The Corporations Act gives powers to liquidators to recover unfair preference payments to a creditor. An unfair preference payment is where a creditor receives a payment before other creditors in circumstances where they knew, or ought to have known, that the company was insolvent. The purpose of the law is to ensure creditors are treated equally when a company becomes insolvent. Generally, where a creditor holds a security over company property it cannot be claimed by the liquidator as an asset of the company and used to meet the company’s debts. The Personal Property Security Act (PPSA) regulates securities over personal property. For a business this will be assets such as machinery, plant and stock. Correct registration of the security on the PPS register prevents a liquidator claiming the secured property as the property of the company in liquidation.
In a recent case the creditor argued that it had a retention of title security with the company. This is an agreement where the creditor retained ownership of goods supplied to a customer and the proceeds of any goods that are sold. The liquidator argued that the security was void because it had been incorrectly registered when external administrators were appointed. Under the PPSA the property the subject of the security becomes the property of the company if the security is not registered at the time a liquidator or external administrator is appointed.
In the recent case the court found that despite not being properly registered the security agreement was not completely void as it was still effective between the creditor and the company. Prior to the company being placed into administration and then liquidation the company had made payments to the creditor. The liquidator claimed these payments as an unfair preference.
The relevant law provides that where money owed under a secured debt is greater than value of the security that amount is an unsecured debt and ranks alongside all unsecured creditors. The creditor argued that at the time it received the payments from the company, those payments were a payment towards a debt for which the creditor held the security. The court agreed with the creditor that the relevant time to determine whether the payment was a preference was at the time of the payment. However the court determined that at the time the company made the payments to the creditor the money owed exceeded the value of the security by more than the amount of the payment. The payments were towards an unsecured part of the debt and as such were an unfair preference.
There are several important things to know from this: Ensure that any security is properly registered and that any credit provided to a secured creditor does not exceed the value of the security.