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Uncommercial Transactions Claims and how to Defeat Them

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Uncommercial transactions in company insolvency QueenslandUncommercial transactions claims are one of the types of voidable transactions in company insolvency and are outlined at section 588FB of the Corporations Act 2001 (CTH) (“the Corporations Act”).

A transaction of a company is an uncommercial transaction when:

  1. There is a transaction of a company; and
  2. There is a transaction with another party (or parties); and
  3. A reasonable person in the company’s circumstances would not have entered into the transaction having regard to;
  4. The benefits and detriments to the company and the other party (or parties).

There are a number of defences and exceptions to uncommercial transactions claims which may mean that a third-party does not have to repay their hard-earned dollars to the liquidator.

This article explains in detail uncommercial transactions claims under the voidable transaction regime in the Corporations Act and details the possible defences and exceptions to uncommercial transactions claims.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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What are Voidable Transactions?

A voidable transaction in company insolvency is a transaction entered into by the company and a third-party which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

  1. 588FA – Unfair preferences;
  2. 588FB – Uncommercial transactions;
  3. 588FC – Insolvent transactions;
  4. 588FD – Unfair loans to a company; and
  5. 588FDA – Unreasonable director-related transactions.

Section 588FE of the Corporations Act outlines the criteria for a transaction able to be avoided by the liquidator.

  1. There must be an insolvent transaction; and
  2. The transaction was made, or an act was done for the purpose of giving effect to it:
    1. During the 6 months ending on the relation-back day; or
    2. It is also an uncommercial transaction – 2 years ending on the relation-back day; or
    3. It is also a related entity of the company – 4 years ending on the relation-back day; or
    4. The company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors – 10 years ending on the relation-back day.

Then, each of the voidable transactions have their own specific requirements.

Section 9 of the Corporations Act defines a what transaction is.

Section 91 of the Corporations Act has a table which outlines the date of the relation-back day.

Section 95A of the of the Corporations Act defines what solvent and insolvent mean.

Section 588FC of the Corporations Act defines what an insolvent transaction means.

If you fall into the category outlined above, then this transaction could be a voidable transaction.

This article will focus on uncommercial transaction claims.

What is an Uncommercial Transaction?

Section 588FB of the Corporations Act says:

(1)  A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

(a)  the benefits (if any) to the company of entering into the transaction; and

(b)  the detriment to the company of entering into the transaction; and

(c)  the respective benefits to other parties to the transaction of entering into it; and

(d)  any other relevant matter.

(2)  A transaction may be an uncommercial transaction of a company because of subsection (1):

(a)  whether or not a creditor of the company is a party to the transaction; and

(b)  even if the transaction is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

So, as outlined above, an uncommercial transaction is:

  1. A transaction of a company; and
  2. A transaction with another party (or parties); and
  3. A reasonable person in the company’s circumstances would not have entered into the transaction; having regard to
  4. The benefits and detriments to the company and the other party (or parties).

This raises some further interesting points, namely:

  1. What is a transaction of a company; and
  2. What does uncommercial mean; and
  3. How have the Courts decided the objective test of whether a reasonable person in the company’s circumstances would not have entered into the transaction; and
  4. What are the benefits and detriments to the parties to the transaction.

What is a Transaction of a Company?

The Court has distinguished a transaction “of a company” from a transaction “of the company”.

In Kalls Enterprises Pty Ltd (In Liquidation) & Ors v Baloglow & Anor [2007] NSWCA 191 Ipp J agreeing with Giles JA said:

… the question whether a transaction is a transaction of a company depends on the nature and extent of involvement of the company in the transaction. A transaction may be “of” more than one company or party. The mere fact that a company is a party to a contract or contracts that form part of the transaction does not necessarily make the transaction “of” that company. Whether a company is so bound up in the transaction that it is a transaction “of” the company is a question of judgment dependent on fact and degree.

Then Basten JA agreeing with Giles JA went on to say:

A transaction “of” a particular company can be said to involve something more than the concept of a company being “party to” a transaction. It involves a different perspective. A sale may involve three companies, a vendor, a purchaser and a financier. Each is “party to” the transaction, but in order to characterise the transaction for the purposes of Pt 5.7B, one needs to identify “of” which company it is a transaction, so as to assess benefits for, detriments to, insolvency of and winding up of, that company.

Therefore, it may be possible that a transaction of the company may not be a transaction of a company.

This determination will rely on the facts of each particular case.

This distinction may, if successfully argued, could enable a party to the transaction (or transactions) to defeat the liquidator’s claim.

A great discussion on these points can be found in McCann, in the matter of Walton Construction (Qld) Pty Ltd (In Liq) v QHT Investments Pty Ltd [2018] FCA 1986.

What does Uncommercial Mean?

A good starting-point, is that 588FB of the Corporations Act is used to recover undervalued transactions, or transactions where no consideration has been paid.

However, the Courts have found that both undervalued transactions have not been uncommercial, and that payment of full consideration have been uncommercial.

The Explanatory Memorandum for the Corporate Law Reform Bill 1992 (Cth) said that the uncommercial transactions provision was to prevent companies:

disposing of assets or other resources through transactions which resulted in the recipient receiving a gift or obtaining a bargain of such magnitude that it could not be explained by normal commercial practice.

In Liquidators’ Avoidance of Uncommercial Transactions (1996) 70 ALJ 390 Professor Keay said:

While not dealing exclusively with undervalue, undervalue is at the heart of the section, that is, if the company received less than what is reasonable from the transaction the liquidator may attack it.

The elements of an uncommercial transaction have been outlined in case law as essentially:

  1. The wording of the legislation – the benefits to the company; and the detriment to the company; and the respective benefits to other parties; and any other relevant matter – are to be determined on an objective basis; and
  2. The objective determination must include the actual knowledge of the controller of the debtor company; and
  3. The recipient received a gift or obtained a bargain of such magnitude that it could not be explained by normal commercial practice; and/or
  4. The consideration lacks commercial quality.

For more on this see Capital Finance Australia Limited v Tolcher [2007] FCAFC 185.

Whether a reasonable person would not have entered into the transaction?

Obviously, section 588FB of the Corporations Act posits an objective test.

A transaction of a company is an uncommercial transaction of the company if, and only if, it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction.

The Courts have determined that the reasonable assessment is based on:

  1. The totality of the company’s circumstances at the time of the transaction; and
  2. What knowledge the director or directors of the company ought to have known; and
  3. The purpose of the transaction at the time of the transaction; and
  4. The business relationship of the parties at the time of the transaction.

In Cussen & Ors v Sultan & Ors [2009] NSWSC 1114 Nicholas J said:

… the court will look at the totality of the business relationship between the parties, and to what the parties under their relationship intended to effect, and how their intention was effected, in part or in whole, by the impugned transaction.

So, with this objective approach, the section also requires consideration of the benefits and detriments to the parties to the transaction.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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What are the benefits and detriments to the parties to the transaction?

The main consideration in 588FB of the Corporations Act is the benefits and detriments of the company and the benefits for other parties to the uncommercial transaction.

What is a Benefit?

For an uncommercial transaction, section 9 of the Corporations Act says:

“benefit” means any benefit, whether by way of payment of cash or otherwise.

The dictionary defines benefit to mean:

an advantage or profit gained from something; or receive an advantage or profit; or bring advantage to.

So following the definitions above, a benefit pursuant to 588FB of the Corporations Act will be an advantage or profit whether by way of payment of cash or otherwise.

What is a Detriment?

Unlike benefit, detriment is not defined in the Corporations Act.

The dictionary defines detriment to mean:

the state of being harmed or damaged; or a cause of harm or damage.

So, a detriment pursuant to 588FB of the Corporations Act will be commercial harm or damage, or harm or damage that can be assessed on a commercial basis.

Does the Liquidator have an uncommercial transaction claim?

If the elements above are reasonably arguable by a liquidator, then the liquidator may have an uncommercial transaction claim against the other party or parties.

If so, then the transaction must have occurred within strict timeframes.

