In the New South Wales Supreme Court case of Hall and Others v Ficema Pty Ltd [2022] NSWSC 29, Ficema Pty Ltd (Ficema) sought to defend an unfair preference claim on the basis that the funds paid to Ficema by an insolvent company were received by it as beneficiary of a Quistclose trust (rather than as a creditor).
In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335, Gibbs ACJ said that the decision of the House of Lords in Barclays Bank v Quistclose Investments, Ltd [1970] AC 567 was authority for the proposition that:
“….where money is advanced by A to B, with the mutual intention that it should not become part of the assets of B, but should be used exclusively for a specific purpose, there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the arrangement will give rise to a relationship of a fiduciary character, or trust.”
Facts
On 17 May 2015, BBY Limited (BBY), a public financial services company, and BBY Holdings Pty Ltd (BBY Holdings) entered into voluntary administration. BBY and BBY Holdings were wound up on 22 June 2015.
The liquidators of BBY and BBY Holdings (Liquidators) brought a claim against Ficema in the New South Wales Supreme Court alleging that 7 payments made by BBY and BBY Holdings were voidable unfair preferences under sections 588FA, FC and FE of the Corporations Act 2001 (Cth) (Act). The alleged preference payments comprised six payments from BBY and BBY Holdings to Ficema totalling $341,889 and one other payment from BBY to Ficema of $3m.
Except for one payment (of $51,787), the payments were made earlier than the ordinary 6 month relation-back period. However, because Ficema, BBY and BBY Holdings had a common director, the companies were found to be related entities so that the extended relation-back period of 4 years applied.
The Liquidators alleged that the $3m payment on 24 June 2014 was repayment of a short-term loan advanced by Ficema to BBY on 16 June 2014.
Ficema denied that it received the $3m repayment as a creditor of BBY. Ficema argued that the initial $3m loan was advanced to BBY on 16 June 2014 for a specific purpose (to meet a potential liability to the Australian Stock Exchange). Because the liability never arose and the funds were not used for the purpose, it was contended that the funds were only ever held by BBY as trustee and that BBY was required to return the funds to Ficema as the beneficiary under the Quistclose trust.
Gleeson J rejected Ficema’s evidence that the $3m loan was advanced for a specific purpose, finding that the reason for the loan was no more specific than BBY having a “problem” with a share trade it was facilitating. His Honour continued that, even if the loan funds were advanced for a specific purpose, this alone would not have given rise to a Quistclose trust. Ficema was also required to prove (which it could not) that (1) that the funds were not intended to become the beneficial property of the borrower (BBY) and (2) that the loan funds were required to be kept separate from other money held by BBY. In this regard, Gleeson J found that there was no stipulation that the loan funds were to be kept separate and, indeed, the loan funds did become mixed with other money held by BBY.
Having found that BBY and BBY Holdings were insolvent during the extended relation back period, Justice Gleeson concluded [at 143]:
“When regard is had to all of the relevant circumstances, the conclusion to be drawn is that the $3 million loan by Ficema to BBY was not impressed with a trust in the nature of a Quistclose trust or otherwise. Ficema did not retain a beneficial interest in the funds advanced to BBY on 16 June 2014. It follows that the payment of $3 million made by BBY to Ficema on 24 June 2014 was received qua creditor of BBY and was an unfair preference.”
The Liquidators also argued that, even if a Quistclose trust did arise, that this would not operate to take the transaction outside the scope of sections 588FA, FC and FE of the Act. Gleeson J rejected the submission and found in obiter that, if a Quistclose trust arose, the loan funds would not have become property of BBY.
Take aways
When evaluating defences raised by creditors in resisting unfair preference claims, it is trite to say that practitioners should bring an enquiring mind and carefully consider all circumstances. Payments which on their face have the hallmarks of being impressed with a trust might upon closer scrutiny be something quite different.
Similarly, parties who do not wish to expose themselves to an unfair preference claim may be able to structure a payment to a third party to avoid the critical debtor/creditor relationship from arising.
