Third party payments, voidable preferences and the Quistclose trust

Introduction

In preference proceedings under section 588FA, Corporations Act, or section 122 Bankruptcy Act, liquidators or trustees in bankruptcy seeking to recover alleged preferential payments made to a creditor prior to the debtor's winding up or bankruptcy, will often learn that payments to the creditor have been made by a third party as opposed to the debtor prior to the debtor's winding up or bankruptcy.

In these circumstances the creditor may be in a position to argue that the payments received from the third party arose from a Quistclose trust emanating from the dealings between the debtor and the third party making the payment. The objective of the creditor in relying on the existence of a Quistclose trust will be to deny the trustee in bankruptcy or liquidator the right to recover the payments received as unfair preferences.