In our March 2012 update we reported on a claim under section 294 of the Companies Act 1993 by the liquidators of Five Star Finance Limited (in liquidation) (FSF) against a trustee of a trading trust (Bowden No. 14 Trust (Trust)) to set aside payments amounting to $928,937.79. The High Court held that the payments by FSF amounted to a restoration of trust funds as they were initially received by FSF in breach of trust. As such the High Court held that the payments were proprietary in nature and "went beyond payments in satisfaction of debts". Accordingly, the payments were not captured by section 294 of the Companies Act 1993.

On appeal, the Court of Appeal overturned the High Court's decision finding that since the payments from the Trust to FSF were made into an overdrawn account, any proprietary interest was lost on the basis that no traceable chose in action could be created by payment into an overdrawn account. Consequently, no proprietary claim survived the payments. As a result, the Court found that the claimed voidable payments from FSF to the Trust were made in reduction of FSF's indebtedness to the Trust and as such were voidable as insolvent transactions.

This decision serves as a reminder that once funds are transferred into an overdrawn account any proprietary claim relating to such funds will most likely be lost.

See Court decision here.