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Unfair Preference Claims

In this article, we will provide you with an overview of unfair preference claims, their possible consequences, and what you should do if you receive a demand for an unfair preference claim.

Unfair preference claims are a legal mechanism by which liquidators may recover payments made by a company in financial distress to its creditors.

Given the current economic outlook in Australia, and the forecast increase in insolvency appointments, the number of unfair preference claims can also be expected to rise.

Business owners should ensure they are aware of unfair preference claims and their possible consequences prior to accepting payment from any customer in financial distress.

In this article, we will provide you with an overview of unfair preference claims, their possible consequences, and what you should do if you receive a demand for an unfair preference claim.

What is an Unfair Preference Claim?

An unfair preference claim is the most common type of voidable transaction, and occurs where a liquidator alleges that a payment (or other transaction) made between an insolvent company and one of its creditors has the effect of unfairly “preferring” that creditor over other creditors.

Elements of an Unfair Preference Claim

In Australia, unfair preference claims are governed by the Section 588FA of the Corporations Act 2001 (Cth), which provides that the following criteria must be met for a transaction to be deemed an unfair preference:

The company and the creditor are parties to the transaction (for example, a payment was made by the company to a creditor);
The transaction was entered into (or payment made):
- when the company was insolvent (or the company became insolvent due to the transaction/payment); and,
- in the period shortly prior to the company appointing an administrator or liquidator (usually the period is limited to around six months); 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 if the transaction didn’t occur and the creditor proved for the debt in the winding up of the company.

Its important to note that payments are only one type of transaction that might be recoverable as an unfair preference.

Situation where an Unfair Preference Claim can arise

Unfair preference claims commonly arise where a creditor receives a payment from an insolvent company shortly before the company is placed into liquidation, while other creditors are left unpaid. In this scenario, the payment results in the (paid) creditor receiving an unfair “preference” over the other (unpaid) creditors of the company.

What happens if a Liquidator considers a payment you received to be an Unfair Preference?

If a liquidator considers that you have received an unfair preference payment, they will send you a letter outlining why the above criteria are satisfied, and usually demanding that you repay the amounts you have received.

If you do not repay the amount demanded by the liquidator, the liquidator may commence proceedings against you seeking to recover the amount of the payment, or otherwise seek other orders with the effect of “voiding” the transaction.

What should you do if you receive a demand for an Unfair Preference Claim?

If you receive a demand for an unfair preference claim from a liquidator, you should seek legal advice promptly to ensure that any deficiencies in the liquidator’s claim, along with any available defences, are identified as soon as possible.

This will enable a response to be provided to the liquidator properly outlining those deficiencies and defences (if any), with a view to avoiding the commencement of legal proceedings.

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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.