A recent matter before the Supreme Court of Queensland Court of Appeal has provided clarity on the establishment of a s588FG(2) Corporations Act 2001 (Cth) defence to an unfair preference claims.

The topical judgment in Queensland Quarry Group Pty Ltd (In Liquidation) & Anor v Cosgrove [2019] QCA 220 (the Case) has firmly placed the onus of proof on a creditor to demonstrate that there were insufficient facts known to the creditor to create suspicion of insolvency.

The Facts in the Case

Queensland Quarry Group Pty Ltd (In Liquidation) (the Company) and the Defendant entered into a joint venture to quarry and develop land that was owned by the Defendant, in his capacity as trustee of a trust. The Defendant and the Company entered into a lease agreement but eventually, the Company defaulted on its obligations and became indebted to the Defendant under the lease agreement.

During the period December 2013 to August 2014, the Defendant was involved in winding up applications against the Company to recover funds owed to the Defendant by the Company under the lease agreement. A settlement was reached but subsequently broke down and no agreed payments were executed.

In September 2014, the Defendant issued a statutory demand to the Company which was not complied with. Subsequently, the Defendant applied to wind up the Company in October 2014. Prior to the hearing for the winding up application a settlement was reached, and payments were made in the amounts of $45,000, $16,250 and $50,000. The winding up application was discontinued.

The Company was eventually wound up following the issuing of a separate statutory demand and subsequent winding up application. The liquidators of the Company, during the course of their investigation, identified the above payments to the Defendant to be preferential and sought to recover the funds as unfair preference payments.

The s588FG(2) Defence

An unfair preference payment is a voidable transaction under s588FE(2A)(a)(i) and s588FF(1) authorizes the Court to make an order to void the transaction(s) in question.

The defence made out by the Defendant under s588FG(2) precluded the Court from making an order where the person to whom a transaction was in favour of; became a party to the transaction in good faith, had no reasonable grounds to suspect that the company was insolvent at that time and any reasonable person in the person’s circumstances would have reached the same conclusion.

On appeal, the Court plainly stated, “ultimately, what is required to be shown to establish the defence…is that there were ‘no reasonable grounds for suspecting’ insolvency.” Further, the question that must be answered in the affirmative is whether, “the matters appreciated by the creditor were insufficient to induce a suspicion of insolvency.”

The Decision by the Courts

At trial before the Queensland Supreme Court, the payments were admitted to be voidable transactions under s588FE(2A)(a)(i) but the Defendant successfully made out a defence under s588FG(2).
The appeal by the Company and the Liquidator was allowed by the Court of Appeal and the trial judge’s decision that a defence had been established was overturned.

The Court assessed the objective facts known to the creditor prior to the transaction in question being executed between the Company and the Defendant. The Court recognized that the original lease agreement that the Company defaulted on and the settlement discussions collapsing all plainly supported a reasonable suspicion that the Company was insolvent. More convincingly, the fact that the Defendant made a winding up application against the Company inherently spoke to a belief on the Defendant’s behalf that the Company was or would become insolvent.

Lessons from the Case

In establishing the s588FG(2) defence, the trial judge placed more emphasis on the good faith and valuable consideration requirements which formed the foundation of how the Defendant successful founded the defence. On trial, however, it became apparent that the question of whether there were “reasonable grounds for suspecting insolvency” was not to be dismissed as procedural, but instead to be treated as almost determinative.

The relevant legislation is comprehensive and with the decision of this recent appeal, the indicia for establishing a defence are not only clearer, but their comparative weighting reflects a stance which is not sympathetic to ignorance or careless business.

Importantly, businesses should remain cautious and vigilant in their dealings with potentially insolvent companies. The courts have shown little appetite to reward ignorance or incompetency in business dealings.

With the onus of proof now sitting on recipients of unfair preferential payment to demonstrate that on the knowledge at hand, is was insufficient to develop suspicion of insolvency, business owners/directors should be on alert to protect their business from similar claims by liquidators of companies. Conversely, liquidators of companies with apparent unfair preference payments are aided by the courts willingness to impose a reasonable person test, making the recovery of potential unfair preference payments far more accessible.