Unfair Preference Claims in Liquidation – A Basic Guide for Creditors

Unfair Preference Claims in Liquidation – A Basic Guide for Creditors

JHK Legal is quite often approached to provide advice on unfair preference claims in liquidation.

An unfair preference is precisely as the name describes – payments or transfers of assets that give a creditor an advantage over other creditors. Liquidators appointed to companies can recover such unfair preferences to distribute equally among the creditors.

While usually money, unfair preferences can include a variety of transactions. This article will focus on money.

This article is a guide to the basic elements of an unfair preference and defences that can be relied upon. It is not a substitute for legal advice. If you have any questions or concerns we suggest that you contact JHK Legal for further information.

Elements of an unfair preference payment claim

The elements of an unfair preference claim are as follows:

  1. The transaction was entered into between creditor and company;
  1. The transaction entered into within the statutory period before the relation back day:

(a) 6 months for non-related parties; or

(b) 4 years for related parties; or

(c) 10 years for any evidence of “attempt to defeat, delay or interfere” with the rights of creditors.

  1. The debt the subject of the transaction must be unsecured.
  1. The company was insolvent at the time of the transaction of became insolvent as a result of entering into the transaction;
  1. The creditor received a better return than it would otherwise.

Legislative basis

The legislative basis for unfair preference payments in the liquidation of a company is the Corporations Act 2001 (Cth) (“the Act”). There is no independent common law basis and no state legislation directly on point.

The relevant sections of the Act are as follows:

588FF Allows the Court to make orders in relation to “voidable transactions as defined in by section 588FE. One such order is the repayment of money.
588FE Makes an “insolvent transaction” a “voidable transaction” if it was entered into, or an act was done for the purpose of giving effect to it:“(i) during the 6 months ending on the relation-back day; or (ii) after that day but on or before the day when the winding up began.”
588FC Defines an “insolvent transaction” as an “unfair preference and“(a) any of the following happens at a time when the company is insolvent: (i) the transaction is entered into; or (ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or (b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.”

588FA Defines what an unfair preference is:“(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if: (a) the company and the creditor are parties to the transaction (even if someone else is also a party); and (b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;…”


Also describing in more detail a number of elements referred to above:

Relation Back Day To be claimable, the Transaction must have occurred within 6 months of the Relation Back Date.The Relation-Back Day is the date that the liquidation is deemed to have started. The relevant day of when the liquidation started is outlined in Part 5.6, Division 1A of the Act:1. for a liquidation that follows a voluntary administration or Deed of Company Arrangement it is the day that the voluntary administrators were first appointed;2. for other voluntary liquidations, it is the date of the members’ meeting that the liquidators were appointed;


3. for an court appointed “official” liquidation it is the day that the application was filed in the court.

Transaction Section 9 outlines that this can include a “payment” amongst other items.
Insolvent Section 95A of the Act provides:“ (1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable. (2) A person who is not solvent is insolvent.
Unsecured Debt Not defined in Act, ordinary meaning is not a Secured Debt.
Secured Debt For s588FA, a secured debt is taken to be an unsecured debt to the extent of so much of it (if any) as is not reflected in the value of the security e.g. where the value of the debt exceeds the value of the security.


Section 588FG of the Act provides defences that may be relied upon by creditors when faced with an unfair preference claim from a liquidator. On the assumption that the creditor was a party to the transactions (see section 588FG(1) of the Act if it was not), the three elements that must be satisfied are:

  1. the creditor became a party to the transaction in good faith; and
  1. at the time when the creditor became such a party

(a) the creditor had no reasonable grounds for suspecting that he company was insolvent at that time or would become insolvent; and

(b) a reasonable creditor in the creditor’s circumstances would have had no such grounds for so suspecting; and

  1. the creditor provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

The so called “running account” defence should also be remembered as found in section 588FA(3) of the Act. Note that this does not provide a complete defence to a claim. In essence, where parties have an ongoing business relationship rather than considering each transaction to determine whether a creditor has received a preference the Court looks at the net position of all of the transactions which formed part of the relationship as if they were one transaction. The Court will consider the difference between the “peak” (maximum) amount of the debt during the relevant statutory period, and the amount owed on the Relation-Back Date.

Case law – third party payments

It is important to note that even if a payment is made by a third party on behalf of the company that is in liquidation, this does not necessarily mean that there has been no preference payment made.

As was found in Re Emanuel (No 14) Pty Ltd: Macks v Blacklaw & Shadfroth Pty Ltd (1997) 147 ALR 281 (“Emanuel”), a liquidator has a right to recover payments made to creditors on behalf of the company by a third party where the net effect of the transaction is either crease or extinguish debt between the third party and the company.

This was expanded in Kassem and Secatore v Commissioner of Taxation [2012] FCAFC 124 where there was no evidence that the third party payer owed a debt to company that was satisfied or reduced by the third party’s payer’s payment to the company’s creditor (akin to that in Emanuel). Instead, the third payer’s payment simply resulted in the creation of a new debt, from the third party payer to the company.

The Full Court of the Federal Court of Australia determined that company’s direction to the third party payer to pay the company’s debt was no different than if company had directed its bank to pay the creditor using funds available from the company’s overdraft account. The Court stated:

“this was a clear example of a lender paying moneys advanced to a creditor of the borrower in accordance with the borrower’s directions…

…Moreover, even if it is not correct to describe the transaction between Mortlake and Antqip as a loan, what is important is the finding that the payment by Antqip to the Commissioner was a payment that was made by or on behalf of Mortlake. So much is plain from the evidence to which we were taken..”

In effect, the challenged payments were made directly from the company to the creditor (using funds borrowed from the third party payer).

It can be drawn from the above two cases that unsecured creditors will not gain any protection from future unfair preference claims by demanding payment from third parties unless the third party pays by way of a gift or other “white knight” arrangement under which any rights created in favour of the third party are subordinated to the company’s other unsecured creditors.

