TGIF 25 June 2021 – Not all preference claims are created equal

This week’s TGIF considers the decision of the Supreme Court of NSW in In the matter of Pacific Steelfixing Pty Ltd [2021] NSWSC 655, where a liquidator failed to adequately prove that payments to a creditor, during the relation back period, were voidable transactions because the Liquidator had not finalised investigations into the potential recovery claims available to him.

Key takeaways 

• Liquidators should identify all potential recoveries available to them before commencing proceedings for unfair preferences.
  
  
• Liquidators bear the onus of proof when proving that a payment to a creditor resulted in that creditor receiving more than they would have if the payment was set aside and the creditor had to prove in the winding up.
  
  
• When bringing proceedings, liquidators should be mindful of the commerciality of the outcome which they are seeking. 

Background

Pacific Steelfixing Pty Ltd (the Company) was registered on 25 August 2017 and operated a labour hire business in the construction and steel fixing industry. MJCR Group Pty Ltd (MJCR), a building company, was the Company’s sole client. Approximately 16 months after its registration the Company was wound up in insolvency by order of the Federal Court of Australia on 12 December 2018. Daniel Frisken was appointed as liquidator of the Company (Liquidator).

The Company had not initially lodged its business activity statements (BAS) and therefore the Deputy Commissioner of Taxation (the Commissioner) had assessed the Company’s tax liabilities by establishing a running balance account (RBA) for the Company pursuant to section 8AAZC of the Taxation Administration Act 1953 (Cth) (1953 Act).

In accordance with the 1953 Act, the debt owed by the Company to the Commissioner on any given day was the amount recorded in the RBA as at that date. During the period from 30 July 2018 to 7 December 2018 the Company made 19 payments to the Commissioner. Those payments totalled $740,000 and were made towards taxation debts owed by the Company (Tax Payments).

During the period of time the Company was making the Tax Payments, the balance of the only bank account the Company held, fluctuated but never exceeded $200,000 and seldom rose above $35,000. During that same period, the debt owed by the Company to the Commissioner varied between $2,193,951.62 and $1,507.272.09.

Following his appointment in December 2018, the Liquidator attempted to recover and reconcile the books and records of the Company, financial statements of the Company and to determine the true financial position of the Company during its 16 month existence. Through investigations the Liquidator became aware of a deed of settlement and release purportedly entered into between the Company and MJCR pursuant to which MJCR was to pay the Company $95,000 (the Deed).

The Liquidator was not however aware of what releases had been given by the Company pursuant to that Deed until shortly before the proceedings commenced.

At the time of the proceedings, the Liquidator had identified five unsecured creditors and no secured creditors. Whilst the Liquidator had not adjudicated on any of the unsecured creditor proofs of debt they did not dispute that the amount owing to the Commissioner was $2,208,365,61.

According to the evidence before the Court, the debt owing to the Commissioner was by far the largest debt owed by the Company and made up a majority of the debt owed by the Company.

Liquidator’s claims

The claims brought by the Liquidator alleged that the Commissioner’s receipt of the Tax Payments were voidable transactions within the meaning of section 588FE of the Corporations Act 2001 (Cth) (the Act) because they were unfair preference transactions within the meaning of section 588FA of the Act that had occurred at a time when the Company was insolvent.

Key issues

Two key issues were considered: whether the Company was insolvent at the time that it made the payments to the Commissioner; and whether the payments resulted in the Commissioner receiving more than if those payments were set aside and the Commissioner had to prove for the tax owing as an unsecured debt in the winding up of the Company .

The Court was required to consider whether the Tax Payments were voidable under section 588FE of the Act on the basis that they were unfair preferences.

Section 588FA(1) of the Act, provides that a transaction is an unfair preference given by a company to a creditor if the company and the creditor are parties to the transaction and the transaction results in the creditor receiving more for the unsecured debt than the creditor would receive for that unsecured debt if the transaction were set aside and the creditor had to prove in the winding up of the company.

The decision

It was not in dispute that the Commissioner had received the Tax Payments. What was in dispute was whether the Commissioner had received more from those tax payments than it would have received if the payments were set aside and the Commissioner had to prove as an unsecured creditor in the winding up of the Company. The Court highlighted that it was the Liquidator as plaintiff, that bore the onus of proof in respect of this question.

Shortly before proceedings commenced, the Liquidator obtained a copy of the Deed. The Deed was purportedly entered into on the day of the winding up order and purportedly released the Company’s rights in respect of receivables of $4.615 million from MJCR in exchange for a payment of only $95,000.

At the time of the hearing the Liquidator had not yet investigated potential actions under section 588FF of the Act in respect of the Deed and the potential recoverability of the receivables that were the subject of the Deed.

The Court determined that, as the Liquidator had not yet investigated potential recoveries in relation to the Deed, he had failed to adequately prove that the Commissioner had received more from the Tax Payments than if those payments were set aside and the Commissioner had to prove in the winding up of the Company.

The Court reached this determination because the Liquidator was uncertain as to the quantum of recoveries from MJCR. Therefore the Company’s assets and funds available for distribution to creditors in the winding up of the Company could not be known. This uncertainty meant it was not possible for the Court to “reach a reasonable decision about whether the defendant received more from the tax payments than it would receive if the payments were set aside and the defendant were to prove in the winding up of the Company”. Accordingly, the Liquidator’s claim was dismissed.  

In circumstances where the Commissioner was the largest creditor of the Company, the Court also queried the commerciality of the decision to bring proceedings against the Commissioner in circumstances where the greatest recovery would result in a payment of $740,000 from the Commissioner in order to repay approximately 80 per cent of that recovery to the Commissioner as the Company’s largest unsecured creditor. 

Comment

The case is a reminder to practitioners of the importance of being able to adequately prove all the necessary elements of a claim before commencing proceedings. When commencing proceedings under section 588FA(1) of the Act a clear understanding of a company’s assets and funds is essential to ensure it can adequately prove that the subject creditor received more from the payments in question, than they would have received had they proved their debt in the winding up of the company.