Kirk v QRO: When the Good Faith Defence Fails and What Queensland Creditors Need to Know

What Happened in Kirk v QRO

In February 2022, a liquidator was appointed to ARG Workforce Pty Ltd and ARG Payroll Pty Ltd, two labour hire companies forming part of the ARG group. By the time the liquidator turned to examine the companies’ transactions, it became apparent the companies had been trading while insolvent from at least 30 June 2019.

The Queensland Revenue Office (QRO) had assessed payroll tax liabilities against both companies from December 2019. The liabilities were significant: approximately $1.17 million against ARG Workforce and approximately $280,000 against ARG Payroll. In July 2021, both companies entered into payment arrangements with the QRO to address those liabilities. A director of the companies attested, as part of those arrangements, that the companies were not insolvent.

During the six months immediately before the relation-back day, the companies made substantial payments under those arrangements. ARG Workforce paid the QRO approximately $2,474,375.01, and ARG Payroll paid approximately $345,791.57, bringing the combined total to approximately $2.82 million. The QRO received these funds on account of outstanding tax debts.

The liquidator commenced proceedings in the Federal Court seeking to recover those payments as unfair preferences under s 588FE of the Corporations Act 2001 (Cth). The QRO did not contest that the payments were unfair preferences. The sole issue before the Court was whether the QRO could establish the good faith defence under s 588FG(2).

The Court held it could not. The QRO was ordered to repay the approximately $2.82 million in recovered funds to the liquidator for the benefit of creditors.

The Good Faith Defence Under Section 588FG(2)

Section 588FG(2) of the Corporations Act 2001 (Cth) provides a defence to an unfair preference claim where the creditor received the payment in good faith. To establish the defence, a creditor must prove three things on the balance of probabilities:

1. It had no reasonable grounds for suspecting the company was insolvent at the time of the transaction.
2. A reasonable person in the creditor’s circumstances would also have had no such grounds for suspicion.
3. The creditor provided valuable consideration for the payment or changed its position in reliance on it.

The test for good faith is wholly subjective. The Court confirmed, consistent with well-settled authority, that “good faith” requires propriety and honesty. As the High Court noted in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, a creditor who knows of insolvency, or suspects it on reasonable grounds, cannot ordinarily be said to be acting in good faith when receiving a preferential payment.

The burden of proof sits squarely on the creditor. This is not an element the liquidator needs to disprove. The creditor seeking to retain a preference payment must come to court with admissible evidence sufficient to discharge that burden.

For institutional creditors, that requirement creates a particular structural problem. As the Full Federal Court confirmed in Cook’s Construction Pty Ltd v Brown (2004) 49 ACSR 62 and Dean-Willcocks v Commissioner of Taxation (2004) 51 ACSR 353, where the creditor is a large organisation, the relevant subjective belief is not that of the entity in the abstract. It is the subjective belief and state of knowledge of each individual within the organisation who had relevant knowledge about the debtor’s financial position at the relevant times. Evidence must be adduced from each such person.

Why the QRO Failed the Test

The QRO’s difficulty in this case was practical and evidentiary, not legal. The transactions occurred in the period leading up to February 2022. By the time the matter came to hearing, years had passed. The witnesses the QRO was able to call had no recollection of the specific circumstances surrounding the payment arrangements or the individual transactions. Their evidence could not speak to what any relevant officer actually knew or suspected about the companies’ solvency at the relevant time.

That evidentiary gap proved fatal. Without direct evidence of what the relevant officers knew and believed at the time of each transaction, the Court could not be satisfied that the QRO had discharged its burden of proving good faith.

The QRO argued that any unfairness in this outcome was the product of requiring institutional creditors to call large numbers of witnesses, particularly where transactions span multiple years and many individuals are involved. The Court acknowledged the difficulty but was unmoved. The legislation places the onus on the creditor, and courts are not free to redistribute it on grounds of convenience.

One further complication was that the QRO had access to information about the companies through the Phoenix Taskforce, a cross-government initiative designed to share information about suspected phoenix activity. The companies were brought to the QRO’s attention through that mechanism. The Court’s findings leave open a significant question: can a government agency with access to phoenix intelligence credibly maintain that it had no grounds for suspecting insolvency? The answer depends on what the relevant individuals actually knew, but access to that intelligence creates an obvious evidentiary difficulty.

In obiter, the Court noted that indirect evidence such as internal systems, protocols, and procedures might in some cases be sufficient to establish good faith where direct witnesses are unavailable. However, for reasons specific to this case, that indirect evidence was insufficient to fill the gap left by the absence of direct recollection.

For creditors who receive an unfair preference demand from a liquidator, the Kirk decision is a reminder that the good faith defence is harder to run than it might appear on paper, particularly for large organisations whose transactions are far removed in time from the hearing date.

What This Means for Creditors in Queensland

The decision in Kirk v QRO has practical consequences for three distinct groups of creditors.

Institutional and Government Creditors

Government bodies and large corporate creditors must treat the good faith defence as a serious evidential undertaking, not a fallback position. If you receive preferential payments from a company that later enters liquidation, consider the following:

• Document contemporaneously. Officers who deal with payment arrangements, debt recovery, and debtor insolvency assessments should record their assessments and reasoning at the time. Notes made years later, or testimony from witnesses with no recollection, will rarely satisfy the court.
• Identify and preserve witnesses. When a significant payment arrangement is entered into, record who was involved and what they knew. If those individuals later leave the organisation, their evidence may need to be obtained before they become untraceable.
• Cross-government data sharing creates exposure. If your organisation receives phoenix or insolvency intelligence through bodies like the Phoenix Taskforce, ATO data matching, or other cross-government mechanisms, that information will be relevant to what your officers “knew or suspected” about the debtor’s solvency. It may undermine a good faith defence even if the relevant individual officers were unaware of it.
• Seek early legal advice. Once a company you have dealt with enters administration or liquidation, seek advice from an insolvency lawyer in Brisbane without delay. Early identification of exposure and early preservation of evidence can make the difference between a defensible claim and an indefensible one.

