Insights / January 25th, 2018

Defending an unfair preference claim on the basis that the payment came from a third party

The Bankruptcy Act states that certain transfers of property to a creditor that occurred in the 6 month period prior to the debtor’s bankruptcy (including a payment) are void (and may have to be repaid to the debtor’s trustee in bankruptcy) if the transfer had the effect of giving the creditor a preference, priority or advantage over other creditors. The Corporations Act contains a similar provision concerning insolvent companies.

The recent decision of Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217 considered the provision where the transfer of property came directly from a third party. The case suggests a way in which a creditor may be able to protect itself against a preference claim when an individual debtor is potentially in financial difficulty.

The relevant facts in Rambaldi were:

  1. Ms Alex owed a significant debt to the Commissioner of Taxation.

  2. Ms Alex entered into a loan agreement with a third party whereby the third party would lend Ms Alex money to pay the debt. The loan was only to be used for the purpose of paying the debt owed to the Commissioner of Taxation.

  3. On 7 July 2014, the third party provided a cheque in favour of the Commissioner of Taxation to Ms Alex, who then deposited it at a post office for the credit of the Commissioner of Taxation.

  4. Ms Alex was made bankrupt on 8 December 2014.

The Commissioner of Taxation accepted that the effect of the transaction was to give him a preference over other creditors and that the transaction was made during the relevant period, but argued that the transfer should not be void because the payment was not in fact a transfer of property by Ms Alex.

It was argued the transfer came directly from the third party or, in the alternative, that the property was only ever held by Ms Alex on a “Quistclose trust” (a trust which can arise when a loan is made for a specific purpose).

The Full Court accepted the Commissioner of Taxation’s argument and found that there was no point at which ownership of the bank cheque or the funds represented by it passed to Ms Alex. There was no basis for inferring that Ms Alex had ever become entitled to the money or indeed that Ms Alex had anything more than possession of the bank cheque for a limited purpose. Accordingly, there was no transfer of property by the debtor and therefore no unfair preference.

The Full Court also found that no Quistclose trust arose because the need for such a trust would only have arisen if the advance by the third party had been made to Ms Alex for her to then make payment to the Commissioner of Taxation. If the advance had been made to Ms Alex, then it is likely that it would have been held by Ms Alex on a Quistclose trust and in that circumstance there would also be no unfair preference.

Cowell Clarke has significant experience in acting for both insolvency practitioners as well as companies and individuals who are the subject of unfair preference claims made by trustees in bankruptcy or liquidators. Please contact Peter Leech if you would like to seek advice.

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