In difficult times, it’s quite common for struggling companies to request to enter into a payment arrangement with their creditors in order to sustain cash flow. In accordance with the Corporations Act 2001, a liquidator has the ability to recover certain payments – known as unfair preferences – made by the company to creditors in the 6 months before the start of the liquidation.
The aim of taking preference action is to ensure that the assets of an insolvent person or company are distributed equally among the creditors.
If your business receives a preference claim from a liquidator, don’t assume that you can’t fight back. Whether you are submitting or defending against a preference claim, we can help you to achieve the best results.
Common signs of a preference payment
When investigating the affairs of the company, a liquidator needs to identify potential preference claims. The following are examples of strong indicators that liquidators look out for when trying to identify preferential payments:
- Payments made after supply has stopped or threats are made to stop supply
- Payments made outside normal trading terms
- Payments made after legal recovery action has commenced
- Payments are made in lump or rounded sums
Actions a Liquidator must take to prove preference claims
In order for a Liquidator to successfully prove a preference claim, they need to establish that:
- The company in Liquidation and the creditor were parties to the transaction
- The transaction took place within six months of the commencement of the company’s ‘winding up’
- The payment was made by the company when it was insolvent or the company became insolvent as a result of the transaction
- The payment resulted in the creditor receiving more than they would have received in a Liquidation scenario
Defences available for creditors
The Corporations Act provides creditors with defences to unfair preference claims. In order to properly defend a preference claim, a creditor needs to establish that:
- It became party to the transaction in good faith
- It had no reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the transaction
- It provided valuable consideration to the transaction
And that’s where our expertise comes in handy.
Whether you have received a preference claim or want to submit one, we can help. Contact us for more information.