In the recent decision of the New South Wales Supreme Court, In the Matter of Pacific Plumbing Group Pty Ltd (In Liquidation) [2024] NSWSC 525, Justice Black considered what must be proved by a Liquidator in order to recover payments made to a third party as unfair preferences.
Liquidators have been familiar with the additional requirements that need to be demonstrated in order to recover payments made by a third party as unfair preferences – a company may be a party to a transaction as a result of giving a third party a direction in respect of making a payment to a creditor or by authorising or ratifying such a payment and there is a loan account between the company and the third party in respect of transactions between them. Those requirements were brought into the limelight when the Victorian Court of Appeal judgment in Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 (Mad Brothers) clarified the circumstances in which a payment from a third party may constitute an unfair preference. The Court of Appeal reached the following conclusions:
- To be an unfair preference, the payment must be made “from the company” meaning from the company’s own money or money to which the company is entitled;
- 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.
- 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 facts of the case In the Matter of Pacific Plumbing Group Pty Ltd (In Liquidation) were relatively straight forward. There were several defendants against which the Liquidator was seeking to recover payments as unfair preferences but there was one particular payment received by Syfon Systems Pty Ltd (Syfon) in the sum of $13,724.55 which was contentious. The payment received by Syfon was not made directly by the company but made to it by a third party, Mainbrace Constructions NSW Pty Ltd (Mainbrace). Further evidence was put by the Liquidator before the Court to demonstrate that Mainbrace made the payment to Syfon on behalf of the company. Upon a review of the company’s books and records, the Liquidator found that the company’s general ledger recorded dealings between the company, Syfon and Mainbrace for an amount totalling the Syfon payment, where the ledger recorded a credit in respect of a transaction with Syfon, again in the amount of $13,724.55, and a debit, recorded as an invoice payment, in respect of Mainbrace on the same day.
In order to reach his decision, Justice Black indicated that two questions must be answered:
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Was the company a “party” to the transaction?
In respect of this question, the Court referred to the decision of Hosking v Extend N Build Pty Ltd (2018) 128 ACSR 555. There was no express arrangement between the company and Mainbrace that Mainbrace would make the payment, on behalf of the company, to Syfon but the Court was satisfied that there was an inferred arrangement. The arrangement was inferred as a result of the transactions which were recorded on the company’s ledger in respect of Mainbrace as a debtor and Syfon as a creditor and the fact that the company was aware of the respective transactions which were recorded in the ledger. Therefore, the company was a “party” to the Syfon payment as a result of those dealings.
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Was the payment received “from the company”, being from the company’s own money or to which the company was entitled, and did the payment diminish the company’s assets?
Justice Black referred to principles set out in Mad Brothers such that in order for the payment to be made “from the company”, it must come from the company’s own money (or from money to which the company was entitled) and that the company’s assets were diminished by reason of the payment. He noted that Rees J in In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232 (who had expressed disquiet about the Mad Brothers’ decision and the issue of proof may turn on the inference as to whether the company’s assets were diminished by reason of the payment) and Richmond J in BounceLED Pty Ltd v Clear Skies Corp Pty Ltd (in liq) [2023] NSWSC 121 were, in both of those respective cases, bound by the authority of Mad Brothers and that his Honour would be no different.
However, Justice Black was not able to conclude, from the financial records which were available to the Liquidator and absent further evidence, that the company had a receivable against Mainbrace at the relevant time so that the effect of the transaction was to reduce the amount of that receivable, rather than increasing a debt then owed by the company to Mainbrace. This conclusion arose out of the dispute which existed between the company and Mainbrace – the company claimed that it was a creditor of Mainbrace but Mainbrace claimed that the company was a debtor.
But for that issue as to whether the payment was in reduction of a receivable that was owed by Mainbrace to the company, the Court would have been satisfied that the Liquidator had satisfied all elements of his claim. Therefore, the Court was not satisfied that the Liquidator was entitled to recover the Syfon payment as an unfair preference.
Catherine Pulverman of FCW Lawyers has considerable experience in respect of unfair preference claims, particularly recovery of third party payments, including defending those claims for creditors. She would be happy to provide advice where necessary as it is important to ensure that the Liquidator can provide sufficient proof with evidence obtained in respect of this critical element of the Liquidator’s claim to prove that the payments were “from the company” and diminished the company’s assets.
