unfair preferences: how a liquidator can claw back payments from creditors
TRANSCRIPT
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This presentation is offered for general information
purposes only. It does not constitute specific legal
advice or opinion. You should not act or rely upon any
of the information contained within this seminar
without seeking the advice of a qualified solicitor who
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Presentation Outline
1. Unfair Preferences 4
2. Did the creditor receive a preference? 6
3. Was the company insolvent at the time? 7
4. Transaction must involve the creditor 8
5. The timing of the transaction 9
6. An Unsecured Debt 11
7. Defences: Continuing Business Relationship 12
8. Defences: Statutory Defence 16
9. Defences: Good faith and suspicion of insolvency 18
10. Contact Us 24
Slide #
Unfair Preferences
A Liquidator may seek to recover (claw back)
payments made or to void a transaction entered
into by a company with a creditor as an unfair
preference under the provisions of
the Corporations Act 2001.
Similar legislation exists
for trustees in bankruptcy.
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Unfair Preferences
To establish that a creditor has received an unfair
preference, the Liquidator must show:
A transaction was entered into between the company
and one of its creditors;
The transaction resulted in the creditor receiving more
from the company than it would have received if it
proved for the debt in the liquidation;
The company was insolvent at the time of the or as a
result of the transaction; and
The transaction was entered into during the period of six
(6) months ending on the relation-back day.
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Unfair Preferences:
Did the creditor receive a preference?
The creditor must receive more from the company
than it would have received if it proved for the debt
in the liquidation.
This is commonly proved by comparing the return
to creditors with and without the subject payment
being recovered.
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Unfair Preferences:
Was the company insolvent at the time?
The company must have either been insolvent at
the time of the transaction, or became insolvent
because of entering into the transaction.
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Unfair Preferences:
Transaction must involve a creditor
The transaction must involve one of the company's
creditors.
Transfers to parties that are not creditors may be
voided under other provisions of the Act.
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Unfair Preferences:
The timing of the transaction
The transaction involving a non-related creditor
must have been entered into during the period of
six (6) months ending on the relation back day.
If the recipient is related to the company the period
is extended to four (4) years before the relation-
back day and if there is any attempt to delay or
defraud creditors the period is extended to 10
years before the relation-back day.
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Unfair Preferences:
The timing of the transaction
The relation back day is the day on which the
liquidation is recognised to have commenced.
Essentially, there are three possibilities.
If the Liquidation followed a voluntary administration,
then it is the day that on which the administrators were
first appointed to the company,
If the Liquidation was by order of a Court, then it is the
day on which the application was filed with the Court,
and
If the Liquidation is a creditors' voluntary winding up,
then it is the date of the resolution to wind up the
company.
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Unfair Preferences:
An unsecured debt
The creditor must be an unsecured creditor.
An unfair preference cannot be given to a secured
creditor so long as the value of the security held is
greater than the amount of the debt.
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Defences:
Continuing Business Relationship
Section 588FA(3) of the Act states that where:
A transaction is an integral part of a continuing business
relationship between a company and creditor, and
In the course of the relationship the level of the
company's net indebtedness is increased and reduced
from time to time, then
All the transactions are taken to be a single
transaction for the purposes of establishing
whether there was an unfair preference.
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Defences:
Continuing Business Relationship
In plain terms this states that where there is a
'continuing business relationship' the amount of
the unfair preference will be determined by
considering all of the transactions (payments and
further supplies) between the company and the
creditor between the relevant dates and calculating
the net effect of these transactions to determine
whether a preference has been received.
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Defences:
Continuing Business Relationship
The Courts have allowed Liquidators to choose the
starting date of the period as the date which best
suits them, so long as it falls within the relation
back period.
The end date is the
commencement of the
winding up.
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Defences:
Continuing Business Relationship
Therefore, the amount of the preference will
usually be the difference between the highest
amount owed during the period and the amount
owing at the time of the appointment.
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Defences:
Statutory Defence
Section 588FG(2) of the Act states that a Court is
not to make an order regarding a voidable
transaction if a creditor can prove that:
1. It became a party to the transaction in good faith,
2. At the time when it became a party: (a) It had no
reasonable grounds for suspecting that the company
was insolvent or would become insolvent, and (b) A
reasonable person in its circumstances would have had
no such grounds for suspecting insolvency, and
3. It provided valuable consideration under the transaction.
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Defences:
Statutory Defence
The onus of proving the above defence lies with
the creditor and the creditor must establish all
three elements to be successful.
The hardest points to prove are that the creditor
became a party in good faith and had no suspicion
of insolvency.
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Defences:
Good faith and suspicion of insolvency
It is not even necessary that the creditor knew or
expected that the company was insolvent to lose
the benefit of the defence.
It is sufficient if a reasonable person in the
circumstances would have had reasonable
grounds to suspect insolvency.
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Defences:
Good faith and suspicion of insolvency
It has been held by the Courts that some factual
basis for a suspicion must be proven and that this
consideration is to be made without applying
hindsight.
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Defences:
Good faith and suspicion of insolvency
It is important to note that the fact that a debtor
company pays late does not necessarily mean that
the creditor should or does suspect insolvency.
This was considered by the Court in the often
quoted case of Seller & Anor v Offset Alpine
Printing Pty Ltd wherein…
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Defences:
Good faith and suspicion of insolvency
1. The Liquidator relied on the following signs of
insolvency:
a) poor payment history;
b) the age of the debts;
c) earlier assurances that they could pay;
d) statements that they were in fact having
difficulty in making the payments; and
e) forceful demands made by the creditor's
solicitors for a guarantee and provision of a
statement of solvency.
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Defences:
Good faith and suspicion of insolvency
2. The creditor relied on the Statutory Defence
and stated that even though the creditor's
terms were 30 days, it was not unusual for the
company's accounts to be outstanding for long
periods of time, and the company had a habit of
not paying until it had itself received payment.
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Defences:
Good faith and suspicion of insolvency
3. In upholding the Defence, the Court noted that
although the matters raised by the Liquidator
were relevant, the test to be applied in
defending a voidable preference action was
one based on the actual circumstances known
to those who benefit from the insolvent
transactions, which must be examined to see
whether a person in those circumstances and
with that particular knowledge could have had
no reasonable belief as to the insolvency of the
company.
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Turnbull Hill Lawyers – Contact Us
If you have any further questions about this topic or
you'd like to discuss a related matter, please
contact our Commercial Litigation Team.
We will endeavour to respond to your enquiry
within 24 hours.
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