In the case of In the matter of Pacific Plumbing Group Pty Limited (in liquidation) [2024] NSWSC 525, the Supreme Court of New South Wales provided helpful insight into what constitutes an unfair preference payment in the context of third party payments. This case serves as a reminder that, in the absence of clear-cut evidence, liquidators should be cautious in bringing unfair preference claims under section 588FA of the Corporations Act 2001 (Cth).
Facts
On inspection of the Company’s books and records, the Liquidator identified a payment made to Syfon Systems Pty Ltd during the relation-back period in the amount of $13,724.55. However, the Liquidator could not find a corresponding transaction recorded in the Company’s bank statements.
Upon further investigation, the Liquidator identified another transaction on the same day made by Mainbrace Constructions (NSW) Pty Ltd to the Company in the exact same figure of $13,724.55. The Company had recorded this transaction as an invoice payment received from Mainbrace.
The Liquidator characterised the above transactions as a payment made by Mainbrace to Syfon on behalf of the Company (Syfon Payment). The Liquidator alleged that Mainbrace was a debtor of the Company, and the effect of the Syfon Payment was to reduce the size of the debt payable to the Company at the relevant time.
The Liquidator issued a letter of demand to Mainbrace, but this was met with opposition when Mainbrace contended that it was in fact the Company that owed a substantial debt to Mainbrace, not the other way round.
The Liquidator brought these proceedings against Mainbrace and Syfon for recovery of the Syfon Payment on the grounds that it was an unfair preference payment. There was no appearance from Mainbrace and Syfon in the proceedings.
Issues
The issue in this case is when can a payment made by a third party on the Company’s behalf give rise to a voidable transaction? The Court identified a two-step approach:
- was the Company a party to the transaction?
- if so, was the payment received by the creditor from the Company’s own money such that it had the effect of diminishing the assets of the Company?
Decision
Step 1: Company is a party to the transaction
The Court accepted the Liquidator’s inference from the Company’s books and records that the Syfon Payment was a third party payment arrangement. In finding this, the Court accepted the explanation in Hosking v Extend N Build Pty Ltd[1] that:
“a transaction can be made up of a series of interrelated dealings and, if it can be established that, as a result of an arrangement (whether express or inferred) between a company and a third party, the third party then paid the company’s creditors, that would constitute a relevant transaction for the purposes of s 588FA(1)(a) of the Act.”
Step two: money received “from the company”
The Liquidator had to satisfy the Court that Mainbrace was a debtor of the Company, and the Syfon Payment had the effect of paying off some of that debt.
The Liquidator’s evidence disclosed correspondence between the Company and Mainbrace where the latter was of the position that:
- it was a creditor of the Company; and
- the Syfon Payment had the effect of increasing the Company’s existing debt position with Mainbrace rather than reducing it.
This position placed doubt on whether the Syfon Payment had the effect of diminishing the assets that would otherwise have been available to the Company’s creditors in a winding up. On this basis, the Court was unable to find that the Syfon payment was “from” the Company.
Key takeaways
But for the unresolved issue between Mainbrace and the Company, the Court would have found in favour of the Liquidator. This case is a helpful reminder that a liquidator should not bring unfair preference claims unless:
- they understand all the requirements that need to be established; and
- they have assessed and have satisfied themselves that their evidence adequately supports the requirements to the claim.
As with this case, even if a claim is undisputed, the Court will require that the case is proved on a balance of probabilities before they will declare a transaction as voidable.
If you would like to discuss this article with us further, please contact David Greenberg, partner, or Alison Chow, associate on (02) 9261 5900.
[1] Hosking v Extend N Build Pty Ltd [2018] 128 ACSR 555; (2018) NSWCA 149 (at [92])