Following on from my previous article which discussed ‘Unfair Preference’ transactions and claims which may be brought by a Liquidator, I will now, in my next few articles, touch on the possible defences available to creditors in the event that they, themselves, are subject to an ‘Unfair Preference’ claim by a liquidator.
In this article I will discuss the most commonly used defence, being the ‘Good Faith’ defence.
Good Faith Defence
Section 588FG(2) of the Corporations Act 2001 sets out that a creditor can defend an unfair preference claim if:
- The creditor received the payment in good faith;
- The creditor had no reasonable grounds for suspecting the company’s insolvency and a reasonable party in the creditor’s circumstances would not have had grounds for suspecting insolvency; and
- The creditor has provided valuable consideration for the payment.
It is important to note that the onus of proving each of the above elements falls upon the creditor and not the Liquidator. Having said that, it is incumbent upon the Liquidator to give consideration to the defences listed above and not to vexatiously issue a preference demand to any creditor who has received a payment within the relation-back period.
What is ‘Good Faith’?
A creditor must establish that they entered into the transaction in good faith, meaning that they acted with honesty and propriety, with there being no reason why they would have questioned the transaction.
What constitutes ‘No Reasonable Grounds for Suspicion of Insolvency’?
A creditor must prove an absence of grounds on which they, or a reasonable person in their position, could have relied, in suspecting the insolvency of a company.
In Tamaya Resources Ltd v Claymore Capital Pty Ltd  FCA 357, the court stated that:
“the existence of reasonable grounds for suspicion should be determined by reference to commercial reality derived from the particular industry as applied to the facts at the time of the transaction without using hindsight. There is no single factor whose presence invariably establishes that there was, or should have been, reasonable grounds for suspicion.”
Furthermore, in Dean-Willcocks v Commissioner of Taxation (2004), the court noted that any suspicion must be of actual and existing insolvency, not potential insolvency.
What is ‘Valuable Consideration’?
This is often the easiest element for a creditor to prove.
A creditor is only required to evidence that they have provided something of value in consideration for any payment received.
The above defence is enshrined in legislation to protect creditors who act in good faith from being successfully pursued by a Liquidator for an unfair preference payment.
In my next article, I will discuss the ‘Running Account / Continuing Business Relationship’ defence which may be available to creditors when defending an ‘Unfair Preference’ claim brought against them by a Liquidator. There have been some interesting and somewhat contentious developments in this area of the law, so stayed tuned…
Should you or your client have any queries in relation to ‘Unfair Preference’ claims or insolvency more generally, please do not hesitate to contact our office for a confidential, obligation free discussion.
About the author
Benjamin Mitchell is a Senior Insolvency Accountant at HLB Mann Judd Insolvency WA. Benjamin assists the Partners with the many Corporate and Personal insolvency appointments managed by the HLB Insolvency team.
If you have any queries about insolvency matters, please feel free to contact the team on 08 9215 7900.