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The Statutory Scheme

General discussion of following sections:

Section 588FA(1)(a),(b)

  • Section 588FC
  • Section 588FE(2),(2A),(2B),(4),(5)
  • Section 588FF(1),(3)
  • Section 588FG(1),(2)

Reviewing the operation of section 588FA(1)

1. Meaning of “transaction”

  •  Section 9 definition
  • Australian Kitchen Industries Pty Ltd v Albarran (2004) 51 ACSR 604 SC(NSW).


2. The requirement of a debtor/creditor relationship

  • Merchant and Partners (Sydney) Pty Ltd v Halse (2000) 18 ACLC 254, CA(WA).
  • Minister of Transport v Francis and Woodings (2000) 18 ACLC 617, CA(WA).

Reviewing the operation of section 588FA (1)(b), (3)

1. General discussion of meaning of “preferential effect,” and the onus of the liquidator to satisfy this requirement.


In determining whether an unfair preference has been bestowed on a creditor, one approach that has consistently found favour with the courts is to analyse the ultimate effect of the transaction under review.


2. Case law discussion of the doctrine of ultimate effect:

  • Airservices Australia v Ferrier ((1996) 185 CLR 266
  • Mann v Sangria Pty Ltd (2001) NSWSC 172, 21/3/2001
  • Beveridge v Whitton (2001) NSWCA 6, 5/2/2001


3. The doctrine of ultimate effect was recently invoked in:

  • Re Centaur Mining and Exploration Ltd (2008) 26 ACLC 1217, SC(Vic)


4. The following cases were discussed in Centaur Mining.  In each case the liquidator’s preference claim was successful with the various courts refusing to allow the doctrine of ultimate effect to operate in defeat of the liquidators’ claims.  In terms of ultimate effect it will be useful to resolve the question – what distinguishes these cases from Centaur Mining?

  • Australian and Overseas Telecommunications Corporation Ltd v Russell Kumar and Sons Pty Ltd (1993) 11 ACLC 281 (payment of outstanding telephone account).
  • Sheldrake v Paltoglou (2006) QCA 52 (payment of arrears of rent).
  • Sutherland v Liquor Administration Board (1997) 15 ACLC 875 (payment of outstanding poker machine taxes).

In each case payments were made to preserve benefits being enjoyed by the company.  In terms of ultimate effect could the benefits gained or preserved be equated to the payments made so as to negate the suggestion of unfair preference?


5. Finally, consider the concept of the running account – being a specific application of the doctrine of ultimate effect:

Running account cases for discussion:

  • Airservices Australia v Ferrier (1996) 185 CLR 483.
  • Whitton v Konemann Australia Pty Ltd (2002) 43 ACSR 436 SC(NSW)
  • Sutherland v Lofthouse (2007) 25 ACLC 1416 CA(Vic).
  • Walsh v Salzer Constructions Pty Ltd (2000) VSCA 228.
  • Wily v Eastern Elevators Pty Ltd (2003) 45 ACSR 261 SC(NSW).


Insolvent Transaction

General discussion of the onus of the liquidator to establish that the company was insolvent at the time of the unfair preference.  The following matters will be considered:


1. Relevance of section 588FC


2. Statutory definition of insolvency under section 95A, CA

Case law:

  • Powell and Duncan v Fryer, Tonkin and Perry (2000) 18 ACLC 480, SC(SA).


3. The distinction between retrospective and current/prospective insolvency.

Case law:

  • Lewis v Doran (2004) 22 ACLC 1009; on appeal (2005) NSWCA 243.


4. Establishing evidence of insolvency

Case law:

  • Re Mike Electric (Aust) Pty Ltd (in liq)
  • Keith Smith East West Transport Pty Ltd v ATO (2002) NSWCA 264
  • ASIC v Plymin (No. 1) (2003) 21 ACLC 700, SC(Vic).
  • Travers v Cmr of Taxation (2006) 58 ACSR 472, Fed C


5. Statutory presumptions of insolvency – operation of section 588E, CA.

Case law:

  • Dwyer v R-Jay Pty Ltd (2007) SASC 115


6. Company’s ability to access unsecured funds or promises of support – issues raised by present wording of section 95A, CA

Case law:

  • Harrison v Lewis (2001) 19 ACLC 566, Vic(SC)
  • Lewis v Doran (see above)


Relation Back

For an unfair preference to be voidable it must have been entered into within a specified time frame with reference to the relation back day.  A general discussion of relation back involves the following:


  • Definition of relation back day contained in section 9, CA
  • Relation back day in respect of a voluntary winding up
  • Relation back day with respect to a court winding up
  • Consequences for the relation back day where immediately before winding up the company was under administration or deed of company arrangement
  • Identifying time periods within which an unfair preference must have been entered into to enable investigation by the liquidator


A particular consequence for the relation back day and the related claw back period may arise where a winding up application is before the Court, however, prior to the making of a winding up order the directors of the company take steps to appoint an administrator.  In such circumstances in the event that the administration proceeds and the winding up application is adjourned or dismissed, the relation back day becomes the date of the administrator’s appointment and not the earlier date of the filing of the winding up application.  This may result in a significant reduction of the liquidator’s review period and consequential limits on preference recoveries.


