Insolvency
Third party payments – are they an unfair preference? By Evan Mijo MICM*
The recent Victorian Court of Appeal judgment in Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 clarifies the circumstances in which a payment from a third party may constitute an unfair preference. The decision is important to any creditors with potential exposure to unfair preference claims and for insolvency practitioners seeking to pursue such claims.
Facts
Evan Mijo MICM
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Eliana Constructions and Development Group Pty Ltd (In Liquidation) (Company) owed Mad Brothers Earthmoving Pty Ltd (Creditor) a debt for excavation works. The parties agreed to settle the debt for an amount of $220,000. To pay the debt, a related entity by way of a common director, Rock Development & Investments Pty Ltd (Third Party), borrowed the funds from a lender. The lender transferred the sum directly to the Creditor to pay the debt under a settlement agreement. The liquidator of the Company brought a claim against the Creditor seeking to recover the $220,000 payment as an unfair preference pursuant to section 588FA of the Corporations Act 2001 (Cth) (Act). The liquidator claimed the Third Party was indebted to the Company at the time the payment was made and therefore was a payment by the Company to the Creditor. The Company’s books indicated the
CREDIT MANAGEMENT IN AUSTRALIA • October 2020
opposite was true, and the Third Party was a creditor, not a debtor of the Company. The liquidator’s claim was successful at trial. The decision was reversed on appeal by the Supreme Court of Victoria. The liquidator appealed to the Court of Appeal.
Court of Appeal Decision The Court of Appeal reached the following conclusions. z To be an unfair preference, the payment must be made ‘from the company’ meaning from the company’s own money or money which the company is entitled to. z It is necessary, in order for a preference to be made ‘from the company’ that the payment has the effect of diminishing the assets of the company available to creditors. z A payment by a third party which does not have the effect of diminishing the assets of the company available to creditors is not a payment received ‘from the company’ and is therefore not an unfair preference. The Court held that the payment made by the Third Party to the Creditor was not a payment ‘from the Company’ for the following reasons. z The liquidator failed to prove that the Third Party was indebted to the Company. z The payment did not have the effect of diminishing the assets of the Company available to creditors.
