Using a Personal Property Securities registration to avoid Unfair Preference Claims

By Stuart Jebb, Lawyer, MST Lawyers

In Today’s economic climate getting paid by customers for goods or services provided can be a difficult task. Many of our clients invest significant time and money in debt recovery procedures and adopt strategies such as payment plans to ensure they are paid what they are rightfully owed.

However, if a debtor company goes into liquidation within 6 months of making any payment, the payment can in certain circumstances be clawed back.

Unfair Preference Claims

The Corporations Act 2001 (Cth) (“the Act“) allows a liquidator to recover money paid to creditors on the basis that they received an “unfair preference” ahead of all other creditors of the company.

A liquidator can recover the money paid to creditor by Court order if it can establish the following:

• the company (in liquidation) and the creditor were parties to a transaction (usually the payment of money);
• the transaction was entered into when the company was insolvent;
• the transaction occurred within the 6 month period ending on the commencement of the winding up; and
• the transaction results in the creditor receiving more from the company than it would have received if it were to prove for the debt in a winding up of the company.

If a liquidator can successfully establish that the creditor received an unfair preference, the creditor will be required to pay back the money received from the company. This is the case even though the money received may have been  for goods or services supplied prior to the company being wound up.

Benefit of being a Secured Creditor

A liquidator will be unsuccessful in making an unfair preference claim if the creditor is deemed a “secured creditor”. The Act states that a company will be deemed a “secured creditor” if the debt that it is owed is subject to a security interest under the Personal Property Securities Act 2009 (Cth) (“PPSA“) or another charge, lien or pledge.

Therefore, by having a security interest under the PPSA, a company may be able to protect itself from a liquidator’s claim that it has received an unfair preference claim when the debtor enters liquidation soon after making payment.

Importantly, the security interest needs to be perfected in accordance with the PPSA. Generally the most common way to “perfect” a security interest under the PPSA is to register the interest on the Personal Properties Securities Register. If a creditor fails to perfect the security interest prior to delivery of goods and receiving the payment from the company, the creditor faces a risk that such payment was received while it was an unsecured creditor and it is therefore capable of being clawed back by the liquidator.

It is also important to note that under section 588FA(2) of the Act, a secured debt is taken to be unsecured to the extent that the debt exceeds the value of the security. For example, where Company A has a registered security interest over stock it supplied on credit terms to Company B, if the value of the stock is less than the value of the debt owed by Company B, Company A will only be a secured creditor to the value of the stock. On the other hand, if the value of the stock is greater than the value of the debt owed by Company B, Company A will be a secured for the entire debt owed.

Accordingly, despite having a perfected security interest under the PPSA , payments made to a creditor in excess of the value of the security interest may be deemed an unfair preference and recoverable by the liquidator.

Getting paid and keeping it

If your company supplies goods on credit you should firstly ensure that your trading terms adequately grant you a security interest, and then secondly, you should ensure that you register such security interest on PPSR.

Without an enforceable security interest, you are at risk that, in the event that the debtor company goes into liquidation, the liquidator may attempt to recover the money paid to you.

If you would like to know more information on the above, or would like advice on how to adequately register a security interest on the PPSR, please do not hesitate to contact our Corporate Advisory team by email corporate@mst.com.au or by telephone +61 8540 0200.