Unfair Preference Claims – Part 1

Unfortunately, some Australian businesses have not survived post pandemic, or have continued trading under questionable circumstances. These events will have a domino effect on creditors, whereby the dreaded preferential claim, needs to be carefully considered.

What is an unfair preference claim?

An unfair preference claim, pursuant to section 588FA[1] of the Corporations Act 2001 (Cth) (Act), is when:

• A debtor company owes a creditor an unsecured debt; and
• The debtor company and the creditor are parties to a transaction (for part or all of the unsecured debt);
• The transaction was an insolvent transactione. the transaction occurred when the company was trading insolvent or the company became insolvent because of the transaction; and
• The payment results in the creditor receiving more than it would have received had the debtor company been in liquidation and the liquidator paid all unsecured creditors a dividend.

The aim of s588FA is to ensure all creditors are treated equally and preventing any unsecured creditors from receiving an advantage over others. Thus, when a liquidator/administrator is appointed, they are given powers to “claw back” these funds and redistribute the funds amongst all creditors. However, not all payments can be claimed by the liquidator/administrator and will depend on whether they were made before or after the relation back date.

What is a relation back date?

Not to get this confused with when a liquidator/administrator can bring on a claim for unfair preference claims, the relation back date refers to the date from when a transaction may be voidable. This is a very technical area, and there are several different scenarios where this date will change; it will heavily rely on how the liquidator/administrator was appointed. Section 91 of the Act has a great table to give you an idea of the complexities of figuring out the relation back date.[2]

Generally speaking, the relevant date is six (6) months prior to the appointment of an liquidator/administrator, or the filing of a winding-up application. As with everything though, there may be instances where a liquidator/administrator can claim transactions beyond this period.

How long does a liquidator/administrator have to bring a claim for an unfair preference?

A Court may make an order about an unfair preference claim if an application is made:

(a)  During the period beginning on the relation-back day and ending:

(i)  3 years after the relation-back day; or

(ii)  12 months after the first appointment of a liquidator/administrator in relation to the winding up of the company;

whichever is the later; or

(b)  Within such longer period as the Court orders.

What are the indicators a company may be trading insolvent when payments are made to their creditors?

Although difficult to ascertain, there are some things a creditor can look out for (or even search up!) to confirm their suspicions that a company may be trading insolvent or entering liquidation. These include, but are not limited to:

1. Seeing notices in relation to the company posted on https://publishednotices.asic.gov.au/browsesearch-notices/

2. Looking at Court Daily Lists or searching Court databases through court websites to see if any court hearings are listed in relation to the company;

3. Continuously receiving late payments, or the company keeps defaulting on payment arrangements;

4. Companies refusing to provide credit, requesting cash on delivery or refusing supply unless a payment is made;

5. Receiving post-dated cheques or dishonoured cheques; and

6. Knowing through networks, that there are other unpaid creditors.

It can be difficult to see if a company is trading insolvent, but there are tell-tale signs, that usually in hindsight are blatantly obvious. So it is always important, to keep up to date with all your accounting and note discrepancies as they appear; a one-off is usually of no concern, but patterns can be red flags  that something isn’t right.

Does it matter if the debt is secured or unsecured?

It does, and it can be your saving grace! It may not be something you can arrange with every customer/supplier, but it is something to consider in future business transactions – Business Solutions Hub can assist.

If a debt is unsecured, i.e. there is no collateral or guarantee connected with the debt, then it is a debt that will come into question with the liquidator/administrator and any payments made towards it may be subject to unfair preference claims. However, a secured debt i.e. a debt registered on the Personal Property Securities Register (PPSR) or a debt that gives rise to a retention of title of goods, may in most circumstances be immune from unfair preference claims.

It is important to note that although a debt is secured, there are still some instances where that debt can come into question. For example, if a debt is secured due to a retention of title of goods (via a contract) then that debt should be equal to or less than the value of the goods; otherwise, any amount greater than the value of the goods may be classified as unsecured and thus can be the subject of a unfair preference claim, if any payments have been made towards it.

As previously mentioned, unfair preference claims are a part of a very technical area of law, and it is important to seek legal advice from Constructive Legal Solutions in the first instance to protect yourself via telephone on 1300 972 092 or at info@constructivelegalsolutions.com.au.

[1] s588FA(1)(a) of the Act http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588fa.html

[2] s91 of the Act http://classic.austlii.edu.au/cgi-bin/sinodisp/au/legis/cth/consol_act/ca2001172/s91.html?stem=0&synonyms=0&query=91