What to watch out for

Unfair preference claims can seem quite technical. With that in mind, creditors should consider the following indicators that liquidators look out for when determining whether unfair preference payments have been made by a company:

  1. payment arrangement and/or instalment plans made outside normal trading terms;
  1. lump sum or round numbered payments not connected to a particular supply invoice;
  1. payments made after legal proceedings have commenced by a creditor; and
  1. payment that are only made after a threat to stop supply or supply has stopped;

amongst other items.

If a company you deal with has gone into liquidation, you have received a demand from a liquidator for the repayment of money, and any of the above items ring true, JHK Legal are happy to assist you through the process.


Author: Alicia Auden, Senior Associate

Published: November 2015

DOCA Extinguishes Debt of Secured Creditor, but does not Extinguish Right to Recover. In the Wake of Bluenergy Group Limited (Subject to a Deed of Company Arrangement) (Administrators Appointed) [2015] NSWSC 997.

It has previously been general practice that a secured creditor who abstains from voting on a Deed of Company Arrangement (“DOCA”) will effectively stand outside of the terms of the DOCA and will be free to enforce their security pursuant to section 444D(2) of the Corporations Act 2001 (Cth) (“Corporations Act”).

In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrators appointed) [2015] NSWSC 997, the court controversially held that the effect of the terms of a DOCA on a secured creditor resulted in the extinguishment of the secured creditor’s debt. However, the court further held that the secured creditor may nevertheless realise or deal with their security as a proprietary right.


Keybridge Capital Limited (the “secured creditor”) held a security interest in all present and future rights and property of Bluenergy Group Limited (the “company”), in the form of a GSA which was registered on the Personal Properties Security Register (“PPSR”). The security was registered on the PPSR from 24 September 2013.

On 9 April 2014, administrators were jointly appointed pursuant to s436A of the Corporations Act 2001 (Cth). On 29 July 2014, the majority of creditors voted in favour of executing a DOCA which contained the following clause:

“On and from the commencing date, this Agreement fully and irrevocably releases and discharges the Company from all Claims”.

The secured creditor attended by proxy but abstained from voting.

On 19 March 2015, the secured creditor appointed another administrator pursuant to s436C of the Corporations Act, in its capacity as the holder of a security interest. The deed administrators of the DOCA brought proceedings to challenge the validity of the appointment of the administrator who had been appointed by the secured creditor and sought a declaration that the appointment be terminated.

The deed administrators argued that the secured creditor was not a secured creditor within the meaning of s51 of the Corporations Act, as its security interest had been extinguished by the DOCA and therefore was unable to meet the requirements of s436C of the Corporations Act to appoint an administrator.

Decision of the Court

The Supreme Court of New South Wales held:

  1. the construction of the term of the DOCA (as detailed above) acted to extinguish the secured creditor’s debt;
  1. the secured creditor’s right to realise and deal with its security was preserved as a proprietary right irrespective of the debt. The terms of the DOCA could not extinguish the right to enforcement as it is expressly protected pursuant to s444D of the Corporations Act;
  1. the secured creditor’s right to realise and deal with its security interest, including appointing a receiver, was not defeated by the wording of the DOCA and accordingly the secured creditor had the right to appoint an administrator. However, the secured creditor was held not to be a creditor in the administration and accordingly the administration was terminated for lack of practical utility (and inconsistency with the purpose of Pt 5.3A of the Corporations Act);
  1. the secured creditor could realise and deal with its security at the date of the release pursuant to the terms of the DOCA, but rights in after-acquired property were not preserved.

Despite the secured creditor’s submission that for s444D(2) of the Corporations Act to have effect, “the debt that is secured should therefore be preserved”, the court followed the reasoning given by the decision in Australian Gypsum Industries Pty Ltd v. Dalesun Holdings Pty Ltd [2014] WASC 89 (“Australian Gypsum”), in determining that a secured creditor holds both a proprietary right as to the security interest granted and a personal right against the company with respect to the debt.

The court looked at the statutory scheme and purpose under Pt 5.3A of the Corporations Act, as well as the decision in Australian Gypsum, in determining that the purpose of the provision is to allow a “fresh start” and further went on to describe the “practical difficulties” in allowing secured creditors to preserve rights to after-acquired property indefinitely.

Application to secured creditors

Pursuant to this decision (and unless distinguished), a secured creditor’s personal rights to the debt and its interest in after-acquired property would be considerably effected where creditors vote in favour of a DOCA that releases all claims.

This recent legal development necessitates the active involvement of secured creditors in negotiating the terms of a DOCA. In instances where a secured creditor’s debt far exceeds the current value of the realisable secured property held (at the time of considering a DOCA), or where there is a likelihood of acquiring considerable after-acquired property, then secured creditors may consider taking an active role in DOCA negotiations to ensure that their full debt is recoverable.


Author: Tania Smith

Published: October 2015

Important QBCC Amendments and the Final Implementation of the Queensland Building and Constructions Commission and Other Legislation Amendments Act 2014 (Qld)

Now that 1 July 2015 has passed some important amendments have been applied to the Queensland Building and Constructions Commission and Other Legislation Amendments 2014 Act (Qld) (“Amending Act”) and it is important for current building licence holders in Queensland to familiarise themselves with such amendments.

Changes include:

  • ‘Construction Company’ as a definition;
  • Reduction of exclusion period;
  • Changes to applications for permitted individuals to reinstate licences.

‘Construction Company’ as a definition

A ‘Construction Company’ has been defined in the Amending Act as “…a company that directly or indirectly carries out building work or building work services…” In days past a building licence holder (“Licence Holder”) that ran a company that was found to be insolvent, no matter the type of company, would be subject to the ire of the QBCC and would have their licence cancelled.

