Rethinking unfair preferences through echoes of the past

Key Points
  • The Victorian Court of Appeal in Cant v Mad Brothers has recently decided that a payment by a third-party to a company’s creditor did not constitute an unfair preference.
  • The Court ruled that the preference must be received by the creditor ‘from the company’ and have the effect of diminishing its own assets.
Background
Before being placed into voluntary administration, Eliana Construction and Developing Group Pty Ltd (Company) and Mad Brothers Earthmoving Pty Ltd (Mad Brothers) executed a settlement agreement in which the Company agreed to pay Mad Brothers $220,000 for a debt the Company owed Mad Brothers.

A payment of $220,000 (Payment) was made to Mad Brothers by Rock Investments Pty Ltd (Rock) from a loan facility Rock had with Nationwide Credit Pty Ltd.

The Company and Rock had the same sole director.

The liquidator, subsequently appointed to the Company, commenced proceedings to try to claw back the Payment as an unfair preference.

One of the liquidator’s claims was that Rock was indebted to the Company at the time the Payment was made and therefore the Payment was a payment by the Company to Mad Brothers. However, the Company’s ledger indicated that Rock was a creditor, not a debtor, of the Company when the Payment was made.

The liquidator was successful before the Associate Judge in the Supreme Court of Victoria, but the decision was reversed by a Judge in the Trial Division. The liquidator appealed.
The Court’s decision
The Court ruled that:
  • to be an unfair preference the payment must be received from the company’s own money, meaning money or assets to which the company is entitled
  • for the payment to be ‘from the company’, receipt of it by the creditor must have had the effect of diminishing the assets of the company available to creditors
  • if a payment is made by a third party which does not have the effect of diminishing the assets of the Company available to creditors, it is not a payment received ‘from the company’ and is therefore not an unfair preference.
The Payment made by Rock to Mad Brothers was not a payment ‘from the Company’ as:
  • there was insufficient evidence to show that Rock was indebted to the Company at the time the Payment was made
  • the Payment did not have the effect of diminishing the Company’s assets.
This decision echoes the requirements of previous legislation that the preference to the creditor must be made out of the company's own assets.
What can we take away?
An unfair preference claim which involves a third-party payment to a creditor may be defeated if it:
  • does not diminish the assets of the company available to creditors
  • is not a payment received ‘from the company’
The decision by the Court may mean that debtors nearing insolvency may make payments from a related entity to preferred creditors, leaving little or no recourse for remaining creditors. 

Post by Hicksons Associate, Roxanna Lam, and Solicitor, Gumneet Mangat.

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