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
With two decisions (No. 1895/2018 and No. 1896/2018), both filed on 25 January 2018, the Court of Cassation reached opposite conclusions in the two different situations
The case
The Constitutional Court (6 December 2017) confirmed that Art. 147, para. 5, of the Italian Bankruptcy Law does not violate the Constitution as long as it is interpreted in a broad sense
The case
With the decision No. 1195 of 18 January 2018, the Court of Cassation ruled on the powers of the extraordinary commissioner to require performance of pending contracts and on the treatment of the relevant claims of the suppliers
The case
The Court of Cassation with a decision of 25 September 2017, No. 22274 confirms that Art. 74 of the Italian Bankruptcy Law provides a special rule, which does not apply to cases to which it is not explicitly extended
The case
With the decision No. 1649 of 19 September 2017 the Court of Appeals of Catania followed the interpretation according to which a spin-off is not subject to the avoiding powers of a bankruptcy receiver
The case
Applicable law
The Italian Government has been delegated to enact a comprehensive restatement of the whole set of rules of insolvency procedures, with specific innovative addresses regarding (to mention only the most important) the concordato preventivo procedure, venue rules, an out-of-court mediation alert process to timely address a risk of insolvency, new forms of security and a streamlined set of priorities among creditors
Introduction