Strategies to Protect your Business from Liquidators’ Unfair Preference Claims
1. Consider structuring transactions in a way that avoids the creation of a debtor-creditor relationship.
Unfair preference claims only apply to transactions between a company and one of its creditors. If goods are not supplied on credit, and a transaction is structured in a way such that your business is not at any point in time a creditor of the company, it is unlikely any payment received from the company will be an unfair preference. If you are unsure whether the way in which you do business results in you being an unsecured creditor, you should seek legal advice regarding your terms and conditions of trade.
2. Take security
Unfair preference claims only apply to transactions in respect of unsecured debts. If your debt is a secured debt, it is unlikely the transaction will satisfy the criteria of an unfair preference.
It is worth noting that the giving of security by the company may itself be a transaction that is an unfair preference, so it is always preferable that security is obtained from the company at the commencement of your working relationship with it; if you wait until you have concerns for your customer’s solvency, it might be too late.
3. Regularly review the value of security you hold
Section 588FA(2) of the Corporations Act 2001 (Cth) provides that, for the purposes of unfair preference claims, a secured debt is taken to be unsecured to the extent that the value of the transaction exceeds the value of the security held by you. There is therefore a risk that any payment you receive may be an unfair preference – notwithstanding that you hold security – to the extent the payment exceeds the amount that you would receive if you enforced your security interest.
This risk can be minimised by regularly reviewing the security you hold, and ensuring its value is adequate to cover the credit you are providing to customers.
4. Register your security
Section 267(2) of the Personal Property Securities Act (PPSA) provides that any security interest granted by a company that is “unperfected” immediately prior to the commencement of the administration or winding up of the grantor corporation “vests” in (i.e. transfers to) the company. Perfection is most commonly achieved by registering your security interest on the PPSR – the Personal Property Securities Register.
The effect of Section 267(2) of the PPSA is that, if you fail to register your security interest on the PPSR – and despite being the “true” owner of the goods over which security is held – you may lose the goods to your customer and its liquidator, and be left with simply proving as an unsecured creditor in your customer’s liquidation.
5. Be careful dealing in your dealings with liquidators and voting at meetings
Be careful in your dealings with liquidators, and voting a creditors meetings, to ensure you do not accidentally surrender your security. If you surrender your security, you will be taken to be an unsecured creditor.
Section 75-87 of the Insolvency Practice Rules (Corporations) 2016 (Cth) provides that for the purposes of voting at a creditors meeting:
- a secured creditor must state in its proof of debt, amongst other things, the creditors estimate of the value of the security (unless they surrender it); and,
- a creditor is entitled to vote only in respect of the balance, if any, due to them after deducting the value of their security as estimated by them.
The effect of the above is that if you are a secured creditor, and you vote in respect of your whole debt or claim, you are taken to have surrendered your security to the company. While a Court application can be made to preserve your position as a secured creditor where your failure to value the security arose through inadvertence, this is a time consuming and costly process (which costs might exceed the value of the security).