For the purposes of practical fairness it has long been contended by the industry and now finally adopted by the QBCC that a Licence Holder will only be subject to a licence cancellation should the company (that has been wound up in insolvency) fall into the category of Construction Company.

Reduction of exclusion period

From 1 July 2015, the statutory exclusion period for Excluded Individuals will be reduced from 5 years to 3 years. This means that a person that has had a building licence cancelled by the Queensland Building and Constructions Commission (“QBCC”) by way of an insolvency event will be able to re-apply for a building licence after the period of 3 years has ended.

However, it is important to note that the penalty for a Licence Holder that has multiple defaults recorded remains a life ban under legislation.

Applications for permitted individuals to reinstate licenses

Prior to July 2015, Excluded Individuals that had suffered the cancellation of their licence through bankruptcy and/or through the winding up of a company that they were a director of (“Insolvency Event”) were allowed to make an application to the QBCC to have their building licence reinstated if they could prove that the Insolvency Event was out of their control. With the enforcement of the Amending Act as at 1 July 2015 this has now changed.

The previous ability to make an application for the reinstatement of a building licence has been dissolved and now the QBCC allows for an Excluded Individual to make submissions to the QBCC to prove that they were not the subject of an Insolvency Event. Such submissions must be made within a 28 day period after receipt of notification from the QBCC and it is incredibly important that a Licence Holder abide by these strict timeframes to avoid the cancellation of their building licence unnecessarily.


There have also been changes to the Building and Construction Industry Payments Act (“BCIPA”). Those changes include that all applications for adjudication must now be submitted via the QBCC. Further, there have been a number of changes to the submission time-frames and the Master Builders have supplied a summary table of the time-frame changes as follows:

Pre-amendment Excluding GST Excluding GST
All claims Claim < $750,000 Claim > $750,000.00
A. Payment claim
Time for claimant to make payment claim after construction work last carried out / related goods and services last supplied 12 months 6 months 6 months
Time for claimant to make payment claim after construction work last carried out or related goods and services last supplied if payment claim is in relation to recovery of a final progress payment (including recovery of retention) 12 months The later of the period prescribed in the contract, or 28 days after expiry of defects liability period. The later of the period prescribed in the contract, or 28 days after expiry of defects liability period.
B. Payment schedule
Time for respondent to provide a payment schedule if progress payment served less than 91 days after reference date 10 business days 10 business days 15 business days
Time for respondent to provide a payment schedule if progress payment served more than 91 days after reference date 10 business days 10 business days 30 business days
C. Adjudication application
Time for claimant to serve adjudication application 10 business days 10 business days 10 business days
D. Adjudication response
Time for respondent to provide an adjudication response 5 business days 10 business days 15 business days (+ adjudicator can grant up to an additional 15 days)
E. Claimant reply to response
Time for claimant to provide reply to adjudication response N/A N/A 15 business days (+ adjudicator can grant up to an additional 15 days)

The changes are to assist in clarifying what has been a relatively complex system of time-frames and adjudication choices. It remains to be seen if this will be successful.


Author: Tim Jones, Paralegal

Published: September 2015

Do Your Contracts Contain Penalties?

If you are familiar with contracts, you will know that in the event of a breach, the non-breaching party may be entitled to a claim of damages in an amount that reflects their loss or damage. Where the contract sets out in advance the value of the damages entitlement, that amount must be a “genuine pre-estimate” of the loss that the non-breaching party will suffer if a breach occurs.

If, instead, the damages entitlement is totally out of proportion to the maximum loss that the non-breaching party could suffer, a court is likely to strike the clause down as a penalty and therefore invalid.

Some examples of penalties may include:

  • default fees – especially in respect of hire purchase or lease agreements;
  • dishonoured cheque fees;
  • service fees;
  • time bar clauses in respect of construction contracts; or
  • termination fees.

Where does Australia stand? – The decision of Andrews v ANZ[1]

The Court unanimously held that certain fees charged by ANZ to its customers could be characterised as penalties and were therefore likely to be unenforceable and refundable to the bank’s customers.

The fees concerned were various honour, dishonor and non-payment fees charged in respect of various retail deposit accounts and business deposit accounts as well as certain over-limit and late payment fees charged in respect of both consumer and commercial credit card accounts.

The High Court held that although the fees were not charged in a circumstance that would typically give rise to penalties, the nature and quantum of the fees enabled them to be viewed as penalties and were therefore unenforceable.

The correct approach in respect of determining what will be classed as a penalty is to ask whether the purpose of the fee is to secure performance of a primary obligation by the party subject to the fee or whether the fee is truly a fee for further services or accommodation. If it is a fee for further services or accommodation (i.e. extending a line of credit or increasing an overdraft facility), it will not constitute a penalty even where the fee payable is significant. If the fee is payable to secure performance of the party subject to the fee, it will only be enforceable if it is a genuine pre-estimate of the damage suffered by reason of that party’s non performance.

Will Paciocco v ANZ[2] change things?

In 2013, a further class action was launched in New Zealand against ANZ challenging the validity of fees charged by the bank on the basis that they were penalties.

The Full Federal Court of NZ determined that in assessing whether a fee is a penalty, you must look at the full amount of loss or damage that may be suffered by the “innocent party” at the time that the contract was entered into. The actual amount of loss suffered is not a consideration.

The Court also determined that indirect consequences and costs as a result of the breach can be taken into account when determining the greatest conceivable loss. In determining the reasonableness of late payment fees, the Court considered, amongst other things, provisioning costs, costs for maintaining regulatory capital and costs relating to running a collections department could all legitimately be taken into account.

Where to go from here?

Andrews is still good law in Australia as it is a High Court of Australia decision.

