Unfair Preference Claims and the Conceivable Third-Party Shield from the Claws of Liquidators

Unfair Preference Claims and the Conceivable Third-Party Shield from the Claws of Liquidators

Receiving a letter of demand from a liquidator demanding repayment of monies received for an unsecured debt owed by a company in liquidation whereby it is alleged that the creditor has been preferred over other creditors can be rather daunting to receive. However, unsecured creditors may now, in certain circumstances, benefit from a successful defence highlighting a loophole which has materialised in the recent decision handed down by the Victorian Court of Appeal in Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 (“Cant Case”), whereby the issue of third party payments was put under the microscope.

What is an unfair preference claim?

One of the key duties of a liquidator is to examine the undertakings of the insolvent company he/she has been appointed to and to ascertain whether any voidable transactions that have taken place in the lead up to the appointment, so that the liquidator may recover monies for the benefit of creditors of the company. One such voidable transaction is an unfair preference payment. In most scenarios involving an insolvent company, there are typically numerous unsecured creditors with outstanding debts owed, therefore, the law considers it unfair for one particular unsecured creditor to receive payment in priority to other unsecured creditors who do not receive payment within 6 months of the appointment of the liquidator.  As such, section 588FA of the Corporations Act 2001 (“the Act”) permits a liquidator to claw back unfair preference payments from unsecured creditors received from the insolvent company less than 6 months prior to the liquidator’s appointment.


Whilst a liquidator can seek to claw back preferential payments from unsecured creditors, in certain scenarios there are defences available to unsecured creditors to oppose that such payments have to be repaid.

The main defences available are summarised as follows:

  1.  The Good faith defence under Section 588FG (2) of the Act, where the unsecured creditor can establish that it could not have reasonably suspected that the company was insolvent;
  2.  The Running Account defence, where payments are made as an integral part of a continuing business relationship between the insolvent company and the unsecured creditor.
  3. The Set Off defence under Section 553C of the Act, where an unsecured creditor may set off a debt/credit owed to the insolvent company against a credit/debt owed by the insolvent company to the same party.
  4. Some creditors argue that they had security in place at the time of the payment and as such they cannot be considered as an unsecured creditor.

One scenario which now gives rise to a defence is the situation where a third party makes payment to the unsecured creditor on behalf of the insolvent company. This defence was recently raised and determined in the Cant Case.

The Third-Party Veil

In the recent Cant Case, the Victorian Court of Appeal deliberated on whether monies paid from a third-party company to a creditor in satisfaction of an unsecured debt owed by the insolvent company could be deemed an unfair preference. It is worthwhile to note, that the sole director of the company in liquidation was also the sole director of the third-party company that made payment to the unsecured creditor.

The Court confirmed that in order for a payment to be considered an unfair preference it must come “from the company” as intended within the provisions of section 588FA or result in a diminution of the company’s assets that are available to creditors. In the Cant Case, the payment came from a third-party’s own money and not from the insolvent company. As the insolvent company’s assets were not diminished by the transaction the Court found there could be no unfair preference. This was held despite the fact that the company in liquidation endorsed, directed and authorised the payment by the third-party to the unsecured creditor, or the fact that both companies were controlled by the same director. In the alternative, the Court acknowledged that in circumstances where company B (the third-party) owes a debt to company A (company in liquidation), and company B is instructed to make payments to an unsecured creditor instead of company A for a debt owed by company A to the unsecured creditor, the transaction in such case would be deemed an unfair preference. This is because the debt owed by the third party to the insolvent company is considered an asset of the insolvent company and therefore as that debt is directed to paying an unsecured creditor of the insolvent company, the insolvent companies’ assets are diminished.

Key Takeaways

The recent decision offers some clarity on the position concerning payments made by third-parties, that being, such payments will not necessarily amount to an unfair preference if there is no obligation or liabilities between the third party and the insolvent company. Although the case was handed down in Victoria, it is plausible to assume that other states will also follow the footsteps of the position laid down in the Cant Case. The complex provisions contained in the Corporations Act are intended to ensure that the assets of a company in liquidation are apportioned fairly. However, this decision invites a potential loophole for insolvent companies who may arrange payment to one or more unsecured creditors ahead of others, by ensuring payments are made from a third party rather than from the company.

How we can help you

JHK Legal has extensive experience in dealing with insolvency and debt recovery matters, and can advise companies, creditors and third-parties on unfair preference transactions and insolvency matters generally. Please do not hesitate to contact us today to discuss your situation.

Written by Rania Kassir


Tips for First Home Buyers

Buying your first home is a long-term investment and a significant milestone. It is important to ensure that you are prepared and properly supported during your conveyance to assist in creating a smooth process.  The following tips can assist during this time.

