When the liquidator of a company comes knocking on a
creditor's door, it is to echoes of "Queue jumper!"
reverberating in the background.
Essentially, one of a liquidator's first tasks when
appointed is to identify whether any creditors have been given
'preferential treatment' - that is, whether they have been
paid some or all of their debt just prior to the company's
liquidation and at the expense of other creditors.
Naturally, as a creditor you would like to keep any payments you
have received. However the liquidator has the right to claim back
that money if it is deemed to be an 'unfair preference
claim' and you are unable raise a defence to such a claim.
So where do you stand as a creditor and how can you avoid a
dispute over payments you may have received?
What is an Unfair Preference Claim?
Under the unfair preference payment provisions of the
Corporations Act 2001 (Act), a liquidator will look at all of the
transactions made by the company in the "relation back
period" (six months before the start of the liquidation).
A payment to a creditor may be deemed a 'voidable
transaction' (i.e. liable to be set aside) if it was made
within that six month period. If that is the case, the creditor may
receive a preference payment demand from the liquidator.
The liquidator bears the onus of proving a number of elements in
establishing an unfair preference claim. Section 588FA of the Act
states that a transaction is an unfair preference if:
the company and the creditor are parties to the transactions
(even if someone else is also a party); and
the transaction results in the creditor receiving from the
company, in respect of an unsecured debt that the company owes to
the creditor, more than the creditor would have received from the
company in respect of the debt if the transaction was set aside,
and the creditor were to prove for the debt in the winding up of
Who is a party to the transaction?
One of the primary criteria when determining unfair preference
claims is proving that the company and the creditor were parties to
the "transaction". On its face this may appear simple
especially where it can be shown, for example, that the company
made a direct payment to a creditor in the relation back period.
However, life is never simple and all sorts of scenarios can
Section 9 of the Act sets out a wide range of examples of
actions that can constitute a 'transaction' by a body
a conveyance, transfer or other disposition by the body of
property of the body and
a security interest granted by the body in its property
(including a security interest in the body's PPSA retention of
title property); and
a guarantee given by the body; and
a payment made by the body; and
an obligation incurred by the body; and
a release or waiver by the body; and
a loan to the body;
and includes such a transaction that has been
completed or given effect to or that has been
The examples are wide reaching but they are not limited to
these. A variety of dealings can give rise to a transaction for the
purposes of the unfair preference payment claim provisions.
Further, a company can be a party to the transaction where it
instigates, authorises or ratifies the transaction and this has the
effect of extinguishing the debt. The totality of the dealings
initiated by the company to achieve the ultimate end will mean it
may be deemed to be a transaction to which the creditor and company
Avoiding the octopus reach of the unfair preference claim
A creditor may be able to defend itself against an unfair
preference claim that the liquidator has been able to prove if the
creditor did not suspect the company was insolvent, and any other
reasonable person in its shoes would not have held a suspicion.
However, before getting into this defensive position,
consideration should be given to how to avoid falling within the
grasp of the unfair preference claim regime in the first
Key actions may include:
requesting money up front for goods or services before supply
(to avoid being in a debtor/creditor position at the time of
taking security from the company where the security is
equivalent to the amount of payment received (remember the Personal
Property Securities Act 1999 (Cth) has opened up opportunities for
creditors in this regard);
operating on strictly COD terms;
running accounts for major clients that involve regular payment
plans, which may help to mitigate potential losses.
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.
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This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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