Voidable transactions: the proper approach to a ‘good faith’ defence under s588FG
In its decision in White v ACN 153 152 731 Pty Ltd (In Liq) [2018] WASCA 119, the Western Australian Court of Appeal has provided clarity about the proper approach that should be taken to the defence, commonly raised in most voidable transaction claims, that the defendant acted in good faith and with no reasonable grounds to suspect the company was insolvent. The defence arises under section 588FG of the Corporations Act 2001 (Cth) (Act).
The decision overturned the previous decision of Master Sanderson in White v ACN 153 152 731 Pty Ltd (In Liq) [2017] WASC 52, which we discussed in April 2017.
Background
The liquidators of Port Village Accommodation Pty Ltd (PVA) brought a claim for an unfair preference against a building contractor of PVA. PVA was involved in providing mine worker accommodation for BHP at a caravan park PVA owned in Port Hedland. The defendant asserted that, for the purposes of section 588FG(1) of the Act, it acted in good faith and had no reasonable grounds to suspect insolvency because:
- The project was backed by BHP;
- BHP had ‘unmet demand for accommodation in Port Hedland’;
- PVA provided ‘repeated assurances’ that funding would be forthcoming;
- No external sources indicated a fundamental problem with the project; and
- The defendant’s representative was ‘familiar with delays in progress payments and believed there was a problem with internal administration rather than a fundamental problem with the financial viability of PVA’.
As we reported in April last year, the Master accepted this argument, and held that, if there had been a preference, the defendant had a defence under section 588FG(2).
Section 588FG(1) and section 588FG(2)
One preliminary issue regarded the distinction between s588FG(1) (which applies where the defendant was not a party to the transaction) and s588FG(2) (which applies where the defendant was a party). The parties accepted that the Master had erred by applying s588FG(2) instead of s588FG(1). The Court of Appeal agreed, but found that nothing turned on this because the relevant test under both subsections was substantially the same for the purposes of this case.
Reasonable grounds to suspect insolvency
The Master found that, because the defendant’s representative did not actually suspect PVA was insolvent, and because he was a ‘reasonable person’, it followed that a reasonable person would have had no grounds to suspect PVA was insolvent.
The Court of Appeal categorically rejected this approach. The Court found:
- Under the ‘first limb’ of s588FG (which relates to whether the defendant in fact had ‘no reasonable grounds for suspecting’ insolvency), the test is not whether the person in fact suspected the company was insolvent: the question is whether, having regard to facts known to the defendant, those facts are sufficient to induce suspicion in ‘a’ reasonable person. It is not relevant whether the person in question was ‘reasonable’: the defendant must, in effect, prove that no reasonable person with knowledge of those facts would have suspected the company was insolvent: at [117]–[122].
- That consideration should also have regard to the ‘training, skills and experience of “the person” in question’: [122].
- Under the ‘second limb’ (which relates to whether a reasonable person in the defendant’s circumstances ‘would have’ had no reasonable grounds to suspect insolvency), the following propositions should be considered:
- the ‘circumstances’ in question are the actual circumstances of the defendant at the time of the transaction, and relate to ‘external’ factors, rather than ‘personal’ factors (such as their ‘perspicacity’ and ‘financial acumen’);
- the court should consider how a reasonable person would assess the information ‘in fact in the possession of the creditor’;
- that information would include knowledge of the absence of enquiries, but would not include information that a reasonable person would have theoretically obtained had those enquiries been made and responded to;
- the standard to be applied is that of a hypothetical person who is assumed to have the knowledge and experience of the “average business person”, rather than the knowledge and experience of the defendant; and
- the ‘circumstances’ include the actual nature and practices of the particular industry in which the transactions occurred, but not the defendant’s subjective views as to the operation of the industry and its practices: [123]–[124].
- The Court needs to consider how a hypothetical reasonable person would view the facts and information available to the defendant at the time, rather than make an assessment of whether the defendant’s witnesses were ‘reasonable’.
- The Master made no finding as to whether the periods of delay in payment were ‘reflective of, or consistent with, industry practices’, or as to whether the ‘hypothetical reasonable person’ would have ‘attributed the delays to, in effect, merely administrative problems’: [142].
- The defendant’s representative’s belief that there were no financial difficulties with PVA was explicable simply as a reflection of the ‘optimism’ that the Master attributed to him as a witness: [142].
Significance
This decision confirms previous authorities as to the proper approach to be taken in relation to a ‘good faith’ defence to a voidable transaction claim. This defence can be notoriously difficult to establish in many cases. A defendant to a preference or other voidable transaction claim should make sure to adduce all evidence that is relevant to the circumstances of the transaction, and, in particular, if delays in payment are considered to be the normal practice within a particular industry, the defendant should consider whether it can give evidence as to that practice.
More broadly, creditors should be aware that taking an optimistic view of a debtor’s ability to pay, and ignoring evidence that the debtor may be experiencing financial difficulties can lead to claims by a liquidator down the track.
This article was written by Tom Langdon, Senior Associate.
Publication Editor: Grant Whatley, Partner.