Unfair Preference Claims & Liquidation - Challenging Claims for Repayment

Friday June 7, 2019

Unfair Preference Claims - Challenging Claims for Repayment

Have you received a demand from a liquidator to repay money you received from a client or customer? Not all is lost, as there may be potential defences available to you under the Corporations Act 2001 (Act).

Part 5.7B of the Act gives liquidators the power to claw back certain transactions made by an insolvent company to unsecured creditors. Unfair preferences are the most common type of voidable transaction. The rationale behind these provisions is to ensure creditors are not provided a preferential advantage over other creditors who are also owed money from the insolvent company.

In general terms, for a transaction to be deemed as an unfair preference, subject to a number of criteria, the transaction made to the creditor by the insolvent company, must be within the six months period prior to the date liquidation commenced, also known as the relation back day. In determining whether a transaction is an unfair preference, the liquidator will look at evidence such as: the company's payment history, if the transactions were paid outside the payment terms, payment arrangements, demands by debt collectors or lawyers and the cessation of supply or work until payment is made. 

Generally a Court may not make an order requiring repayment against a person where:

  • the person became a party to the transaction in good faith;
  • they and a reasonable person in their circumstances, would have had no grounds for suspecting that the company was insolvent; and
  • the person provided valuable consideration or changed their position in reliance on the transaction.

An unfair preference claim demand from a liquidator should not be taken lightly, as time limits in responding will likely apply. Please contact our commercial litigation lawyers as there are effective ways to respond, which may allow you to retain the payment or reduce any amount to be paid.

Nicolle Ang