When a Liquidator issues proceedings for recovery of unfair preference payments under section 588FA of the Corporations Act 2001 (Cth) (the Act), there are statutory defences which can be relied upon by the defendant.  However, an interesting issue arises where a defendant in the unfair preference proceedings seeks to rely on a deed of settlement, which it entered into with the company (now in liquidation) in previous litigation between them, as part of its defence to the unfair preference claim – the defendant will need to prove that the release contained in the deed of settlement does extend to a release of the unfair preference claim.

In the decision of Re Corio Bay Dairy Group Pty Ltd (in liq) [2025] VSC 466 (31 July 2025), Associate Justice Hetyey determined this issue as to whether the release contained in a deed of settlement covered the unfair preference claim brought by the Liquidator of Corio Bay Dairy Group Pty Ltd (In Liquidation) (the Company).

The brief facts of the case can be summarised as follows:

• On 23 January 2019, the Company and Nutritional Powder Technology Pty Ltd (Nutritional) entered into an Engineering, Procurement and Construction Management contract for Nutritional to provide engineering and project management services regarding the construction of an infant formula drying plant;
• On 21 August 2020, Administrators were appointed to the Company and on 7 December 2020, the Administrators became the Liquidators of the Company (one of them retired on 16 August 2021). The Liquidators were taking steps to sell the Company’s assets for a significant sale price, and Nutritional’s assertion of a lien may have obstructed the sale;
• On 19 January 2021, the Liquidators issued proceedings against Nutritional in respect of its registered security interest and its lien;
• On 9 February 2021, the Liquidator and the Company and Nutritional entered into a deed of settlement to resolve the litigation between them concerning Nutritional’s claim that certain progress claims had not been made by the Company and that Nutritional’s lien applied over certain materials supplied to the Company. The release given by the Company and the Liquidator was in respect of all Claims and Liabilities (as defined) against Nutritional as a direct or indirect result of, or arising from, the Matters in Dispute (as defined) and this covered a range of disputes in relation to the original contract, disputed assets, a Notice of Lien and the proceedings on foot;
• On 9 October 2023, the Liquidator of the Company issued proceedings against Nutritional to recover five payments totalling $555,640.70 as unfair preferences;
• In its Defence to the unfair preference claim, Nutritional argues that the release contained in the deed of settlement extends to release it from the unfair preference claim (reliance was also placed on the existence of a running account and the good faith defence). The Liquidator denied that the release was intended to have that effect, but even if it did, the deed of settlement should be rectified;
• Evidence was given by various parties but specifically by the Liquidator who gave evidence that, among other things, it would make no commercial sense to settle the dispute about the lien and those proceedings as well as a release from unfair preference claims (which were over $550,000) by payment of $200,000 to Nutritional;
• Essentially, there were numerous questions for determination by the Court, but some only necessary for determination once the release question was determined – that is, whether the release from all claims arising in respect of the original contract contained in the deed of settlement extended to claims for unfair preferences.

In the reasons for decision, the following is relevant:             

1. An examination of the interpretation of a commercial contract was required to be undertaken and particular considerations arise when interpreting settlement agreements and deeds of release with three key principles:
2. The release should be confined to the matters in dispute at that time; in other words, it should be restricted to the particular recital or the ‘particular occasion’;
3. The general words of the release should be restricted to the matters in contemplation by the parties at the time it was given; and
4. There is a prevention of unconscientious reliance upon the general words of the release as the release is restricted to those matters that were contemplated by the parties at that time – this is the parties’ subjective intentions but it does not mean that it can only ever apply to matters known to them;
5. The recitals in the deed of settlement related to settlement of the proceeding on foot at that time and there is no reference in any of the definitions to which the release relates that mention settlement of any unfair preference claims;
6. By consideration of the entire text of the deed of settlement and its purpose, a reasonable business person would not have held the view that the deed of settlement extended to the unfair preference claims for reasons which included:
7. The ordinary meaning of the words in the release clause does not encompass the unfair preference claim which is now brought by the Liquidator – the various definitions intended to only cover the lien and the earlier proceeding – and the unfair preference claim is not a claim or liability arising in respect of, or in connection with, the notice of lien or the earlier proceeding;
8. A consideration of the words in the release does not support Nutritional’s construction of the release as the recitals make no mention of the unfair preference claim;
9. Consideration of other extrinsic material, including correspondence and negotiations and Court documents in the earlier proceeding, were admissible in the task of construing the parties’ intentions in respect of the deed of settlement;
10. Threshold ambiguity would be established on the terms of the deed of settlement, particularly on the basis that the clause is ambiguous as to whether the statutory unfair preference claims under Part 5.7B of the Act are included as claims in respect of the original contract or disputed assets; and
11. The extrinsic material identified the extent of the dispute about the lien and the matters which covered the release.
12. The Liquidator’s evidence about the extent of the release and that it was not intended to cover unfair preference claims was critical – to the contrary, it was also relevant that Nutritional provided no cogent evidence that it intended for the release to cover unfair preference claims.
13. Importantly, Associate Justice Hetyey did not accept the contention raised by Nutritional that the unfair preference claim was a claim arising from, or in connection with, the original contract – the fact that the five payments were made in respect of the original contract or from variations in respect of that contract did not mean the unfair preference claims arise from, or are in connection with, the original contract.
14. The true purpose of the deed of settlement did not extend to the unfair preference claim and the Liquidator was entitled to rely on Nutritional’s unconscientious reliance on the general release. In those circumstances, Associate Justice Hetyey determined that the deed of settlement did not release the Liquidator’s unfair preference claims.

This case is an interesting example of a defendant seeking to rely on a deed of settlement and the release as a defence in an unfair preference proceeding – it was a technical legal argument to pursue, but when the entire contents of the deed of settlement were considered, together with the extrinsic material, it was abundantly clear that the unfair preference claim was not intended by the parties to be covered by the release.

Catherine has considerable experience in this area concerning unfair preference claims and dealing with unusual defences raised by defendants, including consideration of deeds of settlement and the construction of releases for specific purposes.  If you require advice in relation to the interpretation of a deed of settlement or unfair preference claims, Catherine and her colleague, Laura Pavia, would be happy to provide assistance.