Profits made by a limited company are distributed to shareholders through the declaration of dividends. Quite often, for example in the case of SME businesses, the directors and shareholders of the company are one and the same. In such businesses, directors might take a minimum salary and pay the rest of their remuneration by way of dividend. For some time, this has been a tax-efficient means for directors to be remunerated.

However, before a company is able to pay a dividend, two main criteria must be met:

2018 has been one tough year on the High Street...

Retail, as a sector, has long been under pressure from increased competition from online retailers, which has resulted in reduced footfall on the High Street, affecting many companies, including many well-known names.

In the recent court decision of Trenfield v HAG Import Corporation (Australia) Pty Ltd [2018] QDC 107, the liquidators recovered unfair preferences from a retention of title creditor who argued it was a secured creditor.

The issues

In the recent decision of Heavy Plant Leasing [2018] NSWSC 707, a creditor successfully defended an unfair preference claim by establishing it did not have reasonable grounds to suspect the insolvency of the debtor company, who was a subcontractor in the earth moving business.

The most common way of defending a liquidator’s unfair preferences claim is to rely upon section 588FG(2) of the Corporations Act 2001(Cth); commonly called the ‘good faith defence’.

Commonly, a creditor being sued by a liquidator to refund an alleged unfair preference is owed money by the company in liquidation.

Liquidators argue that under section 553(c)(1) of the Corporations Act 2001 (Act) a creditor is not able to set-off the outstanding indebtedness owed by the company to the creditor to reduce any liability of the creditor to refund any unfair preference. Similar arguments are made by liquidators in relation to insolvent trading claims.

A snapshot of the court decisions

At just before 7.00am on Monday 15 January 2018 following an urgent telephone hearing, a High Court Judge agreed to place six of the Carillion Group companies into compulsory liquidation and appoint the Official Receiver as Liquidator. At the same time, six partners of PwC were appointed as Special Managers to assist the Liquidators.

Just because a liquidator asserts you have received an unfair preference, does not necessarily mean you have or that there are no potential defences available to you.

It is common for commercial contracts to contain ipso facto clauses, which allow a party to terminate or modify the terms of the contract where the other party experiences an insolvency event. A concern addressed by the Government is that these clauses can prevent a financially distressed company from turning their situation around.

The High Court’s recent decision in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28 has confirmed a bankruptcy court can exercise a discretion to go behind the judgment debt where sufficient reason is shown for questioning whether there is a debt due to the petitioning creditor.

In the recent decision of Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953, Cooper Grace Ward acted for the trustee in bankruptcy, who sought directions from the Court regarding the administration of a trading trust where the bankrupt was the trustee.

Facts