Timeframes for Uncommercial Transactions Claims

The timeframes for uncommercial transactions are:

  1. Two (2) years – for an uncommercial transaction claim; or
  2. Four (4) years – if the uncommercial transaction included a related party; or
  3. Ten (10) years – if it was made defeat, delay, or interfere with, the rights of creditors.

The transaction is an uncommercial transaction of the company and it was entered into, or an act was done for the purpose of giving effect to it, during the 2 years ending on the relation-back day.

Alternatively, if the other party is also a related entity of the company, then the insolvent uncommercial transaction was entered into, or an act was done for the purpose of giving effect to it during the 4 years ending on the relation-back day.

Lastly, if the company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors then the insolvent transaction was entered into, or an act was done for the purpose of giving effect to it during the 10 years ending on the relation-back day.

These timeframes raise some interesting questions, namely:

  1. What is the relation-back day?
  2. What is a related entity?

What is the Relation Back Day?

Section 91 of the Corporations Act includes a table which says the relation-back day is either:

  1. The date of the filing of the winding up application; or
  2. The date the company resolves that it be wound up voluntarily; or
  3. The date that the deed of company arrangement was executed.

Most commonly, the date of the winding up application.

What is a Related Entity in uncommercial Transactions Claims?

A related entity is defined at section 9 of the Corporations Act and includes (but not limited to):

  1. A body corporate that is related to the first-mentioned body; and/or
  2. A director or member of the body or of a related body corporate; and/or
  3. A relative of a spouse of such a director or member; and/or
  4. A relative of such a director or member.

Examples of an Uncommercial Transactions Claim in Liquidation

Some examples of uncommercial transaction claims in liquidation include claims for:

  1. The transfer of property of an insolvent company, for undervalued consideration or no consideration, to a related party of the insolvent company; and/or
  2. Payments made by a company to a related entity satisfying the related entities liabilities;
  3. The forgiveness of debts by a company for no commercial reason; and/or
  4. Extravagant upfront payments for services provided by another party being of such a magnitude rendering payments inexplicable in normal commercial practice; and/or
  5. The granting of security thereby turning an unsecured loan into a secured loan with no further consideration or commercial advantage; and/or
  6. The undervalue transfer of shares of a corporate trustee limiting the trustees right of indemnity against trust assets.

The liquidator’s job is to realise as many assets, and recover as much money, as it can to pay company creditors.

This is understandable from an unpaid creditor’s perspective.

However, if you are the party (or the director of the party) to which the uncommercial transaction claim is directed then it may not seem very fair at all.

However, there are a number of defences and exceptions to uncommercial transaction claims.

Defences to Uncommercial Transactions Claims

There are defences to uncommercial transaction claims.  They include:

  1. The person received no benefit because of the transaction; or
  2. The party entered into the transaction in good faith; and
  3. At the time of entering into the transaction a reasonable creditor did not know, or ought not to suspect that the company was insolvent.

Section 588FG of the Corporations Act prescribes transaction which are not voidable as against certain persons.

If the claim is made against a person other than a party to the transaction, then it is a defence under 588FG(1) if:

  1. The person received no benefit because of the transaction; or
  2. If there was a benefit the person received the benefit in good faith; and
  3. At the time when the person received the benefit the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent; and
  4. A reasonable person in the person’s circumstances would have had no such grounds for so suspecting.

If the claim is made against a creditor if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, then it is a defence under 588FG(2) if:

  1. The person became a party to the transaction in good faith; and
  2. At the time when the person became such a party the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent; and
  3. A reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and
  4. The person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

Probably the most important of the above is proving that a creditor did not know, or ought to have known, that the company in liquidation was insolvent at the time of the transaction.

However, as well as the defences 588FG of the Corporations Act, the liquidator must ensure that the elements of the uncommercial transaction are made out.

Elements of an Uncommercial Transactions

As outlined above, for a claim to be an uncommercial transaction claim, the liquidator must prove the elements of the uncommercial transaction.  These include:

  1. There is a transaction of a company; and
  2. There is a transaction with another party (or parties); and
  3. A reasonable person in the company’s circumstances would not have entered into the transaction having regard to;
  4. The benefits and detriments to the company and the other party (or parties).

If we can sufficiently argue that one or more of these elements cannot be made out, then the liquidator’s claim should fail.

For example, we can attempt to argue that:

  1. There was no transaction as defined by the act; and/or
  2. The transaction was not a transaction of a company; and/or
  3. You were not a party to the transaction; and/or
  4. It is reasonable that the company would have entered into the transaction; and/or
  5. The balance of benefits and detriments to the company and the other party (or parties) swings in favour of the person whom the claim is made.

If you have been contacted by a liquidator in relation to uncommercial transactions claims, you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

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OR CALL: 1300 545 133 FOR A FREE PHONE CONSULTATION

Unfair Preference Claims and how to Defeat Them

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Unfair Preference Claims and how to Beat them QueenslandUnfair preference claims are one of the types of voidable transactions in company insolvency and is outlined at section 588FA of the Corporations Act 2001 (CTH) (“the Corporations Act”).

An unfair preference occurs when:

  1. There is a transaction between the company and an unsecured creditor; and
  2. The transaction occurred while the company was insolvent; and
  3. The transaction results in the creditor receiving more than the creditor would receive from the company if the creditor were to prove for the debt in a winding up of the company.

If this happens, then a liquidator may be entitled to recover those funds from the creditor.

There are a number of defences and exceptions to the above which may mean that a creditor does not have to repay hard-earned monies to the liquidator.

This article explains in detail unfair preference claims under the voidable transaction regime and details the possible defences and exceptions to unfair preference claims.

If you have been contacted by a liquidator in relation to unfair preference claims you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

DEDICATED TEAM – FAST ACTING – PROVEN RESULTS

GET A FREE FEE ESTIMATE TODAY

OR CALL: 1300 545 133 FOR A FREE PHONE CONSULTATION

What are Voidable Transactions?

A voidable transaction in company insolvency is a transaction entered into by the company and a third-party which can be avoided and recovered by the liquidator of the company in liquidation.

Voidable transactions can include:

  1. 588FA – Unfair preferences;
  2. 588FB – Uncommercial transactions;
  3. 588FC – Insolvent transactions;
  4. 588FD – Unfair loans to a company; and
  5. 588FDA – Unreasonable director-related transactions.

Section 588FE of the Corporations Act outlines the criteria for a transaction able to be avoided by the liquidator.

  1. There must be a transaction; and
  2. The transaction must be an insolvent transaction; and
  3. It was entered into, or an act was done for the purpose of giving effect to it:
    1. During the 6 months ending on the relation-back day; or
    2. It is also an uncommercial transaction – 2 years ending on the relation-back day; or
    3. It is also a related entity of the company – 4 years ending on the relation-back day; or
    4. The company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors – 10 years ending on the relation-back day.

Then, each of the voidable transactions have their own specific requirements.

What is a Transaction?

Section 9 of the Corporations Act defines a transaction to mean:

“transaction” … means a transaction to which the body is a party, for example (but without limitation):

(a) a conveyance, transfer or other disposition by the body of property of the body; and

(b) a security interest granted by the body in its property (including a security interest in the body’s PPSA retention of title property); and

(c) a guarantee given by the body; and

(d) a payment made by the body; and

(e) an obligation incurred by the body; and

(f) a release or waiver by the body; and

(g) a loan to the body;

and includes such a transaction that has been completed or given effect to, or that has terminated.

Obviously, this is just a list of examples and section 9 explicitly does not limit the scope of what a transaction can be.

What is an Insolvent Transaction?

Section 95A of the of the Corporations Act defines solvent and insolvent to mean:

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

This essentially means that a company that is unable to pay its debts as and when they become due and payable is insolvent.

Care should be taken however to distinguish a temporary lack of liquidity with insolvency.  In Sandell v Porter (1966) 115 CLR 666 the High Court said:

The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity.

Section 9 of the Corporations Act says:

“insolvent transaction” has the meaning given by section 588FC.

Section 588FC of the Corporations Act says:

A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company, or an uncommercial transaction of the company, and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into; or

(ii) an act is done, or an omission is made, for the purpose of giving effect to the transaction; or

(b) the company becomes insolvent because of, or because of matters including:

(i) entering into the transaction; or

(ii) a person doing an act, or making an omission, for the purpose of giving effect to the transaction.

