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:
While a range of outcomes, including a departure under the terms of the current Withdrawal Agreement, remains possible, it is important for businesses to plan for a no-deal Brexit, in which the UK leaves the EU without a withdrawal agreement or other deal. Here we look at the potential impact of a no-deal Brexit on cross-border corporate recovery and insolvency.
Key issues
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.
Immediately following the results of the UK referendum on exiting the EU in June 2016, we wrote about the potential impact of Brexit on cross-border restructuring and insolvency work. As we identified then, the key issue in this area is the potentially significant implications of losing the reciprocal effect of the EU Regulation on insolvency proceedings and the Brussels Regulation (recast). In this article we focus on the impact of the loss of recognition under the Insolvency Regulation.
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.
There have been a number of smoke signals in the last few months around the increase of consumer debt in the UK and a focus on those firms providing consumer credit across the credit spectrum but particularly in the "sub-prime" or "near-prime" space.
Since the credit crunch, a number of consumer credit businesses have stepped in to fill a gap in the lending market. They give sub-prime or near-prime borrowers, who may find it difficult to obtain credit from traditional sources, with high-cost, short-term credit - instant access to funds.