However, it is now more important than ever to review your contracts or any existing commercial arrangements you have. Specifically, contractual requirements that have been put in place to “ enforce” performance of other obligations should not lead to the non-performing party suffering a detriment that is greater than the amount to which the other party is reasonably entitled. Otherwise, your contract may be open to challenge.

JHK Legal has vast experience in drafting and reviewing contracts and is able to assist with ensuring that your contracts are void of contractual penalties. For more information, contact our office in your state and speak to one of our highly skilled lawyers.


Author: Valerie Teo

Published: August 2015


[1] Andrews v Australia and New Zealand Banking[1] Group Ltd [2012] HCA 30

[2] Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50

Setting Aside Personal Guarantees – Grounds of Invalidity

Personal guarantees are binding promises provided by a third party who agrees to be personally liable for the obligations of the contracting party, such as a company. Such guarantees are enforceable in the event of that contracting party defaulting.

Personal guarantees are most commonly provided in relation to the payment of a debt, however other contractual obligations can also be guaranteed.

The usual principles relating to the creation of contracts also apply to the creation of personal guarantees, which means that like any other contract, personal guarantees are liable to be deemed invalid and set aside under certain circumstances.

Special grounds of invalidity apply to spouses who personally guarantee their partner’s company debts.

Grounds of invalidity

The two grounds of invalidity of particular importance for spouses are:

  1. Unconscionability; and
  2. The rule in Yerkey v Jones.


A guarantor can seek relief from the Courts for unconscionability under principles of equitable relief or pursuant to statutory provisions contained in the Contracts Review Act 1980 (NSW).

In order to obtain equitable relief and have an unconscionable guarantee set aside, a guarantor must establish the following two elements:

  1. At the time of providing the guarantee the guarantor was under a special disadvantage, such as age, sickness, mental incapacity, illiteracy, emotional dependence or lack of business acumen; and
  2. the creditor had knowledge of the guarantor’s special disadvantage.

If the guarantor successfully establishes these two elements, then the onus of proof passes to the creditor to show that the transaction was fair, just and reasonable and that the guarantee should be upheld.

In terms of statutory provisions which provide guarantors with relief from unconscionability, section 7 of the Contract Review Act 1980 enables a Court to set aside, declare void, or vary in whole or in part any provision of a guarantee if the Court is satisfied that in the circumstances of the case it would be unfair and unjust to enforce the guarantee.

Section 9(2) of the Contracts Review Act 1980 provides a complete list of matters to be considered by the Court in determining whether a guarantee was unjust in the circumstances relating to the guarantee at the time it was made. The list of matters to be considered focus on:

  1. whether there was material inequality in bargaining power between the parties;
  2. the relative economic circumstances, educational background and literacy of the parties;
  3. whether independent legal or other expert advice was obtained by the party seeking relief; and
  4. whether any undue influence, unfair pressure or unfair tactics were used on the party seeking relief.

The rule in Yerkey v Jones – the special common law rule protecting spouses

The Courts have held that there is a special rule in equity which applies to the execution of guarantees by spouses[1]. The rule in Yerkey v Jones provides that if a spouse’s consent to become a guarantor for the debts of her/his partner’s business is procured by the partner in circumstances where the spouse does not understand the “essential elements” of the guarantee and the creditor accepts the guarantee without dealing directly with the spouse personally, the spouse has a prima facie right to have the guarantee set aside.

The Yerkey v Jones rule encompasses two limbs: the first limb is where the guarantee was given by the spouse as a result of actual undue influence by the partner, whereupon the spouse obtains a prima facie right to have that transaction set aside unless the creditor can demonstrate that the spouse obtained independent legal advice. The second limb is where the spouse misunderstood the purport and effect of the guarantee which she/he gave, upon which the spouse will acquire the same prima facie right unless the creditor took all reasonable steps to inform the spouse of the particulars of the transaction and, additionally, the creditor reasonably believed that the spouse knew what she/he was engaged in. The reasonableness aspect, if proven to have succeeded, will discharge the creditor of its duties to separately inform the spouse.

The “essential elements” of the rule which need to be established by the spouse are as follows:

  1. The rule applies to a spouse who provides a guarantee for the debts of their partner’s business;
  2. The spouse is a volunteer in the sense that they derive no tangible benefit from the transaction;
  3. The guarantee is procured by the partner without any direct dealings between the spouse and the creditor;
  4. The spouse does not understand the guarantee in “essential respects”; and
  5. The spouse does not receive a proper explanation of the guarantee from an independent witness.

If the above conditions are satisfied the Court may set aside the guarantee even if there is no evidence of any misleading or deceptive conduct or misrepresentation by the partner. The rule is an equitable principle and relief may be denied on discretionary grounds. However, even if the Court finds that the rule does apply and that the guarantee should be set aside, the Court may in its discretion limit the relief granted to the spouse/guarantor.

In order to avoid having a personal guarantee set aside, creditor’s should take steps to ensure that parties providing guarantees understand the consequences of entering into the guarantee and are provided with the opportunity to obtain independent legal advice.

If you believe you have provided a personal guarantee in unfair and unjust circumstances or require any assistance please contact our office for further information.


Author: Kathleen Faulkner, Associate

Published: July 2015


[1] Yerkey v Jones (1939) 63 CLR 649; endorsed in Garcia v National Australia Bank Ltd (1998) 194 CLR 395.

What are the Differences Between a Deed and an Agreement?

Lawyers are frequently asked what the difference is between a deed and an agreement and when you would use what type of document.


An agreement or contract must satisfy at least the following pre-conditions (there are others such as having legal capacity) to be valid and enforceable:

  • there must be an offer from one party that is accepted by the other party;
  • each party must have an intention to be legally bound; and
  • consideration must flow between the parties.


