New Decision Affects D&O Liability

A recent federal bankruptcy court decision addresses important principles of fiduciary conduct (and the benefits of a state exculpatory statute) in the context of a financially distressed not-for-profit hospital.

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

Mission Product Holdings, Inc. v. Tempnology, LLC, Case No. 16-9016 (1st Cir., Jan. 12, 2018) (Kayatta, J) (Torruella, J, concurring in part, dissenting in part).

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On 11 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 was passed by the Senate. The Bill features two key changes to the Corporations Act:

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.