Unfair preference payments and third-party payments?

Often creditors, when dealing with a debtor company struggling with outstanding debts, will agree to enter into a payment arrangement.    If the debtor company subsequently goes into liquidation during the course of the payment arrangement, the incoming liquidator will usually seek to recover the payments received by the creditor during the relation-back period on the basis the payments were preferential. 

Section 588FA(1) of the Corporations Act 2001 (Cth) provides that a transaction is an unfair preference given by a debtor company to a creditor if, among other things, the transaction results in the creditor receiving from the debtor company in respect of an unsecured debt, more than the creditor would receive in respect of the debt if the transaction was set aside and the creditor was to prove for the debt in the winding up of the debtor company.

In most instances, but not all, the relation-back period covers the six (6) months prior to the debtor company going into liquidation.  Because of this possibility, creditors may seek to have at risk unsecured debts discharged by way of payments received from a third-party in the belief such payments are beyond the reach of liquidators.   However, this may not always be the case.

In the matter of Evolvebuilt Pty Limited [2017] NSWSC 901 provided a useful overview of situations where a liquidator would have an arguable case to clawback a payment made to a creditor by a third-party on the basis that it was in fact a preferential payment.

For example, if debtor company (A) directs one of its creditors (B) to make a payment to one of A’s creditors (C) to extinguish a debt owed by B to A, then in essence the payment made came out of an asset of A (an account receivable).

Had the payment direction not been given by A, then the money would have been paid to A by B, but if not paid by B to A, the liquidator would have been entitled to recover the amount from B, in which case the funds so recovered would be available to benefit all of A’s unsecured creditors, not just C.

Alternatively, if A directed a party related to it (Z) to make a payment to C, it would be arguable that would be akin to a lender paying money advanced to a creditor of the borrower in accordance with the borrower’s directions.  The position would be the same as if A had borrowed the funds on overdraft from its bank and paid C with those funds.

In either instance, the receipt of the payment was from the debtor company by a direction given to a third-party to make the payment.

The common element is that the conduct or dealing engaged in by the debtor company A has the consequence of affecting a change in the rights, liabilities or property of the debtor company.

These examples can be contrasted with a payment received pursuant to a director’s personal guarantee and indemnity.  In that instance the director giving the indemnity is primarily liable whether or not the debtor company defaults on the debt owed.

Takeaways

The best way to avoid a preferential payment claim is by having an underlying debt fortified by directors’ personal guarantees and credit conditions allowing for registration of a security interest on the PPSR. Before entering into any payment arrangement involving at risk unsecured debts, seek legal advice.

Links and further references

Related insights

What is an unfair preference claim?

Cases

In the matter of Evolvebuilt Pty Limited [2017] NSWSC 901

See also In the Matter of Emanuel (No 14) Pty Ltd (in liq) & Anor v Blacklaw & Shadforth Pty Ltd [1997] FCA 667

Legislation

Corporations Act 2001 (Cth)

Further information about preferential payment claim issues

If you need assistance in relation to preferential payment claim issues, contact Dundas Lawyers Gold Coast for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.