Introduction
The recent decision of Rees J in the New South Wales Supreme Court in the matter Re, Western Port Holdings Pty Ltd (Recs and Mgrs Apptd) (2021) 150 ACSR 274 (“Western Port“) considers the vexed question of when a third party payment will be voidable as an unfair preference. The case also highlights the potential exposure of creditors who receive payments from a company which is bound by a deed of company arrangement (“DOCA“), in circumstances where payments are made when control of the company has reverted to its director.
Background
The liquidators of Western Port Holdings Pty Ltd (“Company“) brought an application to recover, as unfair preferences, $2 million that was paid to the ATO. The impugned amount comprised 26 payments that were made by the Company directly to the ATO and 11 payments that were made by third parties to the ATO. All 37 payments were made when the Company was bound by a DOCA. Under the terms of the DOCA, control of the Company returned to its director, who agreed to cause the Company to pay its debts as and well they fell due, including its tax liabilities.
The two issues in dispute were:
a) whether the payments 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 2001 (Cth) (“Act“); and
b) whether the 11 third-party payments were received “from the Company” within the meaning of section 588FA(1)(b) of the Act.
Under whose authority were the payments made?
Under section 588FE(2B)(d)(i) of the Act, transactions entered into by a company subject to a DOCA under the authority of the deed administrator are not voidable transactions. The key question is not whether payments are made “under the DOCA” but whether payments are made “under the authority of the deed administrators”. It follows that the outcome of any particular case will depend on the provisions of the DOCA and the surrounding factual circumstances.
Rees J found there was no doubt the deed administrators had the power to authorise transactions on the Company’s behalf under the terms of the DOCA. Further, His Honour accepted the deed administrators “pressed” the Company to meet is tax liabilities, following a number of defaults under the DOCA. However, in Rees J’s view, that did not mean the payments were made under the deed administrators’ authority, as opposed to the director’s authority. In particular, the evidence demonstrated that the deed administrators:
a) did not make the payments or instruct anyone to make them;
b) did not know about the payments until after they were made; and
c) were not a party to discussions between the Company and the ATO which resulted in the payments being made (even though they had some knowledge of them).
Accordingly, Rees J found the payments were not exempt from being unfair preferences pursuant to section 588FE(2B)(d)(i) of the Act.
Third party payments
In relation to the 11 third party payments, Rees J considered that he was bound to follow Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSC 198 (“Mad Brothers“), despite noting that the reasoning in that case left him with some “disquiet.” You can read our analysis of Mad Brothers here.
Accordingly, the liquidators had to demonstrate that the 11 third-party payments resulted in a reduction in the Company’s assets. They successfully achieved this by demonstrating that:
a) some of the payments were recorded in the balance sheet relating to the director’s loan account with the Company, which reduced the amount owed by the director to the Company and, in turn, the assets to which the Company was entitled;
b) some payments were loans to the Company, which increased its liabilities; and
c) some payments were the proceeds of a drawdown on a loan to the Company secured by the Company’s book debts, diminishing the assets available to unsecured creditors.
Ultimately, Rees J found that the 11 third-party payments were received “from the Company” within the meaning of section 588FA(1)(b) of the Act.
Take Aways
Western Port is an important decision for two reasons. Firstly, it highlights the exposure of creditors who receive payments from a company which is subject to a DOCA, in circumstances where the control of the company has reverted to its directors. Additionally, while the case follows Mad Brothers, Rees J called into question the analysis of the Victorian Court of Appeal. In particular, while he considered himself bound by Mad Brothers, Rees J did note that:
“The language of s 588FA(1)(b) does not readily permit a construction that it is necessary to demonstrate a diminution in the assets of a company for there to be an unfair preference…”
This particular question was left open by the New South Wales Court of Appeal in Hosking (in his capacity as joint and several liquidator of Evolvebuilt Contracting Pty Ltd (in liq)) v Extend N Build Pty Ltd (2018) 357 ALR 795 and the Federal Court in Commissioner of Taxation v Kassem (2012) 205 FCR 156.
For now, it seems that Mad Brothers will be followed by inferior courts. However, there are still questions surrounding whether it is good law given that the statutory regime makes no express mention of a requirement for a company’s assets to be diminished. However, we will have to wait for the time being, since Mad Brothers was not appealed to the High Court.
~ with Christian Mennilli, Lawyer
