How often are you dismayed, as an unsecured creditor, to be on the receiving end of an Unfair Preference Claim?
How often have you had to pay back money to a liquidator that you have been diligent in collecting from your customer in the first place?
While unsecured creditors may feel claw back of such monies is in itself unfair, one of the main rationales behind the Unfair Preference regime is summed by the High Court as follows:
A primary objective is that of securing equality of distribution amongst creditors of the same class. The pursuit of that objective has the consequential effect of deterring the "race to the courthouse" and that, in turn, enhances the prospect of enabling debtors to trade out of their difficulties without undue and discriminatory risk to creditors.1
The Corporations Act 2001 (the Act) provides a mechanism for this to occur in allowing a liquidator to claw back certain pre-liquidation transactions that were made by the Company at a time when the Company was insolvent and which resulted in a creditor having been preferred over other unsecured creditors.
The Unfair Preference Claim
How a transaction may fall within the ambit of the Unfair Preference provisions, is set out in section 588FA of the Act. One of the key elements is that the liquidated Company (the Company) and the creditor were parties to the transaction (even if someone else is also a party).
The Third Party payer
Whilst a creditor may accept payments from a third party instead of the Company to try to break this link, the circumstances of payment will determine how successful this will be.
In the case of Re Emanuel (No 14) Pty Ltdii, it was found on the facts that, in simple terms, when Company (A) owes money to a creditor (C) and A directs another (B), who owes money to A, to instead pay C and B complies (and C accepts the payment), this transaction with its multiple dealings may still be considered a payment from A to C. On A's liquidation, the liquidator may make demand for repayment on B, even though the payment didn't come direct from A.
We see this third party payer type transaction caught again in a loan scenario in the case of Kassem and Secatore v Commissioner of Taxationiii(Kassem) where a payment made by a related third party payer to the Commissioner on behalf of a Company which eventually went into liquidation, was found to have come from the Company. This was despite existence of any formal documentation or records indicating it was a loan but where there was a history of such loans being made by this related third party in favour of the Company.
Critical elements here are:
- a direction by the Company for the payment to be made; and,
- the Company had some kind of right to the payments.
An interesting contrast
Finally, an interesting contrast to the cases above can be seen in the recent case of Evolvebuilt Pty Ltd . This involved a Contractor (Built NSW), a sub-contractor (Evolvebuilt) and several secondary sub-contractors engaged by Evolvebuilt. Here it was found that payments made by Built NSW to several of the secondary sub-contractors were not monies paid by Evolvebuilt and therefore this key element of an Unfair Preference Claim couldn't be established by the Liquidator.
The facts were as follows:
- NSW and Evolvebuilt entered into a contract (the Head Contract). The Head Contract contained clauses providing that if Evolvebuilt hadn't paid its sub-contractors, Built NSW could deduct monies owed to Evolvebuilt to pay these sub-contractors instead.In September 2012, Built
- A dispute arose between Built NSW and Evolvebuilt, with the result that Built NSW didn't pay Evolvebuilt. Evolvebuilt in turn failed to pay its secondary sub-contractors, who refused to continue work.
- By March 2013, Evolvebuilt requested that Built NSW pay its secondary sub-contractors and made a complaint to the union (CFMEU) which became involved.
- Built NSW terminated the Head Contract and reached agreement with the CMFEU to pay sums found to be properly due and payable to the secondary sub -contractors.
- In May 2013, Evolvebuilt served a payment claim on Built NSW. However, nil liability was found for Built NSW to pay following an adjudication.
- By September 2013, Evolvebuilt had gone into administration and eventually Liquidation.
- The liquidator claimed the monies paid to the secondary sub-contractors as Unfair Preferences.
It was found these monies did not come from Evolvebuilt. The finding of nil liability as between Built NSW and Evolvebuilt assisted in reaching this conclusion, as did the fact the payments were made as a result of Built NSW's agreement with the CFMEU (to which Evolvebuilt was not a party).
Often creditors are faced with an Unfair Preference demand. It is prudent to take a step back and look at whether you received the payments from the Company and whether the Company was a party to the transaction. If a third party payment is made but didn't create any liability between the third party and Company or was an arrangement whereby any such liability was subordinated to the other debts of the Company, this may avoid a finding that the payment came from the Company. Each case will depend on its own circumstances however, there is useful guidance to be found in case-law which may draw comparisons with your own factual scenario.
i G & M Aldridge Pty Ltd v Walsh  HCA 27 at 30.
ii Emanuel (No 14) Pty Ltd, Re; Macks v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281;24 ACSR 292.
iii Kassem and Secatore v Commissioner of Taxation (2012) 205 FCR 156;  FCAFC 124.
iv In the matter of Evolvebuilt Pty limited  NSWSC 901
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.