22 May 2020
This week’s TGIF considers a recent case where the Federal Court ordered payments made while a DOCA was in force, to which the deed administrators were signatories, were recoverable as unfair preferences.
On 15 May 2020, the former deed administrators and liquidators (the Applicants) of Ready Kit Cabinets Pty Ltd (in liquidation) (the Company) successfully recovered payments made to the Deputy Commissioner of Taxation (DCT).
The Federal Court ordered that payments made by Ready Kit Cabinets Pty Ltd (in liquidation) (the Company) to the DCT were recoverable as “unfair preferences” under the Corporations Act 2001 (Cth) (the Act).
On 29 October 2013, the Applicants were appointed as joint and several administrators of the Company. A deed of company arrangement (DOCA) was subsequently executed by the Company, the Applicants as deed administrators and the director.
The DOCA provided that:
Between 28 February 2014 and 16 June 2017, the Company made payments to the DCT totalling $304,772.15 (the Payments) in respect of its tax liabilities. The Payments were made while the DOCA was in force.
The Company owed an amount of unsecured debt estimated at $652,676.49.
The liquidators commenced proceedings against the DCT, seeking to recover the Payments as unfair preferences.
Relevantly, the Act provides that a transaction will not be voidable if it was entered into on behalf of the company “by, or under the authority of” the administrators of a DOCA or of the company.
Accordingly, the key issue in this case was whether the Payments were made “by, or under the authority of” the administrators.
The Applicants contended that:
The DCT contended that the Payments were made “by, or under the authority of” the deed administrators for three reasons:
The Court found that the words “by, or under the authority of” require more than mere contemplation by a DOCA that payments be made.
With respect to the Company’s obligation to comply with taxation laws under the DOCA, the Court observed that this responsibility rested with the Company and its director. The terms of the DOCA did not empower the deed administrators to conduct managerial affairs of the Company, such as making of the Payments.
The Court rejected the DCT’s argument as to the policy considerations behind the introduction of the “by, or under the authority of” limitation, preferring to rely on the natural and ordinary meaning of the legislation rather than extrinsic materials.
Consequently, the fact that the Payments were made by the director meant that the Payments were not made “by, or under the authority” of the Applicants (acting in their capacity as deed administrators).
The Payments were therefore voidable unfair preferences.
This case confirms that the long reach of the preference payment claw-back provisions can extend to unsecured creditors who receive payments from a company subject to a DOCA, even where:
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