A recent decision of the Queensland Court of Appeal provides some insight into the operation of the good faith defence to unfair preference claims. The case is Queensland Quarry Group Pty Ltd (in liq) & Anor v Cosgrove  QCA 220.
The Company operated a quarry on land owned by the creditor. There was a history of disputes and difficulties as to the making of payments by the Company to the creditor for payments due in respect of the operation of the quarry site (including rent and royalties). In about June 2014 a contract for the purchase of the quarry land was entered between the Company and creditor which was due for completion in September 2014. In July 2014 an agreement was also reached by which the Company was to pay certain amounts to the creditor by 31 August 2014.
By September 2014 the Company had not complied with the agreement to pay certain amounts to the creditor. A statutory demand was served by the creditor on the company in early September 2014. By the time the statutory demand had expired at the end of September 2014 the Company had also failed to complete the contract to purchase the land. On 8 October 2014 the creditor filed a winding up application in respect of the Company. A deed was entered into between the Company and creditor which provided (amongst other things) for the payment of the statutory demand amount, rent arrears payable under the July 2014 agreement, costs and for the entry into a further contract of sale.
The Company then paid the creditor (in October and November 2014) the amounts due under the deed. The winding up application was dismissed. Some 3 months after that, the Company was wound up on a different winding up application (by a creditor being substituted as an applicant on a different winding up application).
The liquidator of the Company later brought unfair preference proceedings against the creditor in respect of the payments the creditor had received (including those received after the winding up proceedings had been filed). The creditor defended the claim on the grounds including that she did not have (and a reasonable person in her position would not have) reasonable grounds for suspecting that the Company was insolvent at the time the payments were received by her. This is the “good faith” defence under section s588FG(2) of the Corporations Act 2001.
In support of that defence, the creditor relied upon evidence to the effect that: there had been a history of disputes with the company, there were previously delays in making payments, the creditor had to take legal action to ensure payment was received, the creditor received payments in full in response to the winding up application and the creditor could see the continued trading operation of the quarry in the months leading up to October 2014.
The trial judge found that there was a good faith defence on the basis that there was no reasonable grounds for the creditor to suspect insolvency. It appears that was the first time a Court (in any jurisdiction) has found such a defence to exist after a creditor received payments following a winding up application being filed by the creditor.
The liquidator successfully appealed the decision.
The Court of Appeal restated some of the principles that apply to the consideration of the “good faith” defence that are relevant to creditors and to liquidators. Those principles are as follows:
- Both limbs of the suspicion of insolvency consideration require an objective determination. Firstly, the creditor’s own belief must be on “reasonable grounds”. Secondly, whether a reasonable person in the creditor’s position had no grounds for suspecting insolvency.
- There is no room in either of these tests for the creditor’s idiosyncratic views and beliefs as to the known circumstances to overcome the objective signs of insolvency unless they are also reasonable and a reasonable person in the creditor’s position would hold them.
- There should be caution when placing too much weight on continued trading operations of a company because, without more detailed insight into the financial position of the Company, it gives weight to an uneducated and subjective perspective of the Company’s operations.
- The onus of proof to make out the defence is on the creditor and for the creditor to exclude other rational hypotheses as to the failure to pay debts as and when they fall due. If insolvency (such as when there is a live winding up application or expired statutory demand) remains as one rational hypothesis then the defence must fail.
The key takeaways from this decision are: for creditors – if you receive payments from a company after serving a statutory demand and winding up application there will be an uphill battle staving off an unfair preference claim by a liquidator; for liquidators – there’s still life in bringing unfair preference claims.
If you have received a demand from a liquidator that alleges you have received preference payments, you should obtain urgent legal advice as there may be options available to you. The solicitors at Rose Litigation Lawyers are highly experienced in insolvency matters and will be available to assist you.