It followed that, in order to succeed, the liquidators needed to show that the impugned transaction ultimately resulted in a net decrease in assets available to creditors. It was not sufficient for the liquidators to merely show that the thirteen payments resulted in the Minister receiving more than he would receive from the company in respect of the debt if the transaction were set aside and the Minister were to prove in a winding up of Centaur. This means that Re Discovery Books continued to be good law in respect of the ten rent payments to the Minister—the ten rent payments resulted in Centaur receiving the future benefit of its occupation of the relevant mining tenements.
However, the position with respect to the three royalty payments was different to the ten rent payments. The Court of Appeal found unanimously that all three royalty payments were unfair preferences within the meaning of section 588FA of the Corporations Act because they operated to discharge a past indebtedness to the Minister that arose at the time Centaur sold ore extracted from the tenements and royalties were payable quarterly in arrears. Mandie JA considered Telecom v Russell Kumar & Sons, Sutherland v Liquor Administration Board and said:
the above cases support the proposition urged by the ...[liquidators] that the ultimate effect doctrine does not extend to circumstances where the payment is made in respect of a past debt and is not made to secure the continuing provision of services (or goods) or the acquisition of assets, of a value corresponding with the payment made. The fact that as a practical matter the payment was made to protect the assets of the company or to prevent harm or prejudice to its business prospects or assets is of itself insufficient to take the payment out of the reach of the unfair preference provisions. [emphasis added]
The Minister was ordered to pay $1.2 million (the value of the three royalty payments) to the liquidators of Centaur plus interest from October 2004, when the liquidators had first demanded payment from the Minister.
It is worth noting that the High Court of Australia has never had cause to consider the operation of section 588FA of the Corporations Act in detail and in his judgment in McKern v Minister administering the Mining Act Nettle JA said:
... not all of the reasoning in VR Dye is completely convincing. It does not deal squarely with the apparently plain and ordinary meaning of the legislation or the indications in the Harmer Report and Explanatory Memorandum that the new regime was intended to be a comprehensive statutory regime that avoids common law conceptions. It is also possible to envisage ways of accommodating COD transactions that may do less violence to the language of the section than the preservation of principles developed in the context of the previous regime.
Later Nettle JA said:
In those circumstances, I consider that it would be wrong for this court to now depart from the VR Dye. If the reasoning in VR Dye to be overturned, it is for the High Court to say so.
What does this mean for insolvency practitioners?
McKern v Minister administering the Mining Act is authority for the proposition that, in order to succeed on an unfair preference claim under section 588FA of the Corporations Act, the onus is on the liquidator to plead and prove that:
- the creditor received more from the company in respect of the debt than if the transaction were set aside and the creditor were to prove in a winding up of the company; and
- the transaction resulted in a net decrease in assets available to meet the creditor's claims against the company.
It is the existence of an immediate or future benefit for the company in liquidation that attracts the operation of the doctrine of ultimate effect—that immediate or future benefit needs to be offset against the payment which the liquidator seeks to avoid. A payment in respect of a benefit that had already accrued to the company in liquidation before the impugned payment was made is unlikely to attract the operation of the doctrine of ultimate effect. Further, if the value of the immediate or future benefit is less than the payment made, then the doctrine of ultimate effect will provide only partial protection for the creditor.
1 See Sheldrake v Paltoglou  QCA 52 at
 and New Cap Reinsurance Corporation Ltd (in liquidation) v
All American Life Insurance Company (2004) 49 ACSR 417 at 419
 – .
2 See VR Dye & Co v Peninsula Hotels Pty Ltd (in liquidation)  3 VR 201 and Beveridge v Whitton NSWCA 6.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.