A recent decision in the Supreme Court of New South Wales serves as a timely reminder that a liquidator must jump through all of the procedural hoops before he can establish that a creditor has received an unfair preference payment.

In Shaw (as liquidator of ACN 166 338 138 Pty Limited) (in Liquidation) (formerly Structural Projects Pty Ltd) v KPR Recruitment Australia Pty Limited [2017] NSWSC539, the Court considered a claim by a liquidator that a creditor of the company in liquidation had, in the six months prior to the company being wound up, received a payment from the company that gave it an unfair preference over other creditors. In such circumstances, the Corporations Act ("the Act") provides for the liquidator to seek an order that the creditor in question repay such monies for the benefit of all unsecured creditors.

In the present case, the liquidator had little difficulty in establishing that the creditor had received payments from the company in the six months prior to the company being wound up. However, it is an additional element of any unfair preference claim that the liquidator must prove that at the time that the payment transaction is entered into the company is either insolvent, or is rendered insolvent by the transaction (Section 588FC of the Act).

The liquidator here had received almost no assistance from the directors of the company in obtaining financial records which might have gone some way to establishing the solvency of the company. Consequently, the liquidator attempted to rely upon a presumption of insolvency which is available in certain circumstances where a company fails to maintain adequate books and records. As the Court pointed out however, a presumption of insolvency on those grounds is only available where the creditor that received the alleged unfair preference is a related entity of the company in liquidation (Section 588E(7) of the Act).

His Honour Gleeson AJ went on to voice concern that, when faced with the lack of assistance from directors and officers of the company in liquidation, the liquidator did not utilise other available sources of information relevant to the company's solvency. Such sources could have included banks (statements are usually obtainable by a liquidator from a bank) and the other parties to large transactions entered into by the company (again, such information is usually within the scope of the liquidator's powers to obtain documents to assist him).

The case sets out a very useful summary of the principals to be taken into account when seeking to prove on a balance of probabilities that a company is insolvent. His Honour drew attention to the recognition by the courts of the commercial realities that should be taken into account by a court in assessing a company's financial position. Quoting with approval from Southern Cross Interiors Pty Limited (in Liquidation) v Deputy Commissioner of Taxation (2001) 53NSWLR213 His Honour pointed out that:

"An assessment of solvency requires regard to commercial realities when considering what was resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and whether such realisations are achievable. It is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade, but does not result in the company thereby receiving a cash or credit resource which can be taken into account in determining solvency."

His Honour declined in the present case to grant the liquidator the orders that they sought, on the basis that he was not satisfied that he had established on the balance of probabilities that the company was insolvent when the creditor received its payment.

The case serves as a timely reminder:
• Firstly, to liquidators to ensure that they undertake the task of establishing solvency with a high degree of rigour; and
• Secondly, to creditors who face a claim for an unfair preference payment to ensure, before they make any concessions to a liquidator, that they are satisfied that the liquidator is able to establish insolvency at the time they received the alleged preference from the company.

*Jeff Brown Chairman of Matthews Folbigg
Lawyers and Principal in the Insolvency,
Restructuring & Debt Recovery Group.

July 2017 - FNSCRD501 and FNSCRD505 - FNS51520 Diploma of Credit Management

Download article