Unfair preference claims occur when a creditor has received an advantage over other creditors, by accepting payment, (or another type of transaction) for their liabilities. It is also in the circumstance where they knew or should have known, that the company was insolvent. The term insolvent refers to being unable to pay debts which are owed. Unfair preference claims are also the most common type of voidable transaction. This article will illustrate how these claims can be brought by a liquidator of a company in liquidation.

What Is An Unfair Preference?

Under section 588FA of the Corporations Act 2001 (Cth), an unfair preference received by a creditor can occur under the following circumstances:

1. A debtor company owes a creditor an unsecured debt;

2. The debtor company and the creditor are parties to a transaction (usually payment of some or all of the unsecured debt); and

3. Receipt of payment results in the creditor receiving more than it would have received had the debtor company been in liquidation and the liquidator paid a dividend to all unsecured creditors, such as $0.10 for every dollar of debt owed to them.

An Unfair Preference for an insolvent transaction does not apply to secured debt.

No Suspicion Of Insolvency Defence - Often referred to as the good faith defence

An individual can defend the claim on the basis that they had no knowledge of the company they were dealing with was insolvent. However, the onus lies on the creditor to prove the defence on the balance of probabilities.

In order to successfully raise a defence, a creditor must establish firstly, that it received the payments from the company in good faith. Secondly, at the time of the relevant payment, the creditor had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as a result of making the payments. Finally, that a reasonable person in the creditor’s circumstances would have had no such grounds for so suspecting and that the creditor provided valuable consideration for the payments.

The liquidator can only claw back transactions (and the payments that occurred under them) when they have occurred in the six months before the liquidator is appointed. You refer this as the “relation back period” and the point of appointment of the liquidation is usually the “relation back date”.

A liquidator must bring a claim against you for unfair preference within three years after the relation back date.

If you have received a Letter of Demand/Statement of Claim from the liquidator regarding unfair preference claims, feel free to reach out to Longton Legal’s commercial law team on 1300 599 999.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*