We recently had cause to make an demand under section 588FH on a person related to a company in liquidation, and had to resolve the question of whether the statutory defenses for preferences were available to defend the claim.
Section 588FH is one of those extremely useful, rather sensible, but slightly left field provisions designed to give liquidators powers to recover money that was paid preferentially. The left field part is that the recovery is not made from the creditor that received the payment, but from a party related to the company. We looked at this section in general in our February 2005 newsletter.
A summary of the section is that money may be recoverable from a related party when that related party guaranteed or otherwise secured a debt owed by the company to a creditor, and where that creditor was paid preferentially by the company before the liquidation.
Sometimes directors of companies will make unfair preferences to creditors to protect the related party (sometimes themselves) from claims under guarantees or securities.
The Act says:
CORPORATIONS ACT 2001 – SECT 588FH Liquidator may recover from related entity benefit resulting from insolvent transaction
(1) This section applies where a company is being wound up and a transaction of the company:
(a) is an insolvent transaction of the company; and
(b) is voidable under section 588FE; and
(c) has had the effect of discharging, to the extent of a particular amount, a liability (whether under a guarantee or otherwise and whether contingent or otherwise) of a related entity of the company.
(2) The company’s liquidator may recover from the related entity, as a debt due to the company, an amount equal to the amount referred to in paragraph (1)(c).
In this case our demand was met with a response that the related party relied upon the statutory defenses available to defend preference claims, in particular that there was no suspicion of insolvency. Albeit that we did not think that the related party could prove those defenses anyway, our response was that the defenses were not available in claims under section 588FH.
The defining factor are the words “voidable under section 588FE“.
An unfair preference (s588FA) is an insolvent transaction if the transaction was done whilst the company was insolvent (s588FC). An insolvent transaction is a voidable transaction if it was made within the relevant time period (s588FE). Orders may be granted to void these transactions (s588FF). Section 588FG, which provides the statutory defenses, says that section 588FF orders should not be given in some circumstances.
Section 588FH draws a line before that question of defenses is raised. The 588FH claim may be made when the original transaction is voidable under section 588FE. The reasoning is that the defenses apply to actions and knowledge of a party that has had dealings with the company, usually at arms-length. The related party has not had those types of dealings in relation to the obligation released.
In our case the factors showing the original voidable transaction were very clear and easy to prove. Once the related party conceded that the defenses were not available to them, they decided to settle the matter.