This case examines when a third party payment to a creditor on behalf of an insolvent company may be recoverable by a liquidator as an unfair preference under s 588FA(1) of the Corporations Act 2001 (Cth) which provides as follows:
- A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
- the company and the creditor are parties to the transaction (even if someone else is also a party);
- the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company; and
- even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.
Facts in Brief
Evolvebuilt Contracting Pty Ltd (Evolvebuilt) entered into a contract with a head contractor, Built NSW Pty Ltd (Built) for the construction of significant building works. Part way through the construction, Evolvebuilt ceased operations leaving subcontractors it had retained unpaid. The Construction, Forestry, Maritime, Mining and Energy Union (CFMEU) wrote directly to the head contractor, Built, to demand that it make good Evolvebuilt’s obligations by paying the subcontractors directly. Evolvebuilt also requested Built to pay the subcontractors under provisions in the construction contract allowing the head contractor to ‘leap frog’ Evolvebuilt to pay subcontractors direct.
Built terminated the contract with Evolvebuilt and outlined to the CFMEU an arrangement for the payment of the outstanding amounts owing to the subcontractors. The payments were subsequently made.
Liquidators were appointed to Evolvebuilt and pursued the subcontractors for recovery of the payments from Built as unfair preferences made on behalf of Evolvebuilt.
Issues and Outcome
At first instance, Brereton J found that the head contractor, Built, acted pursuant to the arrangement with the CFMEU (as opposed to the request from Evolvebuilt). He also found that since the payments were made from Built, and from no actual benefit or entitlement which belonged to Evolvebuilt , they were not “made by or received from” Evolvebuilt as required under s 588FA(1) of the Corporations Act 2001 (Cth).
The Liquidator appealed the decision of Brereton J. The NSW Court of Appeal upheld this aspect of the decision of Brereton J, but for different reasons outlined below:
- Although a relevant ‘transaction’ can be ‘made up of a series of interrelated dealings’, Evolvebuilt was not a party to the transactions by which the subcontractors were paid, as payment was made as a result of the actions of the CFMEU.1 Built was under no contractual obligation to Evolvebuilt to pay the subcontractors.2 It was also incorrect to suggest that as a matter of causation, that the request from Evolvebuilt played any part in the transaction between Built and the CFMEU which procured payment to subcontractors;3 and
- As Evolvebuilt was not a party to the ‘transaction’, it was unnecessary to consider the point as decided by Brereton J whether the payments made by Built to the subcontractors were received ‘from’ Evolvebuilt for the purposes of s 588FA(1)(b), or if it was necessary for there to be a diminution in the assets of a debtor company for a transaction to fall within s 588FA(1).4 It was also significant that an adjudicator under the building contract had determined that no money was owed by Built to Evolvebuilt, and consequently no asset or benefit of the insolvent company was impacted by the payments made by Built.
Payment Direct to Another Creditor
A minor part of the judgment related to an appeal from the decision of Brereton J, who found that one creditor who received payment direct from Evolvebuilt established the defence in s 588FG(2) of the Corporations Act 2001 (Cth) of having no reasonable grounds to suspect insolvency in receiving the payment, and in good faith.
The Court of Appeal overturned this part of the decision in finding that the creditor had reasonable grounds to suspect insolvency.
Lessons in Third Party Payments
Quite rightly, third party payments are often recoverable by company liquidators as unfair preferences where they are made by related entities in order to benefit certain creditors at the expense of others. Where a subcontractor becomes insolvent, care should be taken in determining how project payments should be structured to preserve the value of a development. For instance, some States have legislation allowing subcontractors to claim a charge or security over payments to be made by a head contractor.
This article was written by Matthew Broderick, Partner and Elizabeth Singleton, Solicitor.
Publication Editor, Grant Whatley, Partner.