In September 2017, the Australian government introduced the most significant reforms to Australia's insolvency regime for the past 30 years with the enactment of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth).

Employees as Operational Creditor

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “Code”) considers all employees and workmen as operational creditors.

Operational Creditor is defined under Section 5 (20) of the IB Code as: 

"Operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;”

Operational Debt is defined under Section 5 (21) of the Code which states that: 

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

An important part of last year's package of amendments to the Corporations Act 2001 (Cth) were the ipso facto reforms which will stay the exercise of certain contractual rights relating to a counterparty's insolvency or financial position. What, if any, contracts would be exempt from the stay has been a major question, not least for the construction industry.

This has now been answered, with the release of exposure drafts for public comment by May 11 2018 of the:

In the recent Gunns decisions, the Federal Court considered three separate unfair preference claims brought by the liquidators of Gunns Limited (in Liquidation) (Gunns) against:

The Corporations Act 2001 sets out a regime for the order in which certain debts and claims are to be paid in priority to unsecured creditors.

That's straightforward enough for a liquidator, right?

Unfortunately, matters are not that straightforward. In effect, there are two priority regimes under the Act for the preferential payments of particular creditors, each of which applies to a different "fund", and we've observed this has led to some liquidators being unsure of how to proceed – or even worse, using funds they should not.

This week’s TGIF considers the decision in Cant v Mad Brothers Earthmoving Pty Ltd[2020] VSCA 198, where the Court of Appeal refused to find that a payment made by a third party on behalf of an insolvent company was an unfair preference.

Key takeaways

A decision by the Victorian Court of Appeal (Cant (as liquidator of Eliana) & Anor. v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198) on 5 August 2020 provides guidance to creditors and liquidators on when payments from a third party to a creditor can be considered a payment ‘from the company’ and be potentially voidable as a preference payment under part 5.7B of the Corporations Act (2001) (Cth) (Act).

The key facts

The United Kingdom and Australia have recently implemented legislative changes to permit external administrators to assign or sell causes of action available to them.