Feel the pressure – Liquidator appeal dismissed, as third party payments unrecoverable as unfair preferences - Insolvency/Bankruptcy

This week's TGIF examines a recent decision of the New South Wales Court of Appeal in Hosking v Extend N Build Pty Limited [2018] NSWCA 149, which considered whether payments made by a third party to an insolvent company's creditors could be recovered by the liquidator as unfair preferences.

WHAT HAPPENED?

In September 2012, a building and construction company (the Company) entered into an agreement with a principal contractor (Head Contractor) to carry out work on a site in Pitt Street, Sydney.

On 12 March 2013, less than six months after the engagement, the Company ceased operations leaving subcontractors it had retained to carry out the work unpaid. That same day, the CFMEU wrote directly to the Head Contractor to demand that it make-good the Company's debts and pay the subcontractors directly. The Company separately wrote to the Head Contractor requesting the unpaid subcontractors be paid, on its behalf, placing reliance on a contractual provision of the head contract.

Two days later, the Head Contractor terminated the contract with the Company and outlined to the CFMEU an arrangement for the payment of the outstanding amounts owing to the subcontractors. The payments were subsequently made.

Liquidators were appointed to the Company and they commenced proceedings against the subcontractors to recover the amounts paid directly to them by the Head Contractor as unfair preferences.

At first instance, Brereton J refused to grant the orders sought finding that:

the Head Contractor had acted pursuant to the arrangement with the CFMEU (as opposed to the request from the Company); and
given the payments to the subcontractors were made from the Head Contractor's assets, and from no actual benefit which belonged to the Company, it could not be said they were "made by or received from" the Company as required under s 588FA(1) of the Corporations Act 2001 (Cth).

THE APPEAL

The main contentions on appeal were that the primary judge failed to properly apply three decisions of the Federal Court on the construction of s 588FA(1) and, separately, made the following incorrect findings of fact:

that the payments were made in accordance with the arrangement with the CFMEU and not pursuant to the Company's request; and
that the payments were not made from an asset to the benefit of which the Company was entitled.

On the factual issues, the liquidators argued the request from the Company was, consistent with language used in the letter to the CFMEU, part of a "chain of causation" that led to the payments being made and thus made the Company a party to that transaction.

Further, whilst no money was owing by the Head Contractor to the Company, it was, in substance, paying for work which it would otherwise have had to pay the Company.

From a legal perspective, the liquidators argued the circumstances of the case fit neatly within the principles enunciated in Re Emanuel¹.

THE DECISION

The Court of Appeal did not agree with the liquidator's contentions and the appeal was dismissed.

Critically, Bathurst CJ concluded the Company was not a party to the transaction by which payments were made by the Head Company.

Whilst accepting that a transaction could be made up of a series of interrelated dealings, and that the debtor & creditor need not be a party to each part, his Honour found the evidence did not establish a link, or an initiation of a 'course of dealing', from the communications between the Company & Head Contractor on 12 March and the "composite" transaction by which the subcontractors were paid in the days following.

In the circumstances, it was not necessary for his Honour to consider the separate question of whether the payments were received "from the Company". However, it was observed that no moneys were payable by the Head Contractor to the Company out of which it could make payment.

This would suggest that, if the Company was held to be a party to the transaction, the liquidators may have had difficulty satisfying the second essential element of s 588FA(1).

COMMENT

This case serves as a useful reminder of the two essential elements which must be satisfied where payments by a third party are sought to be impugned as unfair preferences:

the payment was made with the insolvent debtor's authorisation; and
the monies that were paid represent a benefit or asset to which the debtor was entitled and brings about a change in its rights, liabilities or property.

Interestingly, the primary judge decided the case on the basis that the second element above had not been met whereas the Court of Appeal's reasons focused on the first aspect, that there was no "transaction" to which the Company was a party. As such, the competing submissions on appeal as to what circumstances will give rise to a payment "from the company" were not considered in detail.

However, Bathurst CJ was inclined to a view, consistent with the decision of Gordon J (as her Honour then was) in Burness², that if payment is received from a third party & authorised by a debtor so as to give rise to a "restitutionary" claim against it in favour of the third party, then such a payment could be said to have been received "from the company".

No final conclusion was expressed and, similarly, the question of whether there must be a diminution in the debtor company's assets for a transaction to constitute an "unfair preference" remains open.

Footnotes

¹Re Emanuel (No 14) Ltd (in liq) (1997) 147 ALR 281

² Burness v Supaproducts Pty Ltd (2009) 259 ALR 339

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