Preventing a preference payment claim

A preference payment is essentially one that provides a benefit or advantage to a creditor over other creditors of a company that is subsequently wound up. In other words, if a company is paid more than what it would have received if that amount was available for distribution between all of the company’s creditors in order of priority under the Corporations Act 2001 (Cth), then the payment is a preference payment and subject to being recovered or clawed back by the liquidator appointed to wind up the insolvent company.

In order to be successful in a claim to claw back a preference payment, a liquidator must prove that:

• the company and the creditor were parties to the transaction;
• the creditor that received the payment was an unsecured creditor;
• the transaction occurred within 6 months of the relation-back day, or in other words, the day that the liquidation commenced;
• the company was insolvent at the time of the transaction, or alternatively, become insolvent by virtue of the transaction; and
• the payment resulted in the creditor receiving more cents per dollar than it would have otherwise in the winding up of the company.

Some useful hints to avoid a preference payment claim include as follows:

• arrange for payment to be made by a third party, rather receiving payment directly from the company that is facing liquidation;
• demand security for payment wherever possible (for example a guarantee from the directors, a retention of title clause, or a fixed and floating charge) and take steps to crystallise said security by registering the security on the PPSR where appropriate;
• keep your debtors ledger under control, so that even if you receive a preference payment, the amount is low enough such that the costs of litigating for the liquidator make the claim uncommercial to pursue;
• invoke the Doctrine of ultimate effect, by ensuring that the payment does not ultimately result in a decrease in the net value of the assets to meet the competing demands of other creditors (noting, however, that there are exemptions to this rule; for example, the payment of past debts and payments to secure continuing provision of goods or services); and
• seek legal advice as soon as you suspect that a creditor may be insolvent.