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Focus: Unfair preference dependent on ultimate effect of transaction

13 July 2010

In brief: The Victorian Court of Appeal recently considered whether mining lease rents and royalty payments made to the Minister administering the Mining Act 1978 (WA) were unfair preferences under section 588FA of the Corporations Act 2001 (Cth). Partner Michael Quinlan (view CV) and Lawyer Leesa Vanmali report on a decision that may affect a liquidator's ability to recover certain payments in a winding-up.

How does it affect you?

  • The decision confirms that, in determining whether a particular transaction constitutes an unfair preference for the purposes of section 588FA of the Corporations Act 2001 (Cth) (the Act), it is, generally, the entirety of the transaction and its ultimate effect that must be considered.
  • The application of the ultimate effect doctrine creates a higher threshold for establishing an unfair preference than would otherwise result from a literal interpretation of s588FA. Accordingly, where the doctrine is applied, it may be more difficult for a liquidator to recover moneys paid by a company to unsecured creditors, on the basis that the payments constitute voidable transactions.
  • The decision reiterates, however, that the ultimate effect doctrine will not extend to certain transactions (including where the payment is made in respect of a past debt and is not made to secure the continuing provision of goods or services).

Background

Centaur Mining and Exploration Ltd conducted mining operations on leased mining tenements in Western Australia. During the course of undertaking those mining operations, Centaur made numerous payments to the Minister administering the Mining Act 1978 (WA), for rent and royalties due under various mining leases. Centaur subsequently went into voluntary administration, following which liquidators were appointed to Centaur.

The liquidators sought to recover the amounts paid to the Minister, on the basis that the payments were, among other things, voidable transactions under s588FA of the Act. After the judge at first instance (Justice Robson) held that none of the payments was an unfair preference and dismissed the liquidators' claim1, the liquidators appealed to the Victorian Court of Appeal.2

The liquidators contended that Justice Robson erred in applying the doctrine of ultimate effect to conclude that each of the payments was not an unfair preference within the meaning of s588FA. In support of that contention, the liquidators argued that the inclusion of the phrase 'if and only if' in s588FA(1) emphasised the exclusiveness of the definition and that s588FA(1) therefore operated to the exclusion of the previous common law doctrine of ultimate effect. Under this construction, a transaction will be an unfair preference simply if it results in an unsecured creditor receiving more than it would receive if the creditor were to prove for its debt in a winding-up of the company.

In response to the liquidators' argument, the Minister relied on VR Dye & Co v Peninsula Hotels Pty Ltd (in liq)3 in which it was held that the doctrine of ultimate effect continues to apply in determining whether a transaction constitutes an unfair preference within the meaning of s588FA.

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The decision

The Court of Appeal, comprising Justices Nettle, Mandie and Beach, dismissed the liquidators' appeal, except in respect of the royalty payments. In doing so, their Honours endorsed the 'careful and elaborate reasoning'4 in the Dye case as to the application of the doctrine of ultimate effect. In particular, Justice Nettle observed that the reasoning in Dye proceeds from the notion that, if the words of s588FA were construed as being 'unconstrained by some sort of overarching test of fairness, they would apply indiscriminately to transactions which have never before been conceived of as voidable preferences'.5 By way of example, his Honour referred to 'cash on delivery' transactions, which, on a literal interpretation of s588FA, may be held to constitute unfair preferences.

Accordingly, the court upheld Justice Robson's decision that the rental payments were not unfair preferences (because the ultimate effect of the payments was not to decrease the net value of the assets of Centaur to the disadvantage of other creditors and therefore the Minister received no unfair preference within the meaning of s588FA).

However, in allowing the liquidators to recover the royalty payments, the court held that the ultimate effect doctrine does not extend to circumstances where a payment:

  • is made in respect of a past debt; and
  • is not made to secure the continuing provision of goods or services, or the acquisition of assets, of a value corresponding with the payment made.6

In this regard, the court noted that the royalty payments:

  • were always paid in arrears and therefore were made in respect of past debts; and
  • were not made to procure the provision of future services or benefits (as compared to the rental payments which might be said to have been the price paid to obtain future periods of occupation).

Their Honours observed that in and of itself, it was irrelevant that the royalty payments had the practical effect of preserving valuable assets (in this case, the mining licences granted to Centaur) that might otherwise have been forfeited.7

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Conclusion

This decision reiterates a court's authority to consider the ultimate effect of a transaction in determining whether it constitutes an unfair preference under s588FA of the Act. In those cases where it is applied, the doctrine of ultimate effect is likely to limit the types of payments that a liquidator may recover under the preference provisions of the Act.

Footnotes
  1. McKern & Ors v The Minister administering the Mining Act 1978 (WA) [2008] VSC 416.
  2. McKern & Ors v The Minister administering the Mining Act 1978 (WA) [2010] VSCA 140.
  3. VR Dye & Co v Peninsula Hotels Pty Ltd (in liq) [1993] 3 VR 201.
  4. McKern & Ors v The Minister administering the Mining Act 1978 (WA) [2010] VSCA 140 at [114].
  5. Ibid at [20].
  6. Ibid at [125].
  7. Ibid at [30] and [125].

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