insolvency network newsletter september 2017
Sep 15 2017
Protection Against A Liquidator’s Preference Claim
What Defences Are Available?
A Liquidator has the ability to recover payments made by an insolvent company to an unrelated creditor if:
- the payment affords an unfair preference, or advantage, to the recipient over other creditors and
- the creditor knew, or ought to have known, that the company was insolvent.
The Liquidator must satisfy each of the following criteria to sustain a preference claim:-
- The company and the creditor were parties to the transaction;
- The creditor was an unsecured creditor;
- The transaction occurred during the 6 month period preceding the commencement of the winding up (the “relation-back period”);
- The company made the payment when it was insolvent, or became insolvent as a result of the transaction; and,
- The payment resulted in the creditor receiving more than they would have received had they proved in the liquidation.
When a liquidator makes such a claim, there are three possible defences available to the creditor.
Statutory Defences
It is a defence if the creditor can establish that at the time of the transaction, they did not receive a benefit. Alternatively, the creditor may be able to establish that the payment was received in good faith. Finally, the creditor may defend the liquidator’s claim if it can be established that, at the time the creditor received the benefit, they had no reasonable grounds to suspect the company was insolvent, or would become insolvent as a result of the transaction. Creditors will also need to establish that a reasonable person, in the creditor’s circumstances, would have no such grounds for suspecting insolvency. A creditor’s suspicion or knowledge of a company’s insolvency is evidenced by the relationship and dealings between the creditor and the company. For example, were payments within agreed terms, dishonoured, or in the usual course of business? If a creditor has strict, documented, credit control procedures and enforces them so that consequently, dealings with the creditor were not unusual, then it is more difficult for a Liquidator to argue that the creditor did, or ought to have, suspected that its customer was experiencing financial difficulties.
The “Running Account” Defence
The running account defence applies to creditors who maintain a continuing business relationship with the insolvent company during the relation back period. A creditor relying on this defence may significantly reduce the size of the Liquidator’s claim, as preferences are not determined by the total payments during the relation-back period, but rather the difference between the ‘peak’ (or maximum) debt during the relation back period and the amount owing at the commencement of the winding up.
Doctrine Of Ultimate Effect
This defence relies on the premise that the payments to the creditor result in the preservation of the insolvent company’s asset pool and that the payments do not cause detriment to other creditors. An often quoted example is the position of a landlord. If a company pays rent late and outside agreed payment terms, then the company could be evicted from the trading premises thus completely depriving the company from access to its income producing assets and its ability to generate cashflow or income with which to meet its payment obligations.
Other Avenues Available To Creditors
Creditors may undertake a more proactive approach by transacting on ‘Cash on Delivery’ terms or even, obtaining security prior to extending further credit. However, in the latter case, the giving of security may be characterised as a preference so caution should be exercised and legal advice sought.
Director’s Personal Liability For Unpaid Superannuation
Australian law imposes strict requirements for employer companies to pay superannuation. Should a company fail to meet its obligations, directors may be held personally liable to pay the superannuation that the company ought to have paid. To avoid such liability, directors must ensure that the company either:
- Pays the superannuation entitlements or,
- Lodges a superannuation guarantee charge (“SGC”) statement with the Australian Taxation Office (“ATO”).
Payment And Reporting Deadlines
Minimum superannuation entitlements must be paid for all eligible employees by the 28th day of the month following each quarter as follows: Quarter Payment due date 1 July - 30 September 28 October 1 October – 31 December 28 January 1 January – 31 March 28 April 1 April – 30 June 28 July If superannuation is not paid by the due date, then the company must lodge an SGC statement within one month of the payment date as follows: Quarter Reporting due date 1 July - 30 September 28 November 1 October – 31 December 28 February 1 January – 31 March 28 May 1 April – 30 June 28 August Once superannuation becomes overdue, the company is required to pay the unpaid superannuation entitlements to the ATO, together with penalty interest (at 10%pa) and an administration fee of $20 per employee per quarter. To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts: Stephen Michell – Director smichell@pcipartners.com.au Philip Newman – Director pnewman@pcipartners.com.au David Quin – Director dquin@pcipartners.com.au Clyde White - Director cwhite@pcipartners.com.au Warren White - Principal wwhite@pcipartners.com.au Sean Pulverman – Principal spulverman@pcipartners.com.au Kylie Wright - Principal kwright@pcipartners.com.au Sophie Zapantis – Senior Manager szapantis@pcipartners.com.au Peter Fraczek - Manager pfraczek@pcipartners.com.au Frank Ntim - Manager fntim@pcipartners.com.au All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any readerwishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein. Liability limited by a Scheme approved under Professional Standards Legislation. It is clearly preferable to ensure that superannuation payments are made on time so that further penalties are avoided.
When Is A Director Liable?
A director’s obligation to pay the unpaid superannuation actually arises the day after the payment due date. However, the ATO must issue a Director Penalty Notice (“DPN”) before it is able to commence recovery proceedings. Depending on the circumstances, it may be either a ‘lockdown’ or ‘non-lockdown’ DPN. The non-lockdown DPN is issued in circumstances where superannuation is unpaid, however, the SGC statement has been lodged by the reporting due date. The non-lockdown DPN requires that, within 21 days, the director:
- pays the outstanding superannuation, or
- comes to a payment arrangement with the ATO, or
- appoints a voluntary administrator, or
- appoints a liquidator.
However, if payment and reporting obligations have not been complied with and have remained unpaid and unreported for three months after the due date, directors may expect to receive a lockdown DPN in which case, the only way to deal with the matter is payment of the debt in full. The option of appointing a voluntary administrator or liquidator is no longer available. The law does not favour the disorganised or uninformed director. A DPN may be avoided if superannuation is paid on time or the unpaid entitlements are reported by lodging an SGC statement by the reporting due date.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:
Stephen Michell – Director smichell@pcipartners.com.au
Philip Newman – Director pnewman@pcipartners.com.au
David Quin – Director dquin@pcipartners.com.au
Clyde White - Director cwhite@pcipartners.com.au
Warren White - Principal wwhite@pcipartners.com.au
Sean Pulverman – Principal spulverman@pcipartners.com.au
Kylie Wright - Principal kwright@pcipartners.com.au
Sophie Zapantis – Senior Manager szapantis@pcipartners.com.au
Peter Fraczek - Manager pfraczek@pcipartners.com.au
Frank Ntim - Manager fntim@pcipartners.com.au
Anna Odrzywolska - Manager aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any readerwishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein
Liability limited by a Scheme approved under Professional Standards Legislation.