A rose by any other name: payments made on behalf of a debtor company can still be unfair preference payments: Kassem and Secatore v Commissioner of Taxation [2012] FCA 152


The liquidators of Mortlake Pty Ltd (Mortlake) applied to the Federal Court for declarations that payments made to Allianz Insurance (Allianz) and the Commissioner of Taxation (Commissioner) in May 2007 (some four months before Mortlake went into liquidation) were unfair preferences under section 588FA of the Corporations Act 2001 (Cth).

The liquidators’ application arose because Antqip Pty Ltd (Antqip) made the payments to Allianz and the Commissioner on behalf of Mortlake.

The disputed payments comprised:

  • two payments made to the Commissioner into a running balance account that Mortlake had and a reallocation of those funds into a superannuation guarantee account; and

  • a payment made to Allianz for worker’s compensation insurance premiums (Payments).

Mr Russell was originally the sole director and shareholder of each of Mortlake and Antqip. He resigned as sole director and shareholder from Antqip but continued to act as a manager of Antqip’s business. He was an authorised signatory of Antqip’s bank accounts and continued to be so after resigning as director.

The Commissioner and Allianz each argued that:

  • the Payments were made by Antqip using its own funds;

  • Mortlake was not a party to the relevant transactions; and

  • it followed that the Payments received by the Commissioner and Allianz were not made by Mortlake.

Mr Russell’s evidence was that the Payments were made using funds lent to Mortlake by Antqip for the purpose of making the Payments. However, Mr Russell failed to notify the administrators and other creditors that Mortlake owed funds to Antqip. Mr Russell made the Payments in his capacity as a manager of Antqip. The court considered that Mortlake was using Antqip’s loans to it in order to make the Payments.

One of Mortlake’s liquidators gave evidence that he did not expect there to be any distribution to any class of creditor, even if the liquidators were successful against Allianz and the Commissioner.

The Commissioner and Allianz accepted that if the court found that the Payments were unfair preferences under section 588FA, then the liquidators were entitled to succeed against them. That is, they had no defence to the claims.

The ultimate effect

The court looked at the ‘ultimate effect’ of the Payments on the net assets of Mortlake.

Whilst not every payment made by a company to a creditor in the six months preceding the company’s winding up need result in the giving of an unfair preference (such as payments on running accounts), the court will consider the ‘ultimate effect’ of the wider course of dealing between the company and the creditor upon the net assets of the company which are available to meet the demands of other creditors.

Allianz received a payment of $56,000 from Antqip. It was clear to the court that Allianz would have received less if it had proved for that amount in Mortlake’s winding up. Therefore, the payment was an unfair preference. In the court’s view, the payment made to Allianz did nothing more than extinguish a pre-existing debt.

In relation to the Commissioner, Mortlake borrowed from one creditor to pay another creditor. There was no enlargement or enhancement of the pool of assets available to satisfy the claims of Mortlake’s other unsecured creditors.

The court concluded that the Commissioner received an unfair preference because he would not have received by way of dividend the $70,000, if he proved in winding up instead of accepting the payment.

The court concluded that, despite the fact that the Payments were made by Antqip rather than Mortlake, the Payments constituted unfair preferences.

Lavan Legal comment

Whilst not all payments made within six months of a company going into liquidation will be considered an unfair preference, the court will have regard to:

  • the debtor company and the creditor’s course of dealing;

  • whether the payment to the creditor has an effect on the net assets of the company; and

  • whether that payment affects the pool of assets available to meet the demands of other creditors.

This case illustrates that, in circumstances where one company has made payments on behalf of a debtor company to a creditor, it is in the court’s discretion to apply the ‘ultimate effect’ test to determine whether that payment was an unfair preference, despite the payment not being directly made by the debtor company.

For more information, please contact:

Dean Hely Frances Hamlett
Deputy Managing Partner Solicitor
(08) 9288 6772 (08) 9288 6831
dean.hely@lavanlegal.com.au frances.hamlett@lavanlegal.com.au

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.