So, an insolvent transaction is a transaction entered into, or an act is done giving effect to a transaction, at a time when a company is unable to pay its debts as and when they become due and payable.

Or the company becomes unable to pay its debts as and when they become due and payable because the transaction was entered into, or because of the act being done giving effect to a transaction.

So that is a voidable transaction.  This article will focus on Unfair Preference Claims.

What are Unfair Preference Claims?

An unfair preference means that because one (1) creditor has been paid more than if it had to prove its debt in the liquidation, while other creditors have not been paid, that creditor will be preferred.

Section 588FA(1) of the Corporations Act 2001 (CTH) says:

(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;

even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency.

As previously outlined above, an unfair preference occurs when:

  1. There is a transaction between the company and an unsecured creditor; and
  2. The transaction occurred while the company was insolvent; and
  3. The transaction results in the creditor receiving more than the creditor would receive from the company if the creditor were to prove for the debt in a winding up of the company.

In Ashala Model Agency Pty Ltd (in liq) & Anor v Featherstone & Anor [2016] QSC 121 Jackson J said at [139]:

… an unfair preference turns on the result or effect of the transaction in relation to an unsecured debt owed to the creditor, by comparing what the creditor received from the company with what the creditor would have received on a winding up (in a pari passu distribution of the available assets to the unsecured creditors in accordance with the statutory priorities).

Timeframes for Unfair Preference Claims

The liquidator must prove that the insolvent transaction was entered into, or an act was done for the purpose of giving effect to it during the 6 months ending on the relation-back day.

Alternatively, if the preferred entity is also a related entity of the company, then the insolvent transaction was entered into, or an act was done for the purpose of giving effect to it during the 4 years ending on the relation-back day.

Lastly, if the company became a party to the transaction for the purpose of defeating, delaying, or interfering with, the rights of any or all of its creditors then the insolvent transaction was entered into, or an act was done for the purpose of giving effect to it during the 10 years ending on the relation-back day.

This raises some further questions, namely:

  1. What is the relation-back day? and
  2. What is a related entity?

What is the Relation Back Day?

The relation-back day is the day that either the winding up application was filed; or the day on which one of the other days outlined at 513B of the Corporations Act or 513C of the Corporations Act.

Section 9 of the Corporations Act says:

“relation-back day” has the meaning given by section 91.

Section 91 of the Corporations Act has a table which basically says the relation-back day is (depending on the circumstances):

  1. The date of the filing of the winding up application; or
  2. The date the company resolves that it be wound up voluntarily; or
  3. The date that the deed of company arrangement was executed.

So, if a creditor applies to a Court for an order winding up the debtor company on 20 June, and the company is subsequently wound-up, then the relation-back day is 20 June.

This means that for a transaction from an unrelated entity to be a voidable transaction, it must have occurred six (6) months prior to 20 June.

This means that for a transaction from a related entity to be a voidable transaction, it must have occurred two (2) years prior to 20 June.

What is a Related Entity?

A related entity is defined at section 9 of the Corporations Act.  The most common include:

  1. A director or member of the body or of a related body corporate; and/or
  2. A relative of such a director or member; and/or
  3. A relative of a spouse of such a director or member; and/or
  4. A body corporate that is related to the first-mentioned body.

So, a transaction to a related entity could include a transaction from the company to a director, a wife of a director, or a related company of the company in liquidation.

Example of an Unfair Preference in Liquidation

A typical example of an unfair preference in liquidation is:

  1. A building contractor engages 3 subcontractors to conduct work;
  2. The contractor pays one of the subcontractors, but not the other two;
  3. The contractor goes into liquidation two (2) months later;
  4. The two unpaid contractors become unsecured creditors in the liquidation;
  5. The money paid to the single subcontractor may be an unfair preference and recoverable by the liquidator.

The idea is to recover as much as possible into the fund to pay all creditors of the company in liquidation.  This is understandable, but not nice for small subcontractors who need the money.

However, there are a number of defences and exceptions to unfair preference claims.

Defences to Unfair Preference Claims

There are defences to unfair preference claims.  They include:

  1. The party entered into the transaction in good faith; and
  2. At the time of entering into the transaction a reasonable creditor did not know, or ought not to suspect that the company was insolvent.

Section 588FG of the Corporations Act prescribes transaction which are not voidable as against certain persons. As against a creditor, 588FG(2) says:

(2) A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company, or an unreasonable director-related transaction of the company, and it is proved that:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person’s circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

The most important of the above is proving that a creditor did not know, or ought to have known, that the company in liquidation was insolvent at the time of the transaction.

The Suspicion of Insolvency

Obviously, the wording of 588FG(2) posits an objective test.

The use of the words “a reasonable person in the person’s circumstances” means that it is not simply what the creditor knew, but what a reasonable creditor in the creditor’s position would or should have known.

By way of example, a creditor can rely on the following to make a case to show that a reasonable creditor in their situation had no way of knowing if the company in liquidation was insolvent at the time of the transaction:

  1. Age of the debts are not unreasonable;
  2. The creditor and the company had a good payment history;
  3. History of late payments followed by payments;
  4. Industry specific reasons (such as irregular payments being normal);
  5. No demands made by the creditor of its solicitors;
  6. No evidence of continued or persistent demands for payment;
  7. Phone calls are being returned by the company, and communication was reasonable; and
  8. Statements that the company were just having short-term liquidity issues.

This is by no means an exhaustive list, but it illustrates ways in which a creditor can persuade a liquidator or a Court that it not only had no knowledge of insolvency but didn’t reasonably suspect insolvency, thereby defending the unfair preference claim.

However, as well as these defences, there are a number of exceptions to unfair preference claims.

Exceptions to Unfair Preference Claims

Obviously, as the liquidator needs to prove that the party to the transaction meets the threshold matters relating to an unfair preference claim.  So, if it cannot then it may not be a valid claim.

The threshold issues include:

  1. There was a transaction;
  2. That transaction was an insolvent transaction;
  3. Within the timeframe outlined above – 6 months, 2 years, or 10 years;
  4. Between the company and a creditor; and
  5. The creditor was an unsecured creditor.

If a creditor can successfully argue these points, then the liquidator may not have an unfair preference claim.

Secured Creditor vs Unsecured Creditor

If a creditor is a secured creditor then the voidable transaction regime may not apply.

A security can include:

  1. Bailment;
  2. A charge or mortgage;
  3. Goods provided on consignment;
  4. Retention of title; and/or
  5. Perfected security on the PPSR.

If you offer goods and/or services on trade credit, then it is advisable for a number of reasons to take security over the trade debtor’s property.

A properly worded credit agreement can not only assist with recovering bad debts, continuing or proceeding with legal action against a company in liquidation, but it may also defeat a claim for unfair preference.

It can also be a partial defence if the company and the creditor had a running account.

The Running Account “Partial Defence”

A single transaction may not be a preference if it forms a running account between the company in liquidation and the creditor.

Section 588FA(3) of the Corporations Act says:

(3) Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account) between a company and a creditor of the company (including such a relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company’s net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship; then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and

(d) the transaction referred to in paragraph (a) may only be taken to be an unfair preference given by the company to the creditor if, because of subsection (1) as applying because of paragraph (c) of this subsection, the single transaction referred to in the last-mentioned paragraph is taken to be such an unfair preference.

What this means for a creditor who has a running account with the company in liquidation is that it may allow for a partial or complete reduction in the unfair preference claim.

The transactions in the running account form one transaction and the preference is calculated on the net position.

The running account reduction is calculated in the following way:

  1. The liquidator will create a six (6) month running balance;
  2. The most amount owed at one time during that period is Peak Indebtedness (PI);
  3. The amount owed at the time of the relation-back day is Current Indebtedness (CI);
  4. The net difference between the two is the unfair preference amount (PC).

So, PI – CI = PC.

If PI is greater than CI then there is an unfair preference claim.

If PI is less than CI then there is not an unfair preference claim.