Case on point:

  •  Re Octaviar Ltd (2008) QSC 216 (Court orders made which were designed to overcome the suggested difficulties with the relation back period that could arise when administration precedes liquidation).


Statutory defence under section 588FG(2)

Section 588FG(2) confers a statutory defence on a party to a voidable transaction who would otherwise be affected by an order under section 588FF, such order invalidating the transaction.


There are four elements of the defence all of which must be established by the defendant/creditor:


(a)        good faith

(b)(i)    no reasonable grounds for suspecting insolvency

(b)(ii)    a reasonable person would have had no grounds for suspecting      insolvency

(c)        valuable consideration


In the normal course there is no issue regarding elements (a) and (c).  It is commonly observed by the courts that the other elements of the defence involve a subjective test (b)(i) and an objective test (b)(ii).


With respect to the subjective test much turns on the meaning of “suspecting insolvency.”  “Suspicion” has been described as something more than a mere idle wondering whether something exists.  It is a positive feeling of actual apprehension amounting to an opinion but without sufficient evidence.  In each case it is a question of looking through the contemporary eyes of the parties at the commercial circumstances then prevailing between them to determine whether or not a suspicion of insolvency was harboured by the defendant.


The question raised by the objective test is whether a reasonable person in the defendant’s circumstances would have had no reasonable grounds for suspecting that the company was insolvent.  Here the defendant will seek to establish that the commercial circumstances prevailing between the parties did not provide grounds for a reasonable person to suspect insolvency.

The significance of the distinction between the subjective and the objective tests was recognised in Sims v Celcast Pty Ltd (1998) 71 SASR 142 where the Court observed:


“The fact that a creditor has in good faith lulled itself by its own deductive processes to a position which…..can afterwards be shown to be flawed will not avail that creditor by reliance on subpara (b)(i) if a reasonable person should have read the signs differently; subpara (b)(ii) will still remain a hurdle for that creditor.”


Two final matters relating to the statutory defence warrant emphasis:


  • Although the defendant bears the onus of establishing the statutory defence under section 588FG(2), that task arises, however, in a context where the liquidator will point to various matters which the liquidator will argue must have engendered relevant suspicion on the part of the defendant and the hypothetical reasonable person.


  • The relevant suspicion under both tests is one of actual and existing insolvency, as distinct from impending or potential insolvency, or a temporary lack of liquidity.


Case law:

  • Whitton v Konemann Australia Pty Ltd (2002) 43 ACSR 436, SC(NSW).
  • Wily v Eastern Elevators Pty Ltd (2003) 45 ACSR 261 CA(NSW).
  • Sellers v Offset Alpine Printing Pty Ltd (2003) VSCA 37.
  • Spectrum Joinery Pty Ltd (in liq) v Turners Building Supplies Pty Ltd (2005) ACTSC 70
  • Burness, In the Matter of Denward Lane Pty Ltd (in liq) (2009) FCA 893


The ATO And Unfair Preferences

The ATO is a unique creditor in insolvency law.  On the one hand a tax liability is simply an unsecured debt in a winding up or bankruptcy.  On the other hand the ATO is in a unique position as an unsecured creditor for the following reasons:

  • The ATO is often a significant creditor of any business, small or large, and across all industries
  • The ATO will often have information on its taxpayer beyond that generally available to most other creditors
  • The inability to pay tax is a significant indicator of a taxpayer’s insolvency
  • The ATO has rights and processes of recovery that are not available to other creditors.  For example, in respect of certain tax debts the ATO has rights of recovery against company directors parallel with its claim against the company as an unsecured creditor.
  • Certain types of tax debt are particularly amenable to misuse by the taxpayer, for example, moneys withheld by an employer from employees’ wages.  Here there is potential to hold on to these moneys as working capital, particularly if other creditors/suppliers are pressing for payment.

It will be useful to consider the position of the ATO in the context of unfair preference recoveries with reference to:

ATO Receivables Policy, Chapter 22, Voidable Transactions

Selected case law:

  • Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353, SC(NSW).
  • Dean-Willcocks v Commissioner of Taxation (2008) NSWSC 1113, 24/10/2008.
  • Hall v Commissioner of Taxation (2004) 51 ACSR 169, SC(NSW).

DISCLAIMER: this newsletter is not intended as legal advice; no reliance is to be placed hereon.