(2B) or not (2B), that is the Question: Payments Required by a Deed of Company Arrangement Voidable as Unfair Preferences

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By Jeremy Mackenzie, Partner and Joe Pokoney, Associate

The Federal Court of Australia in Yeo, in the matter of Ready Kit Cabinets Pty Ltd (in liq) v Deputy Commissioner of Taxation [2020] FCA 632 has examined the circumstances in which a payment made by a company subject to a deed of company arrangement may be challenged as an unfair preference.

The principal question for Middleton J was whether payments required to be made by a deed of company arrangement were therefore made “under the authority of” the administrators, within the meaning of s 588FE(2B) of the Corporations Act 2001 (Cth).

The Deed of Company Arrangement

A common companion of a company in voluntary administration, is the Deputy Commission of Taxation. So it was for Ready Kit Cabinets Pty Ltd (RCK), when it entered administration on 29 October 2013, bringing with it a substantial tax debt.

On 22 November 2013, the creditors of RCK resolved to approve RCK’s entry into a deed of company arrangement (DoCA). The DoCA was entered into by RCK on 11 December 2013 and, in a familiar nod to the Deputy Commissioner, required RCK to:

“comply with all taxation laws in ensuring lodgement of any required Business Activity Statements together with any other returns or information required under the taxation laws (from time to time) and payments of amounts due from the Appointment Date to the Australian Taxation Office within the prescribed time limits”

The DoCA also returned control and management of RCK to the director, who resumed trading from 11 December 2013.

Between 27 February 2014 and 16 June 2017, RCK’s relationship with the Deputy Commissioner deepened, amassing new taxation liabilities of $403,000.76. Critically, however, the director caused RCK to make payments to the Deputy Commissioner totalling $304,772.15 (Payments).

Despite trading on for some years under the DoCA, on 5 July 2017, the creditors of RCK resolved to terminate the DoCA and place the company into liquidation.

The Battlelines: Payments made under Administrators’ Authority?

With RCK in liquidation, the Payments were challenged as constituting unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) and therefore voidable, in accordance with s 588FE(2B).

The Deputy Commissioner disputed that the Payments were unfair preferences, relying upon s 588FE(2B)(d). which provides that a transaction will be voidable only if it was not done on behalf of the company “by or under the authority of the administrator of the deed”.

Whilst the Payments were not made “by” the administrators directly, the Deputy Commissioner sought to argue that the DoCA, requiring RCK to meet its taxation liabilities, meant that the Payments were made “under the authority” of the administrators, thereby falling outside the vulnerable field of transactions under s 588FE(2B).

The Judgment of Middleton J

Following a thorough analysis of the legislation, extrinsic material and terms of the DoCA, Middleton J rejected the Deputy Commissioner’s argument, finding that it RCK was obliged to make the Payments, which the director arranged on the basis of his own authority, and not any authority conferred upon him by the administrators.

In so concluding, his Honour found (at [54]-[60]):

  • the DoCA returned management of RCK to its director, such that the Payments were made from “his own authority in managing the company”;
  • nothing in the DoCA overrode the director’s source of managerial powers under RCK’s constitution, which might otherwise require his authority to be drawn from the administrators;
  • notwithstanding the extrinsic material to which the Court had been referred, nothing as a matter of policy requires that all transactions during the currency of a DoCA must be made “under the authority” of the administrators;
  • even transactions contemplated or required by a DoCA are not necessarily made under the authority of the administrators, especially where the DoCA provides for transactions by a director, without the involvement of the administrators.

A Lesson for the Future

It is not uncommon for companies to enter liquidation following a period of voluntary administration. The decision of Middleton J is reminder that the protection afforded to a company in administration is not absolute, nor does a deed of administration supply a veil to obscure a subsequent liquidator’s scrutiny.

To minimise the risk of later challenge, directors of a company under a deed of company arrangement should ensure that transactions of the company are entered into directly by, or with the clear authority of, the administrators.

For further information, please do not hesitate to contact us.

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