Insolvency & Bankruptcy - Unfair Preference Payments

You run a successful business supplying quality products to a hungry market. Generally your clients are very good with payment however due to the economic downturn some clients have not been able to pay their invoices on time and you have noted that recently that your company has sent out a few reminder letters prompting payment. The majority of those prompted eventually made payment.

Yesterday you received a letter from a liquidator of ABC Co. Pty Ltd (“ABC”) advising that has been placed into liquidation. You remember that ABC made a payment about 4 months ago. The letter goes on further to say that the liquidators are now demanding payment from your company of $15,000.00 claiming that the payment was an “Unfair Preference”.

You supplied the goods, ABC Co. Pty Ltd paid for the goods. Why are the liquidators demanding you pay back that money?

What is an “Unfair Preference”?

An “Unfair Preference” is defined in the Corporations Act 2001 to be a transaction entered into between the company and its creditors which results in the creditor receiving more than it would have received if the creditor were to prove for the debt in the winding up of the company.

The transaction would have to have taken place six months prior to the date of winding up. This is called the “relation-back” day. If this is the case then it is open for the liquidator to seek repayment from all creditors fitting into that category.

This All Seems Unfair

Fortunately the legislature has taken into account the unfairness to some creditors if the liquidator were allowed complete immunity to claw back any payments which they have deemed unfair preferences. Luckily for some creditors, there are certain defences available which if proved would negate the liquidator’s claim. These defences include the “running account” and “good faith” defences.

What should you do?

If you have received a demand by a liquidator with respect to unfair preference payments, we suggest you seek legal advice at the earliest possible opportunity.

Please feel free to contact our office to arrange an appointment with one of our friendly solicitors to discuss the options available to you.