Know your entitlements

Before committing to a property offer and finance application terms, it is important to ensure you are aware of the entitlements for first home buyers and whether you are eligible for any of them.

Typically, your bank or broker can perform an assessment of your circumstances and advise if you are eligible for any entitlements when applying for finance. Alternatively, our subsidiary MKP Property Lawyers can discuss your circumstances and potential incentives that may apply.

Current key incentives for Queensland First Home Buyers include:

  1. First Home Buyer Transfer Duty concession, which eliminates duty payable on transfers for first home buyers at values of $500,000.00 or less;
  2. Queensland First Home Owner’s Grant, being $15,000.00 towards buying or building a new home (subject to eligibility criteria); and
  3. First Home Loan Deposit Scheme

Get the contract reviewed

Once the agent gives you a contract, don’t sign it until you have had it reviewed by your solicitors.

Once you sign a contract, you are bound to it unless there is some lawful basis to terminate it (e.g. under the statutory cooling off period, finance or building and pest).  Having it reviewed will ensure you understand it and that it reflects the terms you need.

Be prepared for paperwork

Prior to and during your conveyance you will be required to consider and complete an extensive amount of paperwork both for your lender and your solicitors.

These documents:

  • For your solicitors, conveyancing booklets, questionaries, to do lists, transfer duty concession forms, searches list and more recently a PEXA client authorisation forms.
  • For your financier, loan application forms, loan agreements, mortgage documents and standard terms documents.

You will also be required to complete verification of identity.  Accordingly, ensuring that your identification documents are available and up to date is essential.

Know your key dates

Once the contract is signed, diarise and keep on top of the contractual dates.  These dates are dependent on the special conditions agreed upon between you and the Seller in the Contract of Sale.

The typical key contractual and special condition dates are as follows:

  • Contract Date, being the date that the contract is formed
  • Deposit dates, being the dates on which any initial and balance deposits are due
  • Building and Pest inspection date, being the date by which the buyer is required to effect and make a decision regarding its building and pest inspections
  • Finance Approval date, being the date on which the buyer is required to make a decision regarding its finance approval to proceed with settlement
    Settlement Date, being the date that the parties are required to settle the sale

Each key date will require different actions and accordingly it is imperative to be prepared for each date so as to avoid any unnecessary delays in the Contract of Sale, as the Seller is not usually obliged to grant extensions of time.

Your solicitor should provide you with details of the key dates and an explanation of what is required for each once the contract is formed.

Have additional funds set aside

Purchasing a home is a costly process and there are a number of payments in addition to the purchase price of the property (i.e. Transfer Duty and Registration fees). It is important to ensure that you have allowed for a variation in the estimated costs and/or unexpected costs that may arise during the process.

In doing so, this will help to reduce the risk of having insufficient funds for settlement when your shortfall funds amount is calculated. This amount will be calculated by your conveyancer, taking into account the loan funds available from your lender in order to ascertain the shortfall funds amount – if applicable.

Most importantly, do not hesitate to ask questions

As a First Home Buyer it is a new and complex process to go through. Do not at any stage hesitate to raise any concerns or ask any questions you may have with your conveyancer. They are there to assist you throughout the entire process.

How we can help you

JHK Legal’s subsidiary MKP Property Lawyers pride themselves on their client focus approach to conveyancing and are always available via phone or email to discuss your matter to ensure you are well-informed, confident and prepared at all stages of your conveyance.

Written By Amanda Gildea 


October 2020 : Update regarding commercial lease negotiations

Queensland Government has amended the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (Qld) to extend their operation to 31 December 2020.

The extension of the scheme applies to leases to lessees who remain eligible for the Jobkeeper scheme during the period 28 September 2020 and to 4 January 2021.

During the extended operation period, all of the protections previously provided under the regulations continue.  This includes:

  • The obligation on lessors and lessees to “act in good faith”;
  • The prohibition on lessors taking enforcement action;
  • The restriction on lessors from making rental increases otherwise required under leases;
  • The right of the lessee to require that negotiations regarding rent reductions during the period 1 October 202 to 31 December 2020.

The only real noticeable change for the extended period is that there is no mandatory waiver of rent during the extended period.  That is, rent concessions to lessees need now only be provided by way of deferral of payment of rent rather than the previous mandatory waiver of half of the provided rent concession.

The amended regulations are available here: https://www.legislation.qld.gov.au/view/whole/html/inforce/current/sl-2020-0079.

How we can help you

Should you or any of your clients require any assistance regarding the leasing regulations please do not hesitate to contact us.

Written by Niall Powell, Special Counsel