Third Party Unfair Preference Payments

Payments made by third parties to creditors may, prima facie, appear to be unfair preferences for the purposes of section 588FA of the Corporations Act 2001 (Cth) (the Act). However, it is important to note that certain factors must first exist in order for such payments to attract the classification of any unfair preferences.

Section 588FA 

Under section 588FA(1), a transaction is an unfair preference given by a company to a creditor of the company if, and only if:

• the parties to the transaction have a creditor-debtor relationship; and
• the transaction results in the creditor receiving more from the company, in respect of an unsecured debt, than the creditor would have received, if the transaction were set aside and the creditor were to prove for the debt in the company’s winding up.

Though the section outlines various exceptions to this rule, this article is focused on how third-party transactions are affected by the section.

Re Emanuel (No 14) Pty Ltd: Macks v Blacklaw & Shadforth Pty Ltd (1997) ALR 281 (Re Emanuel (No 14) 

Re Emanuel (No 14) established that a payment made by a third-party in respect of an unsecured debt on behalf of the company to one of its creditors can constitute an unfair preference payment for the purposes of section 588FA of the Act.

This is provided that the payment made by the third-party reduced the assets available to the company’s creditors in a winding up of the company.

 Cant v Mad Brothers Earthmoving Pty Ltd [2020] VSCA 198 (Cant v Mad Brothers) 

More recently in Cant v Mad Brothers, the Victorian Supreme Court of Appeal found that a payment made on behalf of a company in liquidation by its related entity to an unsecured creditor did not constitute an unfair preference for the purpose of section 588 FA of the Act.

The Court determined that if the payments made by the third party does not diminish the assets available for distribution amongst the company’s creditors, the payment cannot be considered an unfair preference. 

When is a Third-party payment an Unfair Preference?

Based on the existing law, the following factors are likely to be crucial to determining whether a payment made by a third-party constitutes an unfair preference payment for the purposes of section 588 FA of the Act:

• Has the company directed the third party to make a payment to the creditor on its behalf?
• Does the third-party owe the company a debt, which will be satisfied by the third-party making a payment to the company’s creditor?
• Will the payment by the third-party reduce the assets available for distribution among the company’s creditors?

If you are concerned that you have received a pontential unfair preference or are being pursued for an unfair preference, contact our office to discuss how we might be able to assist.