A 588FH Preference Action relates to section 588FH of the Corporations Act which enables liquidators to recover monies from an entity that is related to the company. As a recovery provision, this section facilitates liquidators in claiming unfair preference on behalf of the creditor and the amount of the payment from the related entity.
The Reasoning Behind 588FH Preference Action
The 588FH Preference Action exists where the creditor receives preferential payment and the related party received preferential treatment, through their obligation being reduced or eliminated, an unfair preference arises. This provision operates to level the playing field in instances of liquidation where each creditor attempts to recover a portion of the available assets. Where assets have been offloaded due to unfair preference, the available asset pool is reduced and therefore the remaining body of creditors is at a disadvantage. As proceeds are apportioned to creditors, reducing assets clearly has an impact on the amount that they will receive.
Proving the Claim
In order for the liquidator to make a claim against the related party (588FH Preference Action) two distinct elements must be proved.
- That the creditor did receive an unfair preference (or the more relaxed position that: the creditor was party to a transaction void under 588FE); and
- That the related party was released from an obligation
The relaxed position allows a related party to still be liable despite the fact that the creditor, although receiving a preferential payment, can rely on the available defences.
Proving the positive factors of an Unfair Claim
To establish this element the liquidator must show that the transaction; gave the creditor a preference over other creditors, the transaction occurred while the company was insolvent, and occurred within the relevant time provision.
In relation to 588FH Preference Action, for a transaction to be deemed preferential does not require that the amount be collectable where a defence applies. However, the transaction must have been more beneficial to the creditor than it would have otherwise been if sought in the course of liquidation. Additionally, the creditor must been an unsecured creditor for the transaction to the deemed preferential.
ii) Insolvent Transaction
An insolvent transaction involves an unfair preference or noncommercial transaction, and entry while the company was insolvent or which directly lead to the companies’ insolvency.
iii) Time Stipulations
The relevant time periods are found in 588FE (588FH Preference Action), the most common of which being six months prior to the commencement of winding up (referred to as the relation-back day). This situation involves a payment being made to a non-related creditor but who holds a guarantee from the related party. Where the unfair preference is made to a related party, the period is extended to four years.
The starting date from which time runs is variable depending on how the company was wound up and there are three possible dates. These include the date of; filing the winding up application, appointment of a voluntary administrator, or member’s resolution appointing a voluntary administrator.
What is a Related Entity?
What is a preference payment? As the basis for this claim is that the creditor received an unfair advantage the entity must be related to the company as it is the relationship present which gives rise to the advantage. Most commonly the related entity is a director of the company, a beneficiary under a trust of which the company is trustee, or a close relative of any such entity.
Amount of Claim
The amount of the obligation from which the creditor was released as a result of the payment (or advantage received by the related party) is the amount of the compensation claim. Although this is usually the payment amount this is sometimes not the case.
A claim is limited to the amount ensuing from the unfair preference less any amount already recovered. Therefore where amounts have been recovered from either the creditor or the related party the claim will be limited to the variance between the recovered amount and the unfair payment value, if anything. Although a liquidator is able to take action against either party first it is likely that they will pursue the related entity as they are not protected by the statutory defences which the creditor receives the advantage of (588FG).
Time-frame for 588FH Preference Action
A liquidator has three years after the relation-back day to make an application to the Court, and a mere demand will not suffice to bring the claim within the time-frame. In order for the Court to extend this period an application for extension must be made within the three year period and the liquidator will need to provide adequate justification for the delay.
These time-frames for a 588FH Preference Action however are only applicable in relation to claims brought against creditors and no such limits are imposed by the act for claims made against related entities. Such claim can be made despite no claim being made against the creditor within the stipulated time-frame.