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Good Faith Defence Overturned


A recent matter before the Supreme Court of Queensland Court of Appeal has provided clarity on the establishment of a s588FG(2) Corporations Act 2001 (Cth) defence to an unfair preference claims.

In Queensland Quarry Group Pty Ltd (In Liquidation) & Anor v Cosgrove [2019] QCA 220 on appeal from the District Court, the decision has firmly placed the onus of proof on a creditor to demonstrate that there were insufficient facts known to the creditor to create suspicion of insolvency.

The Facts

  • The Company operated a quarry on land owned by the creditor.
  • In October 2013 Quarry (as tenant) and Cosgrove (as owner) entered into a lease enabling Quarry to use the land for quarry extraction, with rent and royalty fees to be paid to the Owner.
  •  In about June 2014 a contract for the purchase of the quarry land was entered between the Company and the Owner.
  • By September 2014 the Company had not complied with the agreement to pay certain amounts to the Owner.
  • A statutory demand was served by the creditor on the Company in early September 2014.
  • A deed was entered into between the Company and creditor which provided (amongst other things) for the payment of the statutory demand amount, rent arrears, costs and for the entry into a further contract of sale.
  • Payments of $45,000, $16,250 and $50,000 were made and the winding-up application was dismissed.
  • in February 2015 new wind up proceedings was commenced and the Company was eventually wound up following the issuing of a separate statutory demand. 

Original Decision

  • The judge found that there was a good faith defence on the basis that there was no reasonable grounds for the creditor to suspect insolvency. 

The Appeal

  • The appeal by the Company and the Liquidator was allowed by the Court of Appeal and the trial judge’s decision that a defence had been established was overturned.
  • The three Court of Appeal judges agreed with the arguments of Liquidator that her honour “gave too much weight to the fact that the debt was paid in full, with the costs”.
  • They also found that the trial Judge had given too much weight to the subjective beliefs of the recipient of the preference payments that non-payment of debts by Queensland Quarry was a common business practice.
  • The onus of proof to make out the defence is on the creditor and for the creditor to evidence other reasonings as to the failure to pay debts as and when they fall due AND THAT a reasonable person in the Creditor’s position would not have overcome any suspicion of insolvency based on these factors.
  • This is especially true once a Statutory demand has been issued.

Take Outs

Sanity has been restored!

Whilst ‘Good Faith’ is invariably the default reposnse to most preference payment actions, this decision re-affirms the need for the creditor to show that there were “no reasonable grounds for suspecting” insolvency.

Pretium continues to offer assistance to Liquidators looking to pursue preferential payments in an effort to return funds to creditors.