Deeds, to be valid and enforceable, must:

  • be in writing;
  • be signed;
  • be witnessed by at least one person who is not a party to the deed;
  • use wording to indicate that the document is a deed such as “this deed” or “executed as a deed” and “signed, sealed and delivered” in the execution clauses. The wording in the document needs to be consistent – it is not helpful to refer to an agreement and then use “signed as a deed” for the execution clauses;
  • be delivered to the other party or parties; and
  • be supported by evidence that the parties intended the document to be a deed and be bound by it.

Differences between Deeds and Agreements

  1. Consideration is not required for a deed to be legally binding. Consideration is required for an agreement to be binding.
  2. For consideration to be effective, it must flow with or after the agreement is made. Past consideration is not valid consideration for an agreement. Past consideration does not affect the validity of a deed.
  3. A deed is binding on a party when it has been signed, sealed and delivered to the other parties, even if the other parties have not yet executed the deed document: Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609 at 619 per Lord Denning.
  4. Each State has specific legislation dealing with the period of time in which a claims or actions can be commenced. Usually, a claim following a breach of contract/agreement must be commenced within 6 years of the breach occurring. There is a longer period of time to commence action following the breach of the terms of a deed. The particular time period depends on the law of the State (which is why it is important to have a jurisdiction clause in your deed). Those time limits are 12 years in Queensland, New South Wales, the Australian Capital Territory, the Northern Territory, Tasmania and Western Australia; and 15 years in South Australia and Victoria.

Recent decisions

In a recent decision, 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] QCA 245 (400 George Street), the Queensland Court of Appeal confirmed that deeds and agreements differ on the following basis:

  • A deed must have formal wording covered in the format of the document – intention and language were found to be important; and

–       An agreement must have consideration flowing from one party to another, while under a deed that is not a requirement.

Further, in 400 George Street (Qld) Pty Ltd v BG International Ltd [2010] QCA 245, it was held that the execution of a document in the form of a deed does not itself imply delivery unless it appears that execution was intended to constitute delivery (delivery can be inferred from any fact or circumstance, including words or conduct). In 400 George Street, the Court of Appeal decided that the execution of a deed by a proposed tenant did not constitute delivery because they only intended to be bound once all the parties executed the deed which was evidenced by the initial agreement to lease which was stated to be subject to a “mutually agreed legal document by both parties”.

By contrast, the Court of Appeal decided in In Roma Pty Ltd v Adams [2012] QCA 347 that execution of a deed by one party was intended to constitute delivery because the party relying on the document did not wait until the counterparty had executed the deed before sending the signed forms necessary for registration.

Corporations Act 2001

The Corporations Act 2001 (Cth) also deals with the execution of deeds by bodies corporate. Section 127(3) provides that:

“(3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).”

Subsections (1) and (2) state:

“(1)  A company may execute a document without using a common seal if the document is signed by:

(a)  2 directors of the company; or

(b)  a director and a company secretary of the company; or

(c)  for a proprietary company that has a sole director who is also the sole company secretary–that director.

Note:  If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.

(2)  A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:

(a)  2 directors of the company; or

(b)  a director and a company secretary of the company; or

(c)  for a proprietary company that has a sole director who is also the sole company secretary–that director.

Note:  If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company.”

Please note that notwithstanding the above subsection (4) of Sn 127 states that “This section does not limit the ways in which a company may execute a document (including a deed)”.

Author: Rhonda King, Special Counsel

Published: July 2015

How Lenders Should Deal with a Defaulting Borrower

Watch out for any warning signs

Firstly, a lender needs to spot the early warning signs.

These signs include the borrower breaching or being about to breach its financial overdraft limits, or suddenly requesting new facilities or an extended repayment timetable. The borrower may be under increased creditor pressure or subject to litigation, insurance claims or rent reviews.

Other warning signs include the borrower:

  1. Losing a key customer or supplier;
  2. Suddenly losing or changing its management team, in particular the finance director;
  3. Having a sudden change of auditors or trouble signing off its accounts;
  4. Late delivery of information;
  5. Asking its bankers to send cheques for round amounts or postpone or push forward certain payments; or
  6. Deferring any planned or regular capital expenditure.

Other signs might be a spurious or unmeritorious complaint about an interest rate product of the lender that could be an attempt to draw attention away from more fundamental problems.

Gather information

Secondly, lenders need to be aware that information is key.

Lenders should:

  1. Meet with borrowers at regular intervals to open dialogue and discuss strategies;
  2. Get up-to-date financial information from the borrower including management accounts and cash flow statements;
  3. Review security and priority positions;
  4. Instruct independent accountants to review the borrower’s business;
  5. Carry out regular insolvency and other searches against the borrowers;
  6. Obtain valuations of important assets;
  7. Perform regular searches of the personal property securities register; and
  8. Assess the borrowers’ overseas assets and creditors as this may be relevant to jurisdictional enforcement choices.

Communicate with other lenders

Thirdly, lenders need to communicate to other lenders and investors. However, Lenders need to beware of any confidentiality restrictions and privacy obligations first.

It would be recommended for lenders that, after having identified relevant stakeholders, they be prepared to implement standstill or other forbearance agreements to stop unilateral action which might frustrate an overall strategy for a defaulting borrower.

Lenders should also consider deciding whether to support a defaulting borrower or rather minimise their exposure through enforcement mechanisms. A decision will need to be made whether the lender wishes to sell the debt to another financier.

If a lender is to support the borrower, the strategy might involve the following:

  1. Providing new money subject to pricing risk versus reward;
  2. Restructuring existing lending agreements, giving time to pay, providing emergency short-term funding;
  3. Considering new credit enhancement – for example, taking guarantees from directors or shareholders;
  4. Standstill / forbearance agreements in conjunction with other lenders.

On the other hand, an enforcement strategy might include:

  1. Identify events of default;
  2. Accelerate loans or converting a loan to a demand instrument;
  3. Cancel existing commitments; and / or
  4. Enforcing security and appointing a receiver.

Lenders should also consider whether a form of restructuring for a defaulting borrower might be useful.

