Australia: Victorian Court of Appeal Clarifies Preference Law

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:

  1. 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
  2. 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) [2010] 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) [1999] 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[2001] 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

The facts

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.

The appeal

Centaur's liquidators appealed to the Victorian Court of Appeal. There were 10 grounds of appeal, but the main grounds were:

  1. 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
  2. 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:

  1. 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
  2. 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 [2006] QCA 52 at [9] and New Cap Reinsurance Corporation Ltd (in liquidation) v All American Life Insurance Company (2004) 49 ACSR 417 at 419 [14] – [15].
2 See VR Dye & Co v Peninsula Hotels Pty Ltd (in liquidation) [1999] 3 VR 201 and Beveridge v Whitton[2001] 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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.