In a recent case the Judge clearly reasoned that an ROT clause will provide a valid defence to a liquidator’s unfair preference claim in relation to a payment that reduces the debt to which the ROT clause relates.
In Hussain v CSR Building Products Limited, in the matter of FPJ Group Pty Ltd (In Liquidation) (2016) FCA 392 a liquidator’s unfair preference claim was defeated because, amongst other reasons, the alleged preferential payments were not in respect of an unsecured debt but rather reduced a debt that was secured by an ROT interest.
Section 588FA of the Corporations Act 2001 (“the Act”) defines an unfair preference as a transaction (payment) “in respect of an unsecured debt”. The judge confirmed that the defined term ‘security interest’ (introduced into the Act by the PPS reforms) assisted the court’s construction of the term “unsecured debt” in Section 588FA to conclude that an ROT clause ‘secures a debt to which it relates’.
This is a further benefit from ROT clauses. However, it is important to remember the various attributes necessary for an effective ROT clause, and the potentially fatal result upon failing to register on the PPSR.
September 2016