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 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

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.

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

FSA has made a statement explaining how the bank’s failure to comply with FSA’s liquidity guidelines as they applied to it was critical. It says that while the bank’s downfall was not directly due to the breaches, the breaches happened at a critical period for the financial markets and at a time FSA needed banks to keep it up to date on their liquidity. (Source: FSA Explains Liquidity Importance)

FSA has published a set of frequently asked questions designed to help readers understand MG Global’s insolvency position and investors’ rights under it. (Source: MF Global Investors – Your Questions Answered)

FSA has won a case in the High Court in which the court held one individual and two businesses were operating a collective investment scheme without authorisation. The court banned James Maynard from selling land for business purposes in the UK for life and made a bankruptcy order against him. It ordered him and Countrywide Land Holdings Limited to pay £31,896,194 to FSA and ordered Plateau Development & Land Limited, now in liquidation, to pay £918,975. Tracey McDermott said there was a low probability of getting meaningful compensation but that FSA had scored an important victory.

WorldSpreads Limited has become the third firm to enter into the Special Administration Regime. The firm, a spread betting company, entered into the regime following the discovery of accounting irregularities which led to a finding that the firm could not continue in business. (Source: Firm Enters Special Administration)

The Internal Market Directorate is discussing with stakeholders whether the debt write-down or bail-in tool would help a managed reorganisation or winding down of a financial institution that faced imminent failure. This discussion takes place in the context of the ongoing work on an EU framework for managing crises in the banking sector. The debt write-down or bail-in tool would complement the special resolution powers that need to be available for authorities to stem risks to financial stability and limit the recourse to taxpayer’s money.