Insolvency: the reasonable grounds defence

by Mitchell Downes Solicitor, Mahoney Lawyers

 A July 2011 decision[1] of the Federal Court of Australia is a reminder that to successfully raise the good faith defence to an unfair preference claim, a creditor must establish on both an objective and subjective basis that the creditor had no grounds to reasonably suspect[2] the insolvency [3] of the company.

The case

The Court considered whether certain payments made by the company in liquidation, Austech Garage Door Centre Pty Ltd, to Gliderol International Pty Ltd were voidable transactions pursuant to section 588FE(2) of the Corporations Act 2001 (Cth).

The court held the payments were preferential in nature as Gliderol received more than it otherwise would have received had it proved with the other creditors in the winding-up of the Austech. Accordingly, the payments in question constituted an unfair preference pursuant to section s588FA(1) of the Act.

Gliderol told the court that at the time it received the payments, it had no reasonable grounds to suspect Austech's insolvency and therefore a defence under section 588FG of the Act was available to it.

The decision

The court disagreed. It held the basis of the Gliderol's defence was unsustainable due to:-

• subjectively, the credit manager's review of the files was insufficient to conclude that Austech was solvent; and
• objectively, Gliderol ceased supplying goods on account to Austech due to Austech's failure to pay any of its invoices. Further, Austech failed to satisfy a statutory demand. These circumstances would have led a reasonable person in Gliderol's position to suspect Austech's insolvency.

What this means for you

This decision reinforces that creditors’ beliefs concerning debtor solvency are insufficient. If, objectively, a reasonable person in the position of the creditor would have a fear that the company can not pay its debts on time then this defence is not available.

[1] Roufeil v Gliderol International Pty Limited [2011] FCA 847. 

[2]Reasonably suspicion means there must be something in the circumstances which would create in the mind of a reasonable person in the position of the creditor an apprehension or fear that the debtor may be unable to pay his or her debts as they become due.

[3]A company is insolvent when it can not pay its debts as and when they become due and payable.

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