Unfair Preference Claims – To secure or not to secure that is the Question

The question to determine was whether the time of assessing the value of the security was:

1. at the date the security was created; or
2. at the date when each of the payments was made; or
3. at the date of liquidation of the company; or
4. another alternative date,

thus whether the defendant was secured for the purposes of section 588FA of the Corporations Act 2001.

Which do you consider is the correct answer?  Is there a correct answer?  Read on to see if you came to the same outcome as the trial Judge or the three Supreme Court judges when the case was appealed.

Facts in brief

Pub Tap Investments Pty Limited (Pub Tap) owned a hotel business in Adelaide and granted ‘fixed’ and ‘floating’ charges to both a bank and Tap Inn Pty Limited (Tap Inn) as part of a sale of the business.  These charges required periodic payments to be made by Pub Tap to Tap Inn.

Pursuant to the Tap Inn charge and sale of the business the following payments were made:

1. approximately $76,000 in the 6 months prior to the relation back day; and
2. $300,000 in the 2 years prior to the relation back day. 

On 16 July 2010 Mr Matthews was appointed liquidator of Pub Tap.  The liquidator sought to claw back all $376,000 as either unfair preferences or uncommercial transactions despite the existence of the security (the charges).

District Court decision

On 14 July 2015 Justice Chivell determined that the correct answer to the question above was (c).  That is, for the purposes of section 588FA(2) of the Corporations Act, the correct date for assessment of ‘security’ is the date of the liquidation of the company.

Surprisingly to some insolvency practitioners, this was contrary to a long held belief that the appropriate time was when each of the impugned payment was received (answer (b) above).

The impact of answer (c) was that creditors who hold security of a value that exceeds the amount of each challenged payment at the time the payment is made will be exposed to an unfair preference claim if, at the time of the winding up, it does not have security of a value to match the payments received in the relevant period.  Creditors would then be left to raise a defence, such as good faith and no grounds for suspecting insolvency.

Appeal decision

The Court of Appeal (The Tap Inn Pty Ltd V Matthews [2015] SASCFC 188) has unfortunately not assisted in clarifying the correct answer to this question.  Without determining the question Justices Gray, Sulan and Peek simply found that the question was not one which should have been determined as a preliminary ‘hypothetical’ question and should only have been determined after a trial and findings in relation to disputed facts.

So what is the correct answer?

Insolvency practitioners can find little comfort from the Appeal Decision as to the appropriate time for assessing the value of security.  The Full Court simply refused to decide the question as a hypothetical. 

Accordingly, there is currently no undisturbed higher court decision squarely determining the issue.

Creditors and Insolvency Practitioners can however be certain of the following:

1. The decision in Matthews is not binding and creates scope for liquidators to commence unfair preference claims against secured creditors, at least until the position is tested in a higher Court.
2. The mere fact that a creditor has taken security (even security perfected by registration under the PPSA) may not mean that payments to such creditors are automatically beyond the reach of a determined liquidator.
3. Liquidators can expect additional challenges in determining whether there is in fact any security or the ‘value’ of that security at any of the points in time.
4. Creditors may argue that the relevant time of assessing the value of the security is (a), that is, the time of the grant of the security and bolster their positions by insisting on a stock take at the time of granting the security.

Of course, the circumstances of each case must be considered.  We await further judicial discussion of the correct time to assess the value of securities in preference claim proceedings.

For more information, please contact Dajana Malnersic or Nicola Bailey on 02 9234 1500.