Voidable transactions: a stronger 'good faith' defence under s588fg?

Thursday, 13 April 2017

The recent decision of the Western Australian Supreme Court in White v ACN 153 152 731 Pty Ltd (in liquidation) [2017] WASC 52 may significantly lower the bar for a defendant to establish a defence to a voidable transaction claim pursuant to section 588FG of the Corporations Act 2001 (Cth) (Act).

Background

The test imposed on a defendant seeking to rely on section 588FG of the Act has previously been described as 'fairly demanding': Pengulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651, 658. The defendant must prove that:

  • It entered into the transaction in good faith (section 588FG(2)(a) of the Act);
  • At the time of the transaction, it had no reasonable grounds for suspecting that the company was insolvent or would become insolvent because of the transaction (section 588FG(2)(b)(i) of the Act); and
  • At the time of the transaction, a reasonable person in the defendant's circumstances would have had no reasonable grounds for so suspecting (section 588FG(2)(b)(ii) of the Act).

The defendant must also prove that it provided valuable consideration under the transaction or changed its position on reliance on the transaction.

The Court's approach 

The decision in White has the potential to make it significantly easier for a defendant to establish this defence. In particular:

  • In considering 'good faith' and whether the 'subjective' element of proving that the defendant had no reasonable grounds for suspecting insolvency, the Master placed weight on the testimony of the (sole) witness for the defendant, Mr Argyrou, who testified that he did not in fact suspect that the company was insolvent. The Master did not accept that documentary evidence from the time indicated that the defendant in fact must have suspected insolvency. (This was so even though Mr Argyrou was not the defendant, and the judgment doesn't say whether other individuals' knowledge contributed to the defendant's corporate knowledge).
  • The Master was particularly disparaging of submissions as to the unreliable nature of witness's recollections compared with contemporaneous documents, describing them as owing 'much to the pop psychology so popular in the 1960s'. The Master found that '[s]imply to discount a witness' evidence and say based on documentary evidence he or she must have suspected insolvency is not … consistent with Australian jurisprudence'. It is worth noting that the English authority rejected by the Master, Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560, has been cited approvingly by Australian courts, including most recently by the NSW Court of Appeal in Nominal Defendant v Cordin [2017] NSWCA 6.
  • The Master also found that there were no reasonable grounds for suspecting insolvency, despite the defendant's awareness that:
    • there were lengthy delays in paying the defendant's invoices, ultimately leading to the defendant commencing court proceedings before receiving payment;
    • the company was evasive in explaining those delays;
    • there had been numerous delays in the project schedule;
    • those delays were material to the provision of debt and equity funding to the company to fund the project;
    • the debt and equity funders had suspended funding while assessing a revised schedule;
    • the company was seeking alternative funding sources;
    • the payment of the defendant's invoices was dependent on equity drawdowns that were subject to due diligence; and
    • the parties had agreed to amend the payment claim procedure, and the company agreed to grant a mortgage to the defendant to manage the financial risk of the defendant.
  • The Master found that those facts were overwhelmed by the defendant's belief that the project was being funded by BHP Billiton and Deutsche Bank, that the project was necessary to meet BHP's 'unmet demand for accommodation in Port Hedland', and that Mr Argyrou 'remained optimistic' about the project.
  • Finally, in considering the 'objective' test, of whether a reasonable person in the defendant's circumstances would have had reasonable grounds for suspecting insolvency, the Master's conclusion was based wholly on his finding that Mr Argyrou was 'a reasonable person', and therefore 'no other hypothetical individual slotted into the circumstances as they existed would … have suspected insolvency'. This approach would seem to minimise the 'objective' aspects of the test, and, assuming the majority of people are more or less 'reasonable', it runs the risk of eliminating the distinction between sections 588FG(2)(b)(i) and (ii) of the Act for all practical purposes. 

Implications

If this decision is followed, it will likely become more difficult for liquidators to recover voidable transactions, as a claim could be defended relatively easily if there is evidence that:

  • The defendant's witnesses did not in fact suspect the company was insolvent or likely to become insolvent;
  • There was some basis to believe that the company remained solvent (even if the defendant was apparently aware of facts that might suggest insolvency); and
  • The defendant (or its witness) is a 'reasonable person', providing a 'shortcut' for meeting the test in section 588FG(2)(b)(ii) of the Act.

We will also watch with interest whether this Western Australian decision is adopted by other Courts around Australia.

This article was written by Tom Langdon, Associate. Edited by Grant Whatley, Partner.

Important disclaimer: The material contained in this publication is of a general nature only and is based on the law as at 13 April 2017. It is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.