For example:

  1. XYZ Contractors had a running account with A1 Earthmoving;
  2. PI during the six (6) months prior to the relation-back day was $135,496.00;
  3. The CI on the relation-back day was $104,633.00;
  4. $135,496.00 – $104,633.00 = PC;
  5. PC = $30,863.00

What is NOT an Unfair Preference?

The following a potentially transactions which an unfair preference claim may not apply:

  1. There is a genuine pre-payment to a person who is not a creditor of the company; or
  2. A purchase from a supplier on a cash on delivery basis as it may not give rise to a debtor/creditor relationship; or
  3. Payment to a creditor that is a secured creditor of the company in liquidation; or
  4. A right of set-off unless knowledge of insolvency is proved; or
  5. A transaction where the company receives equivalent value to any payment.

If you have been contacted by a liquidator in relation to unfair preference claims you should contact an insolvency lawyer as soon as possible to attempt to defend the liquidator’s demand for money

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Subcontractors’ Charge – Construction Debt Recovery

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Subcontractors' Charge Construction Debt Recovery in QueenslandA subcontractors’ charge under the old Subcontractors’ Charges Act 1974 (Qld) has been repealed and replaced with Building Industry Fairness (Security of Payment) Act 2017 (Qld) (“BIFA”).

The provisions of the repealed legislation have been amended and incorporated into BIFA.

A subcontractors’ charge under the old Subcontractors’ Charges Act are dealt with in Chapter 4 of BIFA.

This article will deal with making a subcontractors’ charge under BIFA in more detail below.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on claiming your subcontractors’ charge by contacting our building and construction lawyers today

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Subcontractors’ Charge

If you are a subcontractor, owed money by a debtor contractor, then you may be able to serve a Notice of Claim on the person obliged to pay the money under the contract (superior contractor by whom money is claimed as payable).  This is a subcontractors’ charge.

By serving this notice correctly, a subcontractor becomes a secured creditor of the debtor contractor, and in the event of insolvency may have a priority claim or be allowed to commence or continue with legal proceedings.

You will also need to serve a copy of the notice to the debtor contractor.

If eligible, and completed correctly, it is the superior contractor’s responsibility to pay to the subcontractor, the money owed to it by the debtor contractor.

This article will outline if you are eligible, explain the process, and provide useful information and links to guild you through the subcontractors’ charges chapter of BIFA.

Parties Involved in the Subcontractors’ Charge

BIFA provides definitions for the following:

Subcontractor – Section 6(3) of BIFA says:

If the party to a contract, who is required to carry out work under the contract, subcontracts all or part of the work – the resulting subcontract is a subcontract for the contract; and the person required to carry out the work under the subcontract is a “subcontractor” for the contract; and the work required to be carried out under the subcontract is the “subcontracted work” for the contract.

Contractor – Section 104 of BIFA says:

“contractor” for a contract, means the party to the contract who is required to carry out work under the contract.

Person – Section 104 of BIFA says:

“person” includes an unincorporated association.

Qualified Person – Section 147 of BIFA defines a qualified person to be:

  1. an architect registered under the Architects Act 2002; or
  2. a registered professional engineer under the Professional Engineers Act 2002; or
  3. a person licensed under the Queensland Building and Construction Commission Act 1991 to carry out or supervise work of the type to which the claim relates; or
  4. a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors; or
  5. a person having expert knowledge of the work to which the claim relates and who is accepted in a particular case as a qualified person by the contractor and subcontractor.

Once you have correctly identified the parties to the Notice of Claim then you are able to give the relevant parties your Notice of Claim. 

The next eligibility criteria is to establish if the work conducted or goods are services provided are meet the requirements under BIFA.

The Meaning of Work

Section 105 of BIFA says “Work” for a contract:

  1. means labour, whether skilled or unskilled, carried out by a person in connection with:
    1. the construction, decoration, alteration or repair of a building or other structure; or
    2. the development or working of a mine, quarry, sandpit, drain, embankment or other excavation in or on land; or
    3. the placement, fixation or erection of materials, plant or machinery used or intended to be used for a purpose mentioned in subparagraph (i) or (ii); or
    4. the alteration or improvement of a thing; or
    5. the demolition, removal or relocation of a building or other structure;
  2. and includes:
    1. the supply of materials used by a subcontractor in connection with other work the subject of a contract; or
    2. the manufacture or fabrication, wherever it happens, of project-specific components for a contract; or
    3. the supply of labour for a contract, other than labour that is only administrative in nature.

So, if the debt relates to “Work” as defined in BIFA, and the subcontractor knows the relevant parties to the contract and the subcontract, then the subcontractor can issue a Notice of Claim.

What is a Subcontractors’ Charge?

Section 207 of BIFA says:

“subcontractors’ charge” means a charge within the meaning of section 3 of the repealed Act (Subcontractors’ Charges Act 1974 (Qld)).

Section 3 of the Subcontractors’ Charges Act 1974 (Qld) defined “Charge” as:

“charge” means a charge under this Act.

A charge pursuant to this Act is a security interest on monies owed to a subcontractor by a contractor, from monies payable to the contractor by the person obliged to pay the money under the contract.

The BIFA allows the payment of monies owed to a contractor, to essentially “leapfrog” the contractor, and be paid directly to the subcontractor.

To do so, the subcontractor must issue a Notice of Claim on the person obliged to pay the money under the contract.

Notice of Claim

If eligible, as discussed above, then a subcontractor must serve a Notice of Claim on the person obliged to pay the money under the contract. This is an approved form – FORM S122 – which you can download from the QBCC website.

Section 122 of BIFA says:

  1. The notice of claim must be made in the approved form and:
  2. State the amount of the claim; and
  3. Include details of the work done by the subcontractor, certified as prescribed by a qualified person; and
  4. Include the other information prescribed by regulation.

The Form S122 has the following headings:

  1. Details of Claimant of Subcontractor Subcontract;
  2. Details of Superior Contractor by Whom Money is Claimed as Payable;
  3. Details of Contract;
  4. Certification by Qualified Person; and
  5. Witness Certification.

It is very important to get these details correct.  Failure to do so may mean that the form is defective, and the subcontractor may lose their secured interest.  We strongly suggest engaging a solicitor to complete this Notice of Claim.

Strict Time Limits for Notice of Claim

Section 122 of BIFA says that:

(4) The notice of claim may be given even if the work is not completed, or payment of the money relating to the charge is not yet due.

(5) However, if the work has been completed, the notice of claim must be given within 3 months after practical completion for the work.

(8) If the notice of claim relates only to a retention amount for the contract, the notice (a) may be given at any time while work under the contract is being performed; and (b) must be given within 3 months after the expiration of the defects liability period for the contract.

This means:

  1. Any time that the works are still being completed; or
  2. After completion – for money owed under a contract – within three (3) months after the completion of works; or
  3. After completion – for retention money – within three (3) months of the expiration of the maintenance period.

Copy of Notice of Claim to Contractor

After giving a copy of the notice of claim to a person obliged to pay money to a contractor under a contract, the subcontractor must give a copy of the notice to the contractor.

Section 123 of BIFA says:

The subcontractor must (a) give the contractor a copy of the notice of claim; and (b) advise the contractor of the name and address of the person given the notice of claim.  If the subcontractor does not comply … the notice is of no effect and the subcontractor’s charge does not attach.

So, the contractor must have a copy of the notice of claim and be given the name and address of the person given the notice of claim.

Failure to do so means that the charge does not attach, and the subcontractor loses its security interest.

We strongly suggest engaging a solicitor to complete this.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on claiming your subcontractors’ charge by contacting our building and construction lawyers today

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Ok, so you have done all of that, now what happens?

Person Must Retain Money

Once served with the notice of claim, the person obliged to pay money to a contractor under a contract must retain the money payable to the contractor.

Section 126(2) of BIFA says:

(2) The person must retain a sufficient part of the money that is or is to become payable by the person under the contract to satisfy the claim until the court in which the claim is heard makes an order about to whom, and in what way, the money is to be paid.

If the person fails to retain the money and pays it to the contractor, then the person becomes liable for that amount of the claim.  Section 126(3) of BIFA says:

(3) If the person fails to retain the money as required under subsection (2), the person is personally liable to pay to the subcontractor the amount of the claim, not exceeding the amount that the person is required to retain under subsection (2).

