Liquidator’s claim dismissed when a bigger claim was available

In the matter of Pacific Steelfixing Pty Ltd [2021] NSWSC 655 (9 June 2021)

Justice Williams dismissed a liquidator’s claim to recover a voidable transaction on the basis that it was an unfair preference because the liquidator had not discharged his onus.

Pacific Steel Fixing Pty Ltd (the Company) provided labour hire services to MJCR Group Pty Ltd (MJCR). The controlling mind of the Company was related to the director of MJCR.

On the same day that a liquidator was appointed to the Company, the Company and MJCR entered into a deed in which the Company compromised its claim of over $4.6 million against MJCR for $95,000 (the Deed).

Prior to obtaining a copy of the Deed or conducting any public examinations, the liquidator commenced proceedings against the Deputy Commissioner of Taxation (the Commissioner) to recover $740,000 in payments made by the Company to the ATO. The liquidator claimed that the payments were unfair preferences under s 588FA of the Corporations Act 2001 (Cth), and so were voidable transactions under s 588FE made when the Company was insolvent.

A few weeks prior to the hearing, subpoenas issued by the liquidator resulted in production of the Deed. Under cross-examination, the liquidator – having learnt of its terms and that it was made on the same day of his appointment – said that the Deed would cause him to question whether it was an uncommercial transaction, and if so, seek to recover the $4.6 million.

Though the liquidator hadn’t yet adjudicated proofs of debt, he accepted that the Company owed the Commissioner over $2.2 million, comprising approximately 80% of the amount owed to unsecured creditors. Her Honour observed that there was a tension between, on the one hand, the liquidator being able to fund proceedings against the Commissioner for only $740,000, and on the other hand, not having funded an investigation into the Deed.

Her Honour said that under s 588FA(1)(b), the liquidator bore the onus of proving that the Commissioner received more from the tax payments than it would receive if the payments were set aside and the Commissioner were to prove as an unsecured creditor in the winding up of the Company.

Her Honour held that the liquidator failed to discharge that onus because the Liquidator’s investigations into other voidable transactions were incomplete. Her Honour said at [99]:

I reject the plaintiffs’ submission that this outcome means that a liquidator is “barred from seeking to recover unfair preference payments in all instances where another claim might vest in the liquidator”. This case turns on its own very unusual facts. … The incomplete investigations may, if completed, result in there being a surplus in the winding up of the Company, meaning that the Court lacks an appropriate basis to determine whether or not the defendant received more from the tax payments than it would receive in the winding up.

Though her Honour dismissed the application, her Honour said that were it necessary to decide, her Honour would have found that the Company was insolvent at the time of the payments, and so the payments would have been unfair preferences.

Even if this case is confined to its facts, it raises questions about the interpretation of s 588FA In any event, a court’s power to make an order under s 588FF when satisfied that a transaction of the company is a voidable transaction within the meaning of s 588FE, is discretionary. Liquidators would be wise to consider the concerns raised by her Honour if they commence proceedings prior to completing investigations in respect of other claims.