The Court of Appeal has this week[1] exposed a possible loophole in the unfair preference regime by finding:
- To be an unfair preference the payment(s) must be received ‘from the company’ which claims the preference.
- To meet this criteria, the payment(s) even if from a third party must diminish the assets of the company available to creditors.
Facts
The relevant facts are as follows:
- A payment was paid on behalf of the company in liquidation (Elaina Construction and Development Group Pty Ltd (the Company)) in the amount of $220,000.
- The payment was made to Mad Brothers Earthmoving Pty Ltd (Mad Brothers) within the relation back period.
- The payment was not made by the Company; rather it was made by a related company, Rock Investments Pty Ltd (Rock) using money it had borrowed from Nationwide Credit Pty Ltd (Nationwide).
- The Company and Rock had the same sole director.
- The Company’s books indicated that Rock may be a creditor of the Company when the payment was made.
The Court
There are a number of requirements to prove an unfair preference, however relevant for this case was the question of whether the $220,000 was a payment from the Company?
The Court found as follows:
- The unfair preference must be received from the Company’s own money, meaning money or assets to which the company is entitled.
- It is necessary, in order for a preference to be ‘from the Company’, that the receipt of it by the creditor has 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.
Due to the evidence given regarding the financial statements, the Court found that the Company was likely indebted to Rock, not the other way around. This meant that there was no set off for an existing debt from Rock to the Company and therefore the assets of the Company were not diminished by the transaction.
There was therefore no unfair preference.
What does this mean?
This case exposes a possible loophole in the unfair preference regime. Essentially if:
- a related third party (who does not owe money to the insolvent company) pays one of the insolvent company’s debts; and
- it does not diminish the assets of the insolvent company;
then an unfair preference claim may be defeated.
[1] In the case of Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198
