With the recent liquidations of a number of building companies, it is timely to discuss what can happen when a Liquidator attempts to claw back money paid by that company as an unfair preference payment.

The Corporations Act 2001 provides the basis for all claims of unfair preferences. Thankfully, it also provides a number of defences that can be relied upon if you are met with a claim for an unfair preference.

This article will provide an overview on unfair preference claims by Liquidators and what you can do if faced with one.

What is an Unfair Preference?
An unfair preference can be in respect of any type of transaction however in the construction industry it is usually seen as a payment from the Company in liquidation to a creditor such as a subcontractor or supplier.

In order to be classified as an unfair preference, the payment by the Company to you has to result in you receiving more than you would receive from the Company in respect of the debt – if the payment was set aside and you had to prove with the other creditors in the winding up of the Company. That is, if you have an advantage over, or are better off than, the other creditors, then this may apply to you.

In addition to this, the Liquidator must also prove that:
1. A creditor / debtor relationship exists between you and the Company and that you were both a party to the transaction; and
2. The payment was made within 6 months of the date of the liquidation (this is the relation back date for non-related parties but can be a longer timeframe for other types of relationships); and
3. The payment was in respect of a debt that wasn’t secured; and
4. The payment was made while the Company was insolvent.

For most businesses in the construction industry any payments received under a contract in the lead up to a Company entering liquidation would meet these requirements.

What happens?
Liquidators have an obligation to examine the records of the Company, this includes examining all transactions within the last 6 months (for non-related parties) and if the Liquidator can satisfy the above listed requirements then they will usually issue a letter of demand for repayment of whatever amounts were paid to you by the Company in those last 6 months.

What can you do?
If you receive a letter of demand (or a claim) from a Liquidator you should seek legal advice.

Depending on the circumstances, you may be able to defend the claim using one (or a combination) of three defences:
The statutory defence under section 588FG of the Corporations Act which can be relied upon if:
a. You gave valuable consideration in exchange for the payment – this is usually the work that you carried out, or the goods supplied, in exchange for the payment under the contact; and
b. You received the payment in good faith;and
c. You had no reason to suspect the insolvency of the Company; and
d. A reasonable person in your position would have had no reason to suspect the insolvency of the Company.

The ‘running account’ defence under section 588FA of the Corporations Act which allows the Court to look at the overall net position rather than each separate payment. This can operate to reduce the overall amount of the claim by the Liquidator. This can be relied upon if:
a. The transaction is an integral part of the continuing business relationship (such as a running account); and
b. in the course of the relationship, the level of the Company’s debt to you is increased and reduced from time to time as the result of payments made and works carried out/supplied.
That the requirements for classifying the payment as an unfair preference have not been satisfied.

If you receive a letter of demand from a Liquidator it is better to get on the front foot and respond promptly, particularly if you can rely upon one of the defences. This is where a strong letter from McKays on your behalf can help to avoid the letter of demand turning into a claim in Court.

For more information about unfair preference claims or dealing with companies in Liquidation please contact the team at McKays.