Dual approach to an unfair preference defence

Liquidators have successfully appealed a decision of the Supreme Court of Western Australia in Hayden Leigh White in his capacity as joint and several liquidator of Port Village Accommodation Pty Ltd (In Liq) v ACN 153 152 731 Pty Ltd (In Liq)1 which was heard by the Supreme Court of Western Australia, Court of Appeal (WASCA).  The WASCA considered the approach taken by the Master in the first instance decision2 in the construction and application of a defence to an unfair preference claim under section 588FG(2)(b)(ii).

Background

Hickory Group was the parent company of Hickory Group WA Pty Ltd (HWA) to whom Port Village Accommodation Pty Ltd (PVA) made payments in excess of $10m during the relation back period in respect of a building project known as “Landing Port Hedland.”  HWA paid the corresponding amounts to Hickory Group.

Mr Argyrou, a director of Hickory Group, who was the main point of contact between PVA and Hickory Group was aware that:

• PVA reported to BHP who financed the project and who would be the ultimate user and beneficiary of the Landing Port Hedland.
• PVA was principally, but not fully, funded by BHP.
• BHP would rent the accommodation at the Landing Port Hedland from PVA.
• BHP was anxious to provide accommodation for its workers.
• BHP effectively pre-paid rent in order to fund working capital for HWA to ensure completion of the project.

Problems in respect of payment of HWA’s invoices arose from the time PVA and HWA signed a formal building contract.³

On 31 January 2013, PVA was placed into voluntary administration⁴ and on 18 April 2013 the creditors of PVA resolved to wind up PVA and appoint the administrators as liquidators.⁵

The liquidators sought orders that (amongst other things) the payments made from PVA to HWA be declared as:

• unfair preferences pursuant to s 588FA of the Corporations Act;⁶
• insolvent transactions within the meaning of s 588FC of the Act; and
• voidable transactions within the meaning of s 588FW(2) of the Act.

The Master dismissed the liquidators’ claim on the basis that Hickory Group had established a defence under s 588FG(2)(b)(ii) of the Act.

The Master’s approach at first instance

The Master applied the defence in s 588FG(2)(b)(ii) of the Act even though Hickory Group had not relied on it as a defence, and the parties had in fact argued the case based on s 588FG(1). 

The Master’s construction of s 588FG(2)(b)(ii) was that it operated on the basis that:

• it was not directed to a hypothetical person who is assumed to have the knowledge and experience of the ‘average business person’; and
• it required examination of whether a creditor acting reasonably would have grounds to suspect insolvency.

This construction of the defence meant that, where a specific creditor was found to be “reasonable” and didn’t suspect or have grounds to suspect insolvency themselves, the defence is established because that person is a “reasonable person in the person’s circumstances.”

The Master’s approach gave consideration to Mr Argyrou’s knowledge and familiarity of the matters and his lack of suspicion and the Master stated, with reference to Mr Argyrou:

He believed the project would proceed and it would produce for his company substantial profits….He clearly took the view most of the problems bedeviling the project could have been sheeted home to a lack of organisation and system on the part of PVA.  He believed the problems were temporary… ⁷

The appeal

The WASCA found that the Master’s misattribution of the defence provisions was not found to be an error which, on its own, would warrant the appeal because the provisions are virtually identical (and in any event, the WASCA considered the misattribution would be treated as a slip).

The appeal was actually upheld based on how the Master construed the defence.  The WASCA set out that the starting point for a s 588FG(2)(b)(ii) defence was to assume the existence of a hypothetical, average, reasonable business person.⁸  To expand on that construction, the WASCA set out at [142] that the defence should have involved assessment of whether:

a hypothetical reasonable person with the knowledge and experience of an average business person in Hickory Group’s circumstances would have attributed the delays [in payment] to, in effect, merely administrative problems.

The WASCA echoed and adopted the established proposition that the test in establishing a defence under s 588FG(2)(b)(ii) is objective as set out in Cussen v Commissioner of Taxation.⁹

Lavan comment

Insolvency practitioners should keep this matter in mind when conducting their detailed investigations into the recovery of unfair preferences.  The review of the relationship, knowledge and correspondence between the creditor and a company should be considered both on the basis of whether the facts and matters actually appreciated by the person (i.e. the creditor acting reasonably), are sufficient to induce a suspicion as to insolvency and whether a hypothetical person with the same knowledge and experience would so suspect.  The matter will now be remitted back to the Supreme Court of Western Australia and Lavan will keep you up to date.