Under Sections 588FE and 588FA of the Corporations Act 2001 (Cth), a payment constitutes an unfair preference and is a voidable transaction if:

  1. the company and you were both parties to the transaction;
  2. the transaction occurred within six (6) months of the commencement of liquidation;
  3. the company was insolvent at the time of entering into the transaction, in that it could not pay its debts when they fell due; and

the transaction resulted in you receiving from the company, in respect of an unsecured debt that the company owed to you, more than you would have received from the company in respect of that debt, than if the transaction was set aside and you were to prove for the debt in the liquidation of the company.

There are however a number of options available in responding to the liquidator and/or defending proceedings by a liquidator for unfair preferences.

There are several defences that may be available and reasons why you should not be required to pay back to a liquidator an amount.

Some of these include:

  • where you are a secured creditor because:

    i. you may have a charging clause or an equitable interest over real property owned by the company;

    ii. you may have a security interest such as under a Retention of Title clause which has been registered on the PPSR; oriii. you may be the beneficiary of a common law lien which is not required to be registered on the PPSR.

  • the statutory defence contained in Section 588FG (1) of the Corporations Act 2001 (Cth) which is commonly known as the “good faith defence.” This defence is essentially that you were not aware that the company was insolvent at the time it made the payments to you. To succeed on this defence, the onus is on you to establish:

    i. that you had no reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of making the payment/s (i.e. the subjective test); and

    ii. a reasonable person in your circumstances would not have reasons to suspect the company was insolvent or would become insolvent (i.e. the objective test).

In addition, another defence that may be available is called the “Doctrine of Ultimate Effect.” In Beveridge v Whitton [2001] NSWCA 6 it was argued by a liquidator that an accountant’s audit of an insolvent company’s books, prior to that company being placed into liquidation, that the payment of those fees being the professional fees for the accountant constituted an unfair preference. In the NSW Court of Appeal, the Court determined that the payment of those fees was not an unfair preference because:

  1. the accountant only accepted the engagement to do the work on the proviso fees were paid speedily;
  2. the value of the services should be treated as the price charged for them;
  3. that it was not the case that the failure to show any quantifiable addition to turnover or inventory meant that the services supplied were without value, or that a payment made for them necessarily decreased the company’s assets; and
  4. the doctrine of ultimate effect does not depend on a transactions ability to improve or worsen a company’s position, but rather it was the ultimate effect of the transaction itself that is relevant.

This defence may be useful in circumstances where the company was insolvent, a liquidator can prove that you knew the company was insolvent and where the goods or services provided (that the payments were for) were of substantial benefit to the company.

It is important to remember that in circumstances of a demand made by a liquidator that these matters are often open to negotiation and the cost involved in defending litigation brought by a liquidator will often exceed a settlement amount which could have otherwise been arrived at had you instructed solicitors to negotiate and defend the claim on your behalf.

If you require further information regarding any of the defences available to a demand or proceedings bought in relation to a preference payment, you should contact Uther Webster & Evans.