Smaller Trade Creditors

The Kirk decision is a reminder that entering a payment arrangement with a financially distressed company does not immunise you from preference recovery if that company later collapses. Payment arrangements often occur precisely because the company is struggling to pay its debts as they fall due, which is the classic hallmark of insolvency.

If your customer is entering a payment arrangement with you, consider whether you have grounds to suspect insolvency. If you do, and you continue to accept payments under that arrangement, you may later face a preference claim. The running account defence, which is discussed in more detail at our guide on the running account defence and Bryant v Badenoch, may in some cases provide an alternative pathway, but it is not available in all circumstances.

For trade creditors seeking to recover overdue debts from a financially distressed customer, our debt recovery lawyers in Brisbane can advise you on the most appropriate recovery strategy having regard to your preference exposure.

Liquidators Pursuing Institutional Creditors

The Kirk decision is a significant practical win for liquidators. It confirms that institutional creditors face a structural evidential disadvantage when defending preference claims. The obligation to call every person with relevant knowledge, combined with the natural deterioration of witness recollection over time, means that preference claims brought against government bodies and large corporations after a period of years are likely to succeed unless the defendant has maintained unusually careful contemporaneous records.

Liquidators considering whether to pursue a preference claim against a government body or large corporate should take the Kirk decision into account when assessing the prospects of recovery. The QRO paid back $2.82 million. Government creditors are not immune.

Practical Steps if You Receive an Unfair Preference Demand

If you receive a demand from a liquidator seeking to recover payments as unfair preferences, the following steps apply regardless of whether you are an institutional or trade creditor.

1. Do not ignore the demand. Liquidators are entitled to commence proceedings if the demand is not met or disputed within the period specified. An unanswered demand can result in judgment by default.
2. Identify the transactions. Gather all records relating to the payments identified in the demand. This includes invoices, payment receipts, bank statements, correspondence with the company, and any internal communications about the company’s financial position.
3. Assess your defences. The good faith defence under s 588FG(2) is the most commonly run defence, but it is not the only one. The running account or peak indebtedness analysis under s 588FA may reduce the quantum of the claim significantly. Seek legal advice on all available defences before responding.
4. Preserve evidence. Identify everyone in your organisation who dealt with the relevant company during the six months before its collapse. Preserve their records and, if possible, obtain their statements while recollection is fresh.
5. Respond in writing. Engage with the liquidator’s claim in writing. Where appropriate, provide your evidence of good faith. Where the claim quantum is disputed, provide your running account analysis.
6. Consider negotiation. Many preference claims settle before proceedings are commenced. If you have partial defences or the claim quantum is inflated, early engagement with the liquidator’s solicitors may result in a commercially acceptable resolution.

Our insolvency lawyers in Brisbane act for creditors responding to preference demands and for liquidators pursuing them. We can advise you on your defences, assess your exposure, and represent you in negotiations or proceedings.

Frequently Asked Questions

What is the good faith defence to an unfair preference claim?

The good faith defence under s 588FG(2) of the Corporations Act 2001 (Cth) allows a creditor to retain a payment even if it would otherwise be an unfair preference. To succeed, the creditor must prove on the balance of probabilities that it had no reasonable grounds for suspecting the company was insolvent at the time of the payment, and that it acted honestly throughout. The burden of proof rests on the creditor, not the liquidator.

Why did the Queensland Revenue Office lose the good faith defence in Kirk v QRO?

The QRO could not adduce sufficient admissible evidence to prove what its officers knew or believed about the companies’ solvency at the time of the payments. The transactions occurred years before the hearing, and the witnesses the QRO called had no recollection of the relevant circumstances. Without direct evidence of good faith from each person with relevant knowledge, the Court could not be satisfied the defence had been made out.

Does a payment arrangement protect a creditor from an unfair preference claim?

No. Entering a payment arrangement with a company does not protect you from a subsequent preference claim if the company enters liquidation. In fact, payment arrangements are often made precisely because the company is in financial difficulty, which can make it harder to establish good faith. You should obtain legal advice about your preference exposure before entering or continuing a payment arrangement with a financially distressed debtor.

What evidence does an institutional creditor need to establish the good faith defence?

An institutional creditor must adduce direct evidence from each person within its organisation who had relevant knowledge about the debtor’s financial position at the time of the disputed transactions. This typically requires witness statements or testimony from credit officers, account managers, and legal staff who dealt with the debtor. Internal protocols and systems may provide indirect evidence of good faith but are unlikely to be sufficient on their own where direct evidence is unavailable.

What should I do if I receive an unfair preference demand from a liquidator?

You should seek legal advice immediately. Do not ignore the demand. Gather all records relating to the payments, identify everyone in your organisation who dealt with the relevant company, and preserve all relevant correspondence and documentation. The good faith and running account defences both depend on evidence that can deteriorate quickly. Early advice from an insolvency lawyer gives you the best opportunity to assess and protect your position.

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This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. Mark Harley is the Principal Solicitor of Boss Lawyers Pty Ltd, practising in insolvency, commercial litigation, and debt recovery in Brisbane, Queensland.