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 claim.
Section 588FG of the Act allows a creditor to rely on various defences to a claim made by a liquidator that the transaction was an unfair preference.
Good faith defence – As an unsecured creditor, you may be able to rely on the good faith defence. In order to do so, you will need to prove that:
- you became a party to the transaction in good faith;
- you had no reasonable grounds to suspect the company was insolvent;
- a reasonable person in your circumstances could not reasonably suspect the company was insolvent; and
- you provided valuable consideration.
Running account defence – this defence can be used in situations where there is a continuing business relationship between the debtor and creditor. The essential feature of this relationship is that it is predicated on the idea that there is an expectation for further debits and credits to be recorded. Note that this is not a complete defence to the unfair preference claim, but may reduce the amount payable to the liquidator.
Often the Good Faith Defenceand the Running Account Defence are used in conjunction to oppose against an unfair preference claim.
What should you do?
Dealing with unfair preference claims from a liquidator can be tricky. It is important to understand the nature of your relationship with the debtor company, as there may be various options available to you in defending these types of claims.
If you have any questions about unfair preference claims, contact Rouse Lawyers on 07 3648 9900 for an obligation-free discussion.