Cant v Mad Brothers Earthmoving ('Cant') is a Court of Appeal decision of the Supreme Court of Victoria, which considered unfair preference claims made to an unsecured creditor.
Eliana Construction and Developing Group Pty Ltd (in liquidation) ('Eliana') incurred a debt to Mad Brothers Earthmoving Pty Ltd ('Mad Brothers') totaling $236,952.31.
Prior to Eliana being wound up, the parties agreed that Eliana would pay Mad Brothers $220,000.00 ('Payment') in full and final settlement of the debt. The Payment was made to Mad Brothers by a third-party, Rock Development & Investments Pty Ltd ('Rock Development') using a local loan facility.
Subsequently, Anthony Robert Cant was appointed as liquidator of Eliana. Cant then commenced proceedings against Mad Brothers, claiming the Payment to Mad Brothers was an unfair preference payment and consequently void.
UNFAIR PREFERENCE PAYMENTS
Transactions considered to be an unfair preference payment are defined in the Corporations Act (2001) (Cth) ('Corporations Act'). Payments of an unsecured debt by a company may be voidable if the payment was made within six months of the company being placed into liquidation. If the payments are an unfair preference, the liquidator is entitled to recover the payment from the creditor.
DECISION OF THE COURT OF APPEAL
As the Payment to Mad Brothers was issued by a third party (Rock Development), the Court was required to consider the following:
- Was Eliana a party to the Payment involving Rock Development and Mad Brothers?
- Was the Payment from Eliana?
Was Eliana a party to the transaction involving Rock Development and Mad Brothers?
Many authorities have accepted that a transaction under the Corporations Act can encompass a series of fused or interrelated transactions involving third parties. Importantly, Eliana's general ledger recorded an entry that the debt to Mad Brothers had been paid by Rock Development. Additionally, Eliana and Rock Development shared a common director and shareholder. This individual acted for both parties with regards to the Payment. Consequently, the Court held that Eliana was a party to the transaction.
Was the Payment from Eliana?
The key consideration for this secondary question was who made the Payment, specifically: Eliana or Rock Development. The Court found the Payment was made by Rock Development and not Eliana and relied upon section 588FA(1) of the Corporations Act which requires the preference payment to be received from the company's own money. As the Payment to Mad Brothers was from Rock Development's money (and not Eliana's funds) the Court found that the liquidator could not recover the Payment as an unfair preference.
Notably, the Court concluded that:
- As the Payment was made by a third party it did not have the effect of diminishing Eliana's assets; and
- Therefore, it could be reasonably ruled that the Payment was not an unfair preference as it did not come from Eliana's own money.
KEY TAKEAWAYS FROM CANT V MAD BROTHERS EARTHMOVING
Cant further clarifies that an unfair preference claim which involves a third-party payment to a creditor may be defeated in circumstances where the payment:
- does not diminish the funds or assets of the company; and
- the payment is not made from the company's own funds.