23 December 2015

Secured creditors and unfair preference claims – appeal allowed from Tap Inn decision

On 1 December 2015, we wrote about the decision of His Honour Judge Chivell of the District Court of South Australia in Matthews v The Tap Inn Pty Ltd [2015] SADC 108. At the time we noted that the decision was subject to appeal, which has now been determined by the Full Court of the Supreme Court of South Australia in The Tap Inn Pty Ltd v Matthews [2015] SASCFC 188.

At first instance His Honour Judge Chivell determined as a preliminary question (meaning prior to a trial without making findings in relation to disputed facts) that when determining the value of a creditor’s security for the purpose of an unfair preference claim and section 588FA(2) of the Corporations Act, the time to assess the value of the security is the date of the winding up of the debtor company, and not at the time each payment is  received.

The consequence of this interpretation is that a creditor that holds security of a value that exceeds the amount of each challenged payment at the time the payment is made will be exposed to an unfair preference claim if, at the time of the winding up, it does not have security of a value to match the payments received in the relevant six month period. The creditor will then be left to raise a defence, such as good faith and no grounds for suspecting insolvency.

In determining the appeal, Gray J (with Sulan and Peek JJ agreeing) found that the question of the time for assessing the value of the security should not have been determined as a preliminary ‘hypothetical’ question and should only have been determined after a trial and findings in relation to disputed facts. The Full Court found that the question may never arise depending on the facts determined at trial. The appeal was allowed and the answer to the preliminary question was set aside.

There were few clues given to practitioners by the Full Court as to its views regarding the time for assessing the value of security as the Full Court was reluctant to consider the issue as a hypothetical.

Accordingly, there is currently no undisturbed judgment in relation to this issue, and practitioners will need to wait for a decision on this issue from a superior court for some certainty to be obtained.

Contact

Melinda Woledge

Marketing & Communications Manager

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