Determination of unfair preferences

26 June 2009

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In the recent decision of Williams (as liquidator of Scholz Motor Group P/L (in liq)) v Peters [2009] QCA 180, the Queensland Court of Appeal considered whether a transaction involved an ‘Unfair Preference’ given by a Company to a creditor of the Company in accordance with s588FA of the Corporations Act (Cth) (Act).

The Facts

Mr Peter Peters (Peters) agreed to purchase a car from the Scholz Motor Group Pty Ltd (Company) for $165,000 and deposited that amount into the Company’s overdraft account. Peters then arranged finance for the car through a finance company who also paid $165,000 into the Company’s overdraft account, on his behalf.

The Company gave Peters a cheque for $165,000 as a refund for the initial payment of the purchase price, but that cheque was dishonoured. A second cheque was also dishonoured.

The Company agreed to a payment plan, then finally provided Peters with a bank cheque for $10,000 and two vehicles as an initial instalment. Peters subsequently sold the two vehicles for a total of $85,000 (Payment).

The Company then went into liquidation and the liquidator applied for an order stating that the Payment was a voidable unfair preference. Peters counterclaimed, stating the Company had held the $165,000 on trust and therefore he was entitled to receive the outstanding $70,000 in preference to the other creditors.

Trust monies and overdrafts

The court found that it was unnecessary to decide if the money was held on trust as trust monies can not be traced through an overdrawn bank account, as on payment into the account the funds ceased to exist. This meant that any proprietary claim over it in equity must fail, leaving only the common law debt.

Unfair preferences

Section 588FA(1)(b) defines an unfair preference as one which results in the creditor receiving more money than they would have if they’d submitted a proof of debt in the winding up.

Peters argued, essentially, that at the 70 cents in the dollar estimated for the Company’s liquidation, he would have received approximately $115,500, ie more than $95,000, so the transaction should stand.

However, the court preferred the interpretation favoured in Walsh v Natra Pty Ltd (2000) 1 VR 523, which views the transaction as full payment of a portion of the debt. This takes into account Peters could submit a proof of debt for the $70,000 still owed to him if the transaction stood, meaning he would receive a total of $144,000.

Peters further argument that he did not suspect, and had no reasonable grounds for suspecting, that the company was insolvent, failed on the grounds that at the time he received the Payment a reasonable person would have suspected insolvency.

Implications

In the current financial environment preference claims will become increasingly commonplace.

This decision emphasises the importance of fairness to all creditors as a consideration in interpreting the Act, as well as the importance of paying careful attention to any signs of insolvency in companies that you are dealing with.

In a time when many companies are operating on overdrafts, it is also important to take note of the finding that trust monies deposited into an overdraft account cease to exist for the purpose of proprietary claims by the beneficiaries.

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