Can an Overdraft Payment Be an Unfair Preference? The Commissioner Takes It on Appeal
Can an Overdraft Payment Be an Unfair Preference? Australian Rock Walls v Commissioner of Taxation
When a struggling company pays a creditor using its overdraft, whose money is it? The answer matters a great deal to liquidators trying to recover payments, and to the creditors who received them. In Australian Rock Walls Pty Ltd (in liquidation) v Commissioner of Taxation [2026] QMC 14, the Queensland Magistrates Court tackled a question that has remained largely unresolved: can a payment made from an overdrawn bank account be a payment received "from the company" for the purposes of s 588FA of the Corporations Act 2001 (Cth)?
The liquidators sought to recover nine payments, totalling approximately $81,000, made to the ATO during the relation back period (the window before liquidation in which payments can be challenged as unfair preferences). The parties agreed the payments were made within that period, the debts were unsecured, and the company was insolvent at the time.
The real dispute was whether the payments were made "from the company" and whether they resulted in a preference.
The Commissioner's Argument
Eight of the payments came from the company's overdraft account. The Commissioner argued they could not be preferences because the funds advanced under an overdraft belong to the bank, not the company. On that view, the bank was effectively the payer and the payments fell outside s 588FA.
The Court's Decision
Magistrate Hay rejected that argument. Her Honour accepted that overdraft funds are technically the bank's money, but held that the company had a contractual right to access and direct the use of those funds. The overdraft gave the company access to money it was entitled to use under its banking arrangements. The company was therefore properly a party to the transaction, and the payments were received "from the company".
The Court relied on the Victorian Court of Appeal's reasoning in Cant v Mad Brothers Earthmoving Pty Ltd, particularly the observation that the relevant question is whether the payment was made from money or assets to which the company was entitled.
The Court also found that the payments reduced the assets available to creditors, which is a necessary element of a preference. The company's income was paid into the overdraft account, reducing the overdraft debt, and was then redrawn to pay selected creditors, including the ATO. Her Honour found this process diminished the pool of assets otherwise available to creditors generally.
The liquidators were unsuccessful in relation to one separate payment, made from the account of a related entity, ARRW.
The Appeal
A Magistrates' Court decision does not bind superior courts and generally carries limited weight outside the case itself. But this one is worth watching because it has now been appealed to the District Court. The Commissioner is reported to be challenging both the finding that overdraft-funded payments were made "from the company" and the finding that the transactions satisfied the asset diminution requirement.
The appeal is likely to turn mainly on the first issue. While Cant discussed payments made through an overdraft facility, it stopped short of deciding whether an unsecured overdraft can support a preference claim.
Takeaways
- Australian Rock Walls matters not because of the court that decided it, but because it answers a question appellate courts have largely left open.
- The District Court appeal offers a chance for authoritative guidance on whether payments funded by an unsecured overdraft can be unfair preferences.
- If the decision is upheld, liquidators may find it easier to recover payments made through overdrawn trading accounts. If it is overturned, the reach of preference claims involving unsecured overdrafts could narrow significantly.
- Given the tension between the Commissioner's position and Cant, the issue may not stop at the District Court. It could go on to the Court of Appeal or even the High Court.
For further information, contact Graeme Scott to discuss your restructuring and insolvency needs.
Graeme Scott | Partner | Litigation & Dispute Resolution
