Defences are available for voidable unfair preference payments under the Corporations Act 2001.
You've done the work, provided a product, invoiced for the work/product and therefore are entitled to be paid. It can therefore be quite shocking to receive a letter from a liquidator demanding payment of the money back. Why should you re-pay money that was paid to you if you are only going to get a portion (if any) back from the liquidator? It's not your fault that the company became insolvent.
What is an unfair preference?
When a liquidator is appointed to a company, they have various statutory powers that enable them to make claims against parties in an attempt to recover money for the benefit of the creditors of the company in liquidation.
The most common claims a liquidator will make are for what are known as voidable transactions, namely voidable unfair preference payments. The voidable transactions provisions are set out at s 588FA to 588FF of the Corporations Act 2001 ("Act").
The idea behind the preference regime is that where one creditor had been paid and others haven't, it has been 'preferred' which isn't fair. As such, the money they received should be returned and go into the pot to be divided up between all of the creditors.
A voidable transaction is a transaction (usually a payment), that is made in the 6 months prior to an external administrator being appointed, or a winding up application being made with a Court. This is known as the 'relation back period'. You should bear in mind that there are some exceptions to this 6 month time limit and in some cases, transactions that took place up to 4 years ago can be attacked by a liquidator.
What is the process?
Usually, a liquidator will send out letters of demand to all those who have received a payment from the company in liquidation during the 6 month relation back period. They do this in the hope that some parties will not read the demand properly and will simply pay the demand without taking the matter any further.
Following the initial demand, if the liquidator thinks there is enough evidence to satisfy the requirement of a claim pursuant to any of s588FA-588FDA of the Act, they will proceed to issue proceedings against that party for recovery of the money paid, or the asset transferred.
Once you receive Court proceedings, there are severe consequences if you do not respond within the required time. If you do not respond, you may have judgment entered against you and this can be costly and difficult to set aside.
If you do receive Court proceedings, there may be several defences available to you. These are set out at s588FG of the Act.
Can I use the good faith defence?
Most business people have heard of the 'good faith' defence, but a lot are unaware of how it actually applies. To be successful in making out a good faith defence, you must be able to show that you did not have any knowledge of, or should have suspected that the Company was experiencing financial difficulties. You also need to show that a reasonable person in your position would not have had knowledge of, or should have suspected, that the Company was experiencing financial difficulties.
As such, if you made numerous demands for payment, or threatened to stop supply of goods or services until payment was made, put the customer on COD terms, started a debt collection process or other such steps, and following this you received payment, it is unlikely that you will be successful in arguing that you received that payment in good faith.
You should also be careful about receiving payment from third parties. If you know that the company who owes you money is insolvent, or may become insolvent, and you accept money from a third party, there are some instances in which this will still be considered a preference and therefore may be clawed back by the liquidator. If you have received a payment from a third party, but have still received a letter of demand from a liquidator, we recommend that you seek legal advice.
If you're unsure of your next steps or whether you have a defence, Madgwicks Lawyers is able to assist. We have a unique perspective in respect of liquidator claims acting for both liquidators and creditors alike. We understand a liquidator's objective and will use this to get you the best possible outcome.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.