Liquidators issue unfair preference claims to ensure the equal treatment of unsecured creditors. Unfair preference claims arise where an unsecured creditor has received payment from a debtor company which is subsequently placed into liquidation.
Unfair preference claims are extremely serious and typically time-sensitive. If your company receives a claim you must seek legal advice and take practical steps to gather information relevant to defending it.
What is an unfair preference claim?
Unfair preferences occur only with insolvent transactions in the event of unsecured debt. If you receive an unfair preference claim, it means that it’s possible you’ve been paid more than you would have if the debtor had been in liquidation, in which unsecured creditors (and this may include third parties), receive only part, or in some cases none of, any outstanding debt, in other words you have been unfairly prioritised by the debtor company.
Under the Corporations Act 2001, in order to bring a claim of unfair preference, a liquidator must have evidence of four things:
- When the company made a transaction it was already insolvent, or became insolvent as a result of the transaction/s.
- There is evidence of all parties’ involvement in the transaction/s.
- The transaction/s caused the creditor to receive more than it would have in the event of the company’s winding up and liquidation.
- The transaction occurred in the six months prior to the Relation Back Date (the first date of the period in which company transactions are considered void).
What to do when you receive an unfair preference claim
Information is everything
If you are served with a claim or letter alleging that you have received an unfair preference, the first thing to do is gather information. Liquidators are obligated to share their reports about the financial position of the company when they made payments to you. Recent legislated changes to the insolvency practice rules mean you can request documents such as audited financial statements, or other reports on the previous financial health of the company, to consider whether or not the company was insolvent at the date it paid you.
Another potentially valuable source of information is your email correspondence, which can be used as evidence of what the company claimed with regard to its ability to pay in a timely fashion.
If you need to defend a claim before the court, there are several possible arguments you can raise which we can discuss in detail with you.
The good faith defence
While the best defence will differ according to the circumstances of each case, however the most common defence to respond to a claim of unfair preference is good faith. The good faith defence means that you neither knew nor suspected that the company was insolvent when it paid funds to you and valuable consideration was provided in respect of the transaction/s. To prove this requires excellent record-keeping and supporting information such as an email trail between you and the debtor company.
In making a decision about an unfair preference claim, the Court assesses the commercial circumstances between the parties at the time of transaction. The Court does not use the benefit of hindsight.
Running account
While the running account defence will most likely only ever result in a partial return of any further amounts owed by the debtor to your business, it can significantly reduce the amount of the liquidator’s claim.
Running accounts occur when there are multiple transactions between the parties that demonstrably form part of a continuing business relationship. For the purpose of establishing whether there was an unfair transaction, the Court treats all transactions as a single transaction.
Set-off defence
Similar to the running account argument, occasionally it may be open to a creditor to argue that the outstanding debt owed to a creditor can be set-off against amounts received as unfair preference payments, which will reduce the amount of debt outstanding to the creditor. As with the Good-faith defence,to use this defence requires evidence that at the time of providing credit, you did not have notice of the debtor’s insolvency.
Timely legal advice is key
Whatever the circumstances between two commercial entities, an unfair preference claim is a serious matter requiring urgent advice. In addition to professional legal assistance, you must prioritise information-gathering from all relevant sources in order to prepare your defence.
Are you looking for an expert to defend an unfair preference claim? Get in touch- we’ve got your back.
DISCLAIMER: This article is intended to provide general information and should not be relied upon as legal advice. Formal legal advice should be sought if you are concerned about, or require particular advice applicable to your specific circumstances in relation to, any topics covered in this article.