In the wake of the Victorian Court of Appeal’s decision in Cant v Mad Brothers Earthmoving [2020] VSCA 198 (‘Cant’), the Supreme Court of New South Wales’ recent decision in Re Western Port Holdings provides further encouragement for liquidators to pursue unfair preference claims with respect to third party payments and payments made during the operation of a deed of company arrangement (DOCA).

Key takeaways

  • Payments to the ATO made directly by the company and by third parties during the operation of a DOCA were held to be unfair preferences.
  • The Western Port decision highlights the potential exposure of creditors, such as the ATO, to preference claims despite the fact that the impugned payments were made during the operation of a DOCA and in circumstances where the then deed administrators were aware of (and even supportive of) the payments being made. In short, the decision narrows the availability of the “deed administrator authority defence” to circumstances where the deed administrators themselves made the relevant payments.
  • The decision also provides useful, practical and specific guidance for liquidators as to the circumstances in which third party payments will constitute payments “received from the company” within the meaning of section 588FA(1)(b) of the Corporations Act.

Background

The liquidators of Western Port Holdings (the Company) sought to recover as unfair preferences approximately $2 million paid to the Commissioner of Taxation (ATO), at a time when the Company remained subject to a DOCA. The impugned payments comprised 26 payments made directly by the Company and 11 payments made by third parties.

The DOCA was terminated by the Company’s creditors following numerous defaults by the Company under the DOCA, resulting in the appointment of the deed administrators as the Company’s liquidators on 24 May 2017.

Key issues

The two key questions which arose for resolution in this case were:

  1. Whether all payments (made directly or by a third party) were made “by, or under the authority of the administrator of the deed” within the meaning of section 588FE(2B)(d)(i) of the Corporations Act and therefore exempt from being voidable transactions; and
  2. Whether the third party payments were “received from the company” within the meaning of section 588FA(1)(b) of the Corporations Act, as recently considered in Cant.

The decision

In finding that all of the impugned payments were unfair preferences, the Court answered the first question in the negative and the second question in the affirmative.

Authority of the deed administrators

In rejecting the ATO’s argument that the payments were made with the deed administrators’ authority, the Court:

(a) found that although the DOCA empowered the deed administrators to permit someone to operate the Company’s bank accounts, that power was never actually exercised.[1] The DOCA returned control of day-to-day management of the Company to the director without limitation;

(b) found that the deed administrators’ role was limited to monitoring compliance with the DOCA (including the Company’s efforts to reduce its tax debt) and that the deed administrators neither made the payments nor specifically instructed anyone to make them;[2]

(c) found that although the deed administrators and their staff certainly “pressed” the Company to discharge its statutory liabilities, meeting those obligations was a core obligation of the director under the DOCA and was therefore relevant to whether the DOCA should be terminated.[3] However, this did not mean that the payments were made under the deed administrators’ authority. Rather, the payments were made under the authority of the director, to whom control and management of the Company had been returned by the DOCA;[4]

(d) rejected the ATO’s argument that the DOCA’s power of attorney clause appointing the deed administrators in the event of default to execute documents and use the Company’s name had the effect of authorising any payments subsequently made by the Company to the ATO;[5]

(e) rejected the ATO’s argument that execution of the DOCA meant that all transactions contemplated by the DOCA were done under the deed administrators’ authority.[6]

Third party payments

In finding that the 11 payments made by third parties were “received from the company” within the meaning of section 588FA(1)(b), the Court held it was bound to follow the precedent established in Cant (despite expressing “disquiet” about the reasoning in Cant). Accordingly, the liquidators needed to prove that the assets available for distribution among unsecured creditors had been diminished by the impugned third party payments; a focus on whether the Company’s net assets were unchanged was a “distraction”.[7] In addition, in considering whether an unsecured creditor has received payment “from the company”, the following matters are relevant:

(a) whether the benefit conferred by the third party on the creditor was a benefit to which the company was already entitled, for example, by reason of a contract between the company and the third party or because the third party owed money to the company;

(b) whether the third party was a related entity of the company by reason of common directors or shareholders or interdependent financial arrangements, such that the third party payment can be regarded as effectively payment by or at the direction of the company; and

(c) whether the third party payment was recorded in the company’s books as a loan to the company.[8]

In applying these principles, the Court made the following findings which led to the conclusion that the 11 impugned third party payments were “received from the company” within the meaning of section 588FA(1)(b):

(a) A payment of $81,830 from the Company’s director and CFO (Mr O’Hare) to the ATO resulted in a commensurate reduction recorded in the balance sheet in Mr O’Hare’s loan account with the Company, thereby diminishing the receivable owed by Mr O’Hare to the Company and resulting in the conclusion that the payment was made from monies or assets to which the Company was entitled.[9] Even though there was no written direction by the Company to the director to pay the ATO, the Court inferred that such a direction was given by reason of Mr O’Hare’s position as CFO and director and his resulting awareness of the Company’s financial circumstances, including the monies which he owed to the Company;[10]

(b) With respect to six other payments from two entities related to Mr O’Hare, where those payments reduced debt owed by those companies to the Company, those payments were payments “from the Company” for the same reasons that applied to Mr O’Hare’s payment.[11] Alternatively, where those payments amounted to loans to the Company, those payments were no different to a scenario where the Company had borrowed the money via its bank overdraft and paid the ATO with those funds, resulting in those payments being received “from the Company” as well.[12] The same reasoning applied to a payment of $400,000 which resulted from a $600,000 loan to the Company from a relative of the Company’s CEO;[13]

(c) Three payments to the ATO by the Company’s invoice financier, Hermes Capital Australia, were the proceeds of drawdown of a loan from Hermes Capital to the Company secured by the Company’s book debts. Accordingly, these payments diminished the assets available to unsecured creditors and were therefore payments received by the ATO from the Company for the purposes of section 588FA(1)(b).[14]