A policy question with insolvency preferences

Is the essence of a preference payment in insolvency that the pool of the debtor’s assets are lessened by the debtor’s payment to the preferred creditor, such that other creditors will receive less? Or is it enough that the preferred creditor simply obtains more that it would have received from the payment than if it had waited and proved for its debt in the liquidation or bankruptcy, along with the other creditors, even if the debtor’s assets are not reduced?

Despite the words of our corporate preference provision – section 588FA[1]not referring to the need for the debtor’s assets to be diminished, that is still held to be a relevant factor in some Australian cases, leading to a judicial inconsistency in approach. This was the conclusion of the Supreme Court of New Zealand in its review of our case law. which Court held, in relation to a similarly worded section under NZ law – s 292[2]that ‘diminution’ of assets was not relevant.

  • The NZ wording in s 292 asks whether the payment “enables another person to receive more towards satisfaction of a debt owed by the company than the person would receive, or would be likely to receive, in the company’s liquidation”.
  • Section 588FA refers to whether “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”.
  • In bankruptcy, s 122[3] refers to whether the payment “had the effect of giving the creditor a preference, priority or advantage over other creditors”.

The NZ Supreme Court said that the most relevant recent Australian authority for its purposes was that of the Full Federal Court in Commissioner of Taxation v Kassem,[4] the facts of which were similar to those of the NZ case. The Full Court accepted that diminution in the value of assets available to the general body of creditors was held to be a relevant factor in earlier Australian cases, including by the High Court in Air Services Australia v Ferrier.[5] But the Full Court said that these cases

“dealt with the former statutory regime. There is nothing in s 588FA(1) which expressly incorporates as a requirement for an unfair preference that the transaction must result in a diminution of the debtor’s assets. Gordon J appears to have rejected a submission that there is such a requirement: Burness at [49].[6]

But in the end, the Full Federal Court did not need to determine the preference on that basis, which the NZSC was the cases in several other cases it referred to.

In New Zealand at least, proof of diminution of the debtor’s assets by its preferred payment is not required: Robt. Jones Holdings Limited v McCullagh [2019] NZSC 86.

But, in Australia …

But in Re Eliana Construction and Developing Group,[7] a successful appeal from an Associate Justice, Robson J reviewed the Australian authorities and found that diminution remains a relevant factor in a preference.[8]

Justice Robson said that:

75. In my opinion, where the transaction involves a reduction in the debtor’s assets which can be measured in money and a consequential discharge of the creditor’s debt by that sum, then the transaction can be said to involve a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Act.

76. Where, however, a payment by the third party which discharges the debtor’s debt to the creditor is authorised and ratified by the debtor and only involves the debtor incurring a liability in favour of the third party, and no reduction of assets of the debtor, then, in my opinion, the payment does not, on that ground, constitute a payment by the debtor to the creditor within the meaning of s 588FA(1)(b) of the Corporations Act.


The issue is more an academic and policy one. The Harmer Report did not refer to the need for diminution, nor do the two Australian sections – s 588FA and the then new section 122.

The policy concerns about that approach are usually expressed as being inconsistent with the purposes of preference law,[9] and to be unfair and perhaps illogical. If that be the case, then it is up to the legislature to include that as a factor, assuming those purposes remain valid. In practice however, the purpose met by a preference recovery is more to have the insolvency laws enforced and promote the principle of fairness, and, often to recoup the IP’s unmet remuneration, than to provide any real dividend return to creditors.


[1] Corporations Act 2001

[2] Companies Act 1993

[3] Bankruptcy Act 1966

[4] Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124

[5] (1996) 185 CLR 483

[6] Burness v Supaproducts Pty Ltd [2009] FCA 893; (2009) 259 ALR 339

[7] Re Eliana Construction and Developing Group Pty Ltd (No 2) [2019] VSC 546.

[8] Hosking v Extend N Build Pty Ltd [2018] NSWCA 149. “Nor is it necessary to determine the question left open by the Full Court in Kassem at [59] of whether it is necessary for there to be a diminution in the debtor company’s assets for a transaction to constitute an “unfair preference” under s 588FA(1)”: [111].

[9] Goode on Principles of Corporate Insolvency Law, 5th ed, 13-85, Kristin Van Zwieten, Sweet & Maxwell, 2018

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