ARTICLE
19 November 2020

Unpacking Unfair Preferences series: The good faith defence

M
Madgwicks

Contributor

Madgwicks Lawyers has been serving clients since 1975 with reliable legal advice, clear explanations of outcomes, and practical options. Their deep expertise helps clients navigate complex matters by providing informed decision-making. The firm prioritizes developing long-term relationships with clients locally and globally, adding value beyond legal services. With over 100 staff and expertise in key practice areas, Madgwicks is an award-winning commercial firm. As part of Meritas, they are connected to a global alliance, offering business law services in 92 countries.
When a liquidator brings a claim for an unfair preference against a company, the good faith defence may be available.
Australia Insolvency/Bankruptcy/Re-Structuring

When a liquidator brings a claim for an unfair preference against a company or individual, there are a number of defences available to them. One of these defences is the good faith defence.

In order to establish a good faith defence, the creditor must establish the following:

  • a) the creditor provided valuable consideration for the transaction or changed their position in reliance on the transaction; and
  • b) the creditor received the benefit of the transaction in good faith; and
  • c) at the time of the transaction:
    • i) the creditor 'had no reasonable grounds for suspecting that the company was insolvent'; and
    • ii) A reasonable person in the creditor's circumstances would have no reason for suspecting the company's insolvency.

One of the most common and contentious elements in most cases is whether the creditor ought to have suspected that the company now in liquidation was insolvent at the time of the payments.

Each case turns on its own facts, however some of the common indicators of a suspicion that the company (now in liquidation) was insolvent at the time of the payments in question are as follows:

  • actions such as receiving post-dated cheques, dishonouring cheques;
  • entering into repayment agreements;
  • defaulting on payment arrangements;
  • knowing of other unpaid creditors;
  • making demands for payment;
  • refusing to provide credit or refusing to supply unless a payment is made;
  • continuous lateness of payment; and
  • issuing legal proceedings.

Lessons

The good faith defence is one of the most common in unfair preference cases, however it is not successful in many cases. It is important to understand the factors and evidence which will put you in the best position to run this defence.

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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More