Recent NSW Court of Appeal Decision – Unfair Preferences Will Come Back to Bite You!

Recent NSW Court of Appeal Decision – Unfair Preferences Will Come Back to Bite You!

As those in the insolvency industry know, or ought to know, unfair preferences are payments or transfers of assets that give a creditor an advantage over other creditors.

Pursuant to section 588FA of the Corporations Act (“the Act”), the normal procedure for a Liquidator to successfully prove a preference claim is as follows:

  • The company (in Liquidation) and an unsecured creditor of said company were parties to the transaction;
  • The transaction took place during the relation-back period:

(a) 6 months for non-related parties; or

(b) 4 years for related parties; or

(c) 10 years for any evidence of “attempt to defeat, delay or interfere” with the rights of creditors;

  • The company was insolvent at the time of the transaction or the transaction caused the company to become insolvent;
  • The creditor received a better return than it would have if the company went into Liquidation; and
  • The creditor knew, suspected or ought to have known that the company was insolvent when it received the payment.

If the above conditions are successfully proven by the Liquidator, the Liquidator can request the repayment of the unfair preference and the creditor must prove their debt in the Liquidation.

Assuming the conditions set out in Section 588FA of the Act are satisfied, the Liquidator has a reasonable chance of making an application to the court to recover (“claw back” pursuant to sections 588FA and 588FB of the Act) the monies. However, a creditor may be able to defend itself against an unfair preference claim.

Furthermore, the Liquidator has a limited period to claw back unfair preference claims. Pursuant to Section 588FF of the Act, the time period during which a Liquidator can bring a voidable transaction claim to a court is three years after the relation-back day, or 12 months after the date of appointment of the Liquidator, whichever is later. The applicable time limit can only be extended by a court order made under Section 588FF (3)(b) of the Act and which is applied for before the expiry of the applicable time period.

However, the NSW Court of Appeal has recently handed down a judgement concerning the limitation period for a Liquidator to bring a claim for preference payments.

In the case of Sydney Recycling Park Pty Ltd v Cardinal Group Ltd (in Liquidation) [2016] NSWCA 329, the Liquidators brought preference payment recovery proceedings against Sydney Recycling Park. The proceedings were filed within the statutory time limit pursuant to Section 588FF(3)(a) of the Act.

After the applicable statutory time limit, the Liquidators sought leave to amend the claim which included additional alleged preference payments. In the Court’s opinion, the alleged preference payments arose from the same or substantially the same facts as those in the original Statement of Claim. The Liquidators stated that the additional alleged preference payments were absent from their original Statement of Claim by reason of further investigations, evidence and discovery.

The case upholds the authority that in specific circumstances, a Liquidator can add additional preference payments that fall outside the applicable time limit to a claim to an existing proceeding.

The above decision appears to be a prudent one. In the past, if additional payments are uncovered after the time limit stipulated in Section 588FF of the Act has expired, one consequence would be that the Liquidator could not amend their claim to include the additional alleged preference payments. This case is a positive decision for Liquidators who uncover additional preference payments after the time limit for filing the initial claim for preference payment recovery has lapsed.