Preferences US, NZ, AUS Flashcards
Jackson- US Preferences
Desire to prefer is the most contentious issue in preference law. In the US they do not have this requirement. Everything is focused on effect. Jackson thinks the difference between the UK and US is between focusing on debtor misbehaviour (UK) and creditor misbehaviour (US, NZ, AUS- you get the payment back unless the creditor is somehow innocent)
UK law encourages creditors to get on and get paid by taking individual action to get their debt back. The US sees this as terrible.
BUT why not? Nigel doesn’t think this should be an issue.
Maxwell Communication Corporation plc v Societe Generale plc [2000]- US Case
It was argued that the pari passu distribution of assets among unsecured creditors was a general rule of insolvency law from which it was not possible to contract out, even to one’s own disadvantage, particularly by analogy with cases on set-off in insolvency. Held: This was not the law. There was no reason why a particular creditor should not waive his right to prove altogether, or save to the extent of assets remaining after another creditor is satisfied, and that he could do this either in the insolvency or in advance of it.
Vinelott J explained his decision in In re British & Commonwealth plc (No 3): “I took the view that to the extent that the assets of the company were insufficient to meet the liabilities to unsecured creditors, other than the holders of the loan stock, the holders of the loan stock had no interest in the assets of the company and no right to vote at a meeting of unsecured creditors, that in the very unlikely, indeed, merely theoretical possibility that the realisation of the company’s assets would suffice to meet the claims of the scheme creditors, the rights of the holders of the unsecured loan stock would be unaffected by the scheme; and that in these circumstances the liquidator he must have meant administratorcould properly call a meeting of the scheme creditors alone, and if the scheme of arrangement was approved, apply to the court to sanction the scheme.”
Barclays Bank Plc v Homan [1993[ BCLC 680 (CA)
UK case which expresses similar opinion to the US system.
If the conduct of a creditor can be castigated as oppressive or vexatious the Court can and should grant relief in order to protect the performance by administrators of their functions and duties.
US Bankruptcy Code s 547
Refered to as the ‘preferential payment rule’which generally provides that where a debtor makes a payment to a creditor and the debtor files bankruptcy within 90 days thereafter, the creditor can often be forced by the Bankruptcy Court to pay all the sums paid by the debtor back into the bankruptcy estate for distribution to general creditors.
When the creditor is an “insider” with the debtor the time period increases from 90 days to one year. This Rule is found in U.S. Bankruptcy Code section 547. The impact of this rule is often devastating to those who have received payment and disbursed it to their own creditors and no longer have the funds to pay to the bankruptcy court.
Defence if payments made in the ordinary course of business between creditor and debtor or payments made according to ordinary business terms- i.e. the preferential payment rule does not apply.
Australia Preference Law
Focuses on creditor misbehaviour.
Defence under Bankruptcy Act 1966 s 122 (avoidance of preferences)
(1)A transfer ofpropertyby a person who is insolvent (thedebtor) in favour of acreditoris void againstthe trusteein thedebtor’sbankruptcyif the transfer:
(a)had the effect of giving thecreditora preference, priority or advantage over othercreditors; and
was made in the period that relates to thedebtor, as indicated in the following table.
(2)(a) the creditor is a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and gave market value for the transfer
(4)(c) creditor not deemed to be in good faith if transfer was made under such circumstances as to lead to the inference that the creditor knew or had reason to suspect:-
(i) that the debtor was unable to pay their debts; and
(ii) that the effect of the transfer would be to give the creditor a preference, priority or advantage over other creditors.
Defence under Corporations Act 2001 s 588FG(2) (amended from the above in 1993)
(a) the creditor became a party to the transaction in good faith, and
(b) at the time the creditor had no reasonable grounds for suspecting the company was insolvent and a reasonable person in the creditor’s circumstances would have had no such grounds for so suspecting, and
(c) the creditor provided valuable consideration under the transaction or changed his her or its position in reliance on the transaction
NZ Preferences Law
In 1993 New Zealand abandoned intent/desire to prefer and introduced a defence.
Re Modern Terrazzo Ltd [1998] 1 NZLR 160 Addendum at page 189
“It was in 1993 that the Australians abandoned the phrase “in the ordinary course of business” as the key exception to their company voidable preference regime.
As one commentator (Keay) put it:
“This abolition has occurred, principally, because of the judicial uncertainty in interpreting what was meant by the phrase. It is undeniable that there has not only been uncertainty, but also confusion.”
New Zealand chose that moment to introduce into its own companies legislation the very phrase which Australia had just discarded.
One of us must have got it wrong.
Although in these situations right-thinking New Zealanders would normally assume it to be Australia, Barker J conceded in James Hardie that in this instance “it is perhaps unfortunate that this phrase was included in the new companies legislation.” He may be right.”
In 2006 New Zealand changed their law to match the defence Australia introduced in 1993.
