May 1, 2018
In every liquidation, Liquidators seek to identify and recover monies paid to creditors where it can be shown the recipient knew or suspected a Company was insolvent at the time payment was made.
The primary purpose of the law of Unfair Preference Claims is to ensure that no one creditor should receive more than others in terms of a cents in the dollar return from a winding up.
While the intent of the law is to ensure everyone receives their fair share of whatever remains of an insolvent company, the consequence can be a creditor may be punished for their diligent, efficient and persistent approach to business in favour of other creditors who may not have been as industrious.
However, just because your client receives a demand to repay an unfair preference does not mean all is lost. There are effective ways to respond and retain the benefit of the funds collected.
To succeed, a Liquidator must be able to demonstrate:
The Liquidator looks for evidence to prove a creditor knew or ought to have known the company was insolvent at the time of obtaining payment. In this regard, the Liquidator will focus on evidence such as:
The Liquidator tries to obtain this evidence from the books of the Company and also a review of all emails and other correspondence from the Company’s IT systems. Often, this information is volunteered to a Liquidator by comments made by the creditor.
Firstly, a creditor who receives such a demand should immediately engage a lawyer and avoid any discussion or correspondence with a Liquidator that will (and often does) weaken their position.
A competent lawyer will be aware of the defences available and will draft a response that may result in the creditor retaining all or part of the benefit of the payment obtained by addressing the:
*Secured creditors (including creditors who hold PPSR) are generally not subject to unfair preference claims.
Section 588FA(3) of the Act states that where:
Section 588FG(2) of the Act states that a Court shall not make an order for a preference or voidable transaction if the creditor can prove that:
(b) A reasonable person in the creditors position would have had no such grounds for suspecting insolvency, and
While a liquidator may assert a preference has been paid, it is up to the creditor who received the payment to prove their defence if a preference is to be avoided.
In a recent Federal Court matter, Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (CPS)(No 2)  FCA 530, where a creditor has no actual notice of facts that would have indicated to a reasonable person in its position that the debtor company was insolvent, they may be able to offset payments received, that may otherwise be preferential, against their outstanding debt remaining unpaid upon liquidation.
For example, where a creditor was owed $100,000 and was paid $40,000 by preference payments, and the creditor has no actual notice of facts that would disclose the company lacked the ability to pay its debts when they fall due, within the meaning of section 95 of the Act, the creditor could set-off its outstanding debt of $60,000 against the $40,000 preference and not have to disgorge any amount to the liquidator.
It is possible to defend claims for preferential payments on the basis of standard practice in certain industries. For example, in the building industry it is commonplace for payments to be made well outside of the creditors’ normal credit terms.
It is also possible to argue that the debtor and creditor relationship was such that there was a history and an agreement, although unwritten, that payments were often made very late.
If you need help with Insolvency, Liquidation or preferential payments, call The Insolvency Experts anytime, 24 hours including weekends, on 1300 767 525.