Has a preference payment loophole emerged?

In early August, the Victorian Court of Appeal handed down its decision in Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198. The decision casts doubt on what was a relatively settled position: that a third-party payment could indeed constitute a preference payment.

In brief, the background to the matter is as follows:

  • Elaina Construction and Developing Group Pty Ltd ("Elaina") owed a debt to Mad Brothers Earthmoving Pty Ltd ("Mad Brothers").
  • Payment of the debt was made but not by Elaina, rather by a related entity by way common director, Rock Investments Pty Ltd ("Rock").
  • Elaina was later placed into liquidation. With the payment to Mad Brothers having been made within the relevant six-month relation-back period, the liquidator sought to recover the payment as a preference.

The Court of Appeal dismissed the liquidator's application. It found that for there to be an unfair preference the payment must be received from the company or result in a diminution of the company's assets otherwise available to the creditors. In this matter, the payment came from Rock not Elaina, and Elaina's assets were not diminished by the transaction – hence the court found there could be no unfair preference.

In coming to the decision, the Court focused on section 588FA(1)(b) of the Corporations Act 2001 which outlines that a transaction is an unfair preference if and only if:

"the transaction results in the creditor receiving from the company ... more than the creditor would receive ... if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company". (emphasis added).

As noted above, this decision changes what was a relatively settled position about third party payments in the context of preferences. Moreover, given it is an appellate court decision in Victoria, it would be binding on lower courts in Victoria. No doubt other jurisdictions will also be interested in the decision.

The decision appears to create a mechanism—or potential loophole—by which a company can genuinely or intentionally "prefer" a creditor and nonetheless potentially defeat a liquidator's preference claim—so long as the payment comes from a source outside the company.

Related article: How to minimise the risk of becoming party to a liquidator's preference claim

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