Caught In The “S” Bend - Liquidator Unable to Syfon Back Unfair Preference

In the recent case of In the matter of Pacific Plumbing Group Pty Limited (in liquidation) [2024] NSWSC 525, Justice Black of the New South Wales Supreme Court considered the issue of payments being made by a third party on behalf of a company in liquidation in regards to a purported unfair preference claim.

The plaintiffs, Pacific Plumbing Group Pty Ltd (In Liquidation) (the Company) and Mr Hurst  (in his capacity as liquidator of the Company) (Liquidator) sought orders under sections 588FA, 588FC, 588FE and 588FF of the Corporations Act 2001 (Cth) (the Act) to recover payments made to the defendants.

Black J considered whether the relevant transactions against three defendants constituted unfair preferences under the Act, and if so, whether they then constituted insolvent transactions and voidable transactions for the purposes of s 558FC and s588FE respectively.

Background

In a judgment in respect of separate proceedings regarding the Company, it was determined that the Company was insolvent for at least six months until it was placed into voluntary administration.

The Liquidator had settled several other claims prior to the commencement of these proceedings. However, the Liquidator sought to recover the following claims (which remained unsettled and were undefended) in relation to payments that were made by the Company within the relation back period:

1. several payments to Corestaff NT Pty Ltd (Corestaff) totalling to $8,500;
2. one payment to C & V Concretors (NT) Pty Ltd (CVC) in the amount of $13,202.20; and
3. one payment to Syfon Systems Pty Ld (Syfon) in the amount of $13,724.55 (Syfon Payment).

Although the Corestaff and CVC payments were not overly contentious and found by the court to be unfair preferences under the Act, the Syfon Payment was more complex because further evidence was put before the Court by the Liquidator, which alleged that Syfon had received the Syfon Payment from a third-party, Mainbrace Constructions (NSW) Pty Ltd (Mainbrace), and not directly from the Company.  

On review of the Company’s books and records, the Liquidator found that the Company’s general ledger recorded dealings between the Company, Syfon and Mainbrace for an amount totalling the Syfon Payment, where the ledger recorded a credit in respect of a transaction with Syfon, again in the amount of $13,724.55, and a debit, recorded as an invoice payment, in respect of Mainbrace on the same day.

The Liquidator expressed the view that the Syfon Payment was made by Mainbrace to Syfon as a payment on behalf of the Company.

The Court was therefore asked to consider whether this constituted an unfair preference, noting that it was not a direct payment by the Company to Syfon.

Issues and principles  

Justice Black discussed the applicability of s 588FA of the Act and outlined the well-accepted principles that a transaction is only an unfair preference if:

• the company and the creditor are parties to the transaction (even if someone else is also a party); and
• the transaction results in the creditor receiving from the company a larger amount than that of what the creditor would receive from the company if the transaction was set aside, and the creditor were to prove for the debt in a winding up of the company.

However, the threshold issue for determination was whether a payment made by a third party on a company’s behalf could give rise to a voidable transaction. His Honour highlighted that the following questions must be considered:

1. Was the company a ‘party’ to the transaction (Question 1)?
2. Was the payment received ‘from the Company’ i.e. from the Company’s own money, and did it reduce the assets of the Company (Question 2)?

Decision

Question 1

His Honour resolved that this question was determined by reference to the authorities, specifically Hosking.¹ The case outlines that a transaction can be made up of interrelated dealings, and that if it is established that because of an (an express or inferred) arrangement the third-party paid the company’s creditors – this would constitute a relevant transaction for the purposes of the Act.

The Court concluded that there was no evidence of an express agreement between the Company and Mainbrace to make payment on the Company’s behalf. However, it was found that there was an inferred arrangement. This was due to the Company’s ledger characterising the Syfon Payment as being in favour of Syfon (i.e. Syfon as a creditor) and a debit of the same amount being in created in respect of Mainbrace (Mainbrace as a debtor).

The Court found that due to these state of affairs, it could be inferred that the Syfon Payment made by Mainbrace to Syfon was a liability of the Company to Mainbrace.

Question 2

Despite the Syfon Payment being made by Mainbrace instead of the Company, the question of whether the Syfon Payment resulted in Syfon receiving ‘from the Company’ more than it would have received should the transaction have been set aside, needed to be considered.

Justice Black referred to Cant²as the overarching authority in these circumstances. A company may be party to the transaction:

• if it gives a third-party a direction (or authorises) the third-party to make that payment;
• payment be received from the company’s own money; and
• receipt of payment has the effect of diminishing the assets of the company available to creditors.

His Honour highlighted that Rees J in Western Port Holdings³ and Richmond J in BounceLED⁴ were in both of those respective cases bound by the authority of Cant and that his Honour would be no different.

Interestingly,  Black J did make reference to Rees J’s disquiet at the Cant decision and expressly outlined her Honour’s views that the question of proof of whether a transaction involving a third-party constitutes an unfair preference, may turn on the question of inference.⁵ His Honour’s findings, however, were that the Court was unable to conclude that the Company had a receivable against Mainbrace and that as such the Court was unable to confirm from the materials made available to it, that Syfon Payment had the effect of reducing that receivable rather than increasing a debt that was owed by the Company to Mainbrace.

This decision was primarily made due to the unresolved dispute between the Company and Mainbrace, in that the Company was of the view that it was a creditor rather than a debtor of Mainbrace, where as Mainbrace was of the contrary position i.e. it was a debtor and not a creditor. Had that issue been resolved, his Honour stated he would have found that the Liquidator had established his claim, on behalf of the Company, against Syfon.

Lavan Comment

This decision is a helpful example of the importance of providing sufficient evidence when making unfair preference claims.

Further, it outlines the applicable line of authority in circumstances where payments have been made by third parties on a company’s behalf and the requirement that payment by a third party must have the effect of diminishing the assets of the company available to creditors, as per the decision in Cant.

If you have any questions regarding this case or in relation to unfair preferences, the experienced Lavan team is here to help.