Given the spate of insolvencies in the construction industry, it is unsurprising that we have acted for a number of contractors who have received correspondence from liquidators:

  • asserting that certain payments made to the particular contractor represent an “unfair preference”; and
  • demanding repayment of the amounts in question.

In circumstances where a contractor may have been short paid, such correspondence is particularly unwelcome.

Unfair preferences

An unfair preference occurs when:

  • a company and a creditor are parties to a transaction
  • the transaction was entered into on or after the “relation-back day”; and
  • that transaction results in the creditor receiving more than the creditor would have received had the creditor proved in the winding up of the company.

In such correspondence, the liquidator asserts that, because the contractor “chased” payment, the contractor must have suspected that the company which made payment was insolvent.

Such an assertion is made to dissuade the contractor from relying on section 588FG (2) of the Corporations Act 2001 (Cth) (Act) and in ignorance of the particular circumstances which generally prevail in the construction industry (i.e. that contractors rarely get paid on time).

A recent example: Matthews v Williams [2018] SADC 70

A liquidator’s claim against a contractor (based on an argument that the contractor had received an unfair preference) was rejected because the Court accepted the Appellant’s (the contractor’s) “good faith” defence.

The Appellant was a contractor who performed work for Scarce Builders & Developers Pty Ltd (Scarce). He would from time to time send invoices to Scarce and a running account was kept. Whilst the Appellant’s terms of trade called for payment within seven days, the running account was generally in debit to the extent of about $20,000.00. Invoices were generally paid 21 – 31 days late, and this didnot change during the course of the relationship. Payments which were made accorded with particular invoices (i.e. payments were not round figures). There was no evidence of rumours or suspicion in the workforce as to the insolvency of Scarce. The Appellant continued to perform work for Scarce (although he eventually stopped work due to a personality clash between himself and one of the staff from Scarce).

There was evidence that the Appellant/contractor had made a claim pursuant to the Building and Construction Industry Security of Payment Act 2009 (SA) (BCISPA). The Appellant contractor suggested that he made that claim because he was concerned that the cooling relationship might have been the reason for non-payment and not because he was concerned that Scarce might be insolvent.

Good faith defence

In substance, section 588FG (2) of the Act provides a defence to an “unfair preference” claim if a party can demonstrate that:

  • the party entered into the transaction in good faith; and
  • at the time that the party entered into the transaction, the party:
    o had no reasonable grounds for suspecting that the company (with which they were entering into the transaction) was insolvent; and
    o a reasonable person in that party’s circumstances would have had no such grounds for such suspicion; and
  • the party provided consideration under the transaction or has changed their position in reliance on the transaction.

Why did the court uphold the good faith defence?

At first instance, the Magistrate had accepted that the Appellant contractor honestly believed that Scarce was solvent when the Appellant contractor received the payments.

On appeal, His Honour Judge Cuthbertson, whilst acknowledging that the Appellant contractor had stopped working for the company (at the time when Scarce’s indebtedness to him was at its highest) and that the Appellant contractor had made a payment claim pursuant to the BCISPA, accepted that:

  • the conduct of the Appellant contractor could only go to the question of whether or not the Appellant contractor believed that Scarce was solvent when it made the payments to Mr Matthews; Mr Matthews’ conduct did not go to the remaining questions to be answered;
  • the underlying facts, which motivated the conduct of the Appellant contractor would be relevant to the question of whether a reasonable person in the position of the Appellant contractor might have suspected that Scarce was insolvent when Scarce made the payments;
  • the evidence would only have given rise to an “idle wondering” as to whether Scarce was solvent; it would not have led a reasonable person to suspect (in the sense of having generated a positive feeling that a state of affairs exists) that Scarce was insolvent when it made the payments; and
  • nothing in the evidence suggested that a reasonable person would have come to a different conclusion than the Appellant contractor did (i.e. that Scarce was solvent when it made the payments).

Take home message

If a liquidator of a construction company makes a demand for repayment of an “unfair preference”, you need to obtain legal advice quickly; as there may be available defences to the claim. So do not just pay upon demand. Seek advice from a lawyer competent and experienced in this field first and then decide what to do.

Of course, the prospects of having difficulties of the sort experienced by Mr Matthews can be lessened by the implementation of appropriate credit and collection policies which are tailored to your particular circumstances.

Contact McKays here if you require legal advice with issues related to “unfair preference’’.