Avoiding Unfair Preferences: Third Party Payments
Posted on August 24, 2020
In the recent decision of Cant & Anor v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198, the Victorian Court of Appeal has clarified the position of third party payments in unfair preference claims.
The Liquidator of Eliana Construction and Developing Group Pty Ltd (in liquidation) (Eliana Construction) sought to recover an alleged unfair preference payment in the sum of $220,000 from Mad Brothers Earthmoving Pty Ltd (Mad Brothers). Interestingly, the payment was not made by Eliana Construction itself, but rather a related company called Rock Development & Investments Pty Ltd (Rock). Eliana Construction and Rock shared the same sole director.
The Court of Appeal considered whether the payment (which was made by Rock) was a payment by Eliana Construction within the meaning of section 588FA(1) of the Corporations Act 2001 (Cth) (Act).
The Court dismissed the Liquidator’s appeal, and made the following findings in relation to section 588FA(1) of the Act and third party payments:[1]
- While a payment may be authorised or ratified by the company, this does not mean that it is a payment received “from the company”.
- A payment must be received “from the company’s own money”, which means money or assets to which the company is entitled.
- In order for a payment to be “from the company”, its receipt must have the effect of diminishing the assets of the company.
- A third party payment which does not diminish the assets of a company is not a payment received “from a company” and is therefore not an unfair preference.
Key takeaways
The Court of Appeal decision is a timely reminder for creditors who are structuring creative arrangements with debtors. Careful wording should be used in any agreement involving third parties, and important consideration should be given to whether there are any background arrangements between the debtor and a third party.
Where there are growing concerns about a debtor’s financial position, creditors should be mindful of, and query, the source of any payment (including payments from third parties) so as to understand whether they may fall foul of the unfair preference regime should liquidators be appointed.
If you are receiving payments from third parties or require assistance with any insolvency matter, please contact Alice Carter, Partner of Lynch Meyer Lawyers’ Insolvency and Restructuring Team.
[1] Cant & Anor v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 at [120].
