A recent decision handed down by Black J in the New South Wales Supreme Court provides some timely guidance for creditors seeking to rely upon the good faith defence to an unfair preference claim brought by a liquidator.
For those who may not know, a liquidator may pursue a creditor under the Corporations Act 2001 (Cth) (the Act) in circumstances where a creditor has received an advantage over other creditors, by receiving payment (or other type of transaction) for their outstanding liabilities and does so at a time when they knew, or ought to have known, that the company was insolvent.
The main defence to an unfair preference claim is for the creditor to argue that they received those monies in good faith and that they did not know, or ought not to have known, that the company was insolvent. This is known as the good faith defence and is found under s 588FG of the Act. When staff at SV Partners consider whether to pursue a creditor for alleged unfair preferences, they tend to pre-empt a creditors good faith defence by looking at some of the following indicators (as a non-exhaustive list):
- Email trails, letters or file notes detailing constant and repeated attempts by the creditor (or its agents) to recover outstanding debts
- Whether the creditors lawyers or debt collection agents issued statutory demands or letters of demand to the company
- The age of the liabilities owed to the creditor, at the time they received each of the alleged unfair preference payments
- Whether any of the payments to the creditor are round, irreconcilable to invoices or dishonoured
- Whether the creditor and the company entered into any repayment arrangements, and whether said repayment arrangements were defaulted upon
- Whether the company incurred penalties or interest charges for late payment of the creditors debt
- Whether the dealings between the company and creditor were consistent or not with the industry norms that the creditor operates in
A mixture of one or more of these key indicators may make a liquidator form the view that the creditor has received an unfair preference and that the creditor may unlikely be able to rely upon the good faith defence.
Re Alsafe Security Products Pty Ltd atf the Alsafe Trust (In Liquidation) NSWSC 428
This was a recent case to which SV Partners successfully argued that the creditor knew or ought to have known that the company was insolvent and therefore it could not rely upon the good faith defence against the liquidator’s unfair preference claim.
(A) Background
Alsafe Security Products Pty Ltd (In Liquidation) (Alsafe) entered into Voluntary Administration on 24 July 2012 and subsequently into Liquidation on 25 October 2012. The Liquidators of Alsafe commenced Court action against Darley Aluminium Trading Pty Ltd (Darley) alleging that unfair preference payments were made to Darley totalling $98,628.58.
By way of defence (amongst a number of other defences, which were subsequently dropped prior to trial), Darley argued that it had received the monies in good faith, in the ordinary course of business, and that it did not know, or ought not to have known, that the company was insolvent.
(B) Relevant indicators
Justice Black had regard to the prior history of trading activity between Alsafe and Darley, in particular at the time of the alleged unfair preference payments, and made the following observations from the evidence about this history:
- Alsafe successfully tendered for a government project;
- Alsafe relocated to new premises in or around late 2011;
- Alsafe maintained its marketing activities by appearing at the 2012 Sydney Home Show and sponsoring the Manly Rugby Football Club;
- Darley placed Alsafe on stopped supply and credit hold for approximately 2 years, meaning that without payment of outstanding liabilities, all future supply would be required to be paid upfront or on a cash-on-delivery basis;
- Darley was pressing for a formal repayment arrangement;
- Various emails trails between management at Alsafe and Darley, in which Alsafe intimated that it was having some troubles paying Darley’s debt in full and it even went as far to say that it “did not wish to suggest a payment plan and then not stick to it;”
- Many of the alleged unfair preference payments were made in round amounts, not generally reconcilable to specific invoices; and
- On the Administrators appointment (being 24 July 2012), invoices owing to Darley remained outstanding since December 2011.
Balancing these indicators together, his Honour placed greater weight on the stopped supply and aging of outstanding liabilities compared to a number of the other indicators Darley attempted to argue. In all, the Court held in favour of the Liquidators.
Takeaway
It is important that creditors seek timely expert advice when Liquidators allege unfair preference claims against them.
With our extensive experience at recovering and defending unfair preferences, SV Partners can help support you and your advisors navigate the tricky unfair preference landscape. Please contact a member of our team on 1800 246 801.
Article written by Matthew Hudson, Supervisor, Queensland.