Unfair Preference Claims in Liquidation: How to Challenge Repayment Claims

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

• the person provided valuable consideration or changed their position in reliance on the transaction.

Need Advice About an Unfair Preference Claim?

Receiving a demand from a liquidator can be stressful, particularly where repayment of funds is sought years after a transaction took place. Unfair preference claims involve complex insolvency laws, strict timeframes and a range of potential defences that may be available depending on the circumstances.

Whether you have received a demand from a liquidator, need advice about a potential defence, or are involved in an insolvency-related dispute, obtaining legal advice as early as possible can help protect your position and assess the options available to you.

Matthew Hicks, Principal Lawyer and Head of HOCW's Commercial Litigation & Insolvency team, advises businesses, creditors, directors and insolvency practitioners on unfair preference claims, statutory demands, debt recovery, insolvency matters and complex commercial disputes.

Visit Matthew Hicks's profile to learn more about his experience and how he can assist.