As well as the person having to retain the money, the contractor has to respond to the notice of claim.  Failure to do so will incur a maximum of 20 penalty units.

Contractor given copy of Notice of Claim must Respond

The contractor must respond to the notice of claim within 10 business days.

Section 128(2) of BIFA says:

(2) The contractor must give both of the following persons a written response to the claim within 10 business days after the contractor is given the copy of the notice of claim, unless the contractor has a reasonable excuse (a) the person given the notice of claim; (b) the subcontractor.

The response to the claim must be made in the approved form and:

  1. Accept liability to pay the amount claimed; or
  2. Accept liability to pay an amount stated in the response, but otherwise dispute the claim; or
  3. Dispute the claim.

The approved form for the contractor’s response is Form S128 – Response to a Notice of Claim.

The details the contractor must include:

  1. Details of claimant subcontractor (person who gave the notice of claim);
  2. Details of superior contractor (by whom money is claimed as payable);
  3. Details of contractor;
  4. Details of the work done by the claimant subcontractor;
  5. Declaration including if the contractor:
  6. Accepts liability to pay the amount claimed; or
  7. Accepts liability to pay an amount stated; or
  8. Disputes the claim.
  9. States amount for which liability is accepted

If the Debtor Accepts Liability to Pay an Amount Claimed

If the contractor accepts the liability for the amount claimed, then the person must pay that amount to the subcontractor.

Sections 129(2) of BIFA says:

If, in the response to the claim, the contractor accepts liability to pay the amount claimed, the person given the notice of claim must pay the subcontractor the amount the person is required to retain.

If the contractor accepts liability to Pay a stated amount in the contractor’s notice, but otherwise disputes the balance of the claim, then the person must pay to the subcontractor the amount stated in the response to the notice of claim and retain the balance (the unsatisfied amount).

Sections 129(3) of BIFA says:

If, in the response to the claim, the contractor accepts liability to pay an amount stated in the response but otherwise disputes the claim, the person given the notice of claim must pay the subcontractor the amount the person is required to retain, up to the amount stated in the response.

If the Contractor Disputes the Claim or Does Nothing

If the contractor disputes the claim, then the subcontractor must commence proceedings in relation to the charge, recover the amount claimed from the person, as a debt owing to the subcontractor, in any court of competent jurisdiction.

Section 136 of BIFA says:

A proceeding for a subcontractor’s charge must (a) be started within (i) if the claim is for the retention amount only – 4 months after the balance of the retention amount is payable; and (ii) otherwise—1 month after notice of the claim is given under section 122 to the person by whom the money is payable; and (b) be brought by way of action.

If the subcontractor does not commence proceedings in the required time to prove the debt, then the charge is deemed to be extinguished unless the subcontractor duly commences a proceeding under section 136 to enforce it.

Debtor Contractor in Liquidation

If the contractor goes into liquidation, then a subcontractor who gave a notice of claim to the person prior to the commencement of the liquidation, and has elevated themselves to the status of a secured creditor, can take advantage of section 471C Corporations Act 2001 (CTH) which says:

Nothing in section 471B affects a secured creditor’s right to realise or otherwise deal with the security interest.

In MSI (Holdings) Pty Ltd v Mainstreet International Group Ltd [2013] QCA 27 the Queensland Court of Appeal said:

Section 471C is concerned with the right of a secured creditor with respect to a security interest. The expression “secured creditor” is defined by s 51E of the Corporations Act to mean: a creditor of the corporation, if the debt owing to the creditor is secured by a security interest.

The expression “security interest” is defined in s51A to have a meaning which includes a charge. According to the definition in the Dictionary in s 9 of the Corporations Act, the word “charge” means: a charge created in any way and includes a mortgage …

Plainly, the charge … was a security interest as defined. Just as plainly, at the time of commencement of the District Court proceeding … there was a debt owed by MSI … which was secured by the charge.

In my view, the commencement and continuation of the District Court proceeding is apt to be characterised as a realisation of [a] security interest for the purposes of s 471C.

As you can see, a subcontractor’s charge may have some substantial benefits for a creditor.

We strongly advise that you seek suitably qualified legal advice in relation to a subcontractor’s charge as soon as possible to secure the money owed to you by a contractor.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on claiming your subcontractors’ charge by contacting our building and construction lawyers today

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Making a Payment Claim – BIFA (QLD)

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Payment Claim new BIFA replaces old BCIPA legislation in QueenslandA payment claim process using the old BCIPA – Building & Construction Industry Payments Act 2004 (Qld) has been repealed and replaced with Building Industry Fairness (Security of Payment) Act 2017 (Qld) (“BIFA”).

The provisions of the repealed legislation have been amended and incorporated into BIFA.

Progress Payments and Payment Claims from the previous BCIPA – Building & Construction Industry Payments Act 2004 (Qld) are dealt with in Chapter 3 of BIFA.

This article will deal with making a payment claim under BIFA in more detail below.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on a claim by contacting our building and construction lawyers today.

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Making a BIFA Payment Claim

If you are eligible, then making a claim using BIFA is a relatively straightforward and structured process allowing you to seek payment for the goods and/or services you have provided.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on a claim by contacting our building and construction lawyers today.

Eligible Person under BIFA

BIFA relates to payments under a construction contract.

Construction contract (whether written or oral, or partly written and partly oral) is defined as:

“construction contract” means a contract, agreement or other arrangement under which 1 party undertakes to carry out construction work for, or to supply related goods and services to, another party.

Construction Work is defined at section 65 of BIFA and are quite extensive, but includes:

the construction, alteration, repair, restoration, maintenance, extension, demolition or dismantling of buildings or structures, whether permanent or not, forming, or to form, part of land … of any works forming, or to form, part of land, including walls, roadworks, powerlines, telecommunication apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for land drainage or coast protection …

In BIFA Construction Work does not include:

the drilling for, or extraction of, oil or natural gas; the extraction, whether by underground or surface working, of minerals, including tunnelling or boring, or constructing underground works, for that purpose.

Related Goods and Services are defined at section 66 of BIFA and include the following goods:

materials and components to form part of any building, structure or work arising from construction work … plant or materials (whether supplied by sale, hire or otherwise) for use in connection with the carrying out of construction work;

And also include the following services:

the provision of labour … architectural, design, surveying or quantity surveying services … building, engineering, interior or exterior decoration or landscape advisory services … soil testing services … and goods and services, relating to construction work, of a kind prescribed by regulation.

The few that are included in this article are just a small sample of the actual types of construction works and related goods & services.  You should follow the links to read them all.

There are also a number of construction contracts that BIFA does not apply to which are referenced under sections 61(2) to 61(4) of BIFA.

If you have an eligible construction contract for work defined as construction work, or the provision of related goods and services, then you might have a right to a progress payment.

Right to a BIFA Progress Payment

If you contract contains a payment provision which is not a void payment provision, you are entitled to a progress payment on the day on which the payment becomes payable under the provision.

Section 70 of BIFA says:

From each reference date under a construction contract, a person is entitled to a progress payment if the person has carried out construction work, or supplied related goods and services, under the contract.

A Reference Date under BIFA is defined at section 67 and says:

A “reference date” for a construction contract, means … a date stated in, or worked out under, the contract as the date on which a claim for a progress payment may be made for construction work carried out, or related goods and services supplied, under the contract

Alternatively, if you contract does not contain a reference date then the reference date is the last day of the month in which the construction work was first carried out, or the related goods and services were first supplied, under the contract … and the last day of each later month.

If you have an eligible construction contract for work defined as construction work, or the provision of related goods and services, and you have a right to a progress payment, then you may be able to make a BIFA payment claim.

BIFA Payment Claim

If you tick all of the boxes above, then you may be able to make a payment claim.

Section 68 of BIFA says that a payment claim:

  1. Identifies the construction work or related goods and services; and
  2. States the amount (the claimed amount) of the progress payment that the claimant claims; and
  3. Requests payment of the claimed amount; and
  4. Includes the other information prescribed by regulation.

