In the recent court decision of Trenfield v HAG Import Corporation (Australia) Pty Ltd  QDC 107, the liquidators recovered unfair preferences from a retention of title creditor who argued it was a secured creditor.
Section 588FA of the Corporation Act 2001 (Cth) provides that a transaction is an unfair preference if the creditor receives from the company, in relation to an unsecured debt, more than the creditor would receive from the company if the transaction were set aside and the creditor were to prove for the debt in the liquidation. For the purpose of section 588FA, a debt is only taken to be unsecured to the extent of so much of it (if any) is not covered by the value of security.
In this case the creditor argued it was a secured creditor because it had a retention of title security interest and the value of its security over the goods and proceeds of sale of those goods exceeded the amount of the payments received from the company in liquidation.
To determine if the payments made to the creditor were unfair preferences, the Court had to consider:
- whether the creditor was a secured creditor and, if so, at what point of time; and
- how any security was to be valued.
There was also a threshold issue of whether the security interest had been perfected.
Was the payment in relation to an unsecured debt?
On the threshold issue, the Court found that the relevant security interest had not been perfected, as it had been incorrectly categorised as ‘transitional’.
Correct registration of a security interest prevents the security from vesting in a liquidator or administrator if the company goes into external administration. Here, as the security interest had not been perfected, upon the appointment of the administrators the security vested in the company immediately before the appointment of the administrators (section 267 of the Personal Property Security Act 2009 (Cth) (PPSA)).
However, the unperfected security was still effective between the parties.
Significantly, the Court held that PPSA does not make an unregistered security interest completely void.
As the unperfected security interest was not void, the Court needed to determine at what point of time the security interest was to be valued.
- The creditor argued that the security was to be valued as at the date of each payment received by the creditor.
- The liquidators argued that, for the purpose of section 588FA, the question of whether the debt was secured was to be assessed at the date of winding up, and by that time there was no security because it had vested in the company.
The Court held that the time for determining whether the debt was unsecured was the time of each payment. The Court acknowledged the following difficulties with this conclusion:
- If the payments not been made, the creditor would have been an unsecured creditor for the purpose of the winding up.
- The purpose of the unfair preference provisions is to ensure that unsecured creditors are treated the same for the purposes of winding up.
The Court’s finding was based on the natural reading of section 588FA(1)(b), being that it refers to a debt that was unsecured at the time the creditor received payment.
What was the value of the security?
The next critical issue for determination was how should the security be valued.
The liquidators argued that the amount of the indebtedness secured at the time of the payments was greater than the value of the security.
The liquidators relied on the decision of Walsh v Natra Pty Ltd (2000) 1 VR 523, endorsed by the Court of Appeal in Williams v Peter  1 Qd R 475, which found that where the total debt exceeds the value of the security, any particular payment made is to be applied first toward the unsecured debt. The Court adopted this approach in this case.
The liquidators further argued that, as the amount of the creditor’s debt exceeded the value of the security, part of the payments received were unsecured, and to that extent, were recoverable as unfair preferences.
The creditor argued that the value of the goods should be taken at their retail value, rather than at the invoice value they were sold to the company. In considering this argument, the Court took a commonsense approach and found it was appropriate to value the stock at its wholesale price, being the invoice price for which the creditor supplied the goods in the first place.
The creditor also sought to rely on the security interest being for both the goods supplied and their proceeds, to argue that, when also taking into account the proceeds of the goods, they were fully secured.
In relation to this argument, the liquidators put forward evidence that there were no records kept of the proceeds of sale between different suppliers, and, consequently, the proceeds were not readily identifiable or traceable.
Further, even if the proceeds could have been quantified, the company records showed that most of the company bank accounts were in substantial overdraft at all relevant times and that all available credit was quickly spent. This meant that if the proceeds were transferred into an overdraft account, they ceased to be traceable, and, if they were transferred into an account in credit, they were spent.
As a result, the Court found that there was no security over the proceeds in relation to the relevant debt.
Overall, in applying this methodology, the Court found that $473,291 of the $696,298.72 in payments received were paid in relation to an unsecured debt, and recoverable as an unfair preference by the liquidators against the creditors.
This case is a good illustration of a number of important points creditors and liquidators should take into account when it comes to preference payments.
First, even where a security interest is not perfected under the PPSA, it is still possible to argue that payments made are in relation to a secured debt and therefore not recoverable by a liquidator as a preference under section 588FA of the Corporations Act.
Second, even when there is security in place in relation to a debt, any payment received will be applied to any unsecured portion of the debt first, leaving those payments open for potential recovery by a liquidator as a preference.
Finally, this case demonstrates the effect that properly maintained stock records can have in determining the value of a particular security interest. The records here were crucial to the identification and valuation of the goods for valuing the security interest.