Government agencies are often the last creditors a liquidator expects to face down in preference recovery proceedings. The ATO, Queensland Revenue Office (QRO), and SPER are sophisticated, well-resourced, and — frankly — used to being on the other side of debt recovery. But Kirk v Commissioner of State Revenue is a timely reminder that institutional creditors are not immune from unfair preference claims, and that their good faith defence can collapse when they cannot produce the right evidence.
What Is an Unfair Preference Claim?
Under section 588FA of the Corporations Act 2001 (Cth), a transaction is an unfair preference if it is entered into between a company and a creditor, the company was insolvent at the time, and the creditor receives more than it would have received if the transaction were set aside and the creditor proved in the winding up.
The typical scenario: in the six months before a company goes into liquidation, it pays a creditor — say, a tax debt to the QRO — when it was already insolvent. That payment comes at the expense of other unsecured creditors. The liquidator can claw it back.
For government creditors like the ATO, QRO, and SPER, these sums can be significant. Outstanding payroll tax, land tax, or QCAT penalty payments made in the shadow of insolvency are exactly the kind of transactions liquidators have in their sights.
The Good Faith Defence Under Section 588FG(2)
The defence that government creditors typically rely on is found in section 588FG(2) of the Corporations Act. To succeed, the creditor must establish all three limbs:
- Good faith: The creditor received the benefit of the transaction in good faith;
- No reasonable grounds to suspect insolvency: At the time of the transaction, the creditor had no reasonable grounds to suspect that the company was insolvent or would become insolvent; and
- Gave value: The creditor gave valuable consideration under the transaction, or changed its position in reliance on it.
All three limbs must be satisfied. If a creditor cannot establish any one of them, the defence fails and the preference is recoverable.
The first limb — good faith under s 588FG(2)(a) — is where government creditors frequently come unstuck. And the evidentiary standard for good faith is precisely what brought the QRO undone in Kirk.
Kirk v Commissioner of State Revenue: What Happened
In Kirk v Commissioner of State Revenue, the liquidator pursued the QRO to recover payments made by the insolvent company in the relation-back period. The QRO raised the good faith defence under section 588FG(2).
The critical battleground was the first limb: could the QRO establish that it acted in good faith — with propriety and honesty — at the time it received the payments?
The QRO’s difficulty was that it could not produce direct evidence from the individual decision-makers involved in the relevant transactions. Instead, the QRO sought to rely on institutional assertions — the kind of evidence that amounts to “our agency’s policy and practice was X, therefore we had no reason to suspect insolvency.” The Court rejected that approach.
The Court required direct evidence from each individual who made or was involved in the relevant decisions — evidence about their contemporaneous state of mind at the time of each transaction. What did that officer actually know? What information did they have? What did they actually think about the company’s financial position?
Institutional assertions about agency policy simply could not substitute for that direct, individual evidence. The QRO could not produce it. The defence failed.
Phoenix Activity Red Flags Were Fatal
Compounding the QRO’s evidentiary problem, the case involved circumstances consistent with phoenix activity — the same director, a new entity, the same business carried on. These are precisely the kinds of red flags that courts find difficult to ignore when assessing whether a creditor had reasonable grounds to suspect insolvency.
The Court found that the QRO had, or should have had, reasonable grounds to suspect insolvency. The presence of classic phoenix indicators placed the QRO on notice — or at least ought to have. That finding was fatal to the first limb — good faith — of the defence.
This aspect of the decision has broad implications. Government creditors dealing with companies that show signs of phoenix activity — particularly repeat registrations, same-director entities, or payment patterns consistent with a company trading through insolvency — are on notice that their good faith defence will face serious scrutiny.
Why Government Creditors Are Poorly Positioned for This Defence
The Kirk decision highlights a structural weakness in the way government agencies handle preference recovery defences.
Unlike a commercial creditor — say, a supplier or bank — who can usually identify the specific person who made the decision to continue supplying or extending credit, government agencies process payments through large, impersonal bureaucratic systems. Decisions about whether to accept a payment, grant a payment plan, or take enforcement action are made by different officers at different levels, often without documentation that captures their individual state of mind.
When a liquidator challenges a preference payment years later and requires evidence of what an individual officer knew and thought at the time, the agency often cannot reconstruct that evidence. Staff turnover, poor record-keeping, and the volume of matters handled mean the institutional evidence is there but the individual evidence is not.
The Court in Kirk made clear that institutional evidence is not enough. That gap is a significant vulnerability for any government creditor defending a preference claim.
Practical Implications for Liquidators
For liquidators conducting preference reviews, the lesson from Kirk is clear: do not assume government creditors are too difficult or politically uncomfortable to pursue. The good faith defence is available to them, but so are its weaknesses.
When investigating preference claims against the ATO, QRO, SPER, or local councils, liquidators should:
- Identify the specific transactions — the individual payments made in the six-month relation-back period (or two years for related parties);
- Document the company’s financial position at the time of each payment — balance sheets, creditor ledgers, trading history, ASIC filings;
- Identify red flags visible to the creditor — were there payment plans in place? Prior defaults? Director-change patterns consistent with phoenix activity? Public notices or court proceedings?
- Issue a formal preference demand and require the agency to identify the individual decision-makers and produce contemporaneous records of their state of mind;
- Challenge institutional assertions — the agency’s “policy” evidence is not sufficient after Kirk.
Boss Lawyers regularly acts for liquidators in preference recovery proceedings, including claims against well-resourced institutional creditors. Understanding the evidentiary requirements of the good faith defence — and where government creditors are likely to fall short — can make the difference between a recovery and a failed claim.
For a detailed breakdown of the good faith defence and why creditors routinely fail to establish it, see our earlier article on the good faith defence to unfair preference claims. For a broader overview, visit our insolvency law services page.
Frequently Asked Questions
Can the ATO claim the good faith defence to an unfair preference claim?
Yes — the ATO and other government creditors can in principle rely on the section 588FG(2) good faith defence. However, as Kirk demonstrates, the evidentiary burden is the same as for any creditor. The agency must produce direct evidence from the individuals involved in the relevant transactions about their contemporaneous state of mind. Institutional assertions about agency policy are not sufficient. Government creditors are frequently poorly positioned to meet this evidentiary requirement.
What evidence does a creditor need to prove the good faith defence?
The creditor must establish three things: (1) it received the payment in good faith; (2) at the time, it had no reasonable grounds to suspect the company was insolvent or would become insolvent; and (3) it gave value or changed its position in reliance on the transaction. For the first limb (good faith), the Court requires direct evidence from the individual decision-maker — not institutional or policy-level evidence. The creditor must show what that specific person knew and believed at the time, and that they acted with propriety and honesty.
How long does a liquidator have to pursue a preference claim?
Unfair preference claims must generally be brought within three years of the relation-back day (the date of the winding up order or resolution) under section 588FF(3) of the Corporations Act. The Court has a limited discretion to extend this period in appropriate circumstances. Liquidators should conduct preference reviews early in the winding up to avoid missing the limitation period.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Article by Mark Harley | Principal Solicitor | Boss Lawyers | 17+ years experience in commercial litigation and insolvency law.
If you need strategic legal advice on unfair preference claims and creditor recovery, contact the team at Boss Lawyers. Our debt recovery lawyers Brisbane act for clients across Brisbane and Queensland. Call us on 1300 267 711 or use our online contact form to get started.
