Australia: Liquidators recover unfair preference payments from retention of title secured creditor

In the recent court decision of Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107, the liquidators recovered unfair preferences from a retention of title creditor who argued it was a secured creditor.

THE ISSUES

Section 588FA of the Corporation Act 2001 (Cth) provides that a transaction is an unfair preference if the creditor receives from the company, in relation to an unsecured debt, more than the creditor would receive from the company if the transaction were set aside and the creditor were to prove for the debt in the liquidation. For the purpose of section 588FA, a debt is only taken to be unsecured to the extent of so much of it (if any) is not covered by the value of security.

In this case the creditor argued it was a secured creditor because it had a retention of title security interest and the value of its security over the goods and proceeds of sale of those goods exceeded the amount of the payments received from the company in liquidation.

To determine if the payments made to the creditor were unfair preferences, the Court had to consider:

  • whether the creditor was a secured creditor and, if so, at what point of time; and
  • how any security was to be valued.

There was also a threshold issue of whether the security interest had been perfected.

WAS THE PAYMENT IN RELATION TO AN UNSECURED DEBT?

On the threshold issue, the Court found that the relevant security interest had not been perfected, as it had been incorrectly categorised as 'transitional'.

Correct registration of a security interest prevents the security from vesting in a liquidator or administrator if the company goes into external administration. Here, as the security interest had not been perfected, upon the appointment of the administrators the security vested in the company immediately before the appointment of the administrators (section 267 of the Personal Property Security Act 2009 (Cth) (PPSA)).

However, the unperfected security was still effective between the parties.

Significantly, the Court held that PPSA does not make an unregistered security interest completely void.

As the unperfected security interest was not void, the Court needed to determine at what point of time the security interest was to be valued.

  • The creditor argued that the security was to be valued as at the date of each payment received by the creditor.
  • The liquidators argued that, for the purpose of section 588FA, the question of whether the debt was secured was to be assessed at the date of winding up, and by that time there was no security because it had vested in the company.

The Court held that the time for determining whether the debt was unsecured was the time of each payment. The Court acknowledged the following difficulties with this conclusion:

  • If the payments not been made, the creditor would have been an unsecured creditor for the purpose of the winding up.
  • The purpose of the unfair preference provisions is to ensure that unsecured creditors are treated the same for the purposes of winding up.

The Court's finding was based on the natural reading of section 588FA(1)(b), being that it refers to a debt that was unsecured at the time the creditor received payment.

WHAT WAS THE VALUE OF THE SECURITY?

The next critical issue for determination was how should the security be valued.

The liquidators argued that the amount of the indebtedness secured at the time of the payments was greater than the value of the security.

The liquidators relied on the decision of Walsh v Natra Pty Ltd (2000) 1 VR 523, endorsed by the Court of Appeal in Williams v Peter [2010] 1 Qd R 475, which found that where the total debt exceeds the value of the security, any particular payment made is to be applied first toward the unsecured debt. The Court adopted this approach in this case.

The liquidators further argued that, as the amount of the creditor's debt exceeded the value of the security, part of the payments received were unsecured, and to that extent, were recoverable as unfair preferences.

The creditor argued that the value of the goods should be taken at their retail value, rather than at the invoice value they were sold to the company. In considering this argument, the Court took a commonsense approach and found it was appropriate to value the stock at its wholesale price, being the invoice price for which the creditor supplied the goods in the first place.

The creditor also sought to rely on the security interest being for both the goods supplied and their proceeds, to argue that, when also taking into account the proceeds of the goods, they were fully secured.

In relation to this argument, the liquidators put forward evidence that there were no records kept of the proceeds of sale between different suppliers, and, consequently, the proceeds were not readily identifiable or traceable.

Further, even if the proceeds could have been quantified, the company records showed that most of the company bank accounts were in substantial overdraft at all relevant times and that all available credit was quickly spent. This meant that if the proceeds were transferred into an overdraft account, they ceased to be traceable, and, if they were transferred into an account in credit, they were spent.

As a result, the Court found that there was no security over the proceeds in relation to the relevant debt.

Overall, in applying this methodology, the Court found that $473,291 of the $696,298.72 in payments received were paid in relation to an unsecured debt, and recoverable as an unfair preference by the liquidators against the creditors.

COMMENTS

This case is a good illustration of a number of important points creditors and liquidators should take into account when it comes to preference payments.

First, even where a security interest is not perfected under the PPSA, it is still possible to argue that payments made are in relation to a secured debt and therefore not recoverable by a liquidator as a preference under section 588FA of the Corporations Act.

Second, even when there is security in place in relation to a debt, any payment received will be applied to any unsecured portion of the debt first, leaving those payments open for potential recovery by a liquidator as a preference.

Finally, this case demonstrates the effect that properly maintained stock records can have in determining the value of a particular security interest. The records here were crucial to the identification and valuation of the goods for valuing the security interest.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions