The clock is ticking – Time barred unfair preference claims from Liquidators

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  

Under section 588FF, a Liquidator has three years to file an application seeking orders about the recovery of a voidable transaction, being an unfair preference in this example. After all, the Liquidator is pursuing a voidable disposition of company property and it makes sense not to let matters drift unattended for years on end.   

Most liquidations are relatively straightforward and the three year timeframe should not be an issue. However, sometimes the affairs of an insolvent company are extremely complex and the determination of these matters (i.e. insolvent trading and unfair preference payments etc.) take a protracted amount of time to settle, combined with the time demands of other matters such as asset realisations, litigation and other investigatory matters. Accordingly, the three year application timeframe can occasionally be pushed right to the end.

In complex circumstances, the Liquidator can make an application to extend the timeframe, on the basis the application to extend it is made within the initial three years; however, the Courts are only likely to grant such an extension in limited situations.

The case law guidance on the point refer to phrases like ‘exceptional circumstances’ and ‘extraordinary circumstances’, so a Liquidator seeking an extension should be well prepared to justify the request.

So take this information into account if one of your clients should ever receive an unfair preference claim from a Liquidator. And if you have any queries about such matters, feel free to get in touch with me for some obligation free and objective guidance.