If you've ever traded with a company that subsequently enters liquidation, you'll know that it can be very frustrating and disruptive to your business. If the company owes you money and you're an unsecured creditor, you'll join the (often long) line of other unsecured creditors and may see little or no money at the end of the process. To make matters worse, if you've received a payment from the company which can be classified as an unfair preference, the liquidator may write to you and demand that you repay the money to the company to be distributed equally among the creditors, or else they will commence recovery proceedings against you.
Fortunately, you do have options. If you receive a liquidator's demand, you should consider whether you can:
These are discussed in more detail below.
The Corporations Act 2001 ("the Act") sets out the elements of an unfair preference. These are:
An unfair preference must contain two further elements to be a "voidable transaction" under the Act. These are:
The onus is on the liquidator to establish each of these elements, and, if successful, a court can make an order directing an unsecured creditor to repay the unfair preference to the company.
When considering whether you may be able to challenge the liquidator's claim, you should consider the following questions:
Was there a transaction?
A liquidator will need to prove that the alleged preference is a "transaction" as defined in the Act. It has a very broad definition and includes not only a payment of money by the company, but also a conveyance, transfer or disposition of the company's property.
Who were the parties to the transaction?
The transaction must be one to which the company and the unsecured creditor are parties. Accordingly, a transaction that only involves either the unsecured creditor or the debtor and a third party cannot constitute an unfair preference.
Was there a debtor-creditor relationship?
For a transaction to constitute an unfair preference, a debtor-creditor relationship must exist between the company and the unsecured creditor with respect to the transaction. For example, there is no debtor-creditor relationship where:
Did we receive an unfair benefit in relation to the transaction?
The liquidator must also prove that the unsecured creditor received more from transaction than it would have received in the actual winding up of the company. For example, if an unsecured creditor received $50,000 from the company prior to the winding up of the company but would have only received $5,000 in the winding up of the company, it can be said that the unsecured creditor has received an unfair benefit of $45,000.
The business purpose of the payment and its context in the general course of dealing are considered to determine whether it gives the unsecured creditor an unfair benefit. For example, there is no unfair benefit where:
The unsecured creditor must establish that: