Unfair Preferences and Third-Party Payments

In the recent Victorian Court of Appeal decision of Cant (as liquidator of Eliana) & Anor v Mad Brothers Earth Moving Pty Ltd [2020] VSCA 198 the liquidator sought an order that a payment of $220,000 was an unfair preference under section 588FA of the Corporations Act 2001. The main issue raised in this case was whether a payment made by a third party could be considered a payment ‘from the company’ and therefore an unfair preference payment. This article examines the issue of third party payments and unfair preference payments.

Facts of Cant v Mad Brothers 

The first applicant (Cant) was the liquidator of the second applicant Eliana Construction and Developing Group (in liquidation) (Eliana). During the period from November 2015 to March 2016 Eliana incurred a debt for earthworks conducted by the respondent Mad Brother Earth Moving Pty Ltd (Mad Brothers) in the amount of $236,952.31.

Mad Brothers served a statutory demand on Eliana in April 2016 and subsequently made an application to the court for Eliana to be wound up due to the failure of Eliana to comply with the statutory demand.

On 15 September 2016 Eliana and Mad Brothers signed a deed of settlement whereby Eliana agreed to pay Mad Brothers the sum of $220,000.00 in full and final settlement of the matter.

The payment of $220,000.00 was made on 16 September 2016 by a company related to Eliana called Rock Development and Investments Pty Ltd (Rock) (Eliana and Rock share the same sole director) using funds Rock had borrowed from Nationwide Credit Pty Ltd (Nationwide).

Eliana was placed into voluntary administration on 11 October 2016 and liquidation on 3 November 2016.

What is an Unfair Preference?

Section 588FA of the Corporations Act provides for unfair preferences and states:

1. A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
2. The company and the creditor are parties to the transaction (even if someone else is also a party; and
3. The transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside, and the creditor were to prove for the debt in a winding up of the company;

Even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australia court or a direction by an agency.

Unfair preference issues raised in this case

In this case, the two key questions raised by section 588FA were:

1. Whether Eliana was a party to the transaction; and
2. Whether the payment to Mad Brothers was received ‘from the company’.

The court held that for a payment to be received ‘from the company’:

1. The payment of the preference needs to come from the company’s own money, being its own assets.
2. The payment has the effect of diminishing the available assets to creditors.
3. A payment by a third party that does not have the same effect of diminishing the available assets of the company is not considered to be a payment received ‘from the company’.

Even if Eliana were found to be a party to the transaction for the reason of giving Rock a direction to pay Mad Brothers the $220,000.00 owed under the deed of settlement, the court found that this does not mean that the payment is received ‘from the company’.

In this case, the payment to Mad Brothers of the $220,000.00 owing under the deed settlement dated 15 September 2016 did not have the effect of diminishing the assets of Eliana and therefore was not considered a payment from the company.

As a result, the payment to Mad Brothers was not a preference payment.

Conclusion

it is important to understand the way a payment is being made to a creditor, especially in circumstances where a payment is being made by a third party. Liquidators need to take care in determining whether a payment made by a third party is a payment that is received ‘from the company’ and also whether the payment has the effect of diminishing the company’s assets prior to making an application pursuant to section 588FA of the Corporations Act.

If you require legal advice or representation in any legal matter please contact Armstrong Legal.