By Phil Colman
Cash flow is critical for all businesses. Prudent businesses are careful about giving credit and firm in pursuing slow payers. But even prudent businesses can become stressed by bad debts or, even worse, being required to pay back debts they have already collected.
This annoying outcome can arise when corporate debtors have gone into liquidation and a liquidator seeks to claim from a creditor what is known as an “unfair preference“. This will arise if the creditor:
- receives a payment or benefit from a debtor company in the 6 months prior to the commencement of process leading to liquidation of the company (Relation Back Period).
- at the time the payment or benefit was received, the debtor company was insolvent or became insolvent as a result; and
- the effect of the payment was that the creditor received more than it would have received had it not received the payment and instead obtained a dividend in the winding up of the company.
The theory behind the unfair preference laws is that, if a company goes into liquidation, one unsecured creditor should not get a better result than other unsecured creditors if they have received a payment or benefit during the Relation Back Period at a time the debtor company was insolvent. The theory arguably has merit if the effect of a liquidator recovering an unfair preference is higher dividends for other unsecured creditors.
But that does not always occur – often the proceeds are used to either cover the liquidator’s fees and costs or to provide better dividends to certain creditors who are entitled to priority. This adds to the degree of annoyance for unsecured creditors who received unfair preference claims.
There are numerous bases upon which an unsecured creditor can defend an unfair preference claim. MST Lawyers has had clients who have faced substantial unfair preference claims and we have assisted them in defending and/or negotiating a settlement of such claims. We are well versed on all legal defences to unfair preference claims and the evidence required to sustain those defences. We keep abreast of reported case judgments to understand the circumstances in which defences may succeed or fail. We provide clear advice to our clients so that they fully understand their risk and costs associated with responding to an unfair preference claim.
Should you receive a letter from a liquidator making an unfair preference claim, do not ignore it. Consider seeking advice from our Dispute Resolution & Litigation lawyers. For advice, please contact Phil Colman at phil.colman@mst.com.au or Mark Skermer at mark.skermer@mst.com.au
