Australia: What to do if a liquidator comes calling – how to deal with unfair preference claims

Last Updated: 25 July 2017
Article by Lara Piercy

A creditor may find itself in a situation where a liquidator demands that it make repayment of alleged unfair preference payments to a company in liquidation. This demand may include repayment of amounts that were previously paid to the creditor by the company (which has subsequently gone into liquidation) in the course of its business dealings. While a liquidator does have the ability to pursue a creditor for alleged unfair preference payments, there are certain defences that may be available to a creditor against such a claim.

Unfair preference payments

Pursuant to the Corporations Act 2001 ("the Act") a transaction is an unfair preference if it results in a creditor receiving more from a company than the creditor would receive if the transaction was set aside and the creditor had to prove for the debt in the winding up of the company (see s 588FA of the Act). An unfair preference will be an insolvent transaction if the transaction was entered into when the company was insolvent (see s 588FC of the Act). If an insolvent transaction was entered into within six months of the Relation Back Day (which can be determined with reference to s 91 of the Act), then it is a voidable transaction (see s588FE of the Act). The six month period ending on the Relation Back Day is referred to as the Relation Back Period.

It can be difficult to determine whether a company was insolvent at the time an alleged unfair preference payment is made. Putting a liquidator to proof that a company was in fact insolvent at the time of the alleged unfair preference payment(s) can be a costly and time consuming exercise.

Defence to a claim for unfair preference payments pursuant to s 588FG of the Act

A creditor may avail itself of certain defences to a claim made against it by a liquidator for unfair preference payments. Pursuant to s 588FG of the Act, a transaction (which includes a payment made by the company) is not voidable where a creditor can demonstrate that:

  1. The creditor became a party to the transaction in good faith;
  2. At the time when the creditor became a party to the transaction, the creditor had no reasonable grounds for suspecting that the company was insolvent (or would become insolvent as a result of the transaction) and a reasonable person in the creditor's circumstances would have had no such grounds for suspecting that the company was insolvent; and
  3. The creditor has provided valuable consideration under the transaction.

A creditor may have little difficulty in demonstrating that it became a party to the transaction in good faith and that it provided valuable consideration under the transaction. However, to maintain a defence pursuant to s 588FG of the Act, a creditor will also be required to show that neither it nor any reasonable person in its circumstances had or would have had reasonable grounds for suspecting that the company was insolvent, as at the date of each payment that was made to the creditor during the Relation Back Period.

There is no one factor that establishes a reasonable suspicion of insolvency. Whether or not a reasonable person will be found to have had reasonable grounds for suspecting a company was insolvent depends on the circumstances of each case. It is necessary to identify every factor that points towards insolvency and consider whether there is an explanation why that factor did not lead to a suspicion of insolvency. For example, a creditor might be able to show that it did not have (and a reasonable person in the creditor's circumstances would not have had) reasonable grounds for suspecting the company was insolvent because the company was consistently late in making payment of amounts due and payable to the creditor and had a history of entering into instalment plans and being issued with letters of demand (see Seller & Anor v Offset Alpine Printing Pty Ltd).

Another explanation as to why a creditor might not suspect that a company is insolvent could be that the creditor was in discussions with the company to enter into a new agreement at some stage during the Relation Back Period. In this case an inference could be drawn that a creditor would not enter into a contract with a company that it suspects to be insolvent.

It is important to bear in mind that Courts have held that it may be difficult for a creditor to show that they (or a reasonable person in their place) had no reasonable grounds for suspecting a company was insolvent in circumstances where they have made repeated demands for outstanding payment.

It is necessary for a creditor who seeks to maintain a defence pursuant to s 588FG of the Act to call all evidence available to it (pursuant to the decision of the NSW Court of Appeal in Cook's Construction Pty Ltd v Brown). In practical terms, this would mean obtaining evidence (including any correspondence, file notes and other records) from everyone who dealt with the company during the Relation Back Period and, depending on the circumstances, possibly some time earlier. This requirement imposes a significant evidentiary burden on the creditor.

A defence pursuant to s 588FG of the Act is required to be made out for each and every payment date. Where multiple payments are made to a creditor during the Relation Back Period, it is possible that a creditor could make out a defence pursuant to s 588FG for some, but not all, of the payments.

Defence to a claim for unfair preference payments on the basis of set off

A creditor may be able to defend a claim brought against it by a liquidator on the basis of a set off, pursuant to s 533C of the Act. A set off defence allows a creditor who receives a payment that would otherwise constitute an unfair preference payment to off-set any outstanding debt owing to it by the company against an unfair preference claim. To avail itself of this defence a creditor must be able to show that it did not have notice of the company's insolvency at the time of giving credit (see Morton & Anor v Rexel Electrical Supplies Pty Ltd). In the case of Morton, the time of giving credit was the date each invoice was rendered by the creditor.

A set off defence is not available where a creditor had notice of the fact that the company was insolvent at the time of giving credit. Notice of the fact that the company was insolvent pursuant to s 553C of the Act requires more than a suspicion of insolvency (and can therefore be distinguished from the requirement pursuant to s 588FG of the Act to show that a reasonable person in the circumstances of the creditor did not have reasonable grounds for suspecting insolvency). A creditor will have notice of the fact that a company is insolvent if it has actual knowledge of facts that disclose that the company is unable to pay its debts when they fall due.

A creditor may be able to off-set part of a liquidator's claim, depending on when the creditor is found to have been on notice that the company was insolvent. In the case of Morton, the Court held that the creditor had actual notice of the fact that the company was insolvent when it was advised that the company did not have funds to make payment of an outstanding invoice.

If a set off defence is available to a creditor, it could significantly reduce the amount of a liquidator's claim against the creditor, or nullify it entirely. A creditor may be able to off-set any debt owing to it by the company prior to the company being placed in liquidation against the amount of the alleged unfair preference payments.

Defence to a claim for unfair preference payments on the basis of a running account

A creditor may be able to defend a claim by a liquidator on the basis of a running balance account argument as a partial defence to a claim, pursuant to s 588FA(3) of the Act. A running balance account defence limits recovery by a liquidator to the difference between a company's peak indebtedness to the creditor during the Relation Back Period and its final indebtedness to the company on the Relation Back Date. A running account defence does not provide a complete defence to a claim, however it can have the effect of reducing (in some cases significantly) the amount of a liquidator's claim for unfair preference payments.

A running account defence can be raised in circumstances where the transaction(s) in dispute can be considered part of a continuing business relationship. If during the course of that relationship the level of a company's indebtedness to its creditor increases and decreases from time to time as a result of a series of transactions, then all transactions are considered one transaction for the purposes of establishing whether there was an unfair preference. In circumstances where a creditor continues to provide goods or services during the period in which payments are made by the company, any claim for an unfair preference payment may be reduced if the value of the goods and services provided to the company is greater than the value of payments made by the company during that period.

For a running account defence to be available to a creditor, payments must be made as part of a continuing business relationship. The purpose of any payment must be in part to induce future supply (see Airservices Australia v Ferrier).

Summary

If a creditor receives a demand from a liquidator of a company seeking repayment of amounts paid to the creditor by the company on the basis of alleged unfair preference payments, it may be in a position to resist any claim foreshadowed by the liquidator on the basis of one of the defences set out above. If a liquidator successfully claims that a creditor has received unfair preference payments, a Court will usually award the payment of interest to the company in liquidation from the date of the initial demand. It is likely that an order will also be made for the creditor to pay the liquidator's legal costs of the proceedings, as well as their own legal costs.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lara Piercy
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.