A financial restructuring could include writing off debt, swapping debt for equity or restructuring loans. Operational changes could also include giving the defaulting borrower time to negotiate a management buy-out or facilitate a change in management acceptable to the lender.   This might give time to enable the borrower to change business direction. The borrower may also look to inflate distributable profits or balance sheet insolvency by issuing new share or reclassifying existing share capital.

A further issue is the need to consider cross-default issues and to assess the advantages and disadvantages of various enforcement mechanisms.   The lender will also need to assess whether any enforcement action will give rise to priority of payment issues.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

For any further information concerning this article, please contact JHK Legal.

Author: Michael Tourkakes LLM., LL.B., Grad.Dip.(Leg Prac), Adv.Dip.Bus.(Leg Prac)

Published: June 2015

The Perils of Mediation in Commercial and Civil Litigation

Mediation is becoming an increasingly popular form of commercial dispute resolution. It is often preferred to litigation upon the basis that it is faster and cheaper.   Mediation will also allow underlying commercial relationships to be preserved.

However, there are potential problems for lawyers arising out of a mediation. There is the potential for negligence actions against solicitors and barristers involved in mediations and claims for wasted legal costs where lawyers breach duties owed to parties.

An example is the recent 2013 English Court of Appeal decision in Frost v. Wake Smith & Tofields Solicitors is a good example where claims can be made against lawyers involved in mediations.   In the Frost case, Mr. Frost made a claim against his solicitors arising out of a mediation which took place in 2003.   The mediation related to a long-running, wide-ranging and acrimonious dispute between two brothers, David and Ronald Frost, who had been in business together for twenty years.

After a difficult mediation, an agreement was reached. The two brothers went out to dinner to celebrate. They left David Frost’s solicitor to draw up the settlement agreement.   This is always a foolish action. Experienced lawyers will never allow the parties to leave the mediation room until the mediation agreement has been finally drawn up, agreed and signed by all parties involved in the mediation.   However, this did not occur in this English decision. The two Frost brothers returned to the mediation room after dinner.   They signed the agreement. Brother Ron subsequently raised various objections to the agreement.   The two brothers ended up requiring a second mediation. Ultimately, the dispute was resolved except for the tax consequences of the agreement.

David Frost alleged that his lawyers had been under an obligation to achieve finality at the first mediation.   He claimed damages representing the difference in value to him between the first and second mediation agreements. At first instance, the English Court rejected Mr. Frost’s claim upon the basis that the first mediation agreement was impossible to perform.   At the first mediation, matters had not developed to a point at which the parties had reached, or could ever reach, a final agreement. It was not within a solicitor’s power to fill in the gaps.   The English Court of Appeal agreed and dismissed David Frost’s appeal.

David Frost did not, however, allege that his solicitor had not advised him properly about enforceability. The Court of Appeal, however, commented in the Frost case that a solicitor in such a situation would be under a duty to warn their client that the outcome of a mediation is not a final and binding agreement from which the other party could not reconcile. However, the Court of Appeal commented that the damages which would flow from the breach of this duty would at best lead only to the recovery of any expenditure wasted in attempting to explore the enforceability of the agreement.

It is also important to remember that under the Civil Procedure Act in Victoria, a party which refuses to mediate without good reason for doing so is likely to be penalized in costs either before formal litigation is commenced or during such litigation.   If that party’s solicitor fails to advise them of this risk, a claim against the solicitor could follow.   An interesting issue might arise where the defendant argues that it is entitled to refuse to mediate because of the strength of its defence. A court might still argue that the defendant should mediate because this strength should be made apparent during the mediation process.

Another duty on lawyers engaged in mediation is the duty to advise a party properly on the merits of the claim or defence. A solicitor could be sued for his or her failure to advise a client properly about the merits of the claim or defence both in the lead up to a mediation and at the mediation itself. Under-settlement may be a particular risk for a claimant where they are ill-advised about the strength and quantum of their claim or of their defence. Both solicitors and counsel could theoretically be liable for a breach of this duty.   Preparation before a mediation involves foreseeing any legal points which may arise and, where appropriate, arranging for colleagues or counsel to be available by phone or email should a need for specialist advice arise during the mediation. An example might be to seek advice about complex taxation issues.

Confusion about the status of offers of settlement can arise during a mediation.   One way of avoiding such an issue is to have the mediation agreement entered into between all mediating parties and the mediator to provide that any agreement reached between the parties and the mediation cannot be complete until it is reduced to writing and signed by or on behalf of each of the parties. In this way, arguments about whether or not offers have been made and, if so, whether or not they have been accepted, will be avoided. This places a duty onto solicitors for all parties to check carefully about the status of offers that have been made, offers that have been rejected, or offers that have been accepted so that a client’s expectations can be managed appropriately.

Frost v. Wake Smith & Tofields Solicitors raised the duty to advise about the nature of any agreement reached at a mediation.   Many details require attention before a final agreement can be reached at a mediation.   These will include checking that the representatives of the parties are in fact authorised to settle the dispute and to sign a settlement agreement. If the authority of those attending the mediation is limited either to sign or to settle the dispute, the solicitors for other parties will need to insist that additional authority is obtained before the mediation can commence.

It is always useful for solicitors attending a mediation to come equipped with a draft settlement agreement either on paper or, preferably, in electronic format on a laptop.   This makes for easy amendment. Many points will need to be checked before the mediation is completed such as the primary claims, secondary claims by and against third parties, payment terms, breach provisions, payment of legal costs and others.   If the mediation occurs within the context of a court case, what is going to happen to that case? Is to be withdrawn, dismissed, discontinued, stayed or is a default judgment being given now or in the future if the mediation agreement is breached or if payments are not made under it? Should the mediation agreement provide that it can be enforced as a court judgment without the breaching party having the right to prevent that enforcement?

