A decision by the Victorian Court of Appeal (Cant (as liquidator of Eliana) & Anor. v Mad Brothers Earthmoving Pty Ltd  VSCA 198) on 5 August 2020 provides guidance to creditors and liquidators on when payments from a third party to a creditor can be considered a payment ‘from the company’ and be potentially voidable as a preference payment under part 5.7B of the Corporations Act (2001) (Cth) (Act).
The key facts
The applicant was the liquidator (Liquidator) of the second applicant (Eliana). Between November 2015 and March 2016, Eliana incurred a debt to the respondent (Mad Brothers) in the amount of $236,952.31 (Debt) for earthworks conducted at various construction sites.
Eliana and Mad Brothers fell into dispute over the Debt with Mad Brothers ultimately seeking to have Eliana wound up on the basis of non-compliance with a statutory demand. That matter was settled when Eliana agreed, on 15 September 2020, to pay Mad Brothers $220,000 in satisfaction of the Debt.
On 16 September 2016, Rock Development & Investments Pty Ltd (Rock), a company related to Eliana by their common sole director, made the payment due under the settlement deed to Mad Brothers using money borrowed from Nationwide Credit Pty Ltd.
On 11 October 2016, Eliana entered into voluntary administration and then liquidation on 3 November 2016.
The key issue on appeal
A key issue on appeal was whether the $220,000 payment was received ‘from the company’. This is the wording of section 588FA(1)(b) of the Act and a pre-condition for classification of a transaction as voidable.
The Court confirmed that whether the payment was ‘from the company’ demanded consideration of whether the assets of the company available for distribution to creditors had been reduced by virtue of the payment. The Court held:
“…The words ‘from the company’ in s 588FA(1)(b) have the effect of retaining the requirement under the previous law that the preference be received from the company’s own money, meaning money or assets to which the company is entitled.
…It is necessary, in order for a preference to be ‘from the company’ that the receipt of it by the creditor has the effect of diminishing the assets of the company available to creditors.
… On the other hand, a payment by a third party which does not have the effect of diminishing the assets of the company available to creditors is not a payment received ‘from the company’ and is therefore not an unfair preference.”
Although leave to appeal was granted, the Liquidator’s appeal was dismissed.
This decision illustrates the care that liquidators must take in evidencing a diminution of the distressed company’s assets where the payment emanates from a third party. Mere authorisation of the payment by the distressed company is not enough. Diminution of assets does not require an actual cash transaction but could take the form of a release of liability to that third party.
Creditors may wish to consider, where possible, how payment for outstanding debt may be structured to take that transaction outside of the voidable transaction regime. The terms of any agreements would need to be carefully worded to ensure the payment does not result in a diminution of the distressed company’s assets.
Holding Redlich regularly acts for both liquidators and creditors in preference payment claims and is well equipped to advise and act in such cases.
Authors: Mitchell Waters & Madeleine Marchingo
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