Section 68 of BIFA also says that a written document bearing the word ‘invoice’ is taken to be a request for payment.

There are strict requirements in BIFA for the issuing and serving of payment claim.  Contact our solicitors today to get legal assistance with issuing a payment claim.

Time Requirements for Payment Claims

Section 75 of BIFA defines the time requirements for making a payment claim.

If the payment claim is not related to a final payment, then the claim must be served the later of:

  1. The time allowed for in the construction contract; or
  2. Six (6) months after the work to which the claim relates was last carried out; or
  3. The related goods and services to which the claim relates were last supplied.

If the payment claim is related to a final payment, then the claim must be served the later of

  1. The time allowed for in the construction contract; or
  2. Twenty-eight (28) days after the end of the last defects liability period; or
  3. Six (6) months after the completion of the works; or
  4. Six (6) months after the complete supply of related goods and services to be supplied under the construction contract.

Summary of Eligibility

In summary to the above a party:

  1. Who has a written or oral construction contract;
  2. Who has provided construction work or related goods and services;
  3. Who has given an eligible payment claim (an invoice) to the other party; and
  4. Who has complied with the time requirements of BIFA.

Than that that party is entitled to the protections offered under the new BIFA legislation.

After the party has validly served a BIFA payment claim, the respondent will then have to give a BIFA payment schedule.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on a claim by contacting our building and construction lawyers today.

Payment Schedules after Payment Claim

Once you have validly served the BIFA payment claim section 76 of BIFA says:

A respondent must respond to the payment claim by giving the claimant a payment schedule within whichever of the following periods ends first … the period, if any, within which the respondent must give the payment schedule under the relevant construction contract … or 15 business days after the payment claim is given to the respondent.

Consequences for not Giving a Payment Schedule

Section 77 of BIFA says:

If a respondent given a payment claim does not respond to the claim by giving the claimant a payment schedule as required under section 76 … the respondent is liable to pay the amount claimed under the payment claim to the claimant on the due date for the progress payment to which the payment claim relates.

If the debtor does not pay the amount in the payment claim by the due date then you can recover that amount as a debt in the Court with jurisdiction; or make an adjudication application.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on a claim by contacting our building and construction lawyers today.

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Consequences for Non-payment of Payment Schedule

Section 78 of BIFA says:

If a respondent given a payment claim for a progress payment does not pay the amount owed to the claimant in full on or before the due date for the progress payment … The claimant may either … recover the unpaid portion of the amount owed from the respondent, as a debt owing to the claimant, in a court of competent jurisdiction … or apply for adjudication of the payment claim.

Section 78 of BIFA defines Amount Owed to mean:

“amount owed” to a claimant for a payment claim, means:

(a) if the respondent did not respond to the payment claim with a payment schedule as required under section 76 —the amount claimed under the payment claim; or

(b) if the respondent did respond to the payment claim with a payment schedule as required to do so under section 76 —the amount proposed to be paid under the payment schedule.

Notice before Commencing Court Proceedings

If you intend to recover the amount mentioned above as a debt in the Court with jurisdiction, then:

  1. Before proceeding you need to give the debtor a notice under section 99 of BIFA; and
  2. The five (5) business days for the debtor to serve the payment schedule, as stated in the notice, has ended.

Section 99 of BIFA says that the notice must be given to the debtor within 20 business days immediately following the due date for the progress payment; and it must be in the approved form.

The approved form for this notice is the Form S99 – Warning Notice – Notice Of Intention To Start Legal Proceedings.

If you correctly serve this notice, and the 5 business days have elapsed, you are then able to recover the amount of the payment claim as a debt in the Court with jurisdiction.

The benefit of commencing legal action in the Court with jurisdiction is that the respondent debtor is statute-barred from raising a defence or bring any counterclaim.

Section 100(3) of BIFA says in relation to proceedings to recover the unpaid amount as debt:

The respondent is not, in those proceedings, entitled (a) to bring any counterclaim against the claimant; or (b) to raise any defence in relation to matters arising under the construction contract.

Valid Service under BIFA

Section 102 of BIFA says that a notice or other document under this chapter can be served pursuant to a term or terms in the construction contract; or pursuant to section 39 of the Acts Interpretation Act 1954 (QLD) which says:

If an Act requires or permits a document to be served on a person, the document may be served—

On an individual—by delivering it to the person personally; or by leaving it at, or by sending it by post, telex, facsimile or similar facility to, the address of the place of residence or business of the person last known to the person serving the document; or

On a body corporate—by leaving it at, or sending it by post, telex, facsimile or similar facility to, the head office, a registered office or a principal office of the body corporate.

If the claimant does not want to commence legal action to recover the debt in the Court, then the claimant can apply for an adjudication application.

What is a BIFA Adjudication?

If you did not want to recover the amount of the payment claim as a debt in the Court with jurisdiction then you could apply to get the matter resolved by adjudication.

An adjudication is a process whereby a professional trained in BIFA dispute resolution assesses the payment schedule and the payment claim and makes a determination in an attempt to resolve this dispute.

A BIFA Adjudication Application

Section 79 of BIFA says that an adjudication application:

  1. Must be in the approved form; and
  2. Must be made in the correct time-frame; and
  3. Must identify the payment claim and the payment schedule to which it relates; and
  4. Must be accompanied by the fee prescribed by regulation for the application; and
  5. May contain the submissions relevant to the application the claimant chooses to include.

A list of BIFA adjudicators can be found here.

Once an adjudication application has been accepted by an adjudicator, the other party must provide the adjudicator with an adjudication response.

The adjudication response must be given within the time required by section 83 of BIFA.

The adjudicator must then decide the matter within the time required by section 85 of BIFA.

Read our great article on Making an Adjudication Application in Queensland

Adjudication Certificate

Once the adjudicator has made the decision, then they must pursuant to section 91 of BIFA provide the claimant with an adjudication certificate.

The adjudication certification certificate must include:

  1. The name of the claimant;
  2. The name of the respondent who is liable to pay the adjudicated amount;
  3. The adjudicated amount;
  4. The date on which payment of the adjudicated amount was required to be paid to the claimant;
  5. The rate of interest payable on the adjudicated amount;
  6. The fees, identified in the decision, that the respondent is to pay;
  7. That the certificate is made under this Act.

The adjudication certificate can then be registered in the Court with competent jurisdiction and enforced as a money order of that Court.

Enforcement of an Adjudication Certificate

Section 93 of BIFA says:

An adjudication certificate may be filed as a judgment for a debt, and may be enforced, in a court of competent jurisdiction.

The adjudication certificate must be accompanied by an affidavit of the claimant stating that the whole or a part of the adjudicated amount has not been paid to the claimant at the time the certificate is filed.

Rule 793 of the Uniform Civil Procedure Rules 1999 (QLD) says:

“enforceable money order” of a court, means (a) a money order of the court; or (b) a money order of another court or tribunal filed or registered under an Act in the court for enforcement.

Because section 93 of BIFA allows for the adjudication certificate to be registered and enforced, in a court of competent jurisdiction, then rule 793 applies and the decision becomes an enforceable money order.

Conclusion

The new Building Industry Fairness (Security of Payment) Act 2017 (Qld) includes some good amendments to assist the payment of monies the subject to building and construction disputes.

Very strict time limits apply to the different stages of BIFA. Ensure that you do not miss out on a claim by contacting our building and construction lawyers today.

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Enforcement Warrant for Redirection of Debts

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Enforcement Warrant for Redirection of DebtsAn enforcement warrant for redirection of debts is an enforcement option pursuant to the Uniform Civil Procedure Rules 1999 (QLD) (“UCPR”).

An enforcement warrant for redirection of debts is a way of enforcing a judgment, enforcing a registered QCAT decision or enforcing a registered adjudication decision.

A warrant for redirection of debts allows the creditor to enforce an enforceable money order over any debts owed to the judgment debtor by a third person.

The redirection warrant confers the obligation on the third person to pay the debt to the creditor rather than the debtor.

Just like other enforcement warrants, a warrant for redirection of debts is obtained by making an application to the Court.  The application consists of:

  1. The application;
  2. A statement in support of the application; and
  3. A draft enforcement warrant.

When the Court issues the UCPR enforcement warrant for redirection of debts, it then needs to be served on the third person who owes the debt to the judgment debtor.

