VOIDABLE PREFERENCES: THE LATEST ON LIQUIDATORS’ CLAW BACK ON PAYMENTS MADE DURING A DEED OF COMPANY ARRANGEMENT

The Supreme Court of New South Wales judgment of Re Western Port Holdings Pty Ltd (receivers and managers appointed)(in Liq) [2021] NSWSC 232 (“Western Port”) has provided liquidators with more comfort to pursue an unfair preference claims against recipients of third party payments and payments made during the course and operation of a Deed of Company Arrangement (“DOCA”).

What is an unfair Preference Payment?

An unfair preference payment is a voidable transaction pursuant to section 588FA(1) of the Corporations Act 2001 (“the Act”) and it is a transaction which may be able to be clawed back by a liquidator of a company if the preference payment made by the company to a creditor was made within 6 months prior to the company being placed into liquidation and provided that:

1. the company and the creditor are parties to the transaction (even if someone else is also a party); and
2. 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.

Why is the case of Western Port Important in respect of unfair preference payments?

It is important to note that while section 588FA (1) of the Act sets out a clear criteria for what constitutes as a voidable transaction comprising of an unfair preference payment claimable by a liquidator, the case of Western Port considers when and how the operation of section

588FE(2B)(d)(i) of the Act might apply rendering a potential voidable transaction such as an “unfair preference payment” as not voidable at all. In this regard, Section 588FE(2B)(d)(i) of the Act provides that  that a transaction is not considered voidable if it was entered into under the authority of the administrator of the deed or the administrator of a company.

The relevance of section 588FE(2B)(d)(i) of the Act to the case of Western Port is as follows:

1. Western Port was placed into a DOCA and then was later placed into liquidation.
2. Upon the company entering liquidation, the liquidators claimed that Western Port made various voidable unfair preference payments to the ATO under section 588FA (1) of the Act during the DOCA.
3. The ATO defended the allegation that it received unfair preference payments on the basis that it relied upon section 588FE(2B)(d)(i) of the Act by submitting that the payments were not voidable transactions as they were made with the “authority” of the deed administrator of the DOCA.
4. Questions considered by the Court relevant to section 588FE(2B)(d)(i) of the Act were as follows:
5. Were all of the alleged unfair preference payments made by the company to the ATO by or under the authority of the deed administrator of the DOCA within the definition of section 588FE(2B)(d)(i) of the Act; and
6. What constitutes as “authority” of the deed administrators?

It was noted in the Western Port case that the deed administrators played an active role in ensuring the company made payments to the ATO and that it was common that deed administrators would take an active role in ensuring a company is adhering to its obligations under a DOCA. However, the extent of activity of the deed administrators’ role in this case consisted of:

1. the deed administrators seeking details as to the company’s outstanding tax liability from the company directors;
2. the deed administrators seeking confirmation from the directors as to whether they had attended to their obligations in paying their tax debt and consistent follow up in respect of same;
3. issuing the company with several notices of default requiring the company to attend to rectifying breaches of the DOCA for failing to pay its tax liabilities on time which had accrued during the process of the DOCA.

Despite the level of involvement and the consistent role the deed administrators took in ensuring the company was adhering to the DOCA, Rees J in her judgment of Western Port considered the authority case of In Yeo, in the matter of Ready Kit Cabinets Pty Ltd (in Liq) v Deputy Commissioner of Taxation [2020] FCA 632 in answering the noted questions above.

Rees J found that the unfair preference payments made by the company to the ATO were not considered “authorised” by the deed administrators because the control of the company was handed back to the directors pursuant to the DOCA and the directors made those payments to the ATO by exercising their control as directors of the company and not under the authority of the deed administrators. In this regard, while it might be considered that the deed administrators

provided the authority to the directors to make payments to the ATO, Rees J made specific note in respect of the construction of section 588FE(2B) of the Act that: “[t]here is no occasion in section 588FE(2B) to look behind the authority of the directors to ask how that authority came about.”[1]

Based on this finding and consideration made by Rees J, it was found that the ATO in these circumstances was unsuccessful in attempting to rely on the exemption under section 588FE(2B) of the Act and found the payments were voidable transactions and unfair preference payments under section 588FA(1) of the Act.

Key takeaways of the case of Western Port with respect to deed administrators appointed to a company are as follows:

1. Western Port highlighted the integral and involved role that a deed administrator can conduct themselves in when a company is in a DOCA.
2. A deed administrator’s role is to ensure that directors are carrying out and fulfilling the company’s obligations under a DOCA.
3. When a company is handed back to the control of the directors under a DOCA, despite the deed administrators being appointed, it is ultimately the directors who are carrying out an authoritative role on behalf of the company.
4. The construction of Section 588FE(2B) does not suggest by way of provision that the court ought to “look behind” where the “authority” has come from.

How we can help you

JHK Legal regularly act for administrators, liquidators, and recipients of unfair preference payments. If you require any advice or assistance in relation to voidable transactions, please please reach out.

Written by Hayley Tibbie, Senior Associate.

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[1] Re Western Port Holdings Pty Ltd (receivers and managers appointed)(in Liq) [2021] NSWSC 232 at [157]