David Frost’s solicitor was fortunate having regard to the Court of Appeal’s decision.

Drafting a complex settlement agreement is the last thing barristers and solicitors want to face after a hard day of negotiation. However, it is an unavoidable duty. However, care must be taken to have already provided clear advice to parties as to what is an acceptable agreement.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

For any further information concerning this article, please contact JHK Legal.

Author: Michael Tourkakes L.L.M, LL.B., Grad.Dip.(Leg Prac), Adv.Dip.Bus.(Leg Prac)

Published: June 2015

What happens when a member of a Self Managed Super Fund enters Bankruptcy?[1]

The number of members of self managed super funds (“SMSFs”) has been growing in recent years; in June 2014 it was 1,011,686, up from 758,589 in June 2009.[2] A large proportion of those members are members of a two-person SMSF (usually, a husband and wife or de facto partners). There are many rules governing the establishment and continuation of SMSFs, and bankruptcy of a member may have important ramifications for the other member(s) of the SMSF, as well as the bankrupt.

  1. What are the general requirements for the number of members?

1.1  Each individual trustee of the SMSF must be a member of the SMSF

This means, for example: if there are two members and the members have elected to have individual trustees of the SMSF rather than a corporate trustee, both members of the SMSF must also be trustees of the SMSF.

Ultimately, this has ramifications further down the line if one of the members enters bankruptcy, because that will also mean one of the trustees has entered bankruptcy.

1.2  Each trustee must not be a disqualified person

A disqualified person includes a number of types of people (for example, someone convicted of certain types of offences). Among other things, it includes someone who is insolvent.

That is, if you are a bankrupt, you are a disqualified person for the purposes of the laws governing SMSFs. Ipso facto, if you are a bankrupt you cannot be a trustee of an SMSF.

1.3  Where there is a corporate trustee, each director of the corporate trustee of the SMSF must be a member of the SMSF

This means, for example: if there are two members the members have elected to have a corporate trustee of the SMSF, both members of the SMSF must also be directors of the corporate trustee of the SMSF.

Again, this has ramifications further down the line if one of the members enters bankruptcy, because that will also mean one of the directors of the trustee has entered bankruptcy.

1.4  The corporate trustee cannot know or suspect a responsible officer is a disqualified person

As a result of the disqualified person definition, this means that if you are a bankrupt, you cannot be a director of a corporate trustee of an SMSF. It further means that a person who has become a bankrupt must resign as director of the corporate trustee as soon as that person becomes aware they are bankrupt.

  1. Can you have a single member SMSF?

Technically, you can have a single member SMSF. However, there are rules regarding single member SMSFs which must be followed. Those rules include:

(a) If there’s a corporate trustee, the member must be a sole director, or one of only two directors where the other director is:

a. A relative of the member; or

b. A person who does not employ the member;

(b) If there are individual trustees, the member must be one of only two trustees (and cannot be the sole trustee) where the other trustee is:

a. A relative of the member; or

b. A person who does not employ the member;

(c) No trustee may receive remuneration for services performed for the SMSF; and

(d) No director of a corporate trustee may receive remuneration for services performed for the SMSF.

  1. What does the Australian Taxation Office require when a member of an SMSF enters bankruptcy?

3.1       The Australian Taxation Office (“ATO”) will provide a six (6) month “grace period”[3] before the SMSF is ceased, which will allow a restructure of the SMSF so that it either:

(a) Meets the basic conditions required; or

(b) Can be rolled over into an industry/corporate fund.

3.2        During that six (6) months, the ATO requires the following:

(a) the bankrupt must remove themselves as trustee/director of corporate trustee as soon as possible;

(b) the bankrupt must inform the ATO in writing using Form NAT 3036;

(c) the bankrupt must notify ASIC of the resignation as director if the SMSF is run by a corporate trustee; and

(d) where the ATO is being informed of a change in trustee, there is a requirement that the ATO be notified within 28 days of the change.

  1. What should you do if you are a member of an SMSF and you face bankruptcy?

4.1  What happens when it’s a single member fund?

If there is a power to appoint a new director of a corporate trustee contained within the SMSF trust deed, that new director can be appointed and then organise for:

(a) the sale of the property; and

(b) the transfer of liquid assets (including the proceeds of sale of the property) into a managed fund.

This can be done during the six (6) month grace period where the member can remain a member as long as that person is no longer the director of the corporate trustee.[4]

The same would apply for individual trustees, as there must be a second trustee in the case of a single member SMSF.

4.2  What happens if it’s a fund with more than one member, but only one of the members enters bankruptcy?

The bankrupt member will need to resign as director or trustee as soon as possible and again, the member who is not bankrupt will need to act to remove the bankrupt’s property from the SMSF before the grace period is over.

The non-bankrupt member will need to:

(a) sell any real estate and halve the proceeds;[5]

(b) transfer the bankrupt’s share of the liquid assets to a managed fund; and

(c) consider whether they want to remain as a single member SMSF, or otherwise roll over their entitlements to a managed fund.

4.3  What happens if both members enter bankruptcy?

If there is a corporate trustee, the actions noted at 4.1 could be followed. However, it should be noted that this would not be acceptable if the SMSF had individual trustees.

In the event of the latter, the trustees would need to immediately sell all assets for the market value available at the time, and then transfer all of the liquid assets to a managed fund.

4.4  When will a bankruptcy trustee try to claw back payments to an SMSF?

A bankruptcy trustee may claw back payments or contributions which are made to defeat creditors. We therefore recommend that from the beginning of the SMSF, the members contribute monies on a regular basis, and, ideally, those monies should be in regular amounts. The regularity of payments would demonstrate that monies held in the SMSF have not been paid in to defeat creditors, but rather for the purposes for which the SMSF is intended.