This article will give you all the information needed to apply for an enforcement warrant for redirection of debts, and give you hints and tips to avoid pitfalls.

There are a number of difficult steps that need to happen before the third person must comply with an enforcement warrant for redirection of debts. We strongly recommend engaging a qualified legal professional

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Enforcement Warrant for Redirection of Debts

Rule 840(1) of the UCPR says:

A court may issue an enforcement warrant authorising redirection to an enforcement creditor of specified debts certainly payable, belonging to an enforcement debtor, from a third person.

For the Court to issue an enforcement warrant for redirection of debts the creditor will need:

  1. An enforceable money order;
  2. An application – Form 9;
  3. A draft warrant – Form 76;
  4. A statement in support of the application – Form 74; and
  5. To serve the debtor and the third person.

We will give you more information on each of these steps below.

What is an Enforceable Money Order?

Rule 793 of the UCPR says:

“enforceable money order” of a court, means – a money order of the court; or a money order of another court or tribunal filed or registered under an Act in the court for enforcement.

Schedule 3 of the UCPR defines an order to mean:

“order” … includes a judgment, direction, decision or determination of a court whether final or otherwise.

An enforceable money order is a money judgment from the Court, or a decision in QCAT or an adjudication decision registered in the Magistrates Court.

A QCAT decision or an adjudication decision that has not been registered in the Court is not an enforceable money order.

Rule 793 of the UCPR says:

“enforcement creditor” means – a person entitled to enforce an order for the payment of money; or a person to whom the benefit of part of the order has passed by way of assignment or in another way.

If an enforcement creditor has an enforceable money order, then to issue the warrant the enforcement creditor will need to ensure that they are eligible.

Eligibility Requirements

The eligibility requirements to be granted an enforcement warrant for redirection of debts include:

  1. There must be a debt owed;
  2. The debt must be an actual debt presently due; and
  3. The debt must be owed by a third person.

We will discuss these eligibility requirements in more detail below.

There must be a Debt Owed

Rule 839 says that the payment of earnings or payment into Court are not debts which can be directed under this warrant. These debts are dealt with in their own enforcement warrants.

As stated above, rule 840(1) of the UCPR says “specified debts certainly payable”.  The UCPR is silent on what constitutes a “specified debt”.

The debt must be owed to the judgment debtor in his/her/its own right.  The debt cannot be owed in its capacity as trustee for example.

The debt also cannot be an unliquidated debt but must be a liquidated amount.

The most common scenario is instalment payments or debts owed under credit agreements for example.

The Debt must be Presently Due

The debt must be presently due and cannot be the mere possibility or probability of a future debt.

Rule 840(3) of the UCPR says:

A debt may be redirected only if the debt, or the part of the debt belonging to the enforcement debtor, is payable to the enforcement debtor from the third person on the date the enforcement warrant is served on the third person.

In Jackson & Chenoweth v Marsh & Webster Ltd [1924] QWN 51 McCawley CJ, Lukin J, Macnaughton J said:

[The] rule … should be read as restricted to debts existing, whether payable in present or in future, and did not include the money which C., on the transactions with B., might ultimately become possessed of on behalf of B. That there was no debt “owing or accruing” by B. to C. at the time the Magistrate made the garnishee order that could be attached.

A conditional debt payable upon a certain event occurring cannot be redirected until the condition has been satisfied.

In Queensland Carriage Waggon and Tramcar Co Ltd v Somerville (1890) 4 QLJ 10 following a long line of precedents Lilley CJ said:

This was not a perfected, absolute debt; it was not due or accruing due, because defendant had not done work, and might never finish it. It depended on a condition—that was, the architect’s certificate …  I cannot deal with the money until Campbell has got what is owing him; and, at present, there is no debt, legal or equitable, nor is there a prospect of any. The rule nisi must be dismissed, with costs of all parties, to be paid by the judgment creditors.

So, the debt must be a present debt and not a debt future or contingent debt.

The Debt must be Owed by a Third Person

The debt must be owed by a third person, which means any person and includes the State.

Rule 793 of the UCPR says:

“third person” means – a person (including the State) from whom a debt is payable to the enforcement debtor; or is likely to become payable to the enforcement debtor

The State Can owe Debts

Section 95 of the Civil Proceedings Act 2011 (QLD) deals with debts owed by the State.

The third person must be within Australia.

The third person must be within Australia.  In Suzlon Energy Ltd v Bangad [2011] FCA 1152 applying obiter dicta from Société Eram Shipping Co Ltd v Cie Internationale de Navigation [ 2004] 1 AC 260 Rares J said:

In principle and on authority it seems to me that the court should not, save in exceptional circumstances, impose such a requirement upon a foreigner …

The debt can be from a Bank

The debt can be from a financial institution to the credit of an enforcement debtor.

Section 97 of the Civil Proceedings Act 2011 (QLD) says:

An amount standing to the credit of an enforcement debtor in an account in a financial institution is, for enforcing a money order, a debt payable to the enforcement debtor

This means that any money held in a bank account can be used to enforce the judgment debt, even if the conditions under 97(1)(a) to (d) have not been met.

This bank account can include a joint bank account.

Joint Fund

The debt can be owed from a joint fund, a joint bank account in the name of husband and wife for example, where only one is the enforcement debtor.

Section 94 of the Civil Proceedings Act 2011 (QLD) says:

(1) This section applies if the debt belonging to the enforcement debtor is a fund of money owned by the enforcement debtor and others (a “joint fund”).

(2) An enforcement warrant may authorise redirection to an enforcement creditor of a joint fund to the extent of the enforcement debtor’s entitlement.

(3) It is presumed a joint fund is owned by the fund owners in equal shares unless, on application of a fund owner or enforcement creditor, the court decides the actual beneficial entitlement of each fund owner.

Partnership Debts

The debts owing to the enforcement debtor can also be partnership debts.

Section 96 of the Civil Proceedings Act 2011 (QLD) says:

A court may issue an enforcement warrant authorising redirection to an enforcement creditor of particular debts, belonging to an enforcement debtor, from a partnership carrying on business in Queensland even if a partner resides outside Queensland.

If the Third Person is a Company

If the third person is a company then the company is subject to section 440D and 471B of the Corporations Act 2001 (CTH).

Section 440D of the Corporations Act 2001 (CTH) says:

During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except with the administrator’s written consent; or with the leave of the Court …

Section 471B of the Corporations Act 2001 (CTH) says:

While a company is being wound up in insolvency … a person cannot begin or proceed with … enforcement process in relation to such property

So, unless leave is granted by the Court, a warrant directed at a corporate third person under administration or in liquidation cannot be made.  Best to check on the ASIC website beforehand.

So, if a judgment creditor is eligible and it can provide an eligible third person, then the judgment creditor can make the application for a warrant for redirection of debts.

Application for a Warrant for Redirection of Debts

The application for an enforcement warrant for redirection of debts – Form 9 – outlines the order (or orders) that the plaintiff is asking the Court to make.

The costs of the warrant are fixed at Schedule 2 of the UCPR depending on the amount of the claim – see item 15.

The application for an enforcement warrant for redirection of debts also needs to state who the third person is namely who the warrant needs to be served on.

The Draft Warrant

The form of the draft enforcement warrant for redirection of debts is Form 76.

The draft enforcement warrant needs to include:

  1. Enforcement Creditor name and address
  2. Enforcement Debtor name and address
  3. Third Person name and address

It also needs to include:

  1. Judgment amount;
  2. Less payments;
  3. Plus interest;
  4. Plus costs; and
  5. Total owing.

The application for an enforcement warrant for redirection of debts and the draft warrant need to be accompanied by a statement in support of the application.

Statement in Support of the Application

The statement in support of the application must be in the approved form – Form 74.

The statement in support of the application should be sworn not earlier than two business days before the date of the application.

Rule 817(1)(b) of the UCPR says:

A person applying for an enforcement warrant must file … a statement in the approved form sworn by the enforcement creditor, or the enforcement creditor’s agent or solicitor, not earlier than 2 business days before the date of the application.

