In brief: A District Court of Queensland decision addressing defences to an unfair preference action, inclusive of: good faith; set-off; and running account. The Liquidator’s opinion that the company was insolvent in reliance upon records that failed to comply with s 286 of the Act is also considered.
Case summary by Scott D. Taylor.
For a copy of the full judgment, please click here.
Implications for Liquidators and Defendants to unfair preference actions:
South East Queensland Machinery Manufacturing and Distribution (Mining) Number 1 Pty Ltd (In Liquidation), previously named Aran Management Pty Ltd (‘Aran Management’), was one of eight within a group of companies that manufactured and supplied complex mining fill plants.
Rexel Electrical Supplies Pty Ltd trading as Inaco Automation Controls (‘Inaco’) supplied electrical components to Aran Management that were used in the manufacture of the mining fill plants.
Aran Management sought to recover $197,469.16 as unfair preferences under s 588FA of the Corporations Act 2001 (the ‘Act’).
Inaco relies on three defences to resist the claim:
(a) Good faith under s 588FG;
(b) Running account so as to trigger the operation of 588FA(3); and
(c) Set off pursuant to s 553C.
Further, Inaco did not admit that:
At trial, Inaco objected to the admission of various documents of Aran Management on the basis:
Inaco disputed the accuracy and authenticity of the documents, and the Liquidator’s conclusions drawn from the documents based on the Liquidator’s conclusion that Aran Management had failed to keep financial records in accordance with s 286 of the Act.
Solvency – Liquidators Opinion
His Honour accepted the Liquidators opinion that Aran Management was balance sheet insolvent from 14 February 2012 and cash flow insolvent from at least 1 March 2012 up until the appointment of the Liquidator on 14 August 2012.
The Liquidator’s conclusions based upon the books and records made available to him that the company was insolvent were accepted, notwithstanding that the books and records necessarily represent records sufficient to satisfy s 286 of the Act.
His Honour stated further that:
Running Account – 588FA(3)
In determining no running account defence existed, His Honour accepted that Aran Management had satisfied the onus of establishing that the payments were not an integral part of a continuing business relationship, but rather, a series of payments designed to reduce the pre-existing indebtedness.
His Honour held that Inaco’s focus was on reducing Aran Managements indebtedness to it:
Good Faith – s 588FG
His Honour held that Inaco failed to make out its defence of ‘good faith’ and referenced the following sequence of events:
Set-off – s 553C
His Honour accepted Inaco’s submissions in part, insofar as $64,658.15 of the $92,323.28 claimed was a set-off.
The plain language of s 553C was followed.
Section 553C can apply to unfair preference actions.
The decision of the NSW Court of Appeal in Buzzle Operations Pty Ltd (in liq) v Apple Computers Australia(involving the set-off of an uncommercial transaction rather than an unfair preference) was followed, as was the reasoning adopted by Mansfield J in Re Parker.
For the same reasons rejecting Inaco’s ‘good faith’ argument, His Honour found that in relation to all but the 31 January invoice, Inaco had actual notice of acts that would have indicated to a reasonable person in Inaco’s position the fact that Aran Management was unable to pay.
Taylor David successfully recovered legal costs of the entire action on an indemnity basis on behalf of the Mr Morton as liquidator. See: Morton & Anor v Rexel Electrical Supplies Pty Ltd (No 2)  QDC 6.