What is an Unfair Preference Claim?

One of the responsibilities of a Liquidator is to investigate the affairs of a company in liquidation and identify any “voidable” transactions, to recoup money for the benefit of the creditors of that company.

A complex series of provisions in the Corporations Act 2001 (Act) allow a liquidator to “unwind” certain transactions.  One category is where a company gives a creditor an “unfair preference” over other creditors.

An unsecured creditor who receives a payment from the company less than 6 months prior to the liquidator’s appointment may receive a letter of demand from the liquidator demanding repayment of the money received.

Why is that? When a company becomes insolvent there are usually several creditors owed money. The law considers it unfair in this situation if one creditor receives payment in priority to others. The role of the liquidator is to identify and recover these “unfair preference” payments, and then distribute available funds between all unsecured creditors.

Proving an Unfair Preference Claim

In order to recover money from you as an unfair preference, a liquidator must prove:

  1. Both the company and the creditor are parties to the transaction in dispute;
  1. The payment was made within the required 6 month time period from the “relation back day” which has a complicated definition in the Act, but one example is the date that Winding Up proceedings are filed in Court;
  1. The company was insolvent when the payment was made;
  1. You received more than you would otherwise receive as an unsecured creditor in the liquidation.

All is not Lost!

There are several ways a creditor can successfully defend an unfair preference claim:

  1. Being a Secured Creditor - If your debt was secured, by a mortgage or a security interest over the company’s property, the payment is not an unfair preference.   Prevention is better than cure, always obtain security where possible.
  1. ‘Good Faith’ - If you can prove you received the payment in ‘good faith’, and did not know the company was insolvent when the payment was made or would become insolvent by making the payment, you are entitled to retain the payment. The Court imposes an objective test and considers whether a reasonable person in the creditor’s circumstances would have reasonable grounds for suspecting that the company was insolvent.

 

  1. Running Balance Account - This applies where the two parties have a continuing business relationship, and allows individual transactions to be considered as a whole when determining an unfair preference.  This requires careful analysis of the business relationship and history of payment and supply.
  1. Set-off - This applies where there have been mutual credits, debts or transactions between the creditor and the insolvent company.  A creditor can only claim set-off if it can demonstrate that the payments were received in good faith, although there are some technical issues that differ for these claims.

The Next Step

Defending an unfair preference claim can be one of the most “unfair” experiences for a creditor who has already waited too long for their money.

The defences available are complex. It is essential to have someone on your side who knows the rules, can effectively assess your risk, and then manage the claim strategically and cost effectively for you. BTLawyers offers fixed fee solutions to manage unfair preference claims against you and get you the best possible outcome.

We can also advise on strategies to manage your credit risk and avoid unfair preference claims when dealing with overdue debtors.

To ensure that you are best prepared, contact our Commercial Litigation team on (07) 3211 2233 for clear, no nonsense advice.

Article prepared by Stephanie Philippou and Olivia Yarrow