The statement in support of the application for an enforcement warrant for redirection of debts must include the following:

  1. The date the money order was made;
  2. The amount for which the order was made;
  3. The date and amount of any payment made under the order;
  4. The costs incurred in previous enforcement proceedings in relation to the order debt;
  5. Any interest due at the date the statement is sworn;
  6. Any other details necessary to calculate the amount payable under the order at the date the statement is sworn and how the amount is calculated;
  7. Any daily amount of any interest that, subject to any future payment under the order, will accrue after the date the statement is sworn;
  8. Any other information necessary for the warrant being sought.

It is likely that the registrar will require an amended form to specifically identify the debt sought to be redirected by the third person.

The Court will consider a number of factors identified in rule 840(2) of the UCPR .

Factors the Court will Consider

Rule 840(2) of the UCPR says:

In deciding whether to issue an enforcement warrant authorising redirection, including regular redirection under division 2, the court must have regard to the following—

(a) whether the enforcement debtor has adequate means of satisfying the order after deducting—

(i) the necessary living expenses of the enforcement debtor and the enforcement debtor’s dependants; and

(ii) any other known liabilities of the enforcement debtor;

(b) whether the amount of regular debt to be redirected would impose unreasonable hardship on the enforcement debtor;

(c) if the applicant is the enforcement debtor—whether, having regard to the availability of other enforcement means, the issue of the warrant would be consistent with the public interest in enforcing orders efficiently and expeditiously;

(d) whether, having regard to the nature of the debt (belonging to the enforcement debtor from the financial institution) and the type of redirection, a regular redirection or otherwise, is appropriate.

If the Court and/or the Registrar is satisfied of the above, then it will issue the enforcement warrant.

The next step in the process is to serve the enforcement warrant for redirection of debts on the third person.

Service of Enforcement Warrant for Redirection of Debts

Once the Court has granted the warrant and provided the judgment creditor with a sealed copy, the judgment creditor must serve the warrant on the third person.

Rule 842(1) of the UCPR says:

An enforcement warrant authorising redirection of a debt belonging to an enforcement debtor from a third person must be served on the third person to have effect.

There is no mention in the UCPR that a judgment creditor must serve the warrant on the judgment debtor.  However, there is a notice to the enforcement debtor on the draft warrant which says:

You may apply to the court to set this warrant aside or to stay its enforcement at any time.

It seems that it is implied in the Form 76 that the enforcement debtor be served a copy of the warrant.

Best practice – serve a copy on the enforcement debtor as soon as practicable after serving the third person.

Ordinary Service of Enforcement Warrant for Redirection of Debts

An enforcement warrant is not an originating application and so ordinary service is the mode of service.

Ordinary service is prescribed at rule 112 of the UCPR and can be performed by:

  1. Posting the warrant to the address of the third person;
  2. Leaving it with a person who looks over sixteen (16) years old;
  3. Leaving it at the address in a position where it is reasonably likely to come to the third person’s attention;
  4. Facsimile of email if permissible.

Best case, unless you can deliver it to the third person personally, express post to the address contained in the enforcement warrant.

Once served the third person has to comply with the warrant using reasonable diligence to give effect to the redirection.

If complied with, the warrant is valid for one (1) year after it was issued.

Section 91 of the Civil Proceedings Act 2011 (QLD) says:

An enforcement warrant ends 1 year after it issues unless the warrant states that it ends at an earlier time.

Failure to Comply with the Warrant

If the third person fails to act using reasonable diligence to comply with the enforcement warrant for redirection of debts, then there are a number of serious consequences.

Section 98 of the Civil Proceedings Act 2011 (QLD) says:

If a third person – does not comply with an enforcement warrant authorising redirection of a debt from the third person; and does not file a notice of objection; and fails to dispute the third person’s liability to pay the debt; the enforcement creditor has the same entitlement to enforce the debt as the enforcement debtor had.

There is also a notice to the third person on the Form 76 which says:

Failure to comply with this warrant may be contempt of court and may entitle the enforcement creditor to obtain an order against you.

So, it is very important that the third party comply with the enforcement warrant.

If the third person objects to the warrant, then it can make an application to set it aside.

Set Aside Enforcement Warrant for redirection of debts

Rule 819(1) of the UCPR says:

An enforcement debtor or another person affected by an enforcement warrant may apply to the court to set it aside or to stay enforcement at any time.

The application should be made by adapting the Form 9 application and providing supporting evidence by way of affidavit Form 46.

Once sealed, a copy of the documents will need to be served on the enforcement creditor and the enforcement debtor.

Rule 31(5) of the UCPR says:

An application must be filed and then served on each respondent at least 2 business days before the day set for hearing the application.

Claim by Other Person

The court may consider that another person claiming the benefit of the debt should be given the opportunity to be heard.

Rule 845 of the UCPR says:

This rule applies if a court considers that another interested person, including, for example, a person other than an enforcement debtor who may be entitled to all or a part of a redirected debt or to a charge or lien on it, should be given the opportunity to be heard.

The court may – order that notice of the hearing of the notice of objection be given to the other person; and at the hearing, decide the other person’s entitlement or give directions as to how the entitlement is to be decided.

Discharge of the Third Person

A payment to an enforcement creditor made by a third person in compliance with an enforcement warrant is a valid discharge of the third person’s liability to the enforcement debtor to the extent of the amount paid.

There is another similar warrant available under this Part, being a warrant for regular redirection from financial institutions, being Division 2 of Part 5.

Regular Redirection from Financial Institutions

A warrant for regular redirection from financial institutions is a warrant directed toward a third person (the financial institution) for a redirection of a regular deposit paid by a fourth person.

The Form for this warrant is Form 77.

Rule 847 of the UCPR says:

This division applies if – an enforcement debtor has an account with a financial institution (the “third person“); and a fourth person (the “fourth person“) regularly deposits earnings into the account (a “regular deposit“).

Rule 848 of the UCPR says:

“regular debt” means a debt, belonging to the enforcement debtor, from the third person because of a regular deposit by the fourth person.

The application is made in the same way as an application for a warrant for redirection of debts, except for the amendments required to ensure that it is an application made under this division.

Content of Enforcement Warrant for Regular Redirection

As well as the provisions outlined above the enforcement warrant for regular redirection must also include:

  1. The name of the financial institution;
  2. Details of the enforcement debtor’s account;
  3. The amount of the deduction to be made; and
  4. The name and address of the enforcement creditor.

See Rule 849 of the UCPR for more.

Once drafted correctly, filed and sealed with the Court’s seal, the enforcement creditor must serve the enforcement debtor and the financial institution.

Service of the Warrant for Regular Redirection

For the warrant to take effect, the enforcement creditor must serve the enforcement debtor and the financial institution.

Rule 850 of the UCPR says:

An enforcement warrant for regular redirection must be served personally or by post on the enforcement debtor and the financial institution.

Sending the warrant by express post with a delivery receipt should suffice, but to be 100% sure, then an enforcement creditor can engage a process server to personally serve the warrant.

Once served, the warrant comes into force after the seventh (7th) day after service is effected.

Complying with the Warrant for Regular Redirection

After that date, the financial institution must deduct from the account the amount specified in the warrant and pay it to the enforcement creditor within two (2) business days.

The enforcement debtor must keep enough funds in its account to pay the amount specified in the warrant.

The obligation under the warrant is discharged upon the total amount specified in the warrant being paid or the enforcement warrant is set aside, varied or expires.

Enforcement Warrant for Redirection of Debts

We strongly suggest that you engage a suitable qualified legal practitioner who specialises in the enforcement of money orders.

If you have a QCAT decision or adjudication decision which need to be registered in the Magistrates Court and enforced, or a judgment, direction, decision or determination of the Court to be enforced then contact our dedicated enforcement lawyers today.

There are a number of complicated steps that need to happen before a Court will issue an enforcement warrant for redirection of debts or an enforcement warrant for regular redirection from financial institutions. We strongly recommend engaging a legal professional.

There are a number of difficult steps that need to happen before the third person must comply with an enforcement warrant for redirection of debts. We strongly recommend engaging a qualified legal professional

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