Case notes on unfair preferences: source of payment

BounceLED Pty Ltd v Clear Skies Corp Pty Ltd (in liq) [2023] NSWSC 121 (Bounce) regarding the applicable principles where a payment is made by a third party.

Bounce manufactured and supplied LED lights and related components for the signage industry. Clear Skies Corp Pty Ltd (in liq) operated a sign manufacturing business. Bounce was paid approximately $63,000 for this supply across 11 payments. 6 of the 11 payments were paid by various third party entities, the other 5 were paid by Clear Skies.

The liquidator of Clear Skies sought to recover all payments as an unfair preference on the basis that they were made during the relevant statutory period and were treated by Bounce as payments made by Clear Skies in satisfaction of outstanding invoices. The Local Court held all the payments were unfair preferences and ordered Bounce to pay that amount to the liquidator. Bounce appealed.

The Supreme Court of NSW allowed the appeal, finding:

That the Local Court had not properly determine the issue as to whether the 6 payments from third parties were “from the Company [Clear Skies]” as contemplated in s 588FA(1)(b). Namely, the Local Court did not consider the matters summarised by Rees J In the matter of Western Port Holdings Pty Ltd (receivers and managers appointed) (in liq) [2021] NSWSC 232:

o “Was the benefit, which was conferred by the third party on the creditor, a benefit to which the company was otherwise entitled, for example, by reason of a contract between the company and the third party (Re Emanuel) or because the third party owed money to the company (Evolvebuilt; Cant v Mad Brothers)?

o Was the third party a related entity to the company, by reason of common directors or shareholders, or interdependence of financial arrangements, such that payment by the third party may be regarded as effectively payment by or at the direction of the company (Burness; Kassem; Cant v Mad Brothers)?

o Was the third party payment a loan to the company: Kassem? If it was recorded as a loan in the books of the company, this will obviously support such a finding: Cant v Mad Brothers.”

As the above matters required further findings of fact, it was appropriate to remit the case back to the Local Court to make those findings.
His Honor also referred to the fact that Rees J in Western Port expressed “disquiet” about the reasoning in Cant v Mad Brothers Earthmoving Pty Limited (2020) 63 VR 222, which propounded that if the “unfair preference payment” was not made by the company in liquidation (such that there is some diminution of its assets) that a preference claim is not available. Her Honour was bound to follow that decision in Western Port as it was not “plainly wrong”. Equally, his Honour in this case was bound by that decision, but of interest, he expressed some agreement with the reasoning of the Court of Appeal in Cant.