Important win for creditors defending unfair preference claims

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The ‘PPSA defence’ has, in recent times, become a very valuable tool used by creditors to defend unfair preference claims.

The Supreme Court of South Australia recently overturned the decision of the District Court of South Australia in Matthews v The Tap Inn Pty Ltd [2015] SADC 108 that was being relied upon by liquidators nationwide to limit the value of the PPSA defence.

This decision focused on whether a creditor’s security is to be valued as at the date of liquidation. This is relevant because liquidators can only pursue unfair preference payments provided they are in respect of an unsecured debt, hence the time for valuing that security can also be a key consideration.

There are competing arguments as to which of the following times are correct for valuing the security under the unfair preference regime, because the legislation is not clear.

1. The date of creation of the security interest; or

2. The time of the relevant payments; or

3. The date of liquidation of the company.

The decisions

In July 2015 a District Court Judge held that the value of the creditor’s security was to be assessed as at the date of liquidation, thereby ignoring the reality and value of the security as at the time of the relevant payment. This impacted the creditor because the value of the security interest as at the later date was substantially reduced, exposing the creditor to a claim.

The finding was overturned by the Full Court of the Supreme Court of South Australia. However, unhelpfully, the question was not resolved in this case and is yet to be determined by a superior court in Australia.

A copy of the judgment of the Full Court of the Supreme Court of South Australia is available here.

The impact of the decision is that it remains uncertain as to when the assessment of the valuation of a creditor’s security interest is to occur in respect of alleged unfair preference payments.

For creditors, it is pleasing that the Full Court allowed the appeal and that there is no superior court decision that requires the valuing of the security as at the date of the winding up (usually when the security is likely to be of less or no value).

Unfair preference claim must relate to unsecured debt

Creditors are frequently able to reduce, and in some cases wholly defend, claims on the basis that they held valuable security. Security interests for this purpose include:

1. purchase money security interests (PMSI) relating to goods supplied or hired on credit;

2. registered mortgages (land and chattel mortgages); and

3. charges arising from credit applications and personal guarantee documentation.

Creditors may have defences available that are not immediately obvious.

It is best practice for creditors to engage specialist solicitors, such as Results Legal, to undertake a detailed security review (including any priority considerations) as part of the assessment of unfair preference claims to ensure all grounds of defence are considered.

Earlier Superior Court decision

The reasoning in the overturned District Court of South Australia decision was not consistent with the relevant comments in an earlier decision in the Queensland Court of Appeal in 2011 in Bradnam’s Windows and Doors Pty Ltd v Offermans [2011] QCA 106 (view here).

Take away points

• We consider that the relevant time to assess the security interest is as at the time of the relevant
payment and not at the time of liquidation, and that the Queensland Court of Appeal
decision supports this view.

• These decisions are important for creditors with potential exposure to unfair preference claims
and for insolvency practitioners seeking to pursue such claims on behalf of creditors.

• The industry would benefit from statutory clarification on the issue.

• We will continue to monitor the development of the law in this area, including any further
litigation that ensues between the parties to the Tapp Inn decision.

Specialist advice

Results Legal specialises in credit based litigation including insolvency law and commercial disputes.

Results Legal also prepares market leading credit agreements and trading agreements that include the relevant terms to best protect trade creditor’s interests.

If you wish to discuss the impact of these decisions, or require any insolvency law advice, please contact our specialist team on 1300 757 534.