Bankruptcy of a member can significantly affect the operation and even existence of an SMSF. If you face bankruptcy or have been made bankrupt, we recommend you immediately seek financial and legal advice in order to meet your ATO requirements, change the structure of the SMSF and/or roll over your entitlements to a managed fund.

Author: Sarah Jones, Legal Practitioner Director

Published: May 2015

[1] This article is not a substitute for obtaining legal advice. We recommend you seek both legal and financial advice before proceeding with any of the actions suggested in this article.

[2] Australian Taxation Office: Self-Managed Super Fund Statistical Report, June 2014 https://www.ato.gov.au/super/self-managed-super-funds/in-detail/statistics/quarterly-reports/self-managed-super-fund-statistical-report—june-2014/

[3] Pursuant to section 174A(4) of the Superannuation Industry (Supervision) Act 1993 (Cth). Note that this grace period is the earlier of 6 months or the appointment of a Registrable Superannuation Entity licensee to the fund.

[4] Keep in mind that if the member is the shareholder of the corporate trustee, then the trustee in bankruptcy could potentially have the right to appoint a different director (using his/her rights as a shareholder).

[5] The benefit of real estate cannot remain wholly with the non-bankrupt member where the property was bought for the SMSF as a whole.

Section 54 – Insurance Contracts Act 1984

Section 54 – Overview

(i)     Operates as shield for insured parties to prevent Insurers from denying claims based on minor breaches of the insurance policy.

(ii)    Does not ordinarily grant a right of action to Third Parties – limited usefulness in recovery.

Section 54 (1)

  • Insurer may not refuse to pay claims in certain circumstances: – (1)  Subject to this section, where the effect of a contract of insurance would, but for this section, be that the Insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the Insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the Insurer may not refuse to pay the claim by reason only of that act but the Insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the Insurer’s interests were prejudiced as a result of that act.
  • Previously, a breach of policy conditions would allow an Insurer to refuse payment of the claim.
  • Section 54 prevents the Insurer from refusing to pay the claim.
  • Claim may still be reduced by the Insurer – the question is what monetary prejudice has been caused by the act?


  • A has a policy that covers him only while driving with a licence.
  • A drives unlicensed and is involved in an accident with B.
  • The accident was 100% the fault of B and was in no way connected with A driving unlicensed.
  • The Insurer is not able to deny coverage to A because he was driving unlicensed and will not be able to reduce the amount paid out.

Section 54(2)

  • (2)  Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the Insurer may refuse to pay the claim.

Section 54(3) and (4)

  • (3)  Where the Insured proves that no part of the loss that gave rise to the claim was caused  by the act, the Insurer may not refuse to pay the claim by reason only of the act.
  • (4)  Where the Insured proves that some part of the loss that gave rise to the claim was not caused by the act, the Insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.

Sections 54(2) – (4)

  • Briefly:

– If the act COULD cause the loss to arise, the claim may be refused.

– The Insured may still prove that the act DID NOT cause the loss to arise, and if they do, then the claim cannot be refused.

– Otherwise, the Insured may prove that the act only CONTRIBUTED to the loss, and if they do, then the claim cannot be refused, but can be reduced (potentially to nil).


  • A has an insurance policy that covers him only while driving in a sober state. A drives his car while drunk. He is involved in an accident with B.
  • B was also drunk and the accident was 50% his fault and 50% the fault of A due to his drunkenness. This is the finding at a final hearing by a magistrate.
  • The Insurer in not able to fully deny the claim, but would be able to reduce the payout by 50%.

Example 2

  • Driver “A” has an insurance policy for a work truck. The policy stipulates that he is not allowed to carry flammable materials.
  • A sees a gap in the market and begins transporting highly flammable gas canisters.
  • A’s truck’s engine catches fire one day and the whole truck, loaded with flammable gas is destroyed.
  • At Hearing, if A manages to prove that the truck would have been destroyed regardless of the gas it was carrying.
  • The Insurer would not be able to refuse the claim, or even reduce it in this instance.

Example 2 – Twist

  • What if A had been required to notify his Insurer if he was undertaking in activities outside of the insurance policy (such as carrying flammable material) but had not done so?
  • The claim still could not be refused.
  • May be reduced to nil. Insurer was denied the opportunity to collect higher premiums, or deny the policy outright if the risk was too great.
  • The operation of section 54 will always depend on the wording of the insurance policy.

Excess Clauses

  • Provide a monetary value which the Insured must bear on each claim.
  • Exist to:

– Clear Insurer’s books of small claims

– Create an incentive for people to manage their own risk/ disincentive to claim.

  • Do not exist to:

– Allow the Insurer to escape paying claims of Insured’s who are bankrupt or insolvent.

Excess Clauses – Cont.

  • Generally, the Insurer in a regular contract of insurance cannot require payment of an excess as a precondition for accepting liability for the claim.
  • Even if it was a precondition, section 54 would operate to prevent the claim being refused.
  • However – in practice with motor vehicle claims – Insurers use excess clauses as a ‘stonewall’ to avoid paying claims when their Insured’s cannot pay the excess.

Usage of Section 54 in Recoveries

  • Generally, only the Insured or a beneficiary of the policy party can invoke section 54.
  • Section 54 gives no right of action to third parties.

– Note, in NSW, an Insurer may be proceeded against directly with leave of the court. This has proven difficult to obtain.

What can be done in the situation of unpaid excess?

  • Request can be made to Insurer to settle the claim less the excess.
  • Insured third party may be coached/ educated into making the request themselves.

Requesting the Insurer pay under S 54

  • Advantages

– Cheap – no harm in asking.

  • Disadvantages

– Ineffective – many Insurers will refuse/ ignore.

– No legal recourse if they do refuse.

– Even if they are willing, they may still need to discuss with their Insured before doing so and must be able to contact them.

Author: Shan Auliff, Senior Associate

Published: May 2015