In a recent decision by the Supreme Court of New South Wales regarding unfair preference claims - In the matter of Pacific Plumbing Group Pty Limited (in liquidation) [2024] NSWSC 525 – Justice Black provides guidance to liquidators on what is required to recover payments made to a third party on behalf of an insolvent company as unfair preferences.
In particular, the case highlighted that a liquidator has the burden of proof to show that:
- the insolvent company is a party to the relevant transaction. Accordingly, a liquidator will need to be satisfied that an express or inferred arrangement exists between the insolvent company and the third party for the third party to pay creditor(s) of the insolvent company; and
- the payment in question must have been received from the insolvent company’s own money and has diminished the assets available to creditors.
In the proceedings, the liquidator of Pacific Plumbing Group brought claims against a number of defendants in an attempt to recover payments made by the company to those defendants as unfair preference payments. However, before commencing proceedings, the liquidator had settled a number of claims and, subsequently, was only seeking recovery of payments made within the relation back period to 3 creditors: - Corestaff NT Pty Ltd (Corestaff), C & V Concretors (NT) Pty Ltd (CV) and Syfon Systems Pty Ltd (Syfon) totalling $35,426.75.
The relation back period is the date in which the Company was placed in voluntary administration, which the Court determined in these proceedings to be 7 September 2020. Therefore, any transaction which was within the six months of the relation back date period, the Court could potentially reverse the transaction as an unfair preference.
Neither Corestaff, CV nor Syfon defended the liquidator’s claims and the Court concluded that the payments directly from the Company to Corestaff and CV were uncontentious, finding that these payments were unfair preference payments and, subsequently, insolvent transactions and voidable transactions.
However, in respect of the claim against Syfon, as the liquidator alleged that Syfon had received its payment in the sum of $13,724.55 indirectly from a third party on behalf of the Company, Mainbrace Constructions (NSW) Pty Ltd (Mainbrace), the Court was required to delve more deeply into this allegation.
The common law principles which underpin what constitutes an unfair preference are well established and were outlined by Justice Black in the proceedings:
- Firstly, the question is whether the insolvent company and the creditor in question are parties to the transaction? In answering this question, the Court would need to be persuaded that an arrangement existed between the insolvent company and the third party (either expressly or by inference) where the third party agreed to pay the creditor of the insolvent company; and
- Secondly, whether the transaction results in the creditor receiving from the insolvent company the relevant payment (i.e. from the company’s own money) and whether a larger sum than that of which the creditor would receive from the company if the transaction was set aside and the creditor was put to proving the debt via the winding up of the company? Put another way, did the receipt of the payment result in the diminution of the assets of the company available to creditors.
The evidence put before the Court was mainly the books and records of the company which provided that a payment was made to Syfon on 3 August 2020, this payment was not recorded in the company’s bank statements and the company’s general ledger recorded a transaction between Syfon (as a credit) and Mainbrace (as an invoice payment debit).
In answering the above questions Justice Black determined that:
As to the first question, there was no evidence of an express agreement between the company and Mainbrace to make the payment on the company’s behalf but found, by examining the surrounding facts of the transaction, that an inferred arrangement existed between the company and Mainbrace where the payment made by Mainbrace to Syfon was a liability of the company.
Accordingly, this inference was proven via the:
- (a) company’s general ledger which recorded the payment as a credit in favour of Syfon and a corresponding debit of the same amount to Mainbrace;
- (b) the company having sufficient knowledge of the relevant transactions based on its books and records and the exchange of funds between the parties; and
- (c) correspondence from Mainbrace to the liquidator regarding larger sums paid by it on behalf of the company.
However, in answering the second question, the Court was unable to find in favour of the Liquidator’s claim against Syfon. As the company and Mainbrace had failed to settle a dispute between themselves—namely where the company saw itself as a creditor rather than a debtor of Mainbrace and Mainbrace held the reverse view--his Honour found that the Company did not have a receivable against Mainbrace. As a result, the Court was unable to conclude that the payment made by Mainbrace to Syfon reduced a receivable of the Company, rather than increasing a debt then owed by the Company to Mainbrace.
Though ultimately the sums in contention were not excessively large, the decision provides important guidance to liquidators with respect to the need for and likely burden of providing satisfactory evidence when making unfair preference claims (which may guide the liquidator on whether to settle or make the claim), and the requirements that need to be met for unfair preference claims when a third party payment is involved.
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