Navigating unfair preference claims: information for accountants and non-insolvency lawyers (in-house and external)

Relevance. Your customer or your client’s customer has gone into liquidation. Two-years later you receive a demand from the liquidator seeking repayment of funds, alleging that you were paid a preference payment prior to the liquidation.

Liquidators have legislative power to commence actions to recover payments received by creditors that are alleged by the liquidator to be preferential payments. At the same time, creditors have statutory rights to assert one or more defences under the Corporations Act 2001 (Cth) to argue that payments they received are not preferences and are therefore not payable to the liquidator.

The Legislative Framework for Unfair Preference Claims

The power of liquidators to claw back payments is found primarily in sections 588FA to 588FF of the Corporations Act 2001 (Cth). These provisions enable a liquidator to recover payments made by a company prior to liquidation that gave a creditor an unfair advantage over others.

An unfair preference typically occurs when a company facing insolvency pays one creditor, putting that creditor in a better position than other unsecured creditors. The purpose is to ensure fairness and equitable distribution among all creditors.

However, creditors have important statutory defences, including:

• s588FG: The creditor had no reasonable grounds to suspect the company was insolvent at the time of payment, both subjectively and objectively, and the payment was made in good faith. The test focuses on the creditor’s knowledge at the time of payment. Repeated late payments or demand letters may raise suspicion.
• s588FA(3): Applies where there is a continuing business relationship, treating a series of transactions as a single arrangement, with preference assessed on net payments exceeding value supplied.
• Secured creditor defence: Payments towards secured debts are generally protected from clawback, particularly if the security interest is registered on the Personal Property Securities Register (PPSR).
• Set-off defence: The set-off defence is no longer valid, making the role of other defences and security more important than ever.

The Mistake Creditors Often Make When Receiving a Liquidator’s Demand

When creditors receive a demand from a liquidator seeking repayment of alleged unfair preference payments, the common reaction is annoyance or frustration.

The critical error is an immediate response with a detailed narrative justifying the creditor’s position. This often includes information unknown to the liquidator, inadvertently strengthening the liquidator’s tactical advantage in pursuing the claim.

For example, providing details about the business relationship, payment history, or knowledge of insolvency can assist the liquidator in refining their arguments or uncovering weaknesses.

Our Clear Advice

When you receive such a demand:

• Do not respond impulsively with detailed explanations or justifications.
• Instead, seek advice from a specialist insolvency lawyer immediately.

We only refer to the best.

If you engage a firm experienced in insolvency matters like us, we can review the correspondence, pose strategic questions, and refer you to a specialist insolvency lawyer. Let’s be clear, we are often on the other side of these transactions as a liquidator, so we know the space intimately. The best advice that we can provide to you is to refer you to an eminent specialist insolvency lawyer rather than retaining the job in our office. Often the eminence of the lawyer will be a factor for consideration by the liquidator. In our network, we only refer to eminent specialist insolvency lawyers that have dealt with these matters hundreds of times and are known and notable. It will be important to establish upfront that they aren’t conflicted – whether they act for the liquidator in this or other matters.

Early expert advice helps you understand:

• whether the payment genuinely constitutes an unfair preference;
• what defences are realistically available to you; and
• how best to respond without exposing yourself to further risk.

Conclusion

Unfair preference claims are complex and can be costly if not handled properly. The single most important step when receiving a liquidator’s demand is not to respond with a detailed justification but to seek specialist advice immediately.

Understanding your rights, defences, and the intricacies of the law through professional advice will help you protect your interests and avoid unnecessary repayments.