So, you’ve recently received payment from one of your customers for goods or services provided by your business, only to receive a letter from a liquidator demanding you to pay it back on the basis it was a ‘preferential’ or ‘unfair preference’ payment?
You may be wondering how you respond to the demand, and most importantly, will you have to pay the money back.
What is an unfair preference payment?
An unfair preference payment occurs in circumstances where a debtor company (or person) makes a payment to a creditor in satisfaction of a debt, shortly before that debtor company is placed into liquidation.
Section 588FA(1) of the Corporations Act 2001 (Cth) (the Act) sets out the elements that must be established in order to satisfy an unfair preference claim:
- The company and a creditor are parties to the transaction (even if someone else is also a party); and
- The transaction results in the creditor receiving from the company, more than they would have received had the transaction been set aside and the creditor were to prove for the debt in a winding up of the company.
If proven, a liquidator will have a claim to void the transaction and reclaim the payment.
What is the relevant period for an unfair preference claim?
An unfair preference payment can include all payments made from a company to a creditor in a 6-month period prior to the company being placed into liquidation. This is known as the “relation back period”.
For example, if a liquidator is appointed to a company on 25 August 2016, then the liquidator may seek to void all payments made to the company dating back to 25 February 2016.
Before making payment of the amount set out in the liquidator’s demand, it is critical to assess whether or not your circumstances may give rise to a defence to the unfair preference ...