One
of the many roles of a liquidator is to try and recover payments made by creditors
to the insolvent company, particularly those which can be considered to be
either unfair or voidable.
However,
the Corporations Act 2001 may require the creditor to recompense monies or
assets in certain circumstances. One such circumstance occurred in Cunningham v Commissioner of Taxation [2010] QDC.
FACTS
This case involved a claim regarding payments of money
received by the Commissioner
of Taxation, the defendant, totaling $143,173 for a discharge of tax
liabilities, on behalf of the company
in liquidation.
In the liquidator’s attempt to recover the
above sum, he relied on:
·
section 588FF of the Act claiming an unfair preference and;
·
section 588FE claiming voidable transaction
THE LAW
What is an unfair
preference?
According to section 588FF an unfair preference
occurs when a creditor has received more from a debtor before liquidation than
that creditor would otherwise have received during the process of winding up.
Section 588FE considers such transactions
as voidable when the company is insolvent.
What happens next?
The
liquidator, also the plaintiff of the company in liquidation, will request the
court to unwind the transaction in such cases, even if it includes the
Commissioner of Taxation. In turn, the Commissioner may demand an indemnity
from the directors of the company in respect of loss and damages it will
suffer, should the liquidator’s claim succeed. The underlying principle for
unwinding a preference is to uphold the equality of distribution among
creditors. This is the classic ‘pari
passu’ principle.
ORDERS
THAT CAN BE GRANTED
Under section 588FF the courts
may grant certain orders if satisfied that a transaction is voidable because of
section 588FE. It can direct the amount to be paid back to the company, either
in its entirety or partially. This also applies to company property that has
been transferred under such transactions.
WHAT
TO LOOK OUT FOR
In this case, although the
defendant denied that the transaction was voidable and an unfair preference, he
did not extend any defense under the Act. The liquidator was able to prove that
the company was insolvent at the time the payments were made to the defendant.
The court, based on the facts,
decided to grant an order for the return of the entire sum.
The Act sets out defenses that
are available to creditors who have received an unfair preference. In order to
rely on the defense, a creditor must prove that valuable consideration was
given; he acted in good faith and; there was no reason to suspect insolvency. If
creditors cannot prove any one of these, then the defense fails. The burden of
proving these defenses lie with the creditor but the liquidator has the right to
challenge any defense.