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Third Party Preference Payments Law Clarified by Victorian Court of Appeal

corporate insolvencyIn Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 (“Mad Brothers”), the Victorian Court of Appeal has provided some much-needed clarity as to the circumstances in which a liquidator can claw back a payment made by a third party to a creditor of an insolvent company as an unfair preference payment pursuant to part 5.7B of the Corporations Act 2001 (Cth) (the “Act”). 

The Court of Appeal determined that, where a third party pays the debt of a company which subsequently goes into liquidation, for that payment to be an unfair preference payment, it must, amongst other things, diminish the available assets of the insolvent company.

The Facts

Eliana Construction and Development Group Pty Ltd (In Liquidation) (“Eliana”) was indebted to Mad Brothers Earthmoving Pty Ltd (“Mad Brothers”). Eliana and Mad Brothers agreed to settle that date by way of a payment to Mad Brothers in the sum of $220,000.00. Rock Development & Investments Pty Ltd (“Rock”), a company related to Eliana, paid the debt to Mad Brothers using borrowed funds. Eliana was subsequently placed into voluntary administration on 11 October 2016 and its creditors subsequently voted to place Eliana into liquidation on 3 November 2016. 

The liquidator appointed to Eliana commenced proceedings to recover from Mad Brothers the $220,000.00 it received from Rock on the grounds that the payment was an unfair preference. 

The liquidator was successful at first instance, however that decision was overturned on appeal to the Supreme Court. The liquidator subsequently appealed to the Court of Appeal.

The Decision in Mad Brothers

The main issues to be determined by the Court of Appeal were whether:

  • Eliana was a party to the transaction within the meaning of section 588FA(1)(b) of the Act; and,
  • the $220,000.00 payment was received from Eliana within the meaning of section 588FA(1)(b) of the Act,

in circumstances where Mad Brothers received the payment from Rock.

The court determined that Eliana was a party to the transaction in circumstances where it had directed Rock to make the payment; however, the fact that Eliana had directed Rock to make the payment did not necessarily mean that the payment had been ‘received’ from Eliana as required pursuant to section 588FA(1)(b) of the Act.  In this regard, the Court held that for the payment to have been ‘received’ from Eliana, it needed to have been received from Eliana’s own money. Importantly, the Court determined that, in order for the payment to have been a preference payment, its receipt by Mad Brothers was required to diminish the assets of Eliana that were available to its creditors. There was no evidence that the payment by Rock to Mad Brothers led to a diminution of the assets available to the creditors of Eliana. Accordingly, the Court of Appeal determined that the payment was not a preference payment.

Had Rock been indebted to Eliana before the $220,000.00 payment was made by Rock to Mad Brothers, that payment would have been a preference payment as its receipt by Mad Brothers would have resulted in a diminution of the assets that were available to Eliana’s creditors. A diminution of assets does not require an actual cash transaction but can take the form of a release of liability to a third party. Upon making the payment to Mad Brothers, Rock’s liability to Eliana would have reduced by the amount of the payment thereby reducing the value of Eliana’s asset, being the debt owed to it by Rock. 

Conclusion

The decision in Mad Brothers, while clarifying the law in this area, may, in certain circumstances, enable creditors and insolvent companies to structure payments to be made by third parties so that they fall outside of the unfair preference regime in the Act. Legal advice should be sought by parties considering such transactions.

Marino Law has extensive experience acting for insolvency practitioners, lenders, financiers, directors and trustees in the administration of all corporate insolvency appointments. Our highly experienced lawyers regularly advise clients in the following areas of corporate insolvency:

  1. voluntary administrations;
  2. liquidations;
  3. enforcement of securities; and
  4. statutory demands. 

We also regularly provide advice to liquidators, lenders, and financiers regarding the registration of security interests on the PPSR, the validity of those registrations and their enforceability. 

Should you require assistance in any of the above areas, please contact one of our highly experienced lawyers.

 

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