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Defending unfair preference claims

31 Aug 2016

Topics

  • Bankruptcy & Insolvency
  • Commercial Disputes

The Federal Court, in a recent decision considered two possible defences available to creditors, in addition to the defences traditionally available in defending unfair preference claims brought by liquidators, those being:

  • whether the company was solvent at the time of the payment;
  • whether a running account was in place; and
  • that there was no reasonable grounds to suspect insolvency,

As unfair preference claims are a fertile source of funds for liquidations it is important creditors explore all possibilities to protect their interests. The Federal Court in the case of Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liq) considered two further defences to an unfair preference claim.

The relevant facts of the case are:

  1. CSR (Creditor) sold building supplies to FPJ Group (Debtor) under a credit agreement. The agreement allowed CSR to retain title to the supplies until payment of the supplies was made; and
  2. FPJ Group was wound up and the liquidator sought recovery of payments made to CSR as unfair preference payments;

The Court dismissed the liquidator’s claims on the basis that the company was not insolvent at the time of the payments. However, the court went on to consider other possible defences which are considered as follows:

Retention of title

It is not disputed that, traditionally, a claim for an unfair preference payment can only be made against an unsecured debt. The Court, however, in determining what constituted an unsecured debt considered the definition of a security interest as defined in the Personal Properties Securities Act 2009 (PPSA) and determined that retention of title clauses within contracts provide a security for the purposes of an unfair preference claim. As such, CSR was considered a secured creditor.

The law is not settled on this point as there is a moving feast of facts that may provide for a security at one point in time but not at another. Clearly, this will turn on the facts of each matter but this is a solid starting point.

Off-setting claims

The Court was also asked to consider whether CSR could off-set liability to repay the unfair preference claim against other debts owed to it. This question was left unanswered but the Court highlighted a number of decided decisions in support of the argument and indicated that there would need to be ‘powerful contrary arguments’ as to why the decided decisions should not be followed.

It seems, although not settled, that debts may be used to off-set any liabilities that arise from an unfair preference claim.

Conclusion

The law remains unclear for creditors and as a result it is necessary for anyone in business to ensure that they clearly understand the roles and responsibilities of the parties to any transaction.

If you require assistance contact a member of our Commercial Disputes team today.