Achieving sales growth is a significant challenge for many Australian businesses. Even if new customers can be found, an inability to collect and hold onto payments can pose another obstacle to growth.

To survive and prosper businesses must plan, and implement, strategies for sustained profitability. It is not enough to simply achieve fantastic sales results and get the money in, businesses must also anticipate, and protect against, the risk that payments received from customers may be clawed back if a liquidator is later appointed to the customer.

Under the Corporations Act 2001 (Cth), the liquidator of a company can seek to clawback payments (called “unfair preferences”) made within six months from the date the liquidator was appointed or, as is often the case, the date a voluntary administrator was appointed. To be an "unfair preference", a payment must result in a business receiving more money from the customer than it would receive in the liquidation.

Unfair Preference Claims

Demands for repayment of an alleged unfair preference may be made by a liquidator more than three years after the administrator/liquidator is appointed. Unfair preference demands also regularly include a warning that, if the payments are not repaid, the liquidator will commence legal action against the business to recover the payments. Defending such actions can be costly and, in some cases, may involve complex forensic accounting and discovery. If the Court decides in favour of the liquidator and against your business, you may also be required to pay the liquidator’s legal costs.

In deciding whether payments constitute an unfair preference the Court will look at the trading relationship between the business and its customer, and in particular, whether the business knew, or ought to have known, that the customer was unable to pay its debts as a when they fell due.

Defending an Unfair Preference Claim

A business may be able to defend an unfair preference claim in circumstances where the business sought and received payments in good faith and where the business had no reason to believe, as at the date of the payments, that the customer was insolvent or likely to become insolvent.

Where the business and the customer operated a “running account”, the Court will look at the ongoing relationship between the business and the customer. The question for many businesses is how to mitigate the risk from unfair preference claims. 

Protecting Against Unfair Preference Claims

Unfair preference claims are often unavoidable. However, there are strategies that can be put into place early to mitigate against, or forestall, successful unfair preference claims. For instance, obtaining personal guarantees and/or other security from third parties may help your business retain payments, or recover payments ultimately lost to a liquidator, from guarantors and other security providers.

With its extensive experience in insolvency matters, Gadens is well placed to assist clients to develop strategies to mitigate against unfair preference claims, and deal with any claims as they arise.