The global COVID-19 pandemic, coupled with an ill-timed crude oil price war between Saudi Arabia and Russia, has in a matter of mere weeks materially disrupted the global marketplace. While we are months or years away from understanding the full impact of the coronavirus pandemic on the economy at large, it is increasingly likely that we may be sliding into a recessionary period. We anticipate that businesses will need to restructure in one way or another to deal with immediate liquidity needs, or long-term financial health.
Canada and Brazil share a long and significant common history of business and investment. Over a century ago, Canadian companies were heavily involved in building electrical and other infrastructure in São Paulo and Rio de Janeiro. Today, over 50 public companies listed on the TSX and TSX-V have substantial assets and operations in Brazil. In 2018, direct investment between the two countries exceeded $14 billion in each direction.
It is a defence to an unfair preference claim to show there were no reasonable grounds to suspect the insolvency of the debtor company.
Referred to as the ‘good faith defence’, the creditor has the onus of establishing the defence contained in section 588FG(2) of the Corporations Act 2001 (Cth).
Suspicion of insolvency
The courts have identified the following principles with respect to the good faith defence:
In the recent case of 1st Fleet Pty Ltd (in liquidation), the Court clarified the information disclosure obligations of external administrators in the Insolvency Practice Schedule (Corporations) (IPSC) and Insolvency Practice Rules (Corporations) 2016 (Rules).
There is only a short time period for compliance, and there can be cost consequences for non compliance.
In business it is not uncommon for a director of a company to be owed money by that company.
If the commercial relationship breaks down, the director may think it is an option to serve a creditor’s statutory demand on the debtor company.
However, recent court decisions demonstrate that issuing a creditor’s statutory demand is not a sure fire method of obtaining payment where the director is owed the debt personally or is a director of both the creditor and debtor companies.
Cases where statutory demands have been successfully challenged
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
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.