As accountants and advisors, you have probably been approached by a client in the past who has received an unfair preference recovery letter from a Liquidator, for monies hard-earned and recovered in good faith. So it is no surprise that the process of recovering unfair preferences has come under scrutiny from industry bodies, such as Subbies United on the east coast who represent the construction sector.
To give some background about how unfair preferences work, one of the duties of a Liquidator is to form conclusions about, and make recoveries from, creditors who received an unfair and preferential advantage over other creditors in the six months leading up to the Liquidator’s appointment, generally speaking.
That process initially requires confirmation that the company in liquidation was in fact insolvent when the payments were made to the creditor, and that the creditor received the payments in bad faith, outside of the ordinary course of business and with reasonable grounds to suspect the company was insolvent when the payments were made.
Indicators of these ‘unfair’ circumstances may include:
- The creditor issuing legal demands resulting in payments
- Written communication from the debtor company with even just anecdotal commentary regarding dire financial difficulties
- The creditor ceasing supply until certain, or all, payments were made
- Rounded payments, indicating a payment plan
In our practice, we consider the points above in detail before finalising our view about whether or not payments are unfairly preferential or not. That is because such matters are actually statutory defences that available to creditors to contest a Liquidator’s claim.
ASIC’s practice update to RLs drew attention to the remarks made by Justice Lee in the matter of Worldwide Specialty Property Services Pty Limited (in liq) v Worldwide Specialty Property Services Pty Limited (in liq)  FCA 687:
“A liquidator holds an important statutory office. It is a matter of concern that any liquidator would make demands of third parties for the recovery of monies when the liquidator did not have, at the time the demand was made, a proper basis for making that demand. Notwithstanding that [the liquidator] was motivated by the laudable motive of seeking to maximise the recovery of monies for creditors, this is insufficient to justify demands being made in the hope that a third party will effectively accept the demand as a ‘fair cop’. If this is a common practice then, in my view, it should be deprecated. A demand should only be made by a liquidator if the liquidator believes, on reasonable grounds, that there is a proper legal and factual basis to make such a demand.”
A result of the increased focus on the equity of the unfair preference recovery process by the likes of Subbies United and others, the Simplified Liquidation process that came into existence on 1 January this year reduces to scope within which a Liquidator can seek to recover an unfair preference from unrelated creditors of the company, capped at $30K and for payments made within the three months leading up to the Liquidator’s appointment.
Additionally, ASIC has also updated its information sheet for creditors so that they are aware of their statutory defences to an unfair preference recovery claim. ASIC has suggested that creditors who receive an unfair preference claim should, rightly, ask the Liquidator for:
- details of the payments they claim result in the creditor receiving an unfair preference
- reasons why they think the payment is an unfair preference payment (including the basis on which the liquidator claims the creditor cannot establish a defence)
- supporting evidence to support their claim
If you come across a client who receives an unfair preference claim from a Liquidator, feel free to get in touch with us for an objective review of their circumstances. We have assisted several creditors with successfully defending unfair preference claims in the past.
About the author
Greg Quin is a Partner and Registered Liquidator at HLB Mann Judd Insolvency WA and has been with the team for 12 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to firstname.lastname@example.org.