Ashurst Restructuring Roundup

Preference Claims: “The Money or the Box?”

Kirk as trustee of the Property of Smith (a Bankrupt) v Smith (No. 2) [2024] FCA 773 ("Smith")

Recovering property purchased with the proceeds of a preferential payment or payment made in the course of another voidable antecedent transaction may be more beneficial than claiming the quantum of the payment.

That is a possible course of action where the proceeds of the payments can be traced so as to establish that they were used either in whole or in part to acquire the property.

That was the case in Smith.

Mr Smith and his wife jointly owned two properties which they sold (the "Broadbeach and Blue Mountain Heights Properties"). The net proceeds of sale of those properties (after allowing for the claims of secured creditors as well as the costs and expenses of the sales) were paid into bank accounts operated by Mrs Smith. Mr Smith received no payments from the proceeds of sale.

Critically, so far as the issue as tracing was concerned, at the time the payments were deposited into Mrs Smith's bank accounts and thereafter until the payments were made from those accounts for the purchase of another property (the "Surfers Paradise Property") those accounts were in credit. This facilitated the tracing exercise as it was possible to continue to account for the funds from the sale of the Broadbeach and Blue Mountain Heights Properties.

Subsequent to those transactions, Mr Smith was bankrupted.

In earlier proceedings: Kirk as trustee of the property of Smith (a Bankrupt) v Smith [2024] FCA 240, the payments to Mrs Smith, which were held to represent Mr Smith's shares of the proceeds of sale of the Broadbeach and Blue Mountain Heights Properties, were determined to be void as against Mr Smith's trustee in bankruptcy by reason of ss 120 and 121, Bankruptcy Act, and thereby recoverable.

As it was possible to trace those payments into the funds used by Mrs Smith for the purchase of the Surfers Paradise Property it was held that Mr Smith's percentage interest in that property was vested in his trustee in bankruptcy.

Smith was a bankruptcy decision and, as such, concerned preferential payments avoided under the Bankruptcy Act rather than the Corporations Act 2001 (Cth) ("CA"). Section 588FF(1)(d), CA empowers the court, where a transaction, including an unfair preference, has been avoided to make an order:

"requiring a person to transfer to the company property that, in the court's opinion, fairly represents the application of either or both of the following:

(i) money that the company has paid under the transaction;

(ii) proceeds of property that the company has transferred under the transaction."

By reference to Smith, that subsection could be invoked to support an application, in effect, to trace the proceeds of a preferential transaction which have been used by the beneficiary to acquire other property.

By way of ancillary relief, the trustee in bankruptcy was appointed as trustee for the sale of the Surfers Paradise Property. Whilst there is divergent authority concerning the appropriateness of such an appointment, the court considered that, as the trustees in bankruptcy were also registered liquidators, they were "required to have an adequate level of expertise, behave ethically, and maintain insurance" there should be no concerns about their capacity to act with an appropriate degree of independence; Smith (at [49